Review of operations – Powertech
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Powertech endured another difficult financial year marked by lower revenue and reduced margins due to significantly lower demand levels. Norbert Claussen, Powertech Chief Executive Officer, said the weakness in the group’s results has largely been in the energy cables business, where volumes have remained subdued and there has been considerable pricing pressure in some of its key products. Consequently, Powertech focused on changing the cost structure of its various businesses to suit the new demand levels which unfortunately resulted in an overall headcount reduction of 20%.
EXTERNAL FACTORS
During September 2008 the first signs of the global economic collapse were evident in the dramatic fall in the prices of base metals having a direct impact on the cables business within Powertech.
Aberdare Cables was also negatively affected by a significant contraction in building and construction activity in South Africa, particularly in the residential sector. Building plans showed a dramatic negative trend in the period under review and prospects of recovery remain subdued. Many projects in the mining, metals and metallurgical areas were either cancelled or postponed and expenditure in other infrastructure projects (excluding 2010 FIFA World Cup-related activities) were also curtailed.
The difficulties experienced globally by most major auto manufacturers resulted in a decline in the demand for platinum used in catalytic convertors. This has, over the years, been a major expansion area where key platinum mining clients have placed substantial orders on Aberdare Cables. The financial challenges being experienced by Eskom resulted in many projects being delayed, negatively impacting the aluminum business of Aberdare Cables. Municipal and Metro demand did, however, continue at a reasonable rate and business from this sector was sufficient to keep key facilities operational in a year where demand was depressed to around 65% of its peak in early 2008.
The requirement for power transformer products from Eskom and the municipalities remained at reasonable levels benefiting the Powertech Transformers group. Due to the financial impact on overseas markets and the strength of the rand, the southern Africa market has become more attractive to outside competition, creating pressure on prices throughout the product range.
At Powertech IST some signs of recovery have resulted in an improvement in order flow and the commencement of previously postponed projects. The 2010 FIFA World Cup event has led to some projects being frozen until after the event. These postponements are mainly to prevent interruption of services, electricity supply or telecommunications due to interference with networks. Neighbouring countries are showing positive signs of economic growth and we expect to benefit in terms of our products, solutions and services in those countries in the near future.
The decline in building activity affected the Powertech Industrial group, in particular at Crabtree where pressure on margins was experienced as market participants sought to maintain production volumes in manufacturing plants. This resulted in price wars affecting some products. Rand strength benefited importers and products sourced from the East were more competitive, undercutting locally-produced products by up to 40%. General economic conditions also negatively affected Powertech Calidus and Strike Technologies’ customers, demand for product.
| Figures in R millions | % change | |
| Revenue | 7 233 |
(25) |
| EBITDA | 424 |
(43) |
| EBITDA margin | 5.9% |
|
| Adjusted diluted headline earnings | 123 |
(54) |
| ROE | 6.0% |
INCOME AND GROWTH
The Portuguese operation of the Powertech Cables group, largely focused on the building and construction industry, experienced a very tough year due to a collapse in this area in both Spain and Portugal. The Spanish operation, Cables de Comunicaciones performed exceptionally well on the back of strong demand from both the telecoms sector and continued success with the extension of the Spanish high-speed railway network.
Although margins remain under pressure as factories fight for their share of a smaller market, collections and cash flow have remained solid. Although overseas competitors have made it clear they wish to establish themselves in the South African market, only one has made the first tentative steps through the acquisition of a local distributor. Aberdare Cables remains the biggest supplier of cables in the market with the widest possible range of products, the biggest production capacity and the largest distribution footprint.
