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Operational review

Manufacturing and Processing

 
Financial highlights
  2014  
Rm  
2013  
Rm  
Variance  
(%) 
  Gross revenue 10 612   10 555   1  
  Gross earnings 1 153   1 078   7  
  Net operating system 364   235   55  
  Capital expenditure 406   306   33  
  Total assets 7 029   6 629   6  
  Total Liabilities 2 589   2 202   18  

Aveng Manufacturing manufactures and supplies concrete products to the construction sector, services and engineered solutions to mining, water, oil and gas and construction clients, and rail construction and maintenance services to the transport sector.


13% growth in revenue
to R3,5 billion
26% growth in operating
earnings to R227 million
 
     

Aveng Manufacturing operations

 

Solly Letsoalo Managing Director

 
Sectors served
  • Infrastructure
  • Mining
  • Transport
  • Power
  • Water
  • Industrial
  • Commercial
  • Geotechnical

Aveng Manufacturing comprises Aveng Manufacturing Infraset, Aveng Manufacturing Duraset, Aveng Manufacturing Lennings Rail Services and Aveng Manufacturing Dynamic Fluid Control. Aveng Manufacturing Automation & Control Solutions and Aveng Manufacturing Facades were moved from Aveng Grinaker-LTA to Aveng Manufacturing, and Steeledale was combined with Aveng Steel, all with effect from 1 July 2013.*

Aveng Manufacturing reported solid revenue growth and a strong improvement in operating earnings for the full financial year although the pace of growth slowed in the second half of the year. Tough trading conditions, exacerbated by labour disruptions in the platinum and gold sectors, impacted the performances of business units exposed to the mining industry. This was offset by the award of major construction, maintenance and materials supply contracts for railway projects in South Africa, Mozambique and Zambia, as well as ongoing demand for construction products in South Africa.

Operating performance

Construction products and rail construction and maintenance

Aveng Manufacturing Infraset benefited from the aggressive pursuit of opportunities in its precast concrete markets in South Africa and southern Africa and was particularly successful in increasing the supply of concrete sleepers and pipes to rail projects.

Infraset is supplying 58 000 sleepers from its newly constructed factory in Tete, Mozambique to the Nacala Section 2 Railway Project and 140 000 sleepers from its Brakpan factory to Zambian Railways, with the potential to supply a further 300 000 sleepers from its Zambian factory. In March 2014, Infraset was awarded a contract to supply pipes and sleepers to Eskom's Majuba Rail project and the company also supplied sleepers for a rail development project for Kalagadi Manganese in the Northern Cape. In addition, Infraset experienced ongoing growth in the supply of its tile and paving products to low-cost housing projects in South Africa.

In order to meet the substantial increase in demand for railway sleepers as well as growing demand for concrete rail masts and culverts, Infraset expanded production capacity at its Brakpan factory and recommissioned the previously mothballed sleeper line at the Westonaria factory.

Lennings Rail Services regained momentum after completion of the FMG rail construction project in Australia by winning a number of rail construction and maintenance awards in Mozambique and South Africa. Rail construction for the Nacala Section 2 Railway Project commenced in November 2013 and is scheduled for completion in October 2014, and mobilisation for construction of the two-year Majuba Rail project began in July 2014. Lennings was also awarded a number of three-year contracts for maintenance of the Transnet rail network and the business unit continues to work on rail construction projects for Exxaro and Kalagadi Manganese in the Northern Cape.

Infraset and Lennings were the main contributors to the improved financial performance of Aveng Manufacturing during the year under review. Infraset achieved 37% growth in revenue to R1,2 billion and Lennings achieved strong growth in operating earnings, in spite of a 10% decline in revenue to R687 million due to the completion of the FMG rail construction contract. While the Nacala project partially offset the loss of cross-border revenue, the Majuba Rail project commenced at the beginning of the 2015 financial year and therefore did not contribute to revenue and earnings in 2014.

