Denel's revised strategy ensures Group is poised for growth

Denel Corporate: strategic leadership forum press release

Denel’s revised strategy ensures Group is poised for growth

20 May 2009, Tshwane. Today’s strategic discussion forum with the media at the Denel Group’s offices in Irene led by Talib Sadik, Group CEO of Denel, outlined the organisation’s revised growth strategy and gave an update on the turnaround progress made to date. With a renewed focus on customers, efficiency and governance, the Group is entering into the next phase of its restructuring process based on five key drivers that will set the state-owned defence and aerospace enterprise firmly on the path to growth and self-sustainability.

Denel’s turnaround strategy was launched in 2006 by its shareholder as a result of its insolvent position due to its high losses. Its implementation has seen the conclusion of three strategic equity partnerships with leading European defence and industrial players such as Carl Zeiss, Rheinmetall Defence and Saab; and the development of a robust corporate governance and financial management framework, laying the foundation for “good business”. “In evaluating the strategy against our objective of becoming self-sustainable, it became necessary to take into account the turnaround progress to date and the changing local and international circumstances – and adapt accordingly,” explained Sadik. “As such it was imperative to revise the strategic pillars and realign them so as to ensure continued momentum towards a sustainable and respected Denel.”

Sadik went on to explain that for Denel’s restructuring strategy to be effective, it must be both dynamic and responsive, “While all nine core entities within the Group are now being managed as effective stand-alone businesses with boards, business plans and governance processes, to reach our long-term goal of profitability in a global environment, we will need to continue with intensive, focused interventions. The revised growth pillars will guide these interventions.”

Comprising improved access to sustainable markets; operational excellence; deepening relationships with the Ministry of Defence; strengthening governance and financial management; and becoming a respected South African company, the revised strategic drivers are in the process of being launched throughout the Group. “Our goal is to ensure that implementation is consistent, continuous and embedded throughout the Group. By setting benchmarks for entities within the Group and holding executive management accountable, we will continue to drive performance and delivery, and build pride within Denel,” said Sadik.

While acknowledging the Group still faced challenges, most notably the continued posting of losses by Denel Saab Aerostructures and securing further recapitalisation, Sadik maintained it was important to acknowledge the milestones that had already been achieved. These included the improved relationship with the South African Department of Defence, enhanced risk management and programme execution, and the significant performance of and turnaround seen in some of Denel’s fully-owned (100% shareholding) businesses. The ongoing transformation seen in the Group and the significant turnaround results achieved by the recently concluded strategic equity partnerships (through improved order cover and transfer of world class industrial systems and processes) were also extremely positive.

“In terms of our equity partnerships, Turbomeca Africa has continued to grow its profits year-on-year. We have also seen Carl Zeiss Optronics’ sales per person has increased from R0.8 million to R1.6 million since its restructuring, and are expecting Rheinmetall Denel Munitions to post its first profits in the new financial year,” explained Sadik. He added that Carl Zeiss Optronics has shown a 100% increase in revenue over a two year period, while Rheinmetall Denel Munitions’ order cover is in the region of 70%.

“We are extremely proud of the significant successes we have seen across the Group,” said Sadik. “During the past year we have celebrated the successful testing of the A-Darter missile by Denel Dynamics, and Denel Aviation becoming Africa’s first accredited Lockheed Martin service centre. Mechem has also successfully completed de-mining projects in Eritrea, the DRC and Sudan. The extension of Denel PMP’s multi-year contract with BAE Systems to supply brass cups for the production of ammunition is also currently under negotiation.” Sadik additionally highlighted Denel Land Systems’ winning significant overseas contracts for infantry weapons, notably mortar systems, machine guns, the NTW-20 anti-material rifle and the AGL grenade launcher. He also lauded the success of Denel OTB in performing test services for the SANDF (South African National Defence Force), the German air force and navy, and the Italian and Singaporean air forces; and DSA for completing its capital investment programme.

When it came to financial performance, Sadik outlined how Denel has succeeded in improving its financial performance over the past five years - significantly minimising the loss incurred by the business from approximately R1 561m in the 2004/05 financial year to R347m in 2008, “The Group’s gross profit has grown from a negative of 6% in 2006/07 to a positive 16% in 2008/09. Revenue per employee across the Group has more than doubled from R353 242 in 2006 to R745 460 in 2009.” Of even more strategic significance however, is the fact that Denel’s order book is also significantly stronger – R16 048m (including confirmed contracts) at the end of 2009 as compared to R3 749m in 2006. “Total research and development has grown to R1 117m in 2009 driven largely by development of the A-Darter 5th generation air-to-air missile, the Badger infantry vehicle and the A400M military cargo aircraft. The positive results of the recent organisational climate survey were also well received where a culture index of 50 was achieved in 2008, as opposed to the 43 recorded in 2006.

Even though the remainder of the recapitalisation package has not yet been received, Sadik said that the revised strategic drivers would go a long way in assisting Denel to better navigate these challenging economic times, “We will continue to engage with the various Government departments with regards to improving our market access both locally and abroad, and secure our recapitalisation. Our focus and commitment to turn the Group around remains unchanged.”

With regards to the company results for 2009, Sadik reiterated that Government’s continued support of Denel needed to be seen as a “long-term investment”. He said that the results of this investment were clearly visible, with a number of individual entities in the Group already showing improved performance. “This is the predominant trend within Denel and one which the new strategic drivers will ensure continues. There are, however, instances where we are still experiencing challenges, but decisive action is being taken in this regard.” He further stated that Denel’s preliminary financial results indicate that the Group will perform better than budget.

In launching the new strategic pillars Denel has not only realigned the Group with its goals of sustainability, world-class performance and delivery, but additionally poised each of its companies for growth. By continuing its focused and determined approach to turning the organisation around and taking the necessary action to ensure this, Denel looks set to become a strategic and valuable defence and aerospace entity all South Africans can be proud of.

Ends.

Letsema Communications

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