Denel’s Chief Financial Officer is cautiously optimistic that the defence conglomerate is turning around and headed for financial sustainability, with major restructuring underway at the group.
Carmen Le Grange was speaking at the sixth annual Aerospace, Maritime and Defence (AMD) Conference on Friday. Hosted by Creative Space Media, it saw the Secretary for Defence, Dr Sam Gulube, captains of industry and experts look at the current state of the defence sector and examine its future. It also saw United Nations officials explain their procurement processes and opportunities for local industry.
Le Grange told the hundreds of delegates assembled at the CSIR International Convention Centre that Denel was still facing a number of challenges. In the 2018/19 financial year the company’s revenue was down 38% to R3.8 billion, compared to R5.8 billion the year before. Similarly, cash in 2018/19 was R575 million (from R1.3 billion the year before), and research and development funding R108 million (down from R769 million). Denel made a R1.749 billion loss in 2018/19 compared to R1.053 million the year before – it last made a profit in 2016.
A number of factors are making it difficult to turn things around more quickly, including low production activity, labour under-recoveries despite headcount reductions, high interest expense, cost to exit loss-making divisions and onerous contracts, and continued liquidity challenges.
However, Le Grange was confident of improvements in future years due to the R1.8 billion capital injection from the state as well as better leadership from the new board appointed in May 2018. Denel is cooperating with the state capture enquiry and Special Investigating Unit (SIU) in pursuing criminal litigation to recoup and claw back financial losses emanating from state capture.
“The future can’t not have a Denel in it,” Le Grange said. “It would not be a good thing if Denel is liquidated as we play a critical part in industry. We plan to improve in future years and in the next budget we will get a charge from the shareholder.”
To transition to the future, Denel plans to exit some areas and keep other core products and systems, namely artillery, missiles, infantry systems, the Overberg Test Range, systems integration division, cyber capabilities and Rheinmetall Denel Munition.
Strategic partnerships will be developed regarding aircraft and engine maintenance, repair and overhaul (MRO), the Rooivalk attack helicopter, unmanned aerial vehicles, maritime MRO and armoured vehicles.
In terms of loss-making divisions, the Group will exit the aerostructures business (it came out of the A400M contract at the beginning of this year); exit the foundry (this was built for PMP in 1970s and requires investment); exit the “huge” property portfolio; exit the Gear Ration division of Denel Vehicle Systems, as well as Denel Sovereign Security Solutions, the canine unit of Denel Land Systems, Spaceteq and insurance company Densecure. Subsidiary LMT went into business rescue this year and is now controlled by new management. Changes are also planned for the optronics side of the business.
Denel is open to investment, particularly regarding companies that can invest in equity, can provide access to additional markets, have a proven track record and protect existing jobs. Denel is currently examining 40 expressions of interest in the company.
Le Grange noted some progress in the turnaround to date. This includes an order intake of R7.8 billion in 2019/20 compared to R509 million in 2018/19; the signing of a R6.3 billion export order (the largest to date); a solid order backlog of R17.4 billion covering four years of sales revenue; exiting onerous contracts that should save R250 million per year; and the reduction of operating costs by R500 million, including R15 million at head office level.
Divesting from non-core assets can generate cash of R1.56 billion, with the first results in a 3-6 month window. Further operating cost reduction has the potential to save R500 million through the supply chain.
Le Grange said Denel has been paying critical suppliers, but not all, although Le Grange assured they would be. The company is tax compliant and has paid its staff and regulatory bodies to ensure compliance. Employee numbers have been reduced, partly through voluntary severance packages, with 3 968 employees at present, down by 900 over the last 16 months.
“We have made significant strides in the turnaround. We have competent leadership in place and a viable turnaround plan,” Le Grange said. “We continue to find cost savings and efficiencies.”