Aveng Manufacturing Facades experienced significant growth in revenue during the first half of the year as a result of its work on major building projects such as Sandton City's Atrium on 5th and Pretoria Towers. Cost overruns, together with labour disruptions, resulted in an operating loss for this business unit. New leadership has been appointed and the business is being repositioned to strengthen its future performance.

Mining and water supplies

Aveng Manufacturing Dynamic Fluid Control (DFC) and Aveng Manufacturing Duraset both have exposure to the mining industry and continued to be impacted by lower demand and industrial actions, particularly at the platinum mines they serve.

Duraset was worst affected due to low demand, high competition and protracted strikes which contributed to a 6% reduction in revenue to R559 million. A number of procurement savings and manufacturing process improvements undertaken at Duraset were not sufficient to offset the financial impact of mining strikes and a decline in the sale of higher-margin products, and Duraset reported an operating loss for the year. Cost management will contribute to a reduction in fixed overhead costs in the 2015 financial year. Duraset continues to focus on improving the balance of its product mix by increasing the sales of higher-margin products. New product lines such as the zinc coating plant and pre-stressed steel pots which commenced service to a range of markets in 2013 achieved growth in volumes during the year under review.

DFC achieved 9% growth in revenue to R427 million, due to the impact of higher international sales volumes in the USA and Finland, and the weaker rand despite the softer mining and water markets in South Africa and Australia.

* Comparatives have been adjusted accordingly.

 
 

Aveng Manufacturing's contribution to the
Group's revenue

To replace the major projects that will be completed late in 2015, Aveng Manufacturing is pursuing additional rail maintenance work in Mozambique and other rail construction and track maintenance opportunities in the rest of Africa.

 
 

DFC entered into long-term contracts with Tsurumi, a Japanese supplier of water pumps and Clay-val, a European supplier of large water valves, to supply their products in the rest of Africa. The business unit concluded an acquisition of South African company, Atval on 1 July 2014 to gain access to the high-pressure knife gate valve market and diversify its product range. DFC's US operation is pursuing opportunities to expand into Latin America, Canada and Russia.

Automation & Control Solutions (ACS) performed well, reporting a 17% increase in revenue to R460 million in spite of delays in the award of new contracts. The business unit benefited from earlier than planned major shut-downs in the petrochemical industry in the first half of the year and an increase in opportunities in the oil and gas and mining industries. It also focused on improving operational efficiencies and strengthening its business development in the sugar, water and chemical process industries.

Key focus areas

Financial performance

Overall, Aveng Manufacturing delivered a strong financial performance in spite of tough market conditions, labour disruptions and losses at two of its operations.

Total revenue grew by 13% to R3,4 billion (2013: R3 billion), largely as a result of substantial increases in the volumes of sleeper sales in Mozambique, Zambia and South Africa, the award of significant rail construction and maintenance contracts, and ongoing growth in the supply of concrete products to domestic construction projects. Net operating earnings grew due to the higher volumes, an improvement in the gross profit margin and the management of costs.

Aveng Manufacturing lost R19 million in operating earnings due to labour disruptions, 84% of which was incurred by Duraset, largely as a result of strikes in the platinum sector. Facades and DFC incurred the balance of labour related losses.

Interventions to reduce Duraset's cost base will continue in 2015.

Working capital management

Aveng Manufacturing focused on strengthening working capital management by improving receivables collection and inventory control during the year.

Geographic expansion

Aveng Manufacturing expanded its capacity in the rest of Africa during the year to accommodate significant growth in demand for concrete products used in the construction and maintenance of railways. A new concrete products factory in Tete, Mozambique commenced operations in March 2014 to supply the Nacala Railway Project and is well positioned to capitalise on other opportunities in the coal mining and related infrastructure developments in Tete province and further afield in East Africa. The operating group is considering expanding its factory in Zambia to serve increasing demand from Zambian Railways, and it also operates a factory in Swaziland.

