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.

• 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