Tony Sinclair

CEO
ceg-compress

Geoff Balshaw

CFO

“The willingness and ability to evolve and adapt to the ever-changing market conditions, together with discipline, focus and good communication in the Capital Equipment Group, has assisted to maintain momentum and growth.”

2017 Review of Operations

The Capital Equipment Group (CEG) has performed exceptionally well in difficult trading markets achieving a record operating profit.

  • Revenue up 10.5%
  • Operating profit up 29.8%
  • Debtors well managed
  • Margin management and cost containment
  • Return on Capital employed up 21.2%
  • Positive cash generation

Market conditions:

  • Good rains in the last trading quarter
  • Maize production in SA up 104%
  • Maize prices down 34% on yellow and 58% on white maize
  • Commodity prices low – mining production down
  • Reduced level of investment in infrastructure by both private and public sectors
  • Devaluation of the South African rand against the US$ has led to competitive pricing

Overall market demand for agricultural and construction equipment has declined in local and international markets, but despite negative market conditions, all CEG businesses have demonstrated improved results.
The results are very pleasing and have surpassed the board’s expectations considering the current operating environment.

Introduction:

The Capital Equipment Group (CEG) consists of local and international companies and divisions which operate in the supply of agricultural, construction and forklift equipment with a strong spare parts base. The South African division of CEG produced exceptional operating results considering the current state of the markets in which it trades. The performance of the international division, consisting of the companies which form part of Kian Ann, showed a pickup from the prior period especially in the last quarter of the year.
The CEG’s overall revenue increased by 10.5% year-on-year to R4 955 billion. The strong results from the South African businesses were however limited by the lower growth in revenue recorded by Kian Ann.
Operating profit in the CEG segment increased by 29.8% to R470 million. The segment operating margin increased from 8.1% to 9.5% and return on capital employed increased from 16.6% to 21.1% in the period.

South African operations
In spite of continuous reduction in the volumes of units sold in each local sector due to external market factors such as drought, reduced government infrastructure spend and a 30% reduction in demand for forklifts over the last 24 months (with little indication of this trend reversing), market share gains across the CEG business have been achieved in each of the respective sectors. To ensure the continuous focus on maintaining momentum in the market, CEG’s distribution footprint has also been increased further to allow access to a larger customer base, resulting in additional equipment sales and improved after sales support, which in turn has led to increased spare parts sales. In particular, the construction equipment businesses performed well in spite of deteriorating markets (decline in mining and construction), with Hyundai and CSE in particular, performing above expectations. In order to mitigate the decline in market demand, a heightened focus on parts, working capital and cost control was successfully adopted. Furthermore, the forklift business also performed above expectations, achieving its best operating profit since being acquired nine years ago.
Overall CEG’s key fundamentals are to ensure that strong working capital discipline and stringent cost controls are maintained.

International operations
Kian Ann has shown positive growth despite the slowdown in resource and construction activity in South East Asia, with Singapore, Malaysia and Indonesia being hit the hardest. The business has had a revenue increase and managed to diversify its exposure to these markets in the past year by growing its revenue outside of South East Asia. Growth being achieved in Myanmar, India and the United Kingdom.
Furthermore, improved working capital management has allowed a further reduction in debt introduced into the business when it was acquired.

Review of operations:

Agriculture

Despite continued drought in the western part of South Africa throughout 2016, the southern Cape and eastern parts of the country have enjoyed good rain falls, resulting in above average crop yields in these regions. Despite the soft commodity prices, business has remained buoyant leading to positive cash flows and demand for new agriculture equipment. In the last four months of trading, rain falls were wide spread which lifted the short-term outlook of farmers, resulting in increased demand for equipment. However, the maize price decreased substantially due to higher crop volume estimates (Yellow maize price decreased by 34% in 12 months). Fortunately, yields have subsequently increased but to insufficient levels to mitigate the decrease in price totally.

Maize Safex Prices April 2010 to end March 2017

Demand for agricultural tractors has declined by 9.7% during the year of trading with a shift toward higher kilowatt tractors.

CEG has, however, gained significant market share in all tractor sectors with the exception only of the Orchard tractor sector.

