Denel 2012 Annual Report

Meeting report

Denel 2011 2012 Annual Report briefing
Mr Zoli Kunene, Chairman of the Board, Denel, noted that in this financial year, Denel had managed to contain debt levels and reduce annual interest charges. Denel had secured some key export orders, which were a key element of long term sustainability. A special effort was made to improve the marketing and sales function of Denel. Denel had fulfilled its mandate and national priorities. The turnaround of Denel could be linked to the fact that it had now secured new revenue streams. It was actively involved in artisan training. Denel contributed to military independence and security of supply. He said that good governance had been established, with the additions to the board, and the appointment of the new Group Chief Executive Officer. Denel had also achieved a top position for ethical leadership.

Mr Riaz Saloojee, Group Chief Executive Officer, Denel, said Denel was a State Owned South African strategic partner for innovative defence, security and related technology solutions. Denel’s purpose was to supply the South African defence and security environment with strategic technology and capabilities. It was also intended to contribute to job creation, enhancement of local technology, foreign policy and regional security objectives. It was required to be a “responsible corporate citizen” because it had to ensure good governance and sustainability, while having regard to transformation imperatives, and employee well-being.

Denel valued performance, integrity, innovation, and accountability. It had a strong customer focus, with a desire for efficiency and growth. Denel’s strategic approach included a focus on profitability and sustainability, which involved secure revenue growth, good stakeholder relationships, and a dynamic Africa strategy. Its leadership had encouraged a sales drive with operational excellence and proper cash and profitability management.

As it currently stood, Denel had both positive and negative factors. Its positive factors included a solid opportunity pipeline, improved financial performance, viable Aerostructures, improved programme performance, the achievement of a BBBEE level 3 compliance, strong human capital base and a solid conventional technology base. Its negative factors included stakeholder alignment challenges, BD capacity and sales drive, the fact that it had, overall, made a net loss, questions around its sustainability, the fact that internal efficiencies needed to improve, sub-optimal research and development (R&D) levels and a weak asymmetrical warfare technology base. 

He noted that over the next three years, Denel intended to double its revenue, with a strong balance sheet. It planned to modernise its technology, to have a 7% net return, and become BBBEE Level 2 compliant.

Mr Salojee explained that Denel had planned high level strategic interventions. These included integrating business development, consolidating businesses, the appointment of a Deputy Chief Executive Officer at a divisional level, to ensure transformation, and embarking on cost optimisation and streamlining support services.

Denel Group was divided into four business clusters: Defence, Security, Certification and Training, and Aerostructures. He explained the group structure. Denel’s core product portfolio consisted of unmanned aerial vehicles, aerostructures, engineering services, land based systems, humanitarian de-mining services and products, maintenance repair, technical training, munitions and sub components, missiles and mine protected vehicles.

In terms of its economic impact, he noted that Denel was involved in national security and peace keeping as well as having an industrial strategy, and contributed to the Industrial Policy Action Plan (IPAP 2) and New Growth Path (NGP). Denel wanted to achieve global competitiveness, achieve optimal employment, which would develop skills, and keep a clean environment. Denel also used its resources and technology for civil dual-use applications.

Denel had faced some challenges in procuring new business. There was competition from developed economies, due to home market defence cuts. International clients were also seeking indigenous solutions. There was also growing geo-political influence and a lack of growth in domestic spending, Denel needed the support of South African National Defence Force (SANDF), along with political and diplomatic support, and a proactive promotion of the recommendations of the Defence Review.

Mr Fikile Mhlontlo, Chief Financial Officer, Denel, then outlined the financial performance. This included presenting figures on sales, operational expenditure, net profit and net cash flows. He also presented a regional perspective, which stated that 63% of Denel’s sales were to South Africa, while 10% went to the rest of the Continent. (See presentation for full details).

