Report of the Portfolio Committee on Economic Development on oversight
visit to companies in distress, dated 23 February 2010
1.
The
Purpose and Terms of Reference
The Portfolio Committee on Economic Development undertook an oversight
visit to companies in distress on 3 and 17 – 19 November 2009. The purpose of
the visits was to investigate how the specific companies in distress have
performed after the Industrial Development Corporation’s (IDC) financial
intervention. Four companies that were said to be in distress and financed by
IDC’s intervention fund were identified. The committee specifically set out to
check the authenticity of these companies and investigate the impacts of such
intervention by the IDC.
The four identified companies are:
Ÿ
Vrede Textiles (Pty) Ltd (
Ÿ
Laser CNC (Pty) Ltd (KwaZulu-Natal)
Ÿ
York Timber Holding Ltd (
Ÿ
Automotive Leather Company (Pty) Ltd (
2.
Background
In December 2008, the Presidential Economic Joint Working Group,
comprising organized Labour, Business and Government, and other social partners
met to consider how
The ‘Framework Response’ has been internationally commended for bringing
together social partners to forge a collective response. It has also been held
up as an example of how countries can respond to the economic crisis in a
sustainable manner.
The
framework provides the basis for a wide range of actions needed to mitigate the
impact of the crisis on the country and the citizenry. It was founded on the
following broad principles:
Ÿ
avoiding unfair placement of the
burden of the economic downturn on the poor and the vulnerable;
Ÿ
supporting and protecting, in as
far as possible, activities aimed at strengthening the capacity of the economy
to grow and create decent jobs;
Ÿ
maintaining the already planned
high levels of investment in public infrastructure, while encouraging the
private sector wherever possible, and to maintain and improve their levels of
fixed direct investment and corporate social investment programmes; and
Ÿ
interventions must be timely,
tailored and targeted as is appropriate.
The Department of Economic Development has been assigned the
responsibility to oversee the implementation of the Framework Response. The Department,
therefore, briefed the Committee on progress made with regards to the ‘framework
agreement’. One of the areas where progress has been made relates to addressing
the problems of access to credit and working capital. In this area, the
Industrial Development Corporation (IDC) made R6 billion available over the
next two years to respond directly to the crisis.
3. Delegation
The delegation consisted of:
Ms E.M. Coleman – Chairperson
Ms D. Tsotetsi
Ms P. Bhengu
Ms H. Line
Mr Z.C. Ntuli – Whip
Mr X. Mabasa
Dr S.B. Huang
Mr S. Ngonyama – (only attended the Atlantis (
4. The oversight findings on the four companies
4.1. Vrede Textiles (Pty) Ltd
4.1.1. Background
Vrede Textiles (Pty) Ltd is located in Atlantis,
The recent loan facilities were approved in June 2009. They comprised
the following:
·
A working capital loan of R2, 5 million;
·
An unconditional loan of R300 000 to fund a
marketing study and promotion grant; and
·
A guarantee of R500 000 to support the raising
of Letters of Credit by Vrede’s bankers.
4.1.2. The purpose of the visit
To investigate and examine the progress made by Vrede Textiles (PTY)
Ltd. after the financial intervention of the IDC.
4.1.3. Factors that influenced the IDC to fund the
company
After exercising due diligence with regard to financial intervention,
the IDC approved the support to the Vrede Textiles because of the following
factors:
Ÿ
The company has the potential to turnaround,
Ÿ
It has sufficient management capacity,
Ÿ
Intervention may result in saving of jobs (59
employees),
Ÿ
The company has the potential to become 100% black
owned.
In addition to the funding approval, the IDC’s Business Support Unit has
commenced interacting with Vrede Textiles to assist the company with establishment
of a viable marketing plan, one of the major weaknesses in the company.
4.1.4. Factors that led to distress
Two factors that led to the distress were as follows:
Ÿ
There has been a slow erosion of Vrede’s market
share over the last few years because of the entry of new competing products,
fashion changes and cheaper imports from many other countries, for example,
Ÿ
The effects of the world economic meltdown gravely
exacerbated Vrede’s position with decline in turnover, including substantive
decreases in exports to some of its traditional customers in the
A commonly held view was that, unless additional funding could be
raised, the company’s shareholders would have had to consider closing the
company down, hence support to Vrede Textiles (PTY) Ltd through financial
intervention fund of IDC.