Tractor unit sales total market (SA) – 1992 to 2016 (2017 estimate)

Northmec – CASEIH Agricultural Equipment

Northmec, the sole distributor of CaseIH agricultural equipment and many other well-known implement brands sourced from around the world, owns 13 retail outlets and also distributes through 43 wholesale outlets strategically located across South Africa to support key farming areas.

Considering the current market conditions in which Northmec trades, this division has had an exceptional year, with turnover increasing and operating profit exceeding the prior years’ results. Operating margin has increased and tractor market share has nearly doubled for the year under review.

To ensure increased focus on the CaseIH brand, some distributors were strategically repositioned and new ones appointed. This meant the distribution foot print was increased providing better coverage and support for farmers. A new 5 500m2 assembly plant will be ready for occupation mid-June 2017 improving the infrastructure for the expected growth of Northmec in the future.

The restructuring process undertaken, which also included the hiring of additional staff, created an improved base for growth which is evident in the results achieved during the year under review. Spare parts sales also increased contributing to a strong divisional overhead absorption rate.

Continuous support from CNH (the factory which manufactures the equipment) during the year has made a significant difference to the improvement of the supply of equipment, competitiveness of the product and access to low kilowatt tractors – providing access to segments of the market previously inaccessible, to assist in increasing market share.

New Holland Agricultural Equipment

New Holland South Africa (New Holland SA) has been the sole distributor of the New Holland brand of agricultural equipment, distributed through a network of over 80 wholesale outlets throughout the country.

Good performance from New Holland, meant it achieving similar turnover results as the previous trading period, with operating profit increasing by 21.2%. Competitive pricing and forex management resulted in market share growth and the best financial results since this company was acquired 11 years ago. Improved inventory management and a dedicated focus on a single brand distribution network has contributed to this division’s good performance. New Holland SA boasts a strong overhead absorption rate, with strong spare parts sales.

In January 2017, New Holland SA was informed by CNH that they have decided to enter the South African market directly to distribute the New Holland product. A 12-month notice period was provided.

Although New Holland SA will lose access to the equipment sales segment, the company still has a major share of the parts market in the country, thus efforts will be concentrated on building the aftermarket side of the business. Sadly, a total of 14 staff members will be retrenched due to the termination of the distribution agreement by CNH.

Management would like to thank all the staff of New Holland SA who contributed to the growth and success of the business since it was acquired 11 years ago.

Landboupart – After Market Agricultural Equipment Spare Parts

Landboupart, an importer of alternative spare parts for agricultural equipment has had another good year, growing significantly during the year under review.

CEG management looks forward to growing this business and further strategic plans include entering the e-commerce market.

Construction

There has been a significant reduction in demand in all sectors of construction equipment over the last 2.5 years with the exception of Articulated Dump Trucks (ADT’s) and Excavators.

The weakening demand trend has been reflected in the construction and mining sector in the current reporting period due to reduced levels of government investment in infrastructure and depressed mineral prices. A large percentage of working equipment is standing idle resulting in reduced demand for spare parts and forcing plant hire rates below breakeven levels.

The significant drop in total unit demand in the sectors in which CEG construction divisions operate, resulted in the recording of an overall market decline of 16% over the last trading year. Despite this, all the divisions are profitable with strong cash flows.

Flexibility in each division due to their strong spare parts base, enables management to ensure continuous momentum is maintained by focusing on successfully getting units out in the market and by doing so, increasing market share in a declining market.

 

Case Construction Equipment (CSE), CASE

Construction, Jacobsen/Ransomes Turf Equipment and Cartcom

Case Construction Equipment (CSE) has had a difficult trading year, however despite turnover being down, operating profit has increased. The market volumes of units in the segments in which CSE trades have declined over the last two years as follows – Loader Backhoes (TLB’s) were down 37.3%, Skidsteers 35.8%, Excavators 24% and Front End Loaders 14.9%. There did not appear to be an improvement in these conditions in the first quarter of 2017, however the division is well prepared to weather the difficult markets ahead and continues to gain market share.

Parts performance remained strong, however a decline in workshop performance was visible, attributed to a large percentage of construction equipment standing idle.

