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Letter from the CEO

There is much to unpack about the events that unfolded during the year. Following the liberalization of the Egyptian pound in November 2016, we found ourselves with a paralyzed market as the currency was still in the early stages of finding its footing and everyone — the business community and consumers alike — was adjusting to the dislocation. As such, we were faced with a new reality that forced us to shift our business strategy and evolve GB Auto Group into more than just an automotive leader, but a fully diversified player. 

The shift in strategy allowed us to capitalize on our strong, high-margin auto-related and financing businesses that saw us through a year where the automotive industry was just beginning to make a recovery. To anchor this strategy, in the second quarter of the year we adopted a new disclosure structure that separately reports our core automotive under GB Auto & Auto Related and high-margin financing businesses under GB Capital. The two businesses are sharply different in terms of financing and capital structure as well as underlying risks. To that end, the separation of reporting — with independent KPIs — was a prudent step in providing a true reflection of the business’s net debt, facilitate more accurate valuations and reveal hidden value in the company’s share.

Throughout the year, GB Auto & Auto Related worked tirelessly to maintain tight control on operating costs, having implemented measures that saw SG&A as a percentage of sales kept within acceptable levels. We rationalized headcount across all functions, adopting a more targeted approach to our marketing expenses and explored means through which to maximize energy efficiency in our premises.

For the Passenger Car division, the start of 2017 was largely geared toward inventory reduction and clearing low-margin car units from the market and replacing them with more profitable ones. By the end of the year, we were seeing clear signs that the macroeconomic challenges which resulted in an industry-wide slump were receding. And while the passenger car market is operating at levels 50.0% below last year, consumers are adapting to new market prices. As we approach 2018, we are seeing signs that volumes are steadily recovering and are now back to our traditional market share level north of 30.0%.

As we anticipated last year, the Motorcycle and Three-Wheeler division made an even faster recovery than Passenger Cars considering three-wheelers both serve demand for transportation and are themselves revenue-generating for their owners. Segment volumes picked up sharply as early as March 2017, with the market already making a recovery toward normal levels, particularly in the three-wheeler segment.

Auto-related lines of business were instrumental this year. For one, Commercial Vehicles & Construction Equipment made a sharp recovery toward the end of the year, with the division outperforming the overall market despite a 50.0% volume slump. The segment is poised for accelerated growth in the quarters to come as appetite rises for our product lineup in the private building and tourism sectors — a breakthrough after we successfully ventured into the urban transport and intercity bus markets.

After-sales was a vital component of our recovery story as well, with our solid reputation for quality service cementing customers’ confidence in us. This translated to strong sales and higher-than-average capacity utilization rates across service centers, with the ramp-up in business allowing us to press on with plans to expand our workshop network in Minya, Aswan, Tanta, Marsa Matrouh and Damietta within the next two years and a truck and bus workshop in Abu Rawash in the pipeline.

The Tire division also performed exceptionally well during the year, with profitability mounting every quarter. The segment reinforced its brand portfolio with the distribution of additional reputable brands this year, and their efforts bore fruit in the early months of 2018 when the division began distributing Turkish-made tuk-tuk tires, a profitable segment where we expect to leverage our strong market position. With the aim of sustaining growth in the truck-bus radial segment, the division also commercialized Pirelli and Pharos Truck tires in February 2018.

As for GB Capital, the business posted consistently strong performance throughout the year while maintaining a healthy loan portfolio quality and coverage ratio well over 100%.  The company played a significant role in overall revenue growth throughout the year and is expected to post similarly strong performance in the coming period in a market that is increasingly looking for financing options.

All in all, our extensive experience in the industry has taught us that with flexibility and carefully outlined strategies, not only can we navigate rocky terrains, but we can come out a better, leaner, transformed operation.

 

Lastly, I would like to conclude with a sincere word of thanks to our Board of Directors and Senior Management for their prudent guidance and solid execution; our staff for their relentless hard work and dedication that has served as the backbone of our success throughout the year; and all other stakeholders that have put their faith in GB Auto’s ability to weather the storm and continue to provide customers with the exemplary service they have come to expect of us and derive maximum value for shareholders.