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UNPACKING OUR MATERIAL ISSUES

As outlined on the previous pages, the group followed an internal and external process involving management, the board and key stakeholders to confirm the significant issues for the group. This is not meant to be a comprehensive analysis of all risks, but aimed to provide the reader with the main issues affecting our operations.

Material issues   Mitigation   Status

  • Strategy and risk

    Strategy and risk

    Market weakness
    Construction order book shrinkage
    Geographic expansion
    Move to larger multi-disciplinary contracts
    Concessions and financial acumen to structure and develop own contracts
    Increase in Construction over-border order book from 24% to 30%
    Increase in Construction over-border traded revenue from 18% to 27%
    R1,6 billion of multi-disciplinary contracts won in mining
    and power still to be traded
    Concessions business growing strongly, with preferred bidder
    stage on a number of contracts with a value of over R4 billion
    Margin retraction
    Stricter bid filter to ensure correct cost base
    Optimised terms with suppliers and sub-contractors
    Import lessons learnt from completed contracts
    Involve multiple group business units in higher margin, value-added contracts
    Shed non-core resources
    Cut or delay non-critical expenditure
    Rationalise and restructure support functions
    Although Construction margins retracted, they are still within or exceeding guidance given at interim time. These will be under pressure in the short term
    Building and Housing 6% (guidance was 4% – 6%)
    Civil Engineering 7% (guidance was 5% – 7%)
    Engineering 7% (guidance was 6% – 9%)
    Margins in Manufacturing and Construction Materials remained under pressure
    Loss-maker ratio increased from 13% – 15%
    Group employee numbers reduced from 12 497 to 11 997
    Restructuring within affected business areas completed
    More onerous commercial terms
    Back to back terms with suppliers
    Ensure cash flow plan at bid stage structured to be positive
    Bid filter to prevent undue cash absorption in tenders
    Cash decline limited as much as possible
    Advance payments still a feature of cash position, although some unwind occurred as expected
    Decline in materials
    volumes
    Re-sized business to suit current and medium term market conditions
    Revalued business to align with expected returns of 8% – 10% within a normalised market
    Reviewed plant and equipment strategy
    Employee numbers decreased from 804 to 557
    Management mostly changed
    Capacity temporarily reduced by 25%
    R16 million of capex vs R47 million budgeted
    Manufacturing price
    and margin pressure
    Process technology upgrades to reduce direct costs
    Variable costs reduced to suit demand
    Market expansion through Advanced Building Technologies (ABT)
    Market expansion through new export channels in Everite
    Implemented product range expansion
    Volumes were mostly flat against an overall market decline in our primary products of 10% – 15%
    Internal inflationary cost pressures were well maintained at 2.4%
    Export volumes up 7.4%
    Loss-making contract in Steel affected result
    Middle East debt crisis
    Terminated and uncompleted contracts
    Agreements reached for payment plans (strong local joint venture partner assisting process)
    Back to back payment agreements with suppliers
    Although work in progress, contract values now agreed for material debts and payments have commenced
    Back to back agreements in place
    No new contracts currently
    Continue to reduce reliance on UAE to focus on other territories in the region
    Size business to match activity levels
    New work being bid in Saudi, Qatar, Jordan
    Business restructure in progress
    Geographic expansion
    Order book decline
    Focus on expansion into new markets
    Reduced reliance on domestic market
    Increase in Construction over-border order book from 24% to 30%
    Appointment of senior executive to Middle East and North Africa
    Deployment of senior executives to African hubs
    Seven additional new territories under development
    Move to larger and EPC concessions contracts
    Concentration of risk
    Introduced risk-bearing capacity tool to establish constraints
    Enhanced bid risk filter process with board participation
    Strict bid filter to ensure adherence to schedule, working capital cycle and cash flow assumptions
    Avoid process design risk
    Market weakness constrained opportunities
    However, EPC capacity building progressed to prequalification, bidding and execution on the group’s third power plant contract and its first mining plant build
    Large EPC and multi-disciplinary bids and prequalifications increased from 18% to 22% of tendered values in the last year
     
  • Planet and compliance

    Planet and compliance
    Environmental and regulatory compliance at Construction Materials
    Potential suspension or loss of mining licence
    Dedicated environmental officer driving compliance
    Inclusion of mining regulations in group regulatory compliance tracking system
    Task team involved with conversion of all mining rights
    Although formal quality certification processes were put on hold while restructuring took place, the cluster adheres to relevant legislation and requirements. There are a few areas requiring improvement where the group is engaging with the relevant authorities
     
  • Performance and risk

    Performance and risk
    Financial capacity
    The potential for bank and bond facility reduction dependent on credit view of sector
    Increase engagement with financial institutions
    Transparency in disclosure
    Demonstrate cash management responsibility
    Adhere to facility covenants
    Engagement with institutions indicates no change to existing facilities
    Institutions satisfied with level of transparency and access to the group
    Cash position has been in line with forecasts and as communicated
     
