Leadership - Financial...

Leadership

Directors and executive management 30Leading ethically 33Executive chairman’s report 34CEO’s report 36Acting CFO’s report 38

29Scaw Metals Group Integrated annual report 2014

Executive directors

Executive chairmanBSc Elec Eng, MSc Eng, MAP, EDP, AMP

Ufikile joined the board of Scaw Metals Group in February 2013.

Ufikile Khumalo (48) Markus Hannemann (47)

CEONHD MechEng, GCC (Mech Eng) Factories, MBA, AMP

Markus Hannemann is responsible for providing strategic leadership to the entire Scaw Metals Group and was appointed CEO in August 2013.

Independent non-executive directors

Nkosemntu Nika (56)

CA(SA)

Nkosemntu joined the board of Scaw South Africa (Pty) Limited on 1 January 2013.

Vusi Opper Twala (51)

BSc (Acc), MBA, MA Development Finance

Vusi joined the board of Scaw South Africa (Pty) Limited on 1 January 2013.

Neo Violet Mokhesi (53)

BCom, MAP

Neo joined the board of Scaw South Africa (Pty) Limited on 1 January 2013.

30 Scaw Metals Group Integrated annual report 2014

Leadership

Directors and executive management

Non-executive directors

Ashley Basil Ally (50)

BSc Elec Eng,Town and Regional Planning, Business and Public Admin

Ashley joined the board of Scaw South Africa (Pty) Limited on 4 May 2007.

Nokuzola Amanda Mpulo (35)

CA(SA), MBA

Nokuzola joined the board of Scaw South Africa (Pty) Limited on 29 January 2013.

Lucas Tseki (35)BCom

Lucas joined the board of Scaw South Africa (Pty) Limited on 4 November 2008.

Alternate non-executive directors

Sechaba Serote (33) Ortal Sharp (32)CA(SA)

Ortal joined the board of Scaw South Africa (Pty) Limited on 1 December 2013.

CA(SA)

Sechaba joined the board of Scaw South Africa (Pty) Limited on 1 December 2013.

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Executive managementExco comprises the most senior leaders in Scaw Metals Group. In addition to executive chairman, Ufikile Khumalo, and CEO, Markus Hannemann, Exco comprises:

Shaw Manyema (37) Gerrit van Wyk (54) Acting CFO BAcc (Hons), MBA

Professional ServicesBCom (Hons), MCom, MBL, AMP

Steve van Wyk (42) Ray Abrahams (45)

OperationsBSc Metallurgical Eng, AMP

TechnicalBSc Mech Eng

George Katergarakis (40) Bheka Khumalo (48)Human ResourcesBCom, Post Grad Dipl in Management, Masters in Management

Sales and MarketingBTech Metallurgical Eng

Dudu Ndlovu (44) Vimla Reddy (38)

Public Affairs and CommunicationBA Comm, MAP

Company secretary and LegalBA, LLB, LLM, Admitted Attorney of the High Court of South Africa


Leadership

Directors and executive management continued

for raising in good faith, violations against the Good Citizenship Business Principles or any legal or ethical concern. There were no reported incidences of corruption during the year.

“Speak Up” operates 24/7 through varied channels including a toll-free telephone line, email, FreePost and free fax. Trained telephone operators answer in English, isiZulu, Afrikaans, isiXhosa and seSotho. The “Speak Up” facility is referred to in, inter alia, the business integrity policy, good citizenship business principles and reinforced in the business integrity training. Reports are “sanitised” and provided to internal audit who prioritises (with the approval of the head of professional services) and investigates said reports. A summary of reported matters from the “Speak Up” facility is periodically presented to the social, ethics and transformation committee and audit and risk committee by internal audit. During the reporting period, there were nine reports via “Speak Up” and of that aforementioned number, there were five ethics-related reports. All anonymous reports were investigated and although there were nil disciplinary hearings, three matters are still being investigated.

Further, we have embarked on a transformation project, which has united the group in a commitment to understanding, inter alia, our employees’ views of their personal values, current group values and the desired group values going forward. Our employees’ feedback will form the basis of the group’s review of the current core values which is currently in progress. The adoption of new values for the group will obviously necessitate the review of all relevant ethics-related policies and the provision of appropriate communication and training to all stakeholders throughout the group.

Ethics awareness remains a priority for Scaw because we believe that earning and continuing to command trust is fundamental to our success. Our stakeholders should be confident that we deal with them fairly and ethically. Integrity means taking an honest, fair and transparent approach in everything that we do. It’s not about being popular, it’s always about doing the right thing.

There were no new incidents or legal actions relating to anti-competitive or collusive behaviour during the year.