The Powertech Transformers group has posted an acceptable financial performance given the current market conditions. Power Transformers recorded an increase of 14% in local revenue while profits increased by 21%. However, the group’s results were impacted negatively by decreases in both revenue and profits at Distribution Transformers, primarily due to the low demand in the building and construction industry. During the year under review, Distribution Transformers was rationalised with the Pretoria miniature substation operation being closed and transferred to the Cape Town operation. Retrenchments at both the Johannesburg and Cape Town operations right-sized these operations in terms of the new demand levels.Powertech IST Data performed well and exceeded the budget for the year, posting an all-time revenue record for this division. Excellent initiatives and prospects culminated from restrategising in terms of demand changes in the markets. Many of the prospects are gaining momentum and IST Data expects to deliver a similar performance in the year ahead.
Powertech IST Energy performed reasonably well at the EBITDA level despite being impacted by fierce price competition in the market, resulting in the loss of turnkey substation tenders. Action plans to counteract the latter were put in place and success rates with tenders are improving. Due to the backlog of electrical power infrastructure projects in the country, increased expenditure is expected. Powertech IST Industrial redirected business into the environmental pollution control sector over the past three years. It completed some major projects and good progress has been made with a significant prospect pipeline for the year ahead. Powertech IST Otokon was impacted by the lack of funds for Eskom’s demand-side management projects, but made a remarkable recovery at EBITDA level through operational efficiencies. It starts the new financial year with a healthy prospect pipeline based on renewed emphasis by Eskom on demand-side management development and also launched their meter reading solution, “SILK”.The access network solutions and power back-up systems of Powertech IST Telecom performed reasonably well under the difficult market conditions in the telecom operator sector and its endeavours to grow in the telecommunication turnkey installations sector started to bear fruit. Although revenue fell short of the budget, good operational efficiency allowed them to meet expectations in terms of EBITDA. Reasonable growth is expected from this division in the new financial year.
Technology Integrated Solutions (TIS) achieved good results in the energy and telecommunication sections of the business, with a weaker performance from projects, solutions and harness manufacturing. Despite delays in various customer contracts, TIS managed to deliver EBITDA of better than break-even. Some consolidation and new initiatives are in progress to return this division to previous profit levels.
The Powertech Industrial group’s revenue was impacted by the large standby power contract obtained by Strike in the previous year, which could not be repeated. Crabtree’s revenue remained flat while operating profit increased by 35%. The company increased its market share in its core business and maintained its leadership position. Strike’s core business grew revenue by 4%, delivering satisfactory profit levels. Powertech Calidus experienced a decline in volumes from one of its major customers, having a particularly detrimental effect. Its operations have been adjusted accordingly and are set to produce much improved results in the new year. Powertech Calidus maintains good relationships with its two Swiss partners Weidmann Electrical Technology AG and Von Roll Schweiz AG, the suppliers of the products that the company sells.Powertech Industrial group continued to institute cost-reduction and containment programmes with considerable success. Through strict asset management, the inventory was reduced by 28% and collectables were well controlled resulting in an 88% improvement in its cash position.
Powertech Batteries experienced a decline in sales activity due to the generally tough market conditions, but this was offset by good working capital management, efficiency improvements and cost reduction, as well as the rationalisation of sites and activities. Good customer relations and account management remain the focus areas. Automotive battery sales into the replacement market performed well on the back of the increased car pool, while the automotive original equipment market saw a drastic decline in volumes. Dynamic Batteries, the offshore automotive replacement operation, posted a fair performance under very difficult trading conditions in the UK. Industrial faced a significant contraction and reduction in capital spend in the mining and materials handling sectors. Battery Technologies delivered a disappointing performance and experienced very difficult trading conditions in all sectors. There was a slowdown in the telecoms project implementation as well as in project activity in the local UPS battery market. Market challenges at Renergy Technologies were further exacerbated by the delay in municipal tenders.
PRODUCTS AND SERVICES
Aberdare Cables has committed some R70 million for the installation of a new catenary vulcanizing line at its Port Elizabeth facility. This line replaces the 30-year old line which has come to the end of its effective life and was replaced with the most modern CV line on the African continent. While it is currently only producing low-voltage and medium-voltage products, it has the capability to be homologated for high voltage products with the addition of new testing equipment. Cable theft has been a serious problem in South Africa and a new patented anti-theft device called Cableguard was introduced to the market during 2010, and the initial response has been extremely positive.