He then outlined the key financial issues. There were concerns around the debt/equity ratio, as Denel showed R1.7 billion debt in March 2012. The solvency figure was R695 million, which was very low for an organisation the size of Denel.  Denel had applied for recapitalisation of R2.7 billion, but only R700 million had been allocated ,and it had not yet been disbursed. In the past, Denel had been recapitalised to allow it to repay its debt. In the future, there was a need to find a sustainable funding model for the company.

Mr Mike Ngidi, Head: Human Resources, Denel, said that Human Resources and Transformation were a major part of Denel. More specifically, Denel’s HR section was concerned that it must live Denel’s values. It placed a major focus on youth development, employee skills development, employee health and well being, transformation and key high level interventions.

Expanding on this, Mr Ngidi said that youth development took the form of different programmes aimed at recruiting and helping the youth of South Africa who wanted to be employed by Denel. This included a host of offerings, from bursaries to school outreach programmes, all of which were primarily intended to address the challenge around lack of skills, and specifically to invest in the development of maths and science. Denel also enrolled about 300 apprentices per year, and believed that, with more funding, it would be able to increase this figure. A school outreach programme for learners from grades 8-12 was taking place in Gauteng and North West provinces. Denel had started to create relationships with universities and took part in engineering fairs, Sci-Bono and aviation week to make themselves known. It also had partnered with the SA Women in Engineering to help encourage young females to pursue careers in engineering. Bursaries were the primary tool for bringing young engineers and scientists in Denel, to counter the ageing workforce profile. Over 90% of the bursars who completed their degree were employed by Denel. Denel offered about 30 bursaries per year. Denel also had built relationships closer to engineering faculties around the country.

Denel held wellness days to check health issues, and offered awareness programmes dealing with HIV/AIDs.

Denel believed in genuine transformation that was sustainable and added value. Transformation Committees were chaired by the CEO of the business entity. Denel had improved in all aspects of Broad Based Black Economic Empowerment (BBBEE) with an over improvement score of 82%, and had maintained level 3 B-BBEE Score.

In conclusion, it was stated that the key issues for Denel were to strengthen the balance sheet, become self sustainable and profitable. More attention would be paid to the placement of cardinal programmes with Denel, progress in the relationship with Armscor. There was a need to align of state aircraft acquisition with growing the local aerospace industry. Denel also wanted to invest in the development of its own staff and contribute to skills development in South Africa.

Discussion
The Chairperson asked why the figures in the Annual Report showed that such large numbers of African male employment had been terminated.

Mr Ngidi said that he wanted to come back to the Committee with a full report, having done an analysis of the figures.

The Chairperson asked if Denel had access to the National Student Financial Aid Scheme.

Mr Ngidi answered that there was no directly connection to NSFAS, because Denel granted bursaries from its own funds. However, it did nope that the Minister of Higher Education and Training would increase funding from NHFAS specifically for bursaries in maths and science.

The Chairperson commented that although the Committee, during a visit, was impressed with the young people in Denel, it also noted the challenge of an ageing workforce.

The Chairperson wanted to know if Denel recruited in rural areas. The Learners Support Programme involved getting engineers out to help young people, but he wanted to know where this was run, and if learners from remote areas were ever invited to the Denel facilities.

Mr Ngidi responded that Denel did try to remove barriers for people from rural areas. It advertised nationally for the bursaries, and although most of the application were done online, Denel also accepted paper-based applications from those in remote areas. He said that students from Gauteng had visited the Denel facilities.

Dr G Koornhof (ANC) also commended Denel on the report. He wanted the Committee to take note that Denel had been given R118 million by National Treasury, for an indemnity claim.

Dr Korinthos noted that Denel currently had ten significant contracts, and stressed that it could not afford to fail in these contracts including contracts for the Rooivalk Helicopters, of which three would be sent to the SANDF in the following year. He questioned what would happen after this delivery

Dr Koornhof commented on the delay in finalizing the wording of the contract with the Hoefyster, and said that Denel had expressed concern that a second phase may not be secured.