Our current values and ethics-related policies were derived from our former parent company, Anglo American. Certain policies have been adopted including, but not limited to, the business integrity policy, gifts, entertainment and hospitality policy and good citizenship business principles which accord with our seven core values. These policies serve as our “moral compass” and helps guide our daily decisions and actions and outlines collectively the expectations we have of our ourselves, what our stakeholders can expect of us and what we can expect of them.

Ethics-related policies are communicated to employees in employment contracts, letters of appointment and form part of ongoing internal communications. In addition, copies of the business integrity policy and the good citizenship business principles are provided to Scaw suppliers. To reinforce ethics awareness, business integrity training is provided annually to employees. In 2013, 250 employees at Scaw operations in Johannesburg, Durban and Cape Town received business integrity training and 237 received competition law training.

The group’s approach to practicing ethical leadership at all times is to lead by example, thereby “setting the tone” and ensuring that there are appropriate mechanisms in place to promote the required ethical practices throughout the group. Management is accessible to employees who seek advice on ethical behaviour. Further, the formation of certain board committees such as the group’s social, ethics and transformation committee and the audit and risk committee provide close scrutiny and oversight of the group’s ethics management programme.

In addition, the group has an anonymous whistle blowing mechanism in place called “Speak Up”. It is operated and managed by Tip-offs Anonymous, an independent company offering anti-corruption reporting services. “Speak Up” is available to employees, customers, suppliers and shareholders to report dishonesty, fraud and other inappropriate behaviour in the workplace and they are able to do so in a safe, confidential and secure way. The group has a non- retaliation policy, ie no person will be prejudiced

Human ResourcesBCom, Post Grad Dipl in Management, Masters in Management

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Leading ethically

holistic transformation process within the group (our Siyaphambili Transformation Project) which is positioning us to achieve our core strategic goal of “Stabilise, Grow and Harvest”. This is beginning to bear fruit as evidenced by the sod turning of our new grinding media plant in Ghana, which fulfils our objective for accelerated expansion into the rest of Africa. We have also committed about R100 million to expand our business’s chain manufacturing operation in Vereeniging.

New beginnings bring a renewed fervour in facing challenges, and we are energised to navigate the difficult economic terrain ahead. As a hybrid group of “more than just steel”, our diversified product offering provides resilience.

Business and economic environmentScaw supplies products into the mining, construction and energy sectors both locally and internationally. The overall market demand remains subdued due to the negative effects of the recent global economic crisis. Competition in the steel sector has intensified because of the imbalance between supply and demand. Recently, we have witnessed the closure of many steel companies worldwide. The recent industrial relations challenges in the local gold and platinum mining sectors continue to impact our business considerably. Activity in the local construction sector has also slowed down significantly since 2010 forcing companies to look for other markets elsewhere.

There are potential opportunities on the horizon. The government’s planned infrastructure roll-out, as outlined in the Presidential Infrastructure Coordination Commission, will increase state expenditure and help to stimulate supply into the construction industry. The increased state procurement in the railway sector will also stimulate the local foundry business, as more emphasis is placed on the requirements for local beneficiation as well as higher levels of job creation and retention. The planned construction of

Executive chairman: Ufikile Khumalo

While there is no doubt we are operating in difficult times, with the impact of the global economic recession being keenly felt in our sector, Scaw as a group is well positioned to weather the storm, largely because of our diversified portfolio, with a sustainable foundation for future growth.

2013 marked a milestone year for the group, with new parent investment and leadership coming onboard. On behalf of the group I welcome our new chief executive officer Markus Hannemann and our acting chief financial officer Shaw Manyema, who have joined me in leading the group forward. Further, we initiated our


Executive chairman’s report

Leadership

various power stations in South Africa will also stimulate demand.

The African continent has also generally experienced an increase in foreign direct investment especially channelled into the mining and resources sectors. This presents an opportunity for Scaw to expand our geographical reach and diversify our portfolio.

Scaw will continue to focus on improving operational efficiency and work with our international partners to provide exceptional value-added services to our customers.

Scaw’s sustainabilitySustainability considerations are integral to all areas of our business. Our realigned strategy is supported by a solid business plan, which includes expansion of capacity and improved efficiencies. We also have access to the latest technologies through long-standing partnerships with reputable international companies. We are well positioned to compete with international companies both on quality and price.

Our Siyaphambili Transformation Project is a critical enabler of our growth strategy and will assist us in empowering our employees across all our businesses for sustainable growth.

Health and safety remains a priority. Our systems, standards and policies provide the basis to minimise risks to our employees and contractors while striving towards a target of zero harm. In addition, we are committed to sound environmental management principles ensuring that our operations do not negatively impact the environment.