4.1.5. Jobs saved
The Vrede Textiles employs 61 employees on a permanent basis, 48 of them
are wage earners and 13 are salaried workers. All of those jobs would have been
lost had the company closed down. With the financial aid, Vrede Textiles have
not yet had to retrench workers. However, they applied to the Department of
Labour to be placed on the labour lay-off scheme.
4.1.6. Participation by the Vrede Textiles in the
Employee Training Labour Lay-off Scheme
As indicated above, Vrede Textiles Ltd had applied to the Department of
labour to be placed on the labour lay-off scheme. The committee is still
awaiting the outcomes of the application process.
4.1.7. Turn-around strategy
The Managing Director of Vrede Textiles informed the Committee that the
loan which Vrede Textiles received from the IDC managed to pay off their Accounts
Payables (creditors). Vrede Textiles further applied for exemption from wage
increases and annual bonuses for 2009 due to the difficult position they found
themselves in. If they were to pay annual bonuses, bonuses alone would amount to
R400k (excluding holiday pay). Vrede Textiles do not foresee having such funds
available in view of their losses in 2009. It was only in October 2009 that Vrede
Textiles exceeded R1m turnover for the month and that was the most for 2009.
Indicators of a turnaround in sales comes from the fact that they have
received a first order from China after exhibiting their product in China
during August/September 2008 as well as repeat order from the Philippines. They
have also received orders from the
With the future in mind, Vrede Textiles have started their own assembly
line, where they could make up their own finished blinds. The Managing Director
believed that the approach gave Vrede Textiles an additional opportunity as a
supplier on the Government database. He
further reported to the committee that Vrede Textiles have never gone the
procurement route before and this was considered a new source of income for
Vrede Textiles.
According to the IDC, the turnaround plan of Vrede Textiles includes:
Ÿ
Strengthening the marketing structure of the
company through, inter alia:
employing a dedicated sales and marketing
person;
engaging a market consultant to develop a
comprehensive marketing plan;
pursuing new export markets through
participation in international trade fairs;
subscribing to the Proudly SA campaign and by
being listed on the Government Supplier database; and
product enhancement initiatives, for example,
DIY.
Ÿ
Ensuring strict financial oversight with
company auditors,
Ÿ
Pursuing the establishment of a Workers’ Trust
to increase worker motivation, support and morale.
With regard to development of the Workers’ Trust, Mr V. Jacobs (Managing
Director) stated that the major shareholder, Mr B Lipschitz, indicated to him
that he “wants out”, on condition that Mr Jacobs takes the liability of the
company (R5m). The committee was briefed that Mr Jacobs would take 60%
shareholding while 40% would go to the Workers’ Trust. Mr Jacobs, however, said
that this process was still at an early stage of discussions and that it had
not been discussed with the workforce.
The performance monitoring mechanisms put in place by the IDC include
the following:
Ÿ
Quarterly management accounts to be submitted
to the IDC,
Ÿ
Submission of audited annual financial
statements to the IDC,
Ÿ
Regular personal contacts by the IDC accounts
manager,
Ÿ
Participation of the IDC Business Support Unit
in engaging a marketing consultant and developing a marketing plan,
Ÿ
IDC assistance in setting up a Workers’ Trust
and share transfer.
4.1.8. Committee observations
Ÿ
Vrede Textiles had very little information
regarding the labour lay-off scheme, even though they applied to the Department
of Labour to be placed on the scheme. No feedback, however, was received from
the Department.
Ÿ
The delegation observed that there was
confusion with regards to the intention of the funding.
Ÿ
Vrede Textiles applied to the Department of
Labour to be exempted from paying holiday bonuses (December 2009) to its
employees.
Ÿ
The company did not have a permanent employee
responsible for marketing.