  • Compliance and corporate governance

    Compliance and corporate governance
    Competition Commission investigation
    Potential fines
    First to report markers to Competition Commission
    Achieved conditional leniency
    Conditional leniency agreement with the Commission granted and signed in August 2011, pending the completion of the industry investigation
     
  • Risk

    Risk
    Safety performance of the group and sub-contractors
    A poor safety record could damage competitiveness and lead to the unacceptable loss of lives
    Management commitment to safety is embedded in managers’ performance appraisals and remuneration
    No fatalities of Group Five employees, but six fatalities in sub-contractor base
    DIFR including sub-contractors worsened to 0.54 from 0.43
    Some improvements seen in:
    Lost time injuries, which declined from 79 to 53
    Non lost time injuries, which declined from 168 to 140
     
  • People

    People
    Talent retention
    Potential loss of critical capacity
    Continue training and maintain competitive remuneration and career path development
    No senior manager or key technical employees left the group in the year under review
    Employee turnover of 6%
    Employee feedback improved year on year
     
  • Stakeholders’ requests

    Stakeholders’ requests

    Below we outline the key issues our stakeholders wanted us to address and where these are discussed in our integrated report, both in the printed section as well as on the CD contained within the report.

    Employees

     

     

     

     

     

     

     

    Feedback improved, with an employee satisfaction rating of 67.0% versus 65.8% last year. Some key issues raised which still require attention:

    Rewards, recognition and performance management
    This measure declined slightly
    Some business units lack formal performance evaluation processes or personal development plans
    Employees feel they don’t receive sufficient feedback or acknowledgement for performance
    Change and transformation
    This measure improved
    Employees requested more information on transformation and the group’s progress
    Improved communication
    This measure improved
    Group communications rated positively, supported by a strong buy-in from employees for the group brand
    However, employees would like more direct communication from their own business units and the opportunity to interact with their senior management
     

    Shareholders (equity providers) and analysts

     

     

     

     

     

     

     

     
    Order book and top line growth
    Geographic and contract role expansion should be unpacked
    How the strategy protects against the downturn should be explained
    Operating profit and margins
    Information on how the group’s value-add competencies will support profitability without having to chase margins
    More detail around value erosion, such as loss-makers, Competition Commission and low-margin contracts
    Cash and related matters
    Information around the working capital unwind
    The potential strain on cash resources as concession projects increase and other growth initiatives require funding
    Return on equity (ROE) – Increasing asset utilisation and profitability of capital-intensive materials business units
    Risk – Need to address contract risk, payment risk and country risk
    Impairments of carrying value of assets in Construction Materials cluster – Update on progress required
    Middle East – payment risk, timing of market recovery, diversion of management time and resources
     

    Financial institutions – (debt providers)

     

     
    Liquidity position going forward
    Areas of risk and financial loss exposure
    Competition Commission fines
    Collectability of Middle East debtors
    Gearing ratio
    Interest cover
    Opportunity to provide debt funding to emerging markets on the basis of controlled credit risk
     

    Media




     
    Competition Commission update required
    Construction Materials – group strategic intent with this cluster
    How strategy will be refined to ensure the group rides through the market storm
    Expansion in Africa and how risks will be managed
    Views on expectations around public sector spend
    Employment issues in tough market conditions
    Broad-based black economic empowerment position against continued pressure from government on corporates
    Information on current contracts
     

    Credit rating agencies


     
    Liquidity position going forward
    Gearing ratio
    Cash availability
    Interest cover
    Areas of risk and financial loss exposure which would affect liquidity and potentially gearing
    Competition Commission fines
    Collectability of Middle East receivables
     

    Insurers

     
    Ability to manage engineer, procure and construct (EPC) risks due to size of contracts and legal liability required to be assumed
    Adequacy of legal expertise to manage EPC contracts
    Increased exposure to Africa, which could result in an increase in plant claims due to a different operating environment
     

    Regulatory bodies

     
    Transparency of disclosure to Competition Commission on all transgressions
    Transparency of operations within each jurisdiction, adherence to legislation and effective ongoing communication and resolution of all queries and assessments raised
    Disclosure of the group’s structures, activities and intention.
    Complete adherence to legislation
     

    Suppliers

     
    Provide information to empower the supplier to perform
    More collaboration on joint initiatives to unlock value to mutual advantage
    Communication regarding the key issues facing Group Five and the role supply partners can play in addressing these
    Information around key safety, health, environment and quality (SHEQ) strategies
     

    Clients

     
    Ability to perform
    Requirement for performance bonds
    Broad-based black economic empowerment ownership complement within the group
    Socio-economic development and Accelerated and Shared Growth Initiative for South Africa (ASgiSA) compliance within tenders
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