Scaw’s ability to beneficiate steel products has seen the group progress beyond being just a primary steel producer. Scaw’s strategy of producing value through the manufacture of secondary steel products, places the group firmly to serve all sectors of the markets in Africa and internationally. Scaw’s products in the mining, construction, rail, industrial, oil and gas sectors are recognised internationally.

GovernanceAs the executive chairman, I have continued to lead the board of directors since my appointment on 1 February 2013. The non-independence of my role is adequately addressed by the composition of the board and particularly by the appointment of a lead independent non-executive director, Mr Nkosemntu Nika, who is also the chairman of Scaw’s audit and risk committee.

AppreciationI wish to thank our entire directorate and management team, and all employees, for hanging in during challenging times and I look forward to working together with you to take Scaw to new heights.

Finally I thank our new and existing stakeholders, whose confidence in the group and faith in management are a constant inspiration to succeed.

Ufikile KhumaloExecutive chairman

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By early 2014, the positive benefits of these changes had already provided an improved position for the group to leverage future growth.

Safety, health and environmentFor the period under review Scaw achieved a significant improvement in its safety performance. The Scaw group achieved a lost-time injury frequency rate (LTIFR) of 0,33. This represents an improvement of 13% against the prior year.

The Scaw group has completed 98% of medical surveillances on employees, while 79% of our employees have undergone voluntary counselling and testing for HIV. The Scaw group has a well established HIV wellness programme and provides employees with ARTs.

The Scaw group remains committed to best environmental practices. During the year, the group committed to an investment of more than R200 million to further improve fume emissions in line with future stricter standards. The group also commissioned equipment that will enable the recycling of waste generated from our melting operations at the Union Junction site.

Group performance overviewScaw has operated under challenging market conditions for the period under review. Similar to steel producers across the globe, Scaw suffered the effects of weak demand and the resultant amplification of the competitive landscape. Locally, the lack of large-scale infrastructure projects and instability in the mining industry compounded the situation resulting in domestic volumes declining. In order to increase sales volumes the group focused on the export market to make up for the declining local demand.

Against a challenging market environment, the group delivered a pleasing performance, production volumes improved by 3% while the group’s EBITDA finished 10% above the corresponding period in the prior year.

Our business divisions reflected a mixed performance given Scaw’s diversity in markets and products. Both the Grinding Media and Rolled Products divisions

Chief executive officer: Markus Hannemann

Scaw is entering a new era of stability following Anglo American’s decision to divest in 2009 and the subsequent effects of the global economic recession. Strategically the group has placed a greater emphasis on ensuring ongoing stability given the tough economic climate and the increased competitiveness of the global steel sector.

During the course of last year, functional changes were implemented to better leverage the combined functional strengths of the Scaw group. Changes at Exco level allowed the development of a strong and aligned team. In addition, various initiatives are under way to boost skills training, stakeholder relationships and communication across all levels to ensure alignment of the group’s strategic objectives.


Leadership

CEO’s report

Looking externally, we continued to emphasise protection of natural resources and the environment and implemented the group’s carbon disclosure project.

OutlookScaw continues to operate in a tough economic environment, but management remains cautiously optimistic of the future. Scaw’s largest customer sectors are the mining and construction sectors. The local construction sector is starting to show early signs of recovery while the mining sector is expected to gain rapid momentum once the current labour issues in the sector are resolved. Furthermore, we remain optimistic that the Scaw group should benefit from the adjudication of the many Transnet infrastructure rail component tenders. Scaw has a long track record of manufacturing these components, Scaw’s localisation content exceeds 95%.

AppreciationI welcome new members and thank our executive chairman, directors, Exco and management and their teams for supporting our vision and facing the challenges with unwavering tenacity.

I also thank our business partners, suppliers and clients for their invaluable support.

Markus HannemannCEO

showed a marked improvement against the prior period. Grinding Media made market share gains across Africa and the Rolled Products division, while suffering sluggish demand from the construction industry, benefited from cost improvements and increased pricing levels. The Wire Rod Products and Cast Products divisions were negatively impacted by depressed sales from the mining industry. Additionally, Cast Products was further impacted by weak demand from the domestic rail sector as continuing adjudication delays for the various local rail tenders severely affected the division’s performance.

SustainabilityTo entrench the sustainability of our business we have consolidated our strategy to Stabilise, Grow and Harvest, and our success in this regard will be measured on an ongoing basis using five key performance indicators associated with our strategy.

Our new corporate identity, launched in November 2013, reflects the refreshed group.