Ÿ
Little or no interaction between the various
departments (for example, Department of Trade and Industry, Department of Labour)
and the IDC.
Ÿ
The R300 000 loan allocated to Vrede Textiles
to fund a marketing study and promotion grant (unconditional) would not be
sufficient for this purpose.
Ÿ
Without the IDC intervention, 61 employees
would otherwise have been unemployed.
Ÿ
The viability of Vrede Textiles is
questionable. The delegation observed that the Managing Director is focused
more on operations and had little knowledge on the financial aspects of the
company.
Ÿ
The issue of the Worker’s Trust was still at the
early stages of development.
Ÿ
The Committee envisage scheduling a joint
oversight visit, with the Portfolio Committee on Labour to Vrede Textiles
during the 3rd term in 2010.
4.1.9. Recommendations
The committee makes the following recommendations:
·
The IDC should submit a report regarding the
marketing grant to the committee two (2) weeks after the House has considered
the report.
4.2. Laser CNC (Pty) Ltd
4.2.1. Background
Laser CNC (Pty) Ltd, one of the identified companies in distress, is
located in
The IDC has approved a R3
million term loan facility and a revolving credit line facility with a limit of
R3 million to bridge its short and medium term working capital requirements
respectively.
4.2.2. The purpose of the visit
To investigate and examine the progress made after the financial intervention
of the IDC.
4.2.3. Factors that influenced the IDC to fund
Laser CNC (Pty) Ltd
Prior to the economic
slowdown, both the automotive and capital equipment sectors experienced
unprecedented growth which was incidentally characterised by a general shortage
of critical components. Suppliers such as Laser were compelled to commit to
pre-production runs schedule. This was done with the intention to shorten lead
times on certain key components in anticipation of a continuing stronger
demand. However, the sudden global economic slowdown has compromised the
group’s liquidity and left the company in an overstocked position. Hence, the
R3 million term facility is required under the auspices of the companies in
distress fund to improve the company’s liquidity position.
4.2.4. Factors that led to distress
Since its inception, Laser’s financial performance
has been sound and consistently achieving positive year-on-year turnover
growth. However, as from the last quarter of 2008, the company has been
experiencing declining turnover and suppressed order book from its traditional
major customers including amongst others Bell Equipment Ltd (contributed 65% of
2008 Turnover). The slump in demand: volumes were
attributable to the sudden global economic slowdown, particularly
within Laser’s targeted market sectors namely, capital equipment, automotives
and construction were heavily affected by the slump.
The downturn coupled with the pursuant recession caused a working capital
funding shortfall.
4.2.5. Jobs saved
Initially, Laser CNC employed around 200 employees.
Between March to May 2009, Laser CNC had to close down two production centres
and reduced the employee costs, by
retrenching 72 workers before the implementation of the labour
lay-off scheme.
4.2.6. Participation by the Laser CNC in the
Employee Training Labour Lay-off Scheme
The committee was informed that the retrenchments took place during
March – May 2009 before the implementation of the labour-layoff scheme.
4.2.7. Turnaround strategy
In response to the
challenges in the market place, Laser’s management formulated a survival and
turn around plan that entails the following:
Ÿ
Broadening of its product offering
with a view to further diversify its markets and customer base outside its
traditional markets.
Ÿ
Working capital optimisation
through implementation of improved demand forecasting tools and reducing stock
holding levels.
Ÿ
Right-sizing the business: This
has been achieved by closing down two production centres and reduction in
employee headcount by having retrenched 72 workers. This happened between March
and May 2009 before the implementation of the labour lay-off scheme. However, Laser
CNC reported that they had contact details of those who were retrenched and if
the need arose to re-hire some or even all of them, they would do so.
Ÿ
Exploring alternate business
opportunities, which include for example Navistar (a manufacturing company in
The slump in demand from
traditional markets led to Laser seeking new business opportunities. Some of
the new business secured includes work on the
On how to address the issue
of seeking potential customers in Africa, Laser reported that they would be
attending a trade show in
According to the DTI, companies
that are within the automotive sector might get further assistance via the
Manufacturing Incentive Programme (MIP), which is a cash back grant and the New
Industrial Development Programme. The programme may fund interventions to a
maximum of R30m.