DFC has grown its presence in international markets in recent years and currently trades in North and South America, Europe (with a strong presence in Finland), Russia and the Middle East. Supply agreements with international water pump and large valve suppliers will diversify DFC's product range and extend its reach into the rest of Africa. Furthermore, the acquisition of Atval will provide access to high pressure valve export markets in Africa, Europe, and North and South America.

Plant and product development

In an increasingly competitive environment, Aveng Manufacturing adapts continuously in order to capitalise on new opportunities, diversify its product range and strengthen the profitability of its product mix. Initiatives in this regard have included the opening up of new factories or expansion of existing facilities to serve growing demand, the consolidation or closure of factories to maximise efficiency, and investments in new product development to maintain a competitive edge.

This strategy is reflected in capital expenditure of R187 million (excluding intangibles) during the year which funded the development of the new factory in Tete, a rail construction plant for Nacala Section 2, the manufacture of three tamping machines for rail maintenance (one of which was sold to the Bombela Consortium for Gautrain), and machining centres and rubber presses for DFC.

Safety and environment

Manufacturing businesses are required to comply with a range of regulations to minimise their impact on the environment and communities affected by their operations. An environmental inspection was undertaken by the Gauteng Department of Agriculture and Rural Development at the operations of Aveng Manufacturing during the year under review. The areas that needed to be addressed included covering coal bunkers to prevent run-off into drains, preventing ash contamination of soil and run-off into drains, reducing dust, smoke and boiler emissions, and ensuring appropriate management of waste disposal. The majority of actions to address areas of improvement were completed during the year and the few remaining remedial actions are well underway.

Substantial increases in sleeper sales volumes during the year were accompanied by higher numbers of new employees. This caused a deterioration in the safety performance at the Brakpan facility and an increase in injuries. As a consequence, the operating group's LTIFR increased to 0,7 (2013: 0,6). The AIFR however improved to 3,71 (2013: 6,27). No fatalities occurred. A concerted effort is being made to strengthen safety management at the Brakpan facility.

Human capital

Ben Khonyane resigned as Managing Director of Duraset and Facades with effect from April 2014. Wouter de Gidts, Managing Director of Lennings, was appointed Managing Director of Facades and retains his position at Lennings. Richard Tembedza, a chartered accountant with experience in business development, was appointed acting Managing Director of Duraset.

Aveng Manufacturing has a succession plan and a skills development plan in place and has made progress in establishing a human resources management structure with learnerships, mentorships, performance contracts, a review process and individual development plans.

An Aveng DNA survey conducted at Aveng Manufacturing identified empowerment and honesty, integrity and trust as the top enablers of performance, while communications and corruption were identified as the leading disablers. Actions, including a facilitated session for the top 100 managers, have been implemented to address the disablers and reinforce the enablers.

Higher levels of interaction between employees and senior management continue in an effort to strengthen labour relations.

Looking ahead

Aveng Manufacturing enters challenging market environments in a strong position in the 2015 financial year.

Railway development remains a key growth market and Aveng Manufacturing will continue to construct and supply concrete products for the major projects underway in Mozambique, Zambia and South Africa during 2015. Lennings secured its order book for 2015, including a number of three-year contracts to develop and maintain the Transnet rail network, and ongoing work for rail development projects related to iron ore mining in the Northern Cape and coal mining in the Waterberg. Infraset has expanded its facilities to serve ongoing current and projected demand for concrete sleepers, masts and culverts in Mozambique, Zambia and South Africa, and it continues to experience strong demand for its concrete products used in the domestic construction market.

To replace the major projects that will be completed late in 2015, Aveng Manufacturing is pursuing additional rail maintenance work in Mozambique in partnership with the ports and railroad authority, CFM, and other rail construction and track maintenance opportunities in the rest of Africa.

DFC's campaign to diversify its product range and grow its markets outside South Africa has received a significant boost from new long-term supply arrangements and the acquisition of Atval.

Duraset will focus on strengthening its financial performance and diversifying into growth markets with innovative new products. The business unit's zinc coating product serves the diverse automotive, power, construction and mining markets and continues to generate growth, while other new products are in development.