While we welcome some new faces who will be instrumental in guiding the group to achieve our strategic objectives, ie a new majority stakeholder in the IDC and new leadership executives – we have also focused on our existing team and a number of notable achievements became evident in the year. Most importantly, the Siyaphambili Transformation Project was initiated and enthusiastically embraced.

We also appointed task teams charged with removing obstacles to the advancement of women in business. Further, our first group of employees in the Rolled Products division embarked on the knowledge exchange programme with BSE Germany. We also launched a safety campaign to re-educate employees with the purpose of directing them to zero harm.

The group is also delighted to announce an improvement in its B-BBEE rating to a level 3 (110% recognition). It is truly an outstanding and prized achievement in our sector.

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Acting chief financial officer: Shaw Manyema

RevenueRevenue for the 12-month period ended 31 March 2014 was R6,5 billion compared to the 15-month period ended 13 March 2013 which was at R8,3 billion. Local sales remained subdued in the period resulting in declines in sales volumes across most operations. In order to increase sales volumes the group focused on the export market to make up for the declining local demand. As a result of the increased focus on export sales, 23% of total revenue was generated from export sales compared to 20% in the previous year.

77%

23%

● Exports● Local

Revenue%

2013: 20%

2013: 80%

Revenue Rbn

March 2014

Additional 3 months

March 2013

6,5

1,6

6,6

The 2014 financial period has been challenging for Scaw. Local demand across most sectors was weak combined with increased import competition. Increased exports assisted the group in negating the effects of sluggish local demand. Competitive pressures continued to place pressure on margins.


Acting CFO’s report

Leadership

EBITDA (Earnings before interest, tax and depreciation)Despite the challenging operating environment, Scaw Metals recorded an EBITDA profit for the period of R361 million, an improvement from the EBITDA of R328 million in the previous comparable period.

EBITDA profit Rm

March 2014 March 2013

361

184

328

Additional 3 months

Finance costsDuring the current period Scaw successfully negotiated and restructured the debt with both Nedbank and the IDC, further strengthening the group’s balance sheet. The restructuring of the Nedbank debt resulted in reduced capital repayments and interest expense while the restructuring of the IDC debt resulted in R3,5 billion of the debt being converted into non-interest-bearing debt. As a result of the debt restructuring process, finance costs declined significantly during the period.

Capital expenditureThe group spent R356 million in capital expenditure during the period in order to maintain, improve and expand production capacity. Key capital expenditure projects for the period included the side frame and bolsters projects and the chain expansion project.

In line with the group’s safety emphasis, 20% of the total capital expenditure during the period was for work done to ensure and improve a safe working environment for our employees.

CovenantsThe group was compliant with all bank covenants in the current period.

Shaw ManyemaActing CFO

Capital expenditureRm

72

10

52

1132

4

175

Safety 72m (Fumex R41m)

SAP payroll R10m

Side frames and bolstersR52m

Substation replacement R11m

Chain expansion R32m

Roll former plant (Ghana) R4m

Other stay in businessR175m

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March2014

(12 months)Rm

March2013

(15 months)Rm

Statement of comprehensive income – key figuresRevenue 6 450 8 252EBITDA 361 328Finance costs (381) (832)

Statement of financial position – extractsNon-current assets 2 245 2 317 Current assets 2 525 2 419

Total assets 4 770 4 736

Total equity and non-current liabilities 3 666 3 286Current liabilities 1 104 1 450

Total equity and liabilities 4 770 4 736

Cash flows – extractsCash flows from operating activities 65 458 Cash flows from investing activities (338) (423)Cash flows from financing activities 22 161

Net cash flow movement for the period (251) 196

Extracts from the group’s financial statements


Acting CFO’s report continued

Leadership

March2014

Rm

March2013*

Rm

Wealth createdTurnover 6 450 8 252Purchase of material and services 4 582 5 836Income from investments 2 15

Total wealth created 1 870 2 430

Wealth distributed as follows:To employees 1 524 1 913To government (in the form of taxes) 0 3To providers of capital 355 795Finance costs on borrowings 355 795Dividends to shareholders 0 0

To support future growth (10) (281)Depreciation 174 204Retained profit/(loss) (184) (485)

Total wealth distributed 1 870 2 430

Wealth distribution proportions % %Employees 82 79Government 0 0Providers of capital 19 33Support future growth (1) (12)

Total wealth distributed 100 100* The year ended 31 March 2013 had 15 months because of the change in year-end.

Value added statement%

(12)

79

33

0

● Employees● Government● Providers of capital● Support future growth

2013

Value added statement%

(1)

82

19

0

● Employees● Government● Providers of capital● Support future growth

2014

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Value added statement

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