Denel restructuring in order to sustain business turn-around


Defence manufacturer Denel says it has initiated a realignment of companies in the group that will lead to savings, increased efficiencies and more effective corporate governance.

The restructuring will see the eleven companies in the group clustered together according to similarity of business and geographical location. The new structure was approved by the Board of Denel in June and the process is expected to be completed by the end of the year, according to Group Financial Director, Fikile Mhlontlo.

The new structure will result in a sharing of non-core and support services and a better utilisation of office space and manufacturing facilities, Denel said in a statement today.

In terms of the new structure the company’s landward defence businesses in Lyttelton, Denel Land Systems and Mechem will be integrated into a single entity. At the group’s headquarters in Irene, Denel Dynamics will incorporate the division responsible for the design and manufacturing of unmanned aerial vehicles (UAVS) as well as Denel Integrated Systems Solutions.

Denel Aviation will incorporate Denel Technical Academy and Denel Personnel Solutions. Denel Aerostructures will remain as stand-alone company at the Kempton Park campus but will, in future, share certain management functions and support services with Denel Aviation.

Ammunition manufacturer PMP in Pretoria and the Denel Overberg Test Range in the southern Cape will remain unchanged.
“Our objective is for Denel to be managed and perceived as one, integrated business,” said Mhlontlo. He added that an integrated Denel would strengthen the company’s ability to retain its position as South Africa’s premier manufacturer of strategic defence and aerospace products and solutions and a growing player in African and global defence markets.
“Denel is a strategic national asset for South Africa and as a state-owned company we will play a growing role to contribute to national objectives in terms skills development, research and the growth of a viable high-tech manufacturing industry,” he said.

The changes to Denel follow the appointment of Riaz Saloojee as new Group Chief Executive Officer in November 2011. The state-owned company has reported a profit of R41 million for the 2011/12 financial year and generated cash of R210 million. Mhlontlo last month said the improved financial performance can be attributed to a growth in export orders and a 67% reduction in the losses posted by Denel Aerostructures. Other successful turnaround strategies include rigorous cash management and financial controls, improved efficiencies and on-going cost containment measures across the operations.
“This is an on-going priority within the group and there is still room for further optimisation and increased efficiencies in the coming year,” Mhlontlo said. Management in each division in Denel have been given specific targets for further reductions in operating costs.

During 2011/12 Denel secured approximately R5 billion in export orders that will be executed over the next five to seven years. Future growth opportunities are underpinned by export orders already concluded as well as local defence orders expected to become operational in the next 24 months.

Mhlontlo said although Denel is pursuing a number of new business opportunities in both the local and international markets the prospects in the defence industry require time to be converted into firm orders.

Thus, the company will have to continue with “robust cash management interventions” to ensure positive cash flows and the continuation of the financial turnaround of the company after it has been loss-making for more than a decade.

Corporate governance in the group has been streamlined and a number of new senior appointments have been made to ensure succession planning and promote diversity and employment equity. The Executive Committee was strengthened to ensure a higher degree of integration between the various entities, Denel said.
“Denel is of vital importance to the broader South African economy because of our role as a custodian of key strategic defence capabilities and a contribution we can make to meet national developmental goals,” said Mhlontlo.

Last month Saloojee said the year-on-year improvement in the group’s financial performance is commendable but Denel is still faced with a challenge to generate positive cashflows in the short- to medium term. It continues to have a high debt gearing of approximately R1.85 billion but he is satisfied that there are adequate risk mitigations with strong prospects for growth and increasing profitability over the next five years.
“Our strategy is aimed at achieving over a three-year period a significant increase in revenue, optimising cost and efficiency, strengthening the balance sheet, modernising technology and transformation. We intend to ensure quicker conversion of order pipelines to orders especially in the export market,” said Saloojee.
“At the same time we will develop and implement measures aimed at optimising and reducing business costs through continuous improvements in efficiencies to ensure we stay competitive and remain in business.
“The Board and executive management share a strategic intent to make Denel a dynamic, vibrant, financially sound and profitable organisation which has empowered its employees with regards to skills development, technology innovation, people retention and reflecting the transformation imperatives of the Government. This forms the foundation from which we will build a long-term sustainable company,” said Saloojee.

The Denel Group and its associates currently employ over 6 700 direct personnel. Taking into account global standards that the industry creates four downstream jobs for every formal employee this means that the company indirectly maintains or supports some 30 000 job opportunities.

Among the key defence programmes currently executed by Denel are:

The successful completion of important milestones on the development phase of a new mechanised infantry combat vehicle (Badger) for the SANDF’s Project Hoefyster.

Denel Aviation has successfully delivered eight certified Rooivalk combat support helicopters to the SA Air Force with the remaining three aircraft scheduled for handover before the end of the current year.

The development of the A-Darter fifth generation air-to-air missile is on track as part of a collaborative programme between South Africa and Brazil. Denel Dynamics has successfully completed flight clearance and integration programmes for firing the A-Darter from the Gripen fighter jet.

The maiden flight of the Seeker 400 Unmanned Aerial Vehicle (UAV) will take place before the end of 2012. The Seeker 400 has a maximum range of 750 km and can stay up in the air for 16 hours.