Laser acknowledged that
there was no union representative on the management team. Members of the
Committee raised concern around this matter but also encouraged the management
of Laser to explore a positive relationship with trade union members and
non-trade union members.
Laser noted that they are
in the process of working on their BBBEE compliance. They had a meeting
scheduled with a consultant to discuss how Laser can obtain BEE status.
4.2.8. Committee observations
·
Laser CNC is in the process of
obtaining BEE status. However, this is at a very early stage.
·
Too much emphasis
was placed on one major client (Bell Equipment).
·
The retrenchment of workers was done
before implementation of the labour-lay scheme.
·
Little or no collaboration and communication
between the Departments of Trade and Industry, Department of Labour and the IDC.
·
Without the IDC intervention, a
further 128 workers would have been without work.
·
There was no labour (union)
representation on the management team.
·
There was little or no communication
with the labour movement within the company about funding.
·
In the event that demand
increases, those employees retrenched would be re-hired.
·
Some of the workers retrenched,
have been employed on a temporary basis.
·
Within DTI, there are other means
of financial aid to SMME’s.
·
The larger share of Laser CNC’s
business comes from one client, Bell Equipment.
·
The IDC representative came
unprepared to the meeting.
·
The Committee envisage scheduling a joint
oversight visit, with the Portfolio Committee on Labour to Laser CNC during the
3rd term in 2010.
4.2.9 Recommendations
·
Laser CNC should consider those
workers retrenched, to be re-instated, once the company becomes viable.
·
Collaboration and communication
between the Departments of Trade and Industry, Department of Labour and the IDC
need to be reinforced and strengthened.
·
Laser CNC, with the assistance of
the DTI and the IDC must explore potential clients in
4.3. York Timber Holdings Ltd – Sabi (
4.3.1. Background
York Timber Holdings Ltd is found in
Since early 2008, demand
for all timber products declined steadily in line with the global economic
recession. The decline in demand resulted in a subsequent stock build-up across
the sawmilling industry. Market
conditions deteriorated further during the beginning of 2009 with the demand
for lumber declining significantly by 25% to 35% followed by discounting of
prices, further increases in stock levels and increased pressure on working
capital. In this period, York’s profit
margins also declined as Komatiland Forests (“KLF”) increased log prices
(bi-annually between 35 & 40% per annum) directly affecting not only York’s
retained earnings, but also all other long term contract holders. York’s interim and final year-end June 2009
results were therefore well below budget (reduction in sales of ca 25% and
EBITDA with 100%) and for the first time York has breached some debt funding
covenants based on the year-end June 2009 reporting period.
4.3.2. Purpose of the visit
To
investigate and examine the progress made after the financial intervention of
the IDC.
4.3.3. Factors that influenced
the IDC to fund the company
The following funding was approved
by IDC’s Special Credit Committee (17 September 2009) and Board of Directors
(Board meeting 07/2009 on 29 September 2009):
IDC follow its rights including
those of the BEE SPV’s to the extent of R213 million and retain the existing
equity stakes of 29.8% and 12.8% for IDC and the BEE SPV’s respectively. The
total “fresh” injection of equity, in the form of ordinary (IDC) and preference
shares (BEE SPV’s), will thus amount to R213 million. Due to the proportional repayment of all
lenders, IDC will receive a payment of around R28.5 million with the capital
balance of the loan facility reduced to R42.7 million. Although it is proposed that some of the
terms of the loan funding will be relaxed, the security position is improved as
original capital security taken remains in place after the R450 million
reduction in the total syndicated debt package.
The current shareholder value of
4.3.4. Factors that led to distress
Since
early 2008 demand for all timber products declined steadily in line with the
global economic recession, resulting in a subsequent stock build-up across the
sawmilling industry. Market conditions
deteriorated further during the beginning of 2009 with the demand for lumber
declining significantly by 25% to 35% followed by discounting of prices,
further increases in stock levels and increased pressure on working
capital. In this period, York’s profit
margins also declined as Komatiland Forests (“KLF”) increased log prices
(bi-annually between 35 & 40% per annum) directly affecting not only York’s
retained earnings, but also all other long term contract holders.
