Denel, the State-owned defence industrial group, on Wednesday briefed Parliament’s Standing Committee on Appropriations about, among other issues, progress with its turnaround plan. This was initiated in 2022 and has three pillars, namely Stabilise, Sustain and Grow.

Stabilise encompasses the securing of shareholder (government) funding, the finalisation and formal implementation of the Section 189 staff retrenchment process, and the right-sizing of the group’s resources and facilities (relative to orders) and the securing of critical skills for high probability opportunities.

In terms of funding to implement Stabilise, Denel needs R5.2-billion. It has secured R3.4-billion from the National Treasury and has raised R992-million from excess funds in the Denel Medical Benefit Trust. But its hope of raising R1.8-billion from the disposal of noncore assets has been dashed by the opposition of the Department of Defence (DoD).

The result is a funding shortfall which means that legacy debt is funded using cash generated by operations, and this is not sustainable.

Regarding staff, the retrenchment process has been partly implemented, but the support staff/technical staff ratio has not been addressed in some the group’s operations. Human Resources (HR) is developing a skills-attraction mandate. The right-sizing process has been partly implemented, but again the disposal of assets has not been supported by the DoD.   

Sustain involves securing Denel’s existing customer base and revenues; implementing new cost-saving measures; and formally creating and structuring its new divisions, aligning and preparing processes, business systems, governance and policies.

To date, securing the existing customer base (plus an export contract that is being delivered) is still a work in progress; revenue growth is not ideal and revenues are lower than forecast in the turnaround plan, with the 2024/25 financial year targets not being reached; and order book conversion is low.

Cost reduction has made progress, with operating costs of R1.32-billion in 2023 being reduced to R694-million last year. But the target had been R500-million. The failure to reach the target is owing to key elements of the turnaround plan, namely IT infrastructure consolidation, space optimisation and restructuring, proceeding more slowly than planned. “A significant increase in operating cost, mainly through the retention and employment of non-productive HR cost [sic] have seen the projected operating cost increase to R912[-million] or 55% of revenue,” stated Denel. Consequently, the direct:indirect ratio had returned to 1.2:1 and the group needs revenues of R4-billion to be able to sustain its currently forecast operating costs.

The restructuring of Denel’s divisions has been completed. Implementation of business systems, governance and policies is still under way, in line with the new business model.

Growth requires the group to identify and secure new revenue streams; bring in operational efficiencies to improve productivity, improve commercial and management skills and governance; and concentrate on improving processes and performance.

Progress so far amounts to the signing of new international contracts by the Landward and Denel Dynamics businesses, with negotiations with National Treasury under way to secure guarantees for Dynamics, as well as the signing of agreements with Airbus, Embraer and Safran, providing access to new markets in Africa. To improve productivity, project review forums have been created in the divisions, to monitor project performance. Regarding management and commercial skills development, Group Commercial appointments have been made and new procedures for business development have been implemented. Performance and process improvements are being implemented by means of the group’s “culture shift project”, and an Internal Control Environment Remedial Plan, to address audit outcomes, has been implemented.