Mr Saloojee said that in terms of the cardinal project, South Africa should be very proud of the Rooivalk. The technology that was involved showed the level of skill there was in the country, to manufacture a system of that nature. Denel was engaging with the Air Force, to see what the future was for the Rooivalk, and as yet there were no plans for the replacement or for an upgrade.

In relation to the Hoefyster, he said that this was on record as being the official combat vehicle of the SANDF. It was, however, still in the developmental stage although Denel had done a huge amount of work on it. Denel needed to enhance the deterrent capabilities. It believed that this was a critical project and hoped that the production phase of the contract was secured.

Dr Koornhof also pointed out that Denel had received R6 billion from the government since 2005, and urged it to develop a sustainable funding model.

Ms G Borman (ANC)  asked why the recapitalisation amounts from the previous years, apparently approved, had not been received as yet.

Mr K Dikobo (AZAPO) congratulated Denel and appreciated the enthusiasm. He also wanted to know why the money had not been released by National Treasury.

Mr Sonto asked why the additional R700 million was not released.

Mr Kunene pointed out that the recapitalisation request was for R6 billion, in 2005, but Denel had only received R4 billion, so there was always a question of a funding gap. However, he did want to assure Members that Denel was on a sustainable path.

Mr Mhlontlo said that the exact figure of 3,5 billion was advanced to Denel. Another 700 million had been allocated but had not been received.

Ms September said that more detail was needed on this point, and commented that she would not like to see fiscal dumping at the end of the year. The Committee must talk to National Treasury as to why Denel had not been paid the money agreed upon. If need be, NT officials should be called to the Committee. The Committee could also perhaps talk to the Standing Committee on Finance.

Mr M Sonto (ANC) wanted to avoid a repeat of what had just happened at another entity, when National Treasury was approached. He commented that this money was approved, but Denel was frustrated, and he did not understand the reasons why it was being withheld did not make sense.

Mr Gololo commented that the funding, once allocated, would have to be spent before 31 March, and asked if Denel had complied with the conditions set by the Public Finance Management Act (PFMA) for receipt of the money.

Mr Koornhof said that the questions must be directed to the Department of Public Enterprises (DPE).

A representative from the DPE said that the conditions were approval of strategy, a business plan and a funding model. She said that it had taken time to put everything together, but Denel had now met all the requirements.

Mr Mhlontlo said that the manner of funding was hurting the overall financial wellbeing of Denel.

Ms G Borman (ANC) said the slide referring to R&D was very important for Denel, and particularly commented on the reduction in spending on R&D from the previous year.

Mr Saloojee said that R&D decreased because the profit was less, and the main priority lay with the staff. If funding continued to be reduced, then the R&D figures would also drop.

Ms Borman asked if Denel had discovered any instances of involvement in serious corruption or defrauding the company.

Ms N Michael (DA) wanted to know how many complaints Denel was receiving on the hotline and how it was dealing with any whistle blowing. She was curious if it was an effective tool to fight corruption.

Mr Mhlontlo said that the fraud hotline was managed by an independent anti-fraud company. The report would go to the Chairman of the Board. On average, about 30 issues a year were being reported. In 2012 there was only 1 case that was misconduct related, and the employee was dismissed. Denel made use of the internal auditors and external people to track such issues.

Ms Borman asked why one of the board members had missed four out of seven meetings.

Mr Kunene responded that this board member had to leave the board.

 Ms C September (ANC) said the presenters had been enthusiastic. However, she asked them to return, early in 2013, to report to the Committee on the areas of concern highlighted. All entities had a responsibility to government’s new growth plan. She asked for consideration, in the entities, of the need for reduction in salary and bonuses at the levels of the chief executives.

Mr Kunene said that general representation of the board was balanced, with six women. There had been no increase in salary for the directors of the board or senior executives.

Mr C Gololo (ANC) congratulated Denel on a job well done. He wanted to know what was going on with the India contract.

Mr Saloojee responded that high level talks were ongoing, and at the moment the problem with the contract was negatively affecting the conduct of business with India, which was a very good partner.