4.3.5. Jobs saved
York has
already implemented the closure, mothballing and reduction in operations as per
one of its work stream strategies. It resulted in the retrenchment of 791
people. The approved funding would, however,
save a further 4060 existing job opportunities provided in several rural
locations in the Mpumalanga province, i.e. 1,983 in forestry and 2,077 in
sawmilling division.
4.3.6. Participation by the York Timbers in the
Employee Training Labour Lay-off Scheme
York
Timbers indicated that they did apply to be placed on the labour lay-off
scheme, but still had to retrench employees.
4.3.7. Turn-around
strategy
Several strategies were identified and task teams
established to implement the turn-around strategies based on the approval by
the Board of Directors. The IDC was also notified about the strategies and
worked closely with the Sub-Committee and the various task teams.
The
start-up of the Driekop sawmill after the destruction of its Wetmill in 2007 by
extreme forest fires has also been completed and will improve York’s sales mix
thereby increasing the average selling price and enhancing gross profit
margins.
Due to the
re-alignment of processing facilities, 791 people had to be retrenched. The wage-earning staff was consulted through
processes that involved CEPPAWU & DUFUAWA while the salaried staff was
consulted on an individual basis. York
had also embarked on a remedial action plan to assist all retrenched
individuals through interventions, such as re-skilling of existing and
retrenched staff and facilitation of counseling to promote skills and abilities
of retrenched staff. York and IDC have
been in discussions with DTI with regards to possible funding to support the
above mentioned actions.
Cost
cutting and restructuring initiatives at head office level have also been
completed with a 10% reduction in salaried staff remuneration. Current performance is ahead of plan with
actual retrenchment costs amounting to R11 million compared to the original
budgeted figure of R17 million resulting in a saving of R6 million. Cost savings with regards to mill closures
and downsizing will also have a positive impact going forward.
The total
outcome after retrenchments and restructuring initiatives is that York will
reduce its overheads by R85 million for the financial year ending 30 June 2010.
York also reported that they have approached the Premier of Mpumalanga, where
they informed the Premier that they are willing to supply wood to the province
in order to assist in the province’s housing developments.
4.3.8. Committee observations
Ÿ
Without the financial intervention of
the IDC, 4060 employees would otherwise have been unemployed.
Ÿ
Even though York Timbers applied to the
Department of Labour to be placed on the labour lay-off scheme, they still had
to retrench employees.
Ÿ
In the event that demand increases, those employees
retrenched, would be re-hired by York Timbers.
Ÿ
Strategic partnerships have been
forged with Indian companies, to address the increase in demand.
Ÿ
There is a good working
relationship between the management and the labour movement.
Ÿ
Mr Meer, an IDC Divisional
Executive, is a non-executive on the board of York Timbers.
Ÿ
York Timbers continues with their
corporate social investments in Mpumalanga.
Ÿ
The Committee envisage scheduling a joint
oversight visit, with the Portfolio Committee on Labour to York Timbers during
the 3rd term in 2010.
4.3.9. Recommendations
Ÿ
York Timbers should consider those
workers retrenched, to be re-instated, once the company becomes viable.
4.4. Automotive Leather Trim (Pty) Ltd T/A
Automotive Leather Company (ALC)
4.4.1. Background
The Automotive Leather Company is found in Rosslyn, Gauteng Province. It
was one of the identified companies in distress which the committee sought to
oversee its work in order to determine what were the latest developments are
after the financial intervention by the IDC.
The Automotive Leather Company’s capability
extends to the manufacture of all related Interior Trims which includes: Seat
covers, trim inserts; steering wheel covers as well as gear and handbrake grips
and bellows.
From design and development to finished production, ALC employs class leading
technology; for example, automated CNC sewing, coating of leather used in PIP
processes, airbag sewing, micro perforation, in-house CAD capabilities, e-data
transfer, video conference facilities and storage, right through to delivery
worldwide.
