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Growing and creating value for the customer under challenging economic conditions


Denel Group's annual results for the 2016-17 financial year show it has performed better than anticipated in a tough economic climate.

The Denel Group's annual results for the 2016-17 financial year show a company that has weathered a challenging global economic period, but managed to perform better than anticipated. The global defence industry, including our local industry, has been challenged in terms of growing profitably in an ever increasing cost-sensitive and competitive market, while also making cost-cutting decisions to maintain acceptable financial performance. Denel has not been immune to these challenging economic conditions.

However, the resilience and hard work of our employees has seen us once more weathering the storm, and ready to take the Denel group to another level of growth and sustainability. The results Denel is presenting would not have been possible without the resilience and support of its employees, suppliers and clients. It is consolidating on the gains of some hard decisions it has taken as the leadership collective, where some divisions have been consolidated, and it is entering new capability areas. This has all happened at a time when Denel, similar to most state-owned companies in the country, has been subjected to intense media scrutiny that has caused reputational damage to its brand.

Denel has always demonstrated a swift agility to identify trends and position itself to respond to opportunities as they arise. The group will continue to look for closer co-operation and alignment within the local defence and research communities, but also internationally. These will be alliances where we can benefit from global expertise to continuously enhance our product offering and penetrate new markets. Already more than 60% of our revenue comes from exports and our future business outlook is bolstered by a strong order pipeline in excess of R40 million.

Based on these substantial exports, Denel is able to maintain, expand and build on a broad scope of sovereign and strategic technologies that would otherwise not have been possible. Credit must go to the Ministry of Defence and Veterans, Armscor and the SANDF, which remain Denel's anchor clients, and Denel is indebted to them for much of its product portfolio and technology funding. It perfectly demonstrates the mutual benefit that can be derived between collaborating government entities. With more than 75% of both the local and export work being localised back to South Africa by Denel, the local defence industry benefits substantially from this partnership.

Going forward, Denel's strategy to create value for its shareholder and the people of South Africa will be guided by:

* Strengthened customer and stakeholder relationships in support of long-term business prospects;
* Efficiency, productivity and profitability;
* Creating capacity for cash generation;
* Enhanced capabilities and innovation; and
* The creation of a dynamic and vibrant organisation.

Strong financial results for long-term sustainability

The core of Denel's growth strategy lies in maintaining a continuous increase in the order book and managing its cash-flow, both of which will be made possible through strong relationships with key clients, suppliers, stakeholders and, above all, active political support from government on its export opportunities. Denel continues to leverage on the existing global partnerships to secure future business. It has consolidated some divisions while at the same time embarking on initiatives to diversify its business offerings.

The results it is presenting to you today is a reflection of the tough economic conditions the industry has weathered in the past year, and the resilience of its business. Denel continued to maintain revenue levels above the R8 billion mark, recording a moderate 2.5% reduction in turnover to the prior year. Exports increased by 5% and now account for 63% of the group's total revenue. Relationships with foreign clients continue to grow with long-term partnerships secured on its strategic projects.

Profitability continues to be satisfactory and exceeded set targets by 9%, posting a total of R333 million NPAT. Return on sales was maintained at the 4% level in line with the prior year's 4.8%. This year-to-year maintenance of profitability was achieved in spite of a reduction in sales in real terms (inflation factored) and is attributable to the group's cost containment discipline. The group is embarking on a strategic drive to further reduce the opex percentage to sales currently at 18% towards a 14% range. With the tough and volatile international trading conditions, Denel returned profitability in spite of a forex loss of R232 million booked for the year. The current debt-to-equity ratio of 1.2:1 is still not at acceptable levels. Plans are already in place to bring it down to even more acceptable levels. An important key lever towards developing the Denel business into long-term sustainability is in optimising the cost structure through operational excellence.

Enhanced capabilities and innovation

The speed of change, accompanied by a global shift towards asymmetric conflict, has led to increased impetus for Denel to be at the cutting-edge of innovation in the defence and technology sectors. The Denel Group already meets many of the South African National Defence Force's requirements in land, sea and air. We expanded our capabilities into the cyber space environment. Cyber threat is on the rise to our national security and economic interests.

