“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.”
2018 Review of Operations
CEG’s management is pleased with the performance considering the difficult trading conditions during the trading period:
Revenue up 2.4%
Operating profit before foreign exchange movements down 3.8% (reduction due to the loss of the New Holland Equipment distribution franchise in May 2017)
Operating costs up by 4.0%
Well managed inventory and debtors
Healthy return on working capital
Positive cash generation resulting in good operational interest income
Wide scale drought in the Western and Eastern Cape
Maize production in SA up 149% (6.7 million tons previous year and 16.7 million tons in the trading year)
Maize prices down 37% on yellow, and 52% on white maize
Liquidity challenges in the agriculture sector due to the low commodity prices
Reduced level of investment in infrastructure by both private and public sectors
Appreciation of the South African rand against the US Dollar during the year under review
Despite negative market conditions in the construction and agriculture equipment markets, CEG increased unit volumes sales significantly thereby securing annuity business through its spare parts business, which is reflected in the revenue increase.
Net operating assets increased to R2 410 million (2017: R2 306 million) giving a return on working capital of 26%.
Review of operations:
Most parts of South Africa, with the exception of the Western and Eastern Cape, had good rains which resulted in a record maize crop. Unfortunately, due to the record crop, the average maize price reduced to below R2 000 a ton from a high of R5 350 a ton in January 2016, which resulted in farmers earning less than the previous year despite the higher yields. The lower profitability has had a direct impact on the farmers’ liquidity and ability to buy capital equipment.
The demand for agricultural tractors increased by 8.7% from 5 855 units to 6 362 units and combine harvesters by 5.4% from 185 units to 195 unit for the calendar year. CEG has gained market share in most sectors of the market.
Northmec – CASE IH Agricultural Equipment
Northmec, is the sole distributor of CaseIH agricultural equipment and many other well-known global implement brands. Northmec owns 13 retail supplier and 47 wholesale outlets strategically located to support key farming areas.
The division has performed well considering the market conditions with revenue increasing by 7.1% during the period under review.However, due to the push to increase volumes, margin was sacrificed, resulting in lower operating profit with only a 3% growth. Whilst operating margin was down, Northmec’s tractor market share increased from 9.1% to 11.8% (an increase of 40% in volumes) and cash generation was strong, thus an overall pleasing set of results.
The tractor market during the year under review was largely a replacement one, therefore in order to do business, trade ins had to be accepted, with the consequence being a build-up of used equipment with effectively no new demand in the local market.
An additional retail branch was opened during the year, with more wholesale outlets to come, increasing the footprint and providing greater coverage to support the customer base.
Northmec opened their new 14 hectare site with a 5 500 square meter Assembly Plant in July 2017, through which all imported equipment is channelled for assembly, quality checks and redistribution to the sales network.
New Holland Agricultural Equipment
CEG management confirmed the termination in January 2017 of the New Holland distribution right in South Africa that it held. The sale of all New Holland equipment held by CEG was completed in May 2017.
Whilst the loss of the New Holland agency was disappointing for both CEG and our customers, on a positive note New Holland South Africa (a CEG company) continues to distribute spare parts under their own brand which constituted a significant percentage of the current New Holland South Africa spare parts turnover.
Further spare parts distribution outlets have been opened during the year with more to follow in the near future.
Landboupart – After Market Agricultural Equipment Spare Parts
Landboupart, an importer of alternative spare parts for Massey Ferguson, John Deere and other agricultural equipment brands, Landbou has had another good year with strong growth in revenue during the year under review.
Management continues to broaden the product base by regularly adding new models and ranges to the customer offering. A branch was opened in Worcester to cover the Western Cape and take advantage of the demand for quality, well priced grape harvester spare parts in the region. Further distribution outlets will be opened in future.
Unit volumes in most product sectors showed signs of recovery over the previous year, in a market that was primarily driven by price in the compact plant sector. The plant hire industry was significantly impacted, with rates reducing due to lack of work, which in turn drove machine pricing down to historical levels and therefore resulted in reduced margins.
A shift in demand to bigger loaders and excavators, used predominantly in the mining sector was also apparent, with this segment showing positive signs of recovery. The product sector that had the most significant growth was that of Articulated Dump Trucks (ADTs).
Case Construction Equipment (“CSE”), CASE Construction, Jacobsen/Ransomes turf equipment and Cartcom
CSE adopted a strategy that focused on particular sectors of the construction industry to drive sales volumes. This sales drive resulted in a significant increase in unit sales volumes and strong growth in revenue. Although margin and profitability were affected, this has resulted in a significantly broader customer base, improved customer retention and new business which may sustain the higher level of sales in the future.
Management plans to maintain volume growth in the coming year, but with a heightened focus on margin management to ensure improved profitability. Jacobsen/Ransomes turf equipment CSE has achieved strong sales through the Jacobson Turf division.