4.4.2. Purpose of the visit
To
investigate and examine the progress made after the financial intervention of
the IDC.
4.4.3. Factors that influenced the IDC to fund
Automotive Leather Company
The stress on liquidity led
to ALT falling in arrears with its trade creditors. The company immediately
embarked on a restructuring program which included retrenchments of 231
employees and cost reduction exercises in order to adjust to a lower intake of
customer orders
Despite the restructuring, the company still
required funding to finance its immediate liquidity needs and therefore
approached the IDC for finance. The IDC has provided ALT with total funding of
R25 million to assist with working capital to execute future orders.
The IDC reported that the
funding approved for ALT is what is termed, a quasi-equity loan (where the loan
is split). The IDC indicated that each application is considered case-by-case,
in other words the needs and circumstances of the different companies are taken
into account, when approving the funding.
4.4.4. Factors that led to distress
The global economic
downturn negatively impacted Automotive Leather Trim (ALT) which experienced a
30% reduction in sales year to year since October 2008. The drop in sales
resulted in a reduction in cash flow. The burden on liquidity was further
impacted by overstock of raw materials in relation to reduced sales level.
4.4.5. Jobs saved
The intervention funding
resulted in the retention of 447 jobs. Manpower was budgeted to increase by 100
people over the next 6 months due to the expected increase in sales with the prospect
of increased sales as a result of the expected launch of the new car models.
ALT noted that
retrenchments started in June 2008, where 231 employees were retrenched. At
that stage, ALT had lost the E-class business, which formed a bigger part of
its turnover, from Mercedes Benz. ALT also indicated that the NUMSA was
informed of this at an early stage and various informative meetings were held
with employees. ALT Management further indicated
to the delegation that they envisaged employing 200 people till March 2010.
4.4.6. Participation by ALC in the Employee Training Labour Lay-off
Scheme
ALC noted that they are not
part of the labour lay-off scheme, since retrenchments already started during
June 2008 (before the implementation of the scheme).
4.4.7. Turnaround plan for the company
Due to the loss in sales,
ALT embarked on an intense marketing drive which had seen them being awarded a
contract from BMW for the new 5 and 7 series. ALT has also been awarded
contracts by Lear and Nissan which would assist them in turning the company
around.
The IDC would analyse the
client’s monthly management accounts to monitor and ensure the business’
success.
4.4.8. Committee observations
Ÿ
Without the intervention of the
IDC, 447 employees would otherwise have been unemployed.
Ÿ
In the event that demand
increases, those employees retrenched, would be re-hired by ALT.
Ÿ
The majority of ALT’s business is
dependent on one major client, BMW.
Ÿ
ALT will be employing 200 workers
till March 2010.
Ÿ
There is a good working
relationship between the management and the labour movement in the company.
Ÿ
The Committee envisage scheduling a joint
oversight visit, with the Portfolio Committee on Labour to the Automotive
Leather Company during the 3rd term in 2010.
Ÿ
4.4.9. Recommendations
Ÿ
ALT must explore opportunities to expand its
client base.
Ÿ
York Timbers should consider those
workers retrenched, to be re-instated, once the company becomes viable.
5. Conclusion
One of the main objectives
of the IDC’s financial funding to these companies in distress was to save jobs.
The evidence from the oversight visit on the four identified companies in
distress shows that the financial assistance of the IDC had managed to save 4
696 jobs.
The Committee was pleased
to note the assurance by all the companies visited that they would in future rehire
those employees retrenched, once the respective companies became viable and
self-sustainable. However, the delegation was concerned that there was little
or no co-ordination between the activities of the IDC, the Departments of Trade
& Industry and Labour.
The committee/delegation wishes
to note that even though there were successes with those interventions reported
above, the IDC still needed to strengthen and reinforce its interventions so
that the intentions and objectives of the interventions could be fully realized.
The committee would like to
thank the management of the four companies that were visited; the Industrial
Development Corporation and the Department of Trade and Industry for making the
oversight visit a success.
Report to be considered.