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PROTECH KHUTHELE HOLDINGS LIMITED - Chairman's statement

Release Date: 14/12/2012 09:00
Code(s): PKH
Wrap Text
Chairman's statement

Protech Khuthele Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 2000/024352/07)
Share code: PKH ISIN: ZAE 000101986
(“Protech” or the “Company”)

CHAIRMAN’s STATEMENT


Shareholders are advised that the Chairman of Protech Khuthele Holdings Limited
("Protech") Mr Mafahle Mareletse, at today’s Annual General Meeting held at the
Firenze Room, The Pivot Convention Centre, Block B at Montecasino at 09h00 read
out the following statement.


“Good morning,

This meeting is about the order of business at hand as outlined in the agenda and
notes to shareholders. It is not about the approach to acquire the Company.
Protech Khuthele has made public its position on this matter on SENS and has
appointed various advisors in that respect including PwC to provide a fairness
opinion on the offer. There is nothing further to say at this time and the Company
will update the market appropriately and in accordance with best practice and the
relevant regulatory frameworks.

However, I would like to update shareholders on the turn-around strategy started in
2011. This led to a number of strategic initiatives and significant headway has
been made in implementing what could be best described as a “culture shift”
throughout the organisation.


The turnaround strategy focuses on six strategic pillars and I want to congratulate
Mr Antony Page as Chief Executive for being the driving force behind this blueprint
since his appointment as CEO on 1 September last year.


The first pillar – changing the organisational culture and skills set

Protech had a legacy of being a very hierarchical and highly siloed operation, which
affected the direction and effectiveness of the business. A key objective from the
outset of the turn-around was to transform this culture into a professionally-led
construction company with a diversified shareholder base, which bears all the traits
expected of a reputable public company.

In order to achieve this, leadership and accountability across all layers of the
business had to be established. Since his employment, Antony has sought to
increase the level of inclusion across the business, increase transparency and
reduce the inherent hierarchy. Newly established platforms, such as the SSCTP
programme enable cross-functional teams from across all levels of the business to
interact. Communication and information sharing between business units
subsequently happens as normal practice, rather than by exception.

Protech developed from a small, predominantly plant hire business into a large
earthworks contracting business over a relatively short period in time. This resulted
in several key skills gaps which compounded risks and resulted in lost financial
opportunities. As such, Antony was instrumental in finding and employing the best
available skills in the industry to fill these critical gaps.

Since the implementation of the turnaround, seven highly competent and
experienced individuals joined Protech’s executive to lead in crucial areas of the
business including strategy, finance and management accounting, engineering,
project and construction management, commercial and risk management,
organisational performance as well as development.

The board is confident that it now has the right management team to continue
delivering on a blue print strategy that will ensure sustainable performance through
market cycles.

The second pillar – formulating and executing clear, measurable business
objectives

Prior to September 2011, Protech’s business strategy was not formalised or clearly
communicated. Since then, the Group has adopted a formal plan directed a growth
through a more diverse market while increasing its product offering.

The focus is now no longer on the assets per se, but on the intellectual capacity
within the business, and the culture of the Group.

I need to remind shareholders, that prior to Antony’s appointment, Protech’s main
strategy seemed to focus on the coal-mining sector in South Africa and the gold
mining sector in other African countries. At the time of CEO’s appointment, the
business was about to invest heavily in contract mining, which would have involved
a large investment into specialised mining equipment. This equipment by its very
nature cannot be utilised in the normal course of business. The current state of the
mining industry in South Africa has lead to other contractors suffering substantial
losses. Through Antony’s intervention this investment was not made and Protech
avoided what would have been a catastrophic failure which the Group probably
wouldn’t have survived.

The Group amended its depreciation policy to allow for the optimal use of the
Group’s capital. In line with internationally accepted norms ownership periods of
the various classes of equipment were extended and the depreciation periods
decreased to prevent unexpected losses as a result of the sale of assets. Since the
implementation:
      -   Pela Plant has reported better than budgeted returns;
      -   PK has reduced its debt levels; and
      -   Is not affected by increased equipment downtime due to increased
          maintenance.

The board believes that the medium term improvements will show in an increase in
revenue per rand invested and an improved Return on Assets and Return on Equity
ensuring an improvement in shareholder value.

The third pillar – Financial management, systems and controls

Part of the turnaround strategy since September 2011, involved the implementation
of a business model to address strategic issues such as the asset structure, the
requirement of future funds, capital structure and dividend policy. A proper cash
management plan and monitoring system was also implemented.

New executive management embarked on a full interrogation of existing financial
systems, policies and procedures. From this, a new system and structure was
developed to provide reliable, timeous and relevant information for all of the
business’s operating areas.

Prior to the turnaround, Protech based its business decisions solely on its financial
accounting systems. The retrospective nature of financial accounting systems,
combined with the late production of these accounts prevented any corrective
action or mitigation measures being put in place, allowing loss-causing problems to
deteriorate longer than reasonably acceptable. New management accounting
systems have subsequently been implemented, together with revised financial
accounting procedures. This has enabled timeous and relevant information on all
projects to be made available to senior management and is used to analyse each
project and also to produce forward-looking information to manage potential risks
proactively.