To this effect, the establishment of the Denel Tactical Cyber Command Centre (DTC3) was an important step towards strengthening South Africa's sovereign capabilities in critical areas and stimulating the growth of research and development in highly specialised sectors.

Denel has ongoing discussions with the South African Air Force and the Department of Defence on the upgrading of the current Rooivalk Mk1F fleet. The world-class capabilities of the Rooivalk combat helicopter have strengthened Denel's reputation as a globally respected defence manufacturer. The Rooivalk is unmatched in providing our forces with unrivalled levels of protection, mobility and firepower. This product provides Denel with lucrative opportunities both locally and internationally, which Denel is relentlessly pursuing.

At the 2016 Africa, Aerospace and Defence (AAD) trade and exhibition among the products Denel brought into the market was a new machine gun. This is a new generation light-weight machine gun, the Denel Machine Gun-5 (DMG-5), which opens up new opportunities in regions such as South America, Middle East and Asia.

The launch of the Africa Truck emphasised Denel's ability to deliver products that are designed to meet the unique requirements of the SANDF especially in its deployment during peace-keeping operations on the continent. This is a national flagship program providing an African solution by Africans aimed at opportunities locally and as well as the rest of the African market.

Our people are our future

The Denel Group values and prioritises its contribution to the national socio-economic imperatives of government. These include skills development, job creation and transformation. The group's Mentorship Programme ensures that our younger employees get the necessary support to enhance their development as they enter their careers of choice.

For Denel, the transformation of our business is a non-negotiable that is implemented in a responsible manner across the group. Currently, black employees make up 62% of the workforce, while female representation has grown to 26%. During the past year, 84% of new appointments came from African, coloured and Indian communities, with more than 50% being female. Denel has set itself targets to do even better by the end of the current financial year.

Denel would not continue to exist without the support and relationships with its communities. As the group, it places a high premium on national socio-economic imperatives, including transformation and skills development. In the past year, Denel allocated significant financial resources into its flagship corporate social investment project, the Schools Outreach Programme (SOP). This programme provides extra maths and science tuition to learners in historically disadvantaged areas. It covers seven provinces in total and these are the Eastern Cape, KwaZulu-Natal, Limpopo, Free State, Mpumalanga, North West and Gauteng.

Growing the business and order pipeline

The Middle East and Asia-Pacific regions are key export targets for the company. We are making great progress to extend our footprint in these markets. Denel Vehicle Systems has successfully delivered N35 4x4 vehicles to a customer in the United Arab Emirates and received further orders for the RG12 and the RG31 mine-resistant vehicles.

Efficiency, productivity, profitability

In the past financial year, we completed the consolidation of all Denel's aviation-related businesses at the Kempton Park campus, resulting in the establishment of Denel Aeronautics. The objective is to improve efficiency and productivity and optimise Denel's cost structures through operational excellence.

Denel Aeronautics is the leading aerospace company in Africa and a powerhouse in design, manufacturing and MRO solutions to both the military and commercial sectors on the continent. Denel continues to deliver on its commitments to the world's most advanced military airlifter, the A400M.

Denel has also grown its footprint in the aviation sector with the full acquisition of Turbomeca Africa (TMA). The Competition Commission has given its approval for this transaction subject to certain human capital conditions. TMA manufactures engine components – including gears, gearbox casings, shafts and couplings – for Safran Helicopter Engines. The company supports 40 customers in 20 countries, including the SA Air Force, the SA Police Services and a number of civilian air operators.

Appreciation

In conclusion, allow me to thank Minister Lynne Brown as the shareholder representative, Deputy Minister Ben Martins, the chairperson of our Parliamentary Committees and the Director-General of the Department of Public Enterprises for ongoing guidance and support. Let me extend my appreciation also to the Minister and Deputy Minister of Defence & Military Veterans, the Secretary of Defence, and the Chief of the SANDF, Armscor, Denel's suppliers as well as organised labour and industry partners for their support.

I further thank our Board of Directors for the confidence and support they have extended to me and the executive team during this period. Last, but not least, allow me to thank each and every one of Denel's employees. The company could not have achieved these results without their efforts and dedication.

Editorial contacts:
Denel Corporate
Pam Malinda
(+27) 012 671 2662
pamm@denel.co.za