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Gavin Pelser

MD
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Bennie Groenewald

CFO

“We are Southern Africa’s leading distributor of engineering consumable products, technical services and solutions.”

2018 Review of Operations

  • ESG’s 2018 results are satisfactory, considering the volatile year with political unrest, the downgrade of South Africa’s credit rating and the low commodity pricing.
  • ESG has seen a downturn in demand for its products and has focused on re-sizing the business through cost saving initiatives and the continued “Simplify for Success” program.
  • ESG has used the year to bed down a number of strategic integrations which will continue through the 2019 financial year.
  • Revenue down 2.3%
  • Operating profit marginally down 0.2%
  • Gross margins remained under pressure especially in the last quarter as the South African Rand strengthened against almost all major currencies
  • The BMG World site is complete and fully operational

Introduction

  • ESG’s 2018 results are satisfactory, considering the volatile year with political unrest, the downgrade of South Africa’s credit rating and the low commodity pricing.
  • ESG has seen a downturn in demand for its products and has focused on re-sizing the business through cost saving initiatives and the continued “Simplify for Success” program.
  • ESG has used the year to bed down a number of strategic integrations which will continue through the 2019 financial year.

Financial Review

The 2018 financial year was challenging, with investors holding back on new capital projects due to the uncertainties facing the South African economy. Revenue decreased by 2.3% to R4.6 billion (2017: R4.7 billion).

The acquisition of Fenner (effective 1 February 2018) did not materially impact revenue, however we foresee a significant boost to revenues going forward. Gross margins remained under pressure, especially in the second half of the financial year during which the Rand strengthened against all major currencies. As in the previous year, the increase in costs remained well below inflation mainly due to cost saving initiatives by management to counter the decline in sales. This resulted in the operating margin of 10.5% (2017: 10.3%) being maintained.

Ensuring unrivalled levels of stock availability remains a strategic differentiator for ESG. Stock levels increased due to the Fenner acquisition and further strategic purchases of specific product ranges affected by the introduction of import duties. The debtor’s book continues to be well managed despite pressure from our major customers to extend credit terms. Debts over R250 000 continue to be insured.

Net operating assets increased to R2.3 billion (2017:R2.0 billion), mainly as a result of the increased stockholding. Return on net segment assets decreased to 20.8% (2017:24.1%).

BMG
BMG’s focus for the year has been on consolidating the business and furthering our strategy to expand the products and services offered to our customers.

Although the strengthening of the Rand in the last quarter resulted in pressure on revenue value and gross margin, there were no upward price adjustments done in this financial year.

The BMG Regional Service Centre roll-out is now complete, with Port Elizabeth and Richards Bay having been added. BMG now has six Regional Service Centres across South Africa.

BMG is focused on partnering with our customers in all sectors by offering the full basket of products supported by technical expertise and field service to install and maintain the products.

The driving force behind BMG’s strategy is to be part of every process, from design, manufacture, installation and on-going maintenance to replacement, ensuring that our customers remain efficient and competitive.

BMG Africa Operations
A new company was created called ESG Exports which focuses on the export of all ESG products to ensure fast, efficient supply to our BMG branch network in Africa.

BMG has 18 branches across Botswana, Namibia, the DRC, Tanzania, Ghana and Zambia, with Hyflo adding two Namibian branches to the tally.

ESG Exports will also supply local cross-border buying houses.

Man-Dirk Group
Man-Dirk Group, ESG’s tool and equipment business experienced a challenging trading year across the business sectors in which it operates.

The IT infrastructure and connectivity was upgraded across all group locations in preparation for the consolidation of ERP systems. The business also spent considerable time and energy on internal processes and new product development, thus setting itself up for an improved performance. At the same time the sales teams focused externally and further improved customer service levels.

Autobax
Autobax has once again delivered a very pleasing performance and has reaped the benefits of its investments in their IT Systems and stock. Autobax has further taken on additional warehouse space to cater for new business developed during the year.

The Autobax team has a clear vision of ”One Team One Goal” which has been the catalyst for the team’s success over the last financial year. Management has also reduced costs without compromising business efficiency.

Market conditions are always tough in the automotive sector, and we continue to face those challenges as they present themselves. Despite this, the Autobax team is well positioned to return another good performance in the forthcoming year with some new projects in the pipeline.

Autobax is highly motivated and focused to become the market leader and offer world class service to its customers.

Hyflo Group
This business has been affected by the global reduction in oil and gas exploration and new projects. A decision was taken to
resize the business and this has assisted the financial performance of the business. The business is refocused on selling its range into sectors including agriculture, food and wine industries.

Hansen Transmissions SA
Hansen has performed above expectations with the growth coming from both new and repair units.

The integration of its operations into the BMG Engineering facility has resulted in improvement in efficiencies and cost savings. This
has set up Hansen Transmission SA for success in the future.

The relationship with Sumitomo/Hansen is solid and a very close technical link is in place.

STRATEGIC DEVELOPMENTS

Acquisitions
The rights to exclusively market, sell and distribute the Fenner range of heavy duty belting throughout Africa was purchased from Fenner South Africa. The increased product and service capability this brings now allows the sale of complete conveyor systems with all products sourced from BMG.

ESG will continue to make strategic acquisitions, to increase our 360 degree offering and continue to add value for customers.

BMG World Upgrade
The BMG World site upgrade has been completed.

Simplify for success

The first phase of S4S, launched in BMG is now complete.

The roll-out of the S4S will now be implemented across the Man-Dirk Group of companies and should be completed in the 2019 financial year.

Outlook

The outlook for the new financial year is positive with improved sentiment in the South African business sector.

Continued rand volatility continues to hamper performance but an upswing in commodity prices will improve mining prospects and investment.

ESG will continue to grow its business and infrastructure in Africa with the aim of achieving our 2022 strategy having 30% of our business come from outside of South Africa (our African operations contributed 10.7% of the 2018 financial year’s revenue. The drop from prior year (11.4%) is mainly as a result of the strengthening of the Rand).

ESG aims to be the leading industrial on-line business in Africa and has embarked on a strategic program to launch an on-line sales platform for the entire group with the launch targeted for July 2018.