As part of the focus on cash flow management, all factors affecting cash are now
taken into account and forecasted in order for future cash flow projections to be
analysed. To this end, possible negative cash flow situations can be avoided which
ultimately places Protech in a safer, more sustainable financial position.

The fourth pillar: Focus on operations

Protech started out as a plant hire business and migrated into the earthworks
contracting space in order to secure work for its plant fleet. Although there was a
transition in revenue streams, there was no physical change in the way the
business operated or managed its cash flows:
   -   Pela Plant was until very recently, seen as the main conduit and profit centre
       of the business, with the earthworks contracting division, PK, merely
       regarded as a means to secure work for the plant fleet.

   -   Subsequently, very little focus was placed on the management of the
       earthworks contracts which PK had secured. This was evident in the fact that
       PK was not required to make a profit, as profits were deemed to come
       through Pela Plant.

   -   Operations were devoid of proper construction and project management
       processes aimed at minimising risks and ensuring tendered profits were
       achieved.

   -   Since Antony joined, and aided by the employment of Chris Ryninks, Nathan
       Pillay, Derrick Pautz and Andre Smit, a culture of diligent project and
       construction management has begun to develop within PK, which is evident
       in several of the new projects. Proper processes have been implemented and
       include but are not limited to progress monitoring, contractual entitlement
       and fulfilment management, profit focus, production monitoring and safety.

   -   PK has also recovered on its contractual entitlements on several projects,
       which had been in loss situations.

As mentioned earlier, the development of a management accounting system is now
providing quality information to managers who can act proactively and will
ultimately result in a more profitable business.

   -   Information produced through the management accounting system is
       analysed, filtered and collated into management dashboards. These
       dashboards are produced weekly, monthly or quarterly, depending on the
       ability to effect change from the information.

   -   The record of under claims and costs and over claims and costs is an
       important part of project management. These “overs and unders” should be
       tracked on a monthly basis since a “snap shot” of the financial transactions of
       the project at a given point in time could be grossly skewed. The concept of
       “overs and unders” was not understood and thus not used in PK to manage
       its projects. An “overs and unders” schedule has been developed, and the
       practice of recognising “overs and unders” explained to project managers.
       These are now being managed on a monthly basis and as such, the financial
       reporting out of the project has become vastly more accurate.

The fifth pillar – strategic markets

As part of the strategic review of the business, no tangible connection between the
sales department and the commercial department could be found. Most of the work
being secured from opportunities presented over the “fax machine” which was not
aligned to the business strategy. There was a big drive into Africa that exposed
Protech to high risk including socio-political, exchange control, judiciary and
currency risks. Equipment confiscation and the inability to manage the number of
projects across all geographies impacted the business negatively.

Protech’s turnaround plan includes three strategic geographies outside of South
Africa: Zambia, Zimbabwe and Mozambique. These countries were selected against
strict criteria including historic and projected GDP and mining sector growth, legal
framework, ability to repatriate profits and past working experience within the
country. Risks inherent to these countries are clearly understood and mitigated
against.

The sixth pillar – information systems

A full revamp of the information systems is underway within Protech in order to
ensure that all the information needs of the business are provided for. The revamp
seeks to address the strategic information needs of Protech which include high level
reporting, accessibility of information, effective operations and data security.

The initial measure of success of the turn-around strategy was evidenced by the
interim results for the six months to 31 August 2012. Can I remind shareholders
that all key metrics were moving in the right direction, as follows:

   -   The tangible net asset value per share increased from 79,2 cps at 29
       February 2012 to 83,5 cps
   -   Revenue increased 7% year-on-year to R530,6 million
   -   Operating profit significantly increased by 92% to R32,2 million
   -   Cash flow from operating activities was up 80% to R97,8 million
   -   EPS increased 46% to 4,1c
   -   We retained a healthy cash balance of R104,7 million, up 45%
   -   Lost time injury frequency rate was down by 19% to 0,3
   -   Careful management of debt and protection of balance sheet meant that the
       net gearing ratio decreased from 64% to 36%. This included a repayment of
       debt totalling R61,5 million

I believe, and the information to date demonstrates and supports my belief that,
the Group is gaining traction and momentum on its turnaround strategy. The
trading environment remains challenging, although indications from Government
regarding infrastructure spend is encouraging. That said, we have the plan,
management and skills firmly in place to achieve Protech’s goal of sustainable
growth.

Our integrated report for 2012 provided target ranges for the key metrics
mentioned above. Given current market conditions and notwithstanding an
anticipated improvement in the cycle, the board remains confident that these
targets will be achieved in the next three to five years.
We have renewed our energy and focus to reinforce the reputation of the Company
and this will be reflected in our performance over the medium term.

Now we can attend to the business on the agenda for today.

Thank you.”

Sponsor
Deloitte & Touche Sponsor Services (Pty) Limited

14 December 2012

Date: 14/12/2012 09:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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