Denel Turnaround Strategy briefing

NCOP Public Enterprises and Communication

25 February 2014
Chairperson: Ms M Themba (ANC, Mpumalanga)
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Meeting Summary

Denel briefed the Committee on its Turnaround Strategy, which was described as being aligned to the mandate given by government. The main pillars of the turnaround were said to focus on revenue and growth, organisational management, people and transformation, technology and strategic relationships. Denel sought to set up mutually beneficial strategic relationships between itself, the Department of Defence and Armscor internally, to collaborate with BRICS and other developing countries. It would be diversifying into the C4ISR, space and maritime domains, and using modernised technology and infrastructure as a result of improved investment in research and development. Finally, it sought to achieve profitable business, adequately funded with a good and balanced debt to equity ratio. It was stressed that Denel, whilst not yet completely improved, had at least managed to make strides and was able to service its debt, unlike in the past when it had needed a bail-out from government. It was seeking to grow revenue, transform and achieve greater efficiency and there was considerable focus on its human capital needs, attracting and retaining talent and performance.

Members were very pleased with the evidence of the progress that Denel had made, and encouraged it to share the good news with the public at large, stressing several times that this information needed to be spread to internal stakeholders and communities at large. Denel reiterated that it had not attempted to hold itself out as fully recovered but rather was focusing on constant and sustainable change. Members asked how the situation of losses in Denel’s aero structures were going to be turned around. They were interested in the bursary offerings, asking to whom 80 bursaries were given, the criteria used to select schools for the outreach programme, sought clarity about the Youth Summit and wanted more specifics about activities in the provinces. They emphasised the importance of follow ups with the schools, where particular enthusiasm had been apparent, and said that Denel itself should be proactive and not wait for the Department of Education to report back to it. Details of interventions in the provinces were going to be forwarded to the Committee.

The Committee also asked for more information about the length of contracts, and if Denel employed contractors and consultants, and heard about contracts with Malaysia, Brazil, United Arab Emirates and Saudi Arabia. Members asked whether it sold to all countries, particularly to Israel, and how it could ensure that its own weapons would not be used against South Africa, but Denel emphasised that it had long-term sustainable relationships with countries, and was emphasising partnerships rather than merely selling products. It was explained that it operated under the strictest compliance and only sold to countries allowed by the government of South Africa, so defence relationships did not exist with Israel. Members also asked about the risk strategy, gender equity and succession plans.
 

Meeting report

Denel’s Turnaround Strategy: briefing by Denel
Mr Riaz Saloojee, Group Chief Executive Officer, Denel, said that the strategic intent of Denel was aligned to the mandate given by the shareholder. The strategic roadmap was underpinned by revenue and growth, organisational management, people and transformation, technology and strategic relationships. He said that the Denel of the future would be characterised by the following:
- Mutually beneficial strategic relationships between Department of Defence (DoD), Armscor and Denel
- Collaboration with BRICS and other developing countries
- Successful diversification into the C4ISR, space and maritime domains
- Modernised technology and infrastructure as a result of improved investment in research and development
- A profitable business, adequately funded with a balanced debt/equity ratio.

Mr Fikile Mhlontlo, Group Financial Director, Denel, said that Denel continued to show progress towards self-sustainability, through improved financial reporting and restructuring. There was a strategic focus on significantly growing revenue by aggressively driving business development, as well as enhancing technology and capabilities, whilst continuing transformation and efficiency imperatives.

Ms Natasha Davis, Human Resource and Transformation executive, Denel said that Denel was in the process of creating a high technology environment and better competencies. The main focus of the Human Resource strategy lay in talent acquisition and attraction, earning and development, transformation, and employee relations and performance management. (See document for further details on each of these)

Discussion
The Chairperson congratulated Denel on a job well done. She expressed concern however about what was reflected on slide 18. This slide showed that Denel was not “out of the woods” yet. She asked for clarity about borrowing against the balance sheet.

Mr Saloojee apologised if an impression was created that Denel was out of the woods, and agreed that whilst it had improved, it was as yet far from that stage. What the presentation had attempted to show was the possibility of a method to improve Denel and deal with the difficulties in a long term and sustainable way. The difference now was that Denel was able to service its debt. It still had to rely on borrowing from institutions. However, unlike the situation in the past, when it needed to get a bail-out from government, it was now at least able to pay back its long-term debt. There was still hard work ahead.

The Chairperson said that the aero structure division was responsible for the losses and this situation had not changed that much, as was evidenced by the graphs on slide 17. She asked Denel to explain how it planned to change the fortunes of that division to make it profitable.

Mr Saloojee recalled that South Africa (SA) had cancelled a R400 million programme with Germany and France. That programme was supposed to have delivered significant offsets into aero structures, to keep it going. However the way in which those contracts were structured would actually have amounted to a loss for Denel on those contracts. In the last 18 months those contracts were re-negotiated with Airbus, so they had become profitable again. The company had also been restructured to cut out all hidden and overhead costs. Denel aero structures had some of best aero structure manufacturing capabilities in the world and it should be proud of that. The Ministry had provided support in terms of the new acquisitions of South African Express and South African Airways. The new acquisitions of aircraft were going to be linked directly to an offset programme that involved specific work packages done locally in South Africa. This business was looking good, as it moved forward. Denel was getting more work from Airbus.