This year’s trading conditions however were marred by the severe drought in the Cape region, resulting in many golf courses holding on to their existing units, and the golf industry in general reporting lower rounds year-on-year in all regions.
However, healthy profits were realised in the division, with a notable increase in spare parts sales overall.
Cartcom completed its final year as part of the CSE stable. As rental contracts expired the fleet of carts have been sold off. Management will not be continuing with the Golf Cart division in the next financial year.
HPE – Hyundai Excavators, Loaders and Loader Backhoes
HPE has performed exceptionally well during the year with a significant increase in the volume of units sold. The improved performance has been achieved by improving aftermarket support and focusing on sourcing well priced spare parts.
HPE’s traditional markets in industry, construction and mining are displaying positive future prospects. The energy sector, where HPE Africa has also traditionally been active, could also provide significant future opportunities.
HPE remains committed to an efficient and cost effective business model based on product diversification and providing excellent service to its customers. HPE have acquired the McCloskey International range of crushing and screening equipment to compliment the construction equipment range. HPE will continue to place great emphasis on spare parts and service capacity. HPE has also developed the internal capacity to manufacture plant accessories, in order to provide a “one-stop-shop” service, to more effectively serve their clients’ needs.
Management is confident that HPE will continue to make a positive contribution to CEG in the coming year.
Doosan Excavators and Loaders
Doosan has a distribution network in South Africa of three owned retail outlets and seven independent wholesale distributors with two added this year to take advantage of the opportunities existing within the mining sector.
Significant changes were made to the management team during the year under review, with the new management achieving a strong overall increase in revenue, especially in the last financial quarter.
The major challenge during the year was to maintain momentum in equipment unit sales and to provide customers with aftermarket support and competitive pricing in spare parts and equipment. Equipment margins have been under pressure, however a strong aftermarket base has contributed to retaining and establishing new customers.
A positive turnaround is visible and further recovery is expected in the new year.
Criterion Equipment – TCM forklift trucks
Criterion Equipment is the sole supplier of renowned TCM forklift trucks in South Africa, and certain neighbouring countries. TCM forklift trucks are imported from Japan and China. The forklift truck industry experienced a buoyant year, with the industrial market increasing to 8 700 units, up from 6 500 units, for the calendar year.
Criterion continues to invest in its rental fleet, both long-term and short-term. Criterion will continue to introduce new models, not previously available, giving it access to a further significant portion of the market.
Criterion is proud to advise of the purchase of Shamrock Handling Concepts Proprietary Limited (“Shamrock”) effective 2 January 2018. Shamrock was established in 1994 and is the sole distributor of Moffett truck mounted forklifts. Shamrock’s product offering includes other prominent brands, such as Combilift, Innolift, Agrimac all-terrain forklifts and Multisweep sweepers.
Criterion produced a pleasing set of results for the year, in line with management expectations.
SPARE PARTS AFTERMARKET
The spare parts aftermarket division of CEG has performed exceptionally well, contributing significantly to CEG’s operating profit. Many customers have held back on spending money on repairs over the last two years, but now we are beginning to see an increase in enquiries and demand. Machines have been idle for the last few years and now with demand picking up, owners are repairing existing fleets rather than replacing equipment, which bodes well for the year ahead.
Equipment Spare Parts (“ESP”)
ESP’s revenue has improved year-on-year, with operating profits exceeding both the budget parameters and last year’s results. ESP’s undercarriage products achieved strong growth.
Management is confident that ESP will continue to make a positive contribution to CEG in the coming year.
Kian Ann – After-market, Construction, Undercarriage and related spare parts (KA)
Kian Ann trades globally, with a strong presence in South East Asian markets, and is considered a leading supplier of undercarriage, ground engaging tools and truck spare parts in the world.
Kian Ann has had a much improved year with a strong increase in both revenue and operating profit, further enhanced by good cash generation and cost control. Kian Ann displayed a unique resilience, not evident in similar global businesses.
2017/18 showed signs of improved world economic prospects with key indicators pointing to general growth internationally and as a result growth for wholesalers such as Kian Ann, who play a significant role in the supply chain. This is very positive for Kian Ann.
Kian Ann management will continue to look for opportunities to build the business.
The results for the financial year are below expectations, however there are areas of the business that have performed exceptionally
well. The loss of the New Holland agricultural equipment business impacted negatively on CEG’s overall performance, especially in terms of operating profit. Most of the lost revenue has been recovered, and the current aim is to also recover the lost operating profit.
The focus for the new trading year is to adapt to the market:
Taking advantage of market opportunities;
Identifying potential opportunities for acquisitions; and
The management of CEG, with their strong and supportive work force that continuously work in a positive environment, and are confident in the financial and structural basis of all the companies in CEG.
CEG is well positioned to take advantage of any improvement in market conditions and to make acquisitions aligned with CEG’s future strategic planning.