The performance of the Jacobsen Turf division has improved in a market where golf courses are extending the life of their fleets resulting in an increase in the demand for spare parts. Turf contractors are recycling second hand machines rather than buying new machines. CSE continues to actively focus on its Jacobsen brand, increasing its market share in the golf course maintenance equipment sector.

Cartcom (golf cart rental company), performed within expectations and continues to generate strong cash flow. Management continues to wind down long-term rentals with the intention of eventually trading out of this business.

HPE – Hyundai Excavators, Loaders and Loader Backhoes

HPE has a distribution network through three owned branches and five independent distributors.

HPE has performed exceptionally well in difficult markets after a period of rebuilding the company and establishing a strong foundation for future growth with both sales and operating profit improving. There has been marked improvements in all areas of the business with spare parts sales increasing substantially, workshops going from a loss to a healthy profit and machine sales resulting in market share gains.

Management is confident that HPE is well placed to continue to make a positive contribution to CEG in the future. HPE generates positive cash flow through effective stock management. In order to provide customers with availability and competitive spare parts, further financial investment has been made to increase parts coverage. Cost control and improving market share are a priority in the coming year.

Doosan SA Excavators and Loaders

Doosan has a distribution network in South Africa of three owned retail branches and five independent wholesale distributors.

The current year under review produced disappointing financial results.

The major challenge has been to compete in a declining market. The focus has thus been to maintain momentum in equipment unit sales by sacrificing margins and providing customers with high levels of after sales support. Further support from the factory has also assisted.

Doosan SA has a very strong spare parts base which provides support to the rest of the business.

Forklifts

Criterion Equipment – TCM forklift trucks

Criterion Equipment (Criterion) is the sole distributor of TCM forklift trucks in southern Africa, imported directly from China and Japan. Criterion distributes the TCM product through seven of its owned branches.

Major changes have been experienced in the forklift supplier landscape during the year under review. Overall industry volumes dropped significantly when compared to the previous year of trading, with the total number of imported units recorded at approximately 6 000 units for the year, a decrease of 17.7%. The aggregate decrease over the last two years stands at 33%.

Despite this decline, Criterion has gained market share and traded relatively well in these conditions, achieving its best operating profit, which is in stark contrast to the state of other companies in this sector in South Africa.

In spite of the challenges faced by the industry, an increase in the demand for short-term rentals has assisted to improve the financial performance of this business. Criterion continues to provide a meaningful contribution to CEG and will be adding more products in the future to improve market penetration.

Parts aftermarket

The spare parts divisions of CEG have performed exceptionally well, contributing significantly to gross profit. Margins have been maintained and the agricultural segment has further expanded through diversification into other product lines.

Equipment Spare Parts (ESP)

Strong sales growth performances from the various product lines enabled ESP to finish the year with satisfactory overall results. Profits were boosted through good margin management and cost control.

The supply to the construction market sector performed well. However, on the downside the mining sector was affected by a downturn in the sales into Africa, with the Western Cape and KwaZulu-Natal sales regions enjoyed relatively positive sales buoyancy throughout the year.

Once again ESP ended the year with strong results.

Kian Ann – After-market, Construction, Undercarriage and related spare parts

Kian Ann trades globally and is rated as one of the leading suppliers of undercarriage, ground engaging tools and truck spare parts in the world, with a strong presence in the South East Asian markets.

Although trading has been difficult, there are signs of improvement in the Asian markets. A focus on countries outside of the South-East Asia region has proved to be successful. Kian Ann adapted well to the market conditions by achieving a respectable operating profit with efficient cash generation, and good cost, inventory and debtors control.

Kian Ann management will continue to look for opportunities in other markets outside of South East Asia to build the business and has acquired a controlling interest in its UK based company Steve Woods Ltd, as well as a minority interest in an undercarriage roller company in China – further improving its distribution network and sourcing base.

Prospects

The results for the financial year under review are well above expectations and the aim in the next trading year, is to continue to adapt to the market changes:

  • Take advantage of potential opportunities for acquisitions
  • Improve unit sales
  • Continue to build a strong spare-parts base

The financial and structural bases of all the companies in the Capital Equipment Group are sound and management look forward to another successful year going forward.