CHIEF EXECUTIVE OFFICER'S REVIEW

The high-level objective for 2018 was to maintain the rapid growth of the business by increasing production from existing facilities, commissioning a new veneer factory and improving margins. Further objectives included increasing sales, sourcing trade finance funding, reducing administration costs and generating improved performance at an operating level.

2018 financial performance overview

Year-on-year revenue grew by 70% in 2018, driven by 93% growth in Forestry division revenues from our own production assets, and 57% growth in trading revenues. 2018 gross profit margin improved dramatically to 15.8%, from 5.7% in 2017.

As expected, and in line with the Group's growth, current assets and current liabilities also increased.

·     Trade and other receivables increased year-on-year by 72%, with much of the growth attributable to revenue expansion. However, one-off items such as the current portion of the consideration due for the sale of the Tanzanian businesses, also had an impact

·     Inventory increased by 23% year-on-year. This was largely attributable to the increase in timber production in Gabon

·     Payables increased by 43% year over year, slightly below the growth in cost of goods sold.

Working capital requirements increased by $2.0m year-over-year, also in line with management's expectations given the growth rate of the overall business. Working capital requirements will continue to grow as the business expands, hence the emphasis on attracting trade finance funding.

Forestry & related capex

The forestry division contributed significantly to overall margin expansion, recording a 21% gross profit for the year versus 12% in 2017. The sawmill in Gabon achieved an average recovery rate of lumber from logs of 34%. New machinery to be purchased in 2019 should improve this recovery rate, and alongside the installation of new kilns is expected to drive further margin expansion. The new sawmilling equipment will also improve the finished quality of our sawn lumber which will in turn open new export markets for our own production, enhancing our status with clients as we move towards our objective of becoming industry leaders.

Thorough research and rigorous cost benefit analysis was conducted during 2018 prior to making capex commitments. As a result of this analysis, we are confident that the additional equipment scheduled for installation during 2019 will lead to further margin improvement.

Capex during 2018 was committed to strengthening core infrastructure to underpin increased, consistent future profit margins via:

·     increased harvesting capacity - 2 new Komatsu bulldozers, 3 new MAN trucks

·     terminating outsourcing of kiln drying for sawn timber in Gabon - New kilns are being installed in 2019 from Chinese company Techdry with 2000m³ monthly capacity for drying Okoume

·     repair and upgrade to kilns at rented facility in Abidjan, Ivory Coast with monthly capacity of 1400m³, species dependent.

·     reconditioning of container crane at the same facility to allow quicker and more efficient movement of containers, a key development as trading volumes grow

·     full commissioning of veneer factory including additional machinery to reduce some manually intensive production and post-production processes.

Veneer factory

The highest production-related priority for 2018 was to fully commission the veneer factory in Gabon. The emptying of 10 containers full of second-hand industrial equipment and its assembly and integration with new custom-built boilers and generators into a functioning factory was a remarkable feat to witness. Hats off to the Moroccan engineering team for delivering a state of the art, Cremona equipped factory within the forecast budget.

As the factory became fully functional towards the end of 2018, Mr Driss Farissi joined to take overall charge of the facility with the objective of scaling up production of high-quality product. Mr Farissi is a Moroccan national with more than 25 years of experience in veneer production and factory management and is familiar with Gabon having spent 9 years there previously.

As with the equipment upgrades planned for the sawmill, output from our impressive veneer facility will enhance our product mix and reputation with clients around the world as we move up the value chain.

Upgrade of logistics team

Monetising the forestry division's scaled up levels of production is dependent on close communication with the logistics team, and the performance of this critical hub. Anne Laure Boichot, a French national who joined us in April 2018, has proved an invaluable addition to the leadership team in Libreville and merits a special mention in this report. Anne Laure's team dovetailed and kept pace as production increased during 2018, shipping a total of 299 containers from Libreville, creating a step change for the business and for our cashflow.

Trading

The trading division delivered a gross profit margin of 12%, consistent with management observations throughout the year. The division had to exercise patience during 2018 with financial capacity to trade being tightly restricted since investment was focused on the production units, where higher levels of operating expenditure were required as production increased. The $10m of funding committed after the year end in early 2019 will be drawn down as the trading team activates relationships with suppliers with whom they have multi-year track-records as well as with new suppliers. Our trading team, while ramping up activity, will remain mindful of the global economic outlook, including any signs of continued slowdown in China, a large player in the tropical timber market. Having sold into more than 40 different countries in the last two years, we have the luxury of a diversified customer mix, with no dependence on any single geography. China remains an opportunity for the group since it was the destination for only 4% of our total sales during 2018.

Cost management and internal controls

Internal control and financial monitoring capabilities have continued to evolve and improve throughout 2018 under the guidance of CFO Carnel Geddes.