The Chairperson asked to whom the 80 bursaries were given. She explained that she asked this because it was useful information for constituencies so that they could follow up and make sure more learners there also followed that route, from other provinces and schools. She also asked what criteria were used to select the schools.

Mr Jacobs asked if there was feedback on the issue on Denel taking people to state owned enterprises to expose them to various careers.

The Chairperson said that the children who went to Denel had come back excited and even changed their subjects afterwards. She asked how Denel followed up after visiting schools. She also asked if there was someone present who could give the stories of the schools and elaborate on them, as these were “good stories”.

Ms Davies said that the schools outreach programme was offered in Gauteng by Denel employees, who volunteered their time and taught extra mathematics and science classes over weekends. The programme in the North West was started some years ago. In that province, a school was identified as a centre of excellence, and teachers came and taught learners mathematics and science over the weekends as well as the holidays. This programme had been expanded, in the year under review, to Limpopo and the Free State. It was Denel’s intention to roll out the programme to Mpumalanga, although at the moment, in this province, there was a problem with the identification of the school, which should be sorted out during this month because there was a need for collaboration between Denel and the Department of Education, who took the proximity of the school into consideration. The Limpopo and the Free State programmes had started already. Those learners would be in Grade 12 this year and at the end of the year Denel sourced the potential bursary holders and potential artisans for its academy from amongst those learners.

The Chairperson asked for clarity about the Youth Summit.

Ms Davies said that the learners who attended the Youth Camp hosted in Free State had been Grade 10 and 11 learners at the time, but were now in Grade 12. It was the intention of Denel to go back to those learners and offer them opportunities like bursaries. That was the first programme that was run in this way, in cooperation with other State Owned Companies (SOCs). The plan was to offer similar programmes again, and have an annual event to host learners from different provinces in Johannesburg.

Mr H Groenewald (ANC, North West) said that the report showed good management and a positive attitude in the company. The Denel group were ambassadors for South Africa. Denel was thanked for the Turnaround Strategy.

Mr M Jacobs (ANC, Free State) echoed Mr Groenewald’s praise, and added that Denel had done a good job and therefore indeed had a good story to tell. However, he felt that Denel had to be specific about what it was doing in the provinces, pointing out that since Members of this Committee reported back to their constituencies, it made sense for Denel to inform the committee of matters that needed to be taken back to the constituencies.

Mr Saloojee replied that one of the known weaknesses of Denel was that it had not been communicating properly and regularly. This was why Ms Vuyelwa Qina, Group Executive: Communications was busy with a dynamic, integrated communication strategy, with its internal stakeholders, and this strategy had been approved by the Board. This was intended to build up a dynamic that clearly shared matters with the Committee, unlike in the past.

Mr Z Mlenzana (COPE, Eastern Cape) asked how Denel’s interventions were progressing in the provinces.

Mr Saloojee replied that details would be provided to the Committee about where in the provinces Denel was working, what it was working on, what the specific issues were, and how people were being attracted. This would include information on what was done in regard to following up further with people.

Mr Jacobs said that the last time the Committee had visited Denel, there were complaints regarding contracts. He asked for more information about long contracts, as they would sustain Denel.

Mr Saloojee replied that Denel had contracts that it sustained externally and these included some huge contracts with Malaysia, Brazil, United Arab Emirates and Saudia Arabia. There were many local contracts with the air force and the army internally and those were anchor contracts that supported Denel. It did have small contracts as well. The strategic partnership, with the Memorandum of Incorporation, would allow Denel to talk about specific amounts of money that would be allocated over a specific number of years to specific contracts.

Mr Jacobs asked for information about Denel’s marketing strategy.

Mr Saloojee replied that Denel was partnering with local people and technologies in other countries as part of its strategy. It had long-term sustainable relationships in terms of technology transfer and was looking at how to assist the countries with whom it was going to partner with. This was in order to sustain its capability, in terms of giving and receiving support for the entire life cycle. Its value proposition in relation to sale of products had also changed. Firstly, it was no longer selling products alone, but it was selling partnerships. Secondly it had really revamped the manner and attitudes around doing business with Denel, and this had been a huge cultural shock. Denel’s position, from an India, Brazil, South Africa (IBSA) perspective had just created a better environment for it to leverage political relationships in a more significant way. The external environment had changed fundamentally, and so had the way in which Denel was doing business.

Mr Jacobs asked for information about internships, and where in the provinces they were located.

Mr Mlenzana echoed the positive sentiments of the previous speakers and thanked Denel for the presentation. Denel had done good work in turning its situation around.

Mr Mlenzana then asked about the Training Academy as Denel had been asked to reach out to the provinces in this way. He too repeated that Members had constituency offices and this was a way for Denel’s interventions to be made known in the deep rural areas. 

