Gigaba applauds Denel’s turnaround

MINISTER MALUSI GIGABAS ADDRESS AT THE DENEL POST-AGM MEDIA

BRIEFING ON 22 JULY 2013

The global economic downtown of 2011 and 2012 has continued to impact on the growth prospects of many industries across the world, including the defence industry which has continued to bear the brunt of the shrinking defence budgets.

The trend is set to continue for the foreseeable future until we see a shift in global growth projections.

However, the emerging markets defense expenditure is expected to be resilient.

Our objective as government is for Denel to grow into a global player in the defence industry and to become a preferred supplier and prime contractor for the Department of Defence’s large programmes as well as for the African Continent.

To achieve this, the company will have to aggressively invest in research and development which will help to secure long-term sustainability.

Furthermore, I am engaging with the Minister of Defence and Military Veterans to strengthen our collaboration so that the South African National Defence Force becomes the platform to showcase Denel’s capabilities.

In support of the collaborative initiatives between the two Departments, DPE is preparing to undertake a study into the economic benefits derived from the Rooivalk

Attack Helicopter manufacture programme, in which Denel Aviation was the prime contractor and the Original Equipment Manufacturer (OEM).

The study will assist us in developing the business case for further investment in design and manufacturing.

In pursuit of African business, I have directed the Board of Denel to develop a comprehensive African strategy and align it with the Department’s own strategy so that the company can leverage off the Government’s diplomatic programme on the continent.

PERFORMANCE DURING THE YEAR UNDER REVIEW

With regards to the financial performance under review, I have noted the improvements in the performance of the business especially the following:

· The 10% revenue growth, driven by a 34% increase in exports;

· 73% improvement in net profit of R71m during the year under review, marking a third consecutive year of positive financial performance;

· 35% reduction losses in DAe; and

· 54% improvement in debt-to-equity ratio.

The positive performance demonstrated on the company’s bottom line over the 2012/13 financial year amidst unfavorable market conditions.

I have further noted the following positive developments:

· Improvements in the terms of the Denel Aerostructures’ Airbus A400M contract;

· The introduction of new capabilities into the SOC through the Tawazun Dynamics joint venture between Denel Dynamics and Tawazun Holdings of the UAE;

· Denel Land Systems acquisition of a majority stake in Light Mobility

Technologies (LMT) to introduction of armoured vehicles; and

· The accreditation of Denel Aviation as an MRO Centre for Russian Helicopters.

The expansion of Denel’s technological and defence capabilities will be its strong value proposition as it positions itself as global player in the export market.

I am encouraged by the company’s financial performance, business developments and new initiatives for the year under review.

However, I will be the first to admit that the company is not yet out of the financial woods.

As such, I have asked both the Board and management to develop a long-term growth strategy which will place the company in a sustainable growth trajectory, with Africa firmly in its focus.

The long-term strategy will take into account Denels’ advanced manufacturing capabilities and leveraging with other aviation asserts in the DPE portfolio to unlock opportunities through collaboration between SAA Technical, SA Express Technical and Denel Aviation.

This should result in the establishment of a World Class – scale and technical capability – MRO business leveraging from OR Tambo International Airport as one of the fastest growing hubs as well as the Ekurhuleni Aerotropolis plan.

The other opportunity is on Supplier Development obligations associated with the SAA fleet renewal contributing to the expansion of Denel’s aerostructures, engineering and maintenance capabilities.

Accordingly, I have directed the Board of Denel to pursue collaboration with SAA to leverage on this procurement to help deepen industrial capabilities, skills development and job creation.

This collaboration is part of the broader push for SOC within our Portfolio to work together in pursuit of strategic opportunities.

This will have positive impact to our balance of payment.

On issues of transformation, particularly with regard both to gender and employment equity, the Board will soon be presenting their human capital development strategy to indicate how institutional planning will be undertaken to address the company shortcomings in this regard.

I have noted the moderate improvement on employment equity status within Denel as the total number of black employees is 4% more than the previous year from 45% to 49%.

I have further noted the increased effort in transforming the Denel’s engineering skills pipeline and am of the view that the numbers are still too low to compensate for impending mass retirements due to Denel’s engineering skills age profile.

This matter must be addressed well in time, before it reaches crisis point.

SUPPLIER DEVELOPMENT AND SOCIO-ECONOMIC OBJECTIVES

I commend Denel on their 85% local spend.

However, the 2013 Annual Report has limited information on how this was allocated and who are the beneficiaries.

Reporting just on aggregate BBB-EE levels is not sufficient.

We need transparency in terms of race, gender and youth spending profile so that we understand if we are making a difference in the lives of our people and changing the structure and ownership patterns of our economy.

I am encouraged by the commitment in implementing the skills development programme.

52 new engineering trainees have been enrolled at Denel from an initial target of 28 committed in the 2012/13 Shareholder Compact, which is a 186% achievement.

92 artisan trainees were enrolled against a target of 62 or 148% achievement, with 11 technician trainees enrolled against a target of 11 which is 100% achievement.

There is improvement in addressing equity and gender in the training programme, as

92% of artisan and technician trainees are black with 30% of these trainees being women, but more women should be enrolled in these programmes.

We should make a conscious effort to reach and more than comply with the 50% gender target.

In terms of skills development, we would further expect the company to optimise its utilisation of the Denel Training Academy (DTA) to ensure a consistent pipeline of skills, both for Denel as well as for the economy at large.

In this regard, we are enhancing our collaboration with the Department of Higher

Education and Training as agreed between myself and Minister Nzimande.

We commend Denel for hosting a successful winter school youth camp for Mathematics and Physical Science pupils from the Free State Province during the June 2013 school holidays.

I would like this to be expanded to cover the rest of the country.

CONCLUSION

The death of Denel Mechem employees, Mr Morne Lotter (41) and Mr Alan Simpson

(53), on 19 June 2013 in Mogadishu in Somalia, is a tragic reminder that some activities of Denel will at times expose employees to mortal danger.

I have directed the Board to ensure that adequate risk analysis protocols, including consultation with our diplomatic missions, are in place to ensure the safety of employees deployed outside our borders.

I expect the Board and Management to continue aggressively to ensure that Denel is returned to operational profitability.

And that all our people are not only the beneficiaries of the enterprise but accrue economic benefits from SOC spend through enterprise development and real business opportunities.

I thank you

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