During the year, Aberdare Cables moved its head office and its main distribution facility to a new location in Elandsfontein which is known as the Aberdare Group Operations Centre. This 50 000 m2 facility will ultimately accommodate all the Aberdare Cables activities previously spread over five sites in the Gauteng area.
During the year, further investments were also made in the group’s ERP platform provided by SAP under the project name Gyro, and introduces APO (Advanced Planning Options) to Aberdare Cables’ planning system for the first time.Powertech Transformers experienced an improvement in the availability of raw materials and various long-term contracts have been put in place to secure supply going forward. Management focus will be on improving on-time delivery, quality, productivity and reducing working capital.
Anticipating future cost increases and a potential shortage of electricity, Powertech Systems Integration has developed a number of initiatives to address the expected increase in demand for alternative power supply and energy-efficient solutions.
It is expected that the pressure on telecommunication operators to provide data and telephone services at lower rates will impact their buying power and more cost-effective solutions in this regard are currently being planned to increase market share.
Crabtree also developed a number of new products during the year and its standby power products, introduced over the last two years, continue to make a substantial contribution to both the Crabtree and the Strike Technologies businesses, the latter providing engineered solutions.
BUSINESS PARTNER RELATIONSHIPS
At Aberdare Cables the challenge remains to find a balance between inventory and service to provide reasonable profitability. Falling volumes naturally create demand for smaller batches and shorter delivery times. All the factories have had to work very hard to maintain product quality and with a few exceptions customer satisfaction levels for quality have been maintained.During the year a major supplier of aluminum rod decommissioned its rod mill in Richards Bay and this necessitated sourcing aluminum from off-shore suppliers. While pricing from alternative suppliers has been competitive, managing the longer supply chain has required inventories to be extremely carefully controlled. In the case of copper, Palaborwa Mining Company remains a major supplier to Aberdare Cables although alternative sources have been used when shortages have occurred due to supply interruptions. The strong rand continues to encourage the entry of overseas players and in certain product ranges, margins have been substantially reduced as a result of large consignments of cable coming into South Africa. This is expected to continue while the rand remains under R9/USD.
The primary drive of Aberdare Cables during the next three to five years will be to develop the company into a globally competitive power cable manufacturing business. A number of key projects are under way, targeting specific issues related to improving delivery performance at a more competitive price. These projects are driven at executive level and enjoy high visibility and continued review. Some of the primary focus areas are the improvement of business processes and the development of people. The objective of restoring the business to an acceptable level of profitability and generating a return for shareholders in line with their expectations, is expected to be achieved within the next three years.
During the year Desta Power Matla was incorporated into Powertech Transformers to consolidate its operations as well as to introduce an empowerment partner into the Power Transformer side of the business. Due to the change, Powertech Transformers received a B-BBEE level three contributor rating through Empowerdex.Powertech IST’s solutions-based business lends itself towards three levels of business partnerships: Firstly, business partnerships are formed with many of the large customers to develop solutions for them, ranging from feasibility studies to EPCM contracts and full turnkey solutions. Although most of the business stems from tender responses, the relationships with the customers allow our solutions to be prominent in terms of customer requirements. Secondly, the System Integrator business relies heavily on subcontractors to provide services that are not part of our core business, or that are infrequently used. In this event, more than one service provider is used to ensure efficiency and capacity to handle peaks in demand.
The third business partner relationship, that is of utmost importance, is our relationship with our suppliers. In particular, Powertech IST closely manages international suppliers of the best-of-breed products that are being offered as part of its solutions. Due to the fact that most of these international agreements are not exclusive, Powertech IST’s position as preferred distributor depends on good performance and communication with suppliers. Finally, Powertech IST’s strategy is to continuously search for world-class products at the forefront of technology. This enables it to offer alternatives to existing solutions.