Mr Saloojee said that the schools programme was still relatively young and would be expanded as more resources become available. No provinces would be neglected. Denel was committed to the development of the rural areas to make itself more representative.

Mr Mlenzana reiterated that Denel was telling good news, and said that it should continue to do so. It should also assist the Committee in passing on positive information, and keep communication alive between Denel and the Committee, and he suggested that perhaps, when it visited rural areas in particular, Denel should invite the Committee to accompany it.

Mr M Sibande (ANC, Mpumalanga) said that when the Committee had visited Denel, it was not doing very well at that stage, but this strategy report reflected major improvements, especially when the further aims of Denel were mentioned. He asked how Denel would approach a country like Israel, given what that country was doing in Palestine and Syria.

Mr Jacobs asked what Denel was selling to other countries and if these weapons could be turned back on the country itself.

Mr Saloojee replied that Denel operated under the strictest compliance regime. It could not sell anything to certain countries if this government did not allow it to do so. It would only sell to those considered as political allies. That meant that there was no possibility of Denel selling to any rogue states that might use the weapons against South Africa itself. Denel would also not sell to countries that were in conflict like Israel. Denel did not have a defence industrial relationship with Israel.

Mr Sibande said that he was concerned abut the sections in the report that spoke about inefficiencies, and noted that Denel had reduced eleven divisions down to six divisions, with one director. He asked if Denel had a risk management strategy, as monitoring and evaluation were key and fundamental to the process.

Mr Saloojee replied that Denel had a fundamental comprehensive risk management strategy that was reviewed by external and internal auditors and the Auditor General’s office. It had identified ten key risks that affected businesses, and those were monitored regularly.

Mr Sibande asked if Denel used consultants.

Mr Saloojee replied that Denel did not use consultants.

Mr Sibande asked what the gender composition was of the four black senior executives.

Mr Saloojee replied that Denel had not reached gender equity, and was aware that it needed to do so. However, he noted that it was difficult to attract women into the industry, as the private sector paid higher salaries that were more attractive.

Mr Sibande asked if the employment of the 600 people noted was temporary or permanent, and what criteria were used around employment.

Mr Saloojee replied that the 600 workers were permanent workers. Denel had 14% contract employment. The majority of its workers thus had permanent contracts.

Mr Sibande asked if Denel employed people from foreign countries.

Mr Saloojee replied that Denel had three associated companies. Denel itself did not employ any foreigners. In the three associated companies, there were three employees from abroad.

Mr Sibande said that the DVD that was shown was a great marketing tool and clearly showcased the positives about Denel. He said that it would have been useful if more of the Committee Members had a military background.

Mr Saloojee replied that the DVD was linked to the positives outlined, but he noted that this was essentially a corporate marketing video, and would be changed slightly to better reflect the good story in the future. It would be sent to all Committee Members as requested.

Mr Sibande asked how many black empowered companies had been given contracts by Denel.

Mr Sibande asked for clarity about the Hoefyster development contract, and what criteria were used to allocate such a large amount of money of R8.4 billion.

Mr Saloojee replied that that amount, R8.4 billion, was high because of the level of technology and the number of vehicles that had been contracted by ARMSCOR and the Department of Defence (DOD).  Denel and the Minister had said that the local content on that programme must be 70%, because of the nature of the historical legacy inherited in this industry. There were also not many Black Economic Empowerment (BEE) companies that provided core capability into the defence industry. There was a concerted programme, run together with the Ministry, that at least 25% to 30% of the companies had to have BEE shareholding.

The Chairperson repeated that the visits to the schools by Denel had left a lasting impression because when students returned to schools they were so excited that some had even changed their subjects to be able to work in the industry. She urged Denel to get feedback from schools directly, rather than waiting for the Department of Education for feedback. When it returned from the schools, it should immediately start to follow up on what had been gained from visits, so that it was possible to have debates by the children about what they saw, and to stress the importance of mathematics and science.

Mr Mhlontlo said Denel did have a dedicated individual who oversaw the people coming in for visits, and what the Chairperson had suggested was in fact already being done.

Mr Jacobs asked if Denel had been working on building capacity to sustain the turnaround strategy, because the Committee did not want to see a situation where the strategy collapsed when certain staff members left.

Mr Mhlontlo said that the strategy was executed by human capital that had been in the company for many years. Denel also consistently put in a succession plan to ensure that those future leaders were the second tier of leadership. In addition to this, Denel was doing projections and asking questions about its own future. For instance, if it knew that the level of activity was now at R4.4 billion and supported by 6000 employees, it was already also planning and investigating what would be needed when it began to execute at R5 billion, taking into account the natural attrition that was likely, at what levels and layers more expertise was needed, and what changes in skills development needed to take place in order to sustain higher levels of activities. Denel was comfortable that its turnaround was sustainable.

Mr Sibande thanked Denel for being honest to the Committee. He reminded Denel to send through the DVD to members.

The meeting was adjourned.
 

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