Denel's June salaries still up in the air

Denel CEO Danie du Toit told parliament on Wednesday that the company cannot guarantee that it will be able to pay salaries for a second month in a row.
Denel CEO Danie du Toit told parliament on Wednesday that the company cannot guarantee that it will be able to pay salaries for a second month in a row.
Image: REUTERS/Siphiwe Sibeko/File Photo

State arms company Denel cannot guarantee that it will be able to pay salaries for a second month in a row, after only paying part of its staff in May.

The company told parliament that it needs working capital of about R230m on average to run its business.

“In terms of June salary payments, we are sort of consolidating to see what cash we have. We will make a decision about June salary payments in the next coming days,” said Denel CEO Danie du Toit on Wednesday.

Du Toit told a joint meeting of parliament's oversight committees on public enterprises that the company's financial situation was not great and that it was not generating the revenues it needs to cover its expenses.

He explained how, when the company could not pay full salaries in May, it applied a sliding scale - with the lowest level employees receiving 100% of their salaries and those at the top receiving around 20%.

The company received some funds from the unemployment insurance fund (UIF) for March and it has applied for April and May.

One of numerous struggling state entities, Denel recently received R576m from the government. It is however not allowed to pay salaries with this money.

Denel generates cash from trade and sales, from what it calls its “strategic initiatives” like when it divests or sells some of its assets or inventory, and from cash injections from the state, said Du Toit.

The company has been further battered by the coronavirus pandemic, he said, adding: “I am careful not to blame Covid-19.”

“We made cash and liquidity plans and in February - before Covid-19 - we were quite confident that we would get through the next few months, based on a projected income from those three sources,” said Du Toit.

“What happened with Covid-19 is that we could not receive our export permits. We have around R400m of invoicing we could do.”

Limitations on air, sea and freight have also contributed to the cash drying up, he said. As a consequence, the company could not generate the cash it had in the first months of its corporate plan.

Du Toit said some major international players had put a block on transactions, reserving cash as they were nervous and not processing transactions. But those blocks were being taken away in recent days, he said.

The R576m cash injection from the state came with conditions, one of which is that it cannot be spent on salaries. Instead salaries must be paid from income generated from trade.

Denel's revenue grew from R4bn in 2013 to R8,2bn in 2016. But it started declining in 2016.

Local order intake and spending from Armscor also declined over the years, said Du Toit. Armscor spending has been reduced by over 40%, his presentation showed.

He cited among other reasons for a decline the company's cost structure versus its revenue. This he said was unsustainable.

“Our typical employment cost is around R144m a month - we can't sustain that on the revenue of around R2.8bn,” said Du Toit.

The company's debt situation was also unsustainable, he said. Denel is heavily reliant on a R3.4bn government guarantee to obtain money from lenders to fund its operations.

Du Toit said their liquidity and corporate plan shows that they will get through with the R576m and the money generated from strategic and turnaround initiatives and from trade. “So the intention is not to go and ask for another significant recapitalisation,” he said.

Du Toit explained how when the new board of directors arrived at Denel in 2018/19, it could not find information that it could trust and believe. After assessing the situation, they concluded that they were dealing with a fragmented and defocused organisation that was loss-making and ineffective, and had weak business systems, poor governance and elements of corruption.

He said they are trying to stabilise the company and are starting to exit onerous agreements like the A400M contract and others in Chad, Venezuela and the DRC. They are also divesting from non-core businesses and focusing their capabilities and working with equity partners to rebuild Denel.


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