Mr Gololo asked if there were any plans by Denel to create an airplane in the future.

Mr Salojee confirmed that South Africa had the capability of building an airplane and he thought that Denel had the technological compatibility, but it had to be a joint matter.
 
Mr Sonto was interested to know why some of the universities had not been as involved with Denel as others.

Mr Sonto asked how Denel was servicing its debt.

Mr Mokoena questioned whether Denel was involved with the Square Kilometre Array. He noted that Stellenbosch had tried to develop a satellite for South Africa, and he was curious if Denel had any role in that, because it had been aborted.

Mr Salojee responded that there was no direct involvement between SKA and Denel but many Denel employees had been taken by SKA. There was an intense discussion going on with space programmes, in terms of satellites, and Denel would be involved in that.

Mr Mokoena was pleased to note that Denel was becoming involved in the prevention of rhino poaching and asked how this was being done.

Mr Salojee explained that Denel was helping the National Parks with situational awareness around rhino poaching, and could sometimes use its unmanned aircraft.

Mr Dikobo was interested to know where the 300 apprentices were drawn from.

The Chairperson said that he really would like Denel to pay more attention to the rural areas. The Committee had raised this point with other state owned companies. There were benefits of paying attention to these areas.

Ms September asked for a comprehensive report about how Denel was addressing the transformation imperatives.

Ms Borman felt that Denel perhaps should be more proactive in trying to find people with potential. Some had wonderful brains but needed outside help to reach full potential.

Mr Dikobo commented that he was concerned to see a threat to the Denel BRRR rating because of its staff profile. Denel did not seem to have a policy on transformation, and he could not understand this, since surely training and transformation went hand in hand. He agreed that Denel should do more outreach, and go to the rural areas. He had been a school principal for twenty years in Limpopo, and had never once seen Denel representatives in his area.

Ms Borman noted that transformation in employees could not be measured solely on the colour of skin, and questioned why, in some areas, a reduction in the white component was not matched by concomitant increases in black employees. She commented also on the serious shortage of females in executive positions.

Mr Kunene commented that there were six female board members.

Mr Sonto also said that white male employees seemed to dominate at managerial staff levels. He too commented that in critical areas transformation and training, Denel did not seem to be moving forward.

Mr Kunene said that there were no barriers for rural students. A rural school had in fact attended the Air Show, at Denel’s request. He hoped that he could present updated progress reports, on the next occasion that Denel spoke to the Committee.

 Ms Michael asked if  the targets were being met, for the government guarantees.

Ms Michael asked if the Waterkloof Air show was a successful venture for Denel.

Mr Salojee summarised that Denel was a significant player in the developing world. It had also made key agreements with large and strategic national defence companies around helicopter maintenance, aerospace and vehicle technology. This showed the value for the initiatives that they had undertaken. He would come back to the Committee with more reports on human resources issues.

The Chairperson said that he hoped that the Committee and Denel would have another opportunity to discuss matters, before the next Annual Report presentation. There could be a very significant and positive turnaround of Denel. Members had been quite open about Denel’s needs and would support it. He was very pleased to see its work with the youth, and said that more time needed to be spent on addressing poverty, to make a real difference in the lives of the people.

Mr Sonto suggested that if Denel had met all the requirements for the release of the outstanding funds, this Committee should write asking that the funds be released.

Dr Koornhof asked if that letter would be written to DPE.

Ms September thought the Committee could write a letter to National Treasury and the Standing Committee on Finance, as the Division of Revenue Act did not appear to have been followed.

Ms Borman suggested that perhaps a special meeting needed to be called with relevant officials, to speed up the matter.

The Chairperson agreed with other Members that letters would be written as suggested.

Adoption of Minutes
Dr Koornhof commented that the Minutes of 10 October had been circulated previously and proposed their adoption, subject to the correction of Mr Dikobo’s name.
The minutes of 10 October were adopted, with amendment.

The minutes of the meeting on 17 October were also adopted.

The meeting was adjourned.