We migrated to new web-based accounting software allowing for round the clock access by group management and minimising risk of loss of data.  Some subsidiary accounting functions were also centralised. A system of monitoring controls for the ITF was designed and implemented and is checked daily at board level. New weekly reports for group sales and profit margins were also initiated, as well as stock levels in Gabon and Ivory Coast which are reviewed at executive board level together with Group cash flow. In 2019 this has been further extended to also track harvesting and shipping data against budgets.

During 2018, turnover increased by 70% while combined operating and administration costs increased by only 26%.

Operationally, the Libreville office houses our management and logistics teams handling the day-to-day aspects of the production business as well as timber exports from Gabon. The offices in Ivory Coast and Denmark are trading and back-office hubs. All three are scalable platforms and can support a significant increase in levels of business.

At the half-year, I had noted that administration and operational costs appeared high in the context of current levels of profitability and targeted a 10% cost reduction for administration expenses during the second half of 2018. The administration cost reduction target was exceeded with administrative expenses falling from a total of $3.9m in 2017 to $2.11m in 2018.

Operating costs increased by $3.4m over the same period as the Woodbois business was only consolidated for six months of 2017 following its acquisition in the latter half of 2017. The disposal of the Tanzanian business will remove $1.5m in operating costs in the current year. Mozambique was responsible for 20% of the total operating cost base of the Company but provided less than 2% of revenues. Reflecting the prevailing business climate, the cost reduction measures carried out in the second-half of 2018 will ensure that the operational cost base for Mozambique in 2019 falls much more closely into line with its contribution.

Mozambique

Due to issues documented in quarterly updates throughout the year, largely related to export restrictions, we elected to perform a very limited harvest in Mozambique during 2018, which was sold mainly into the domestic market.

Given the high value of Mozambican hardwood species, research is underway into broadening the 'finished product' mix from air dried sawn timber, including the cost and availability of the additional machinery and skills required.

We have first class facilities, equipment and people in Mozambique and look forward to increasing activity in the future when, but not before, the clarity required for us to re-allocate meaningful levels of operating capital, has been provided by the relevant government ministries.

I must make a special mention of Adriano Rafael, a Mozambican national, who with the support of the local leadership team, and in particular the vastly experienced Ivan Muir, has stepped seamlessly into the important role of company administrator in Mozambique. Adriano's elevation to this role from data administrator at our bush mill in 2016, speaks volumes of his drive and application, and demonstrates the ability for smart dedicated people to thrive within the Woodbois working environment.

Social impact and sustainability

In pursuit of our social impact objectives, in 2018 we have continued to engage with high-level representatives from international organisations, such as the African Development Bank, the World Bank, local governments, heads of local communities, certification bodies and academic institutions. We also solicited the views of and initiated discussions with local and international platforms, the New Partnership for Africa's Development (NEPAD) and the World Economic Forum as well as multiple African banks and investment specialists.

We continue to align our sustainability strategy with the United Nations Sustainable Development Goals (SDGs) which sets out a vision for ending poverty, hunger, inequality and protecting the Earth's natural resources. Through our operations we aim to contribute to Africa's economic transformation with positive impact, social development and strong environmental management.

Sustainably commercial considerations and alignment with these goals will continue to shape decision making internally, in alignment with our mission statement, which equally sets out our growth ambitions while acknowledging the responsibility we carry for the communities in which we operate. With the ambition to become a market leader, the Company has continued to recruit high quality personnel and to train its staff to the highest standards.

A full sustainability report for 2018, detailing the various initiatives carried out by the Company is currently in production and is scheduled to be released shortly.

Sector Leadership

Last year's annual report reflected upon the fact that the integration period in the latter half of 2017 for two businesses (Obtala and Woodbois) with operations and management teams in 9 different countries had been relatively smooth. Combining businesses with different histories, cultures and working practices is a process rather than an event, and it was of course necessary to continue to manage this process closely throughout 2018. The common bond of partnership which is reinforced by the shareholdings of board members, has continued to strengthen, most noticeably as team objectives have been achieved. As the teams in different geographies have deepened their respective relationships, committed leadership is fostering a competitive spirit and a collaborative culture. The diverse combination of skillsets within our leadership team is a genuine differentiator for us in this industry, and supports our ambition to become the leading producer and global supplier of sustainable African hardwood and hardwood products to the rest of the world.

It only remains for me to thank the board and all of our staff for demonstrating their care for each other and for the Company as well as their incredible commitment in 2018; it is a privilege to lead this team.

For and on behalf of the Board.

Paul Dolan

Chief Executive Officer

7 May 2019

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND TOTAL COMPREHENSIVE INCOME