To understand why industrial player Distribution & Warehousing Network (Dawn) has been in trouble for the past few years, one need look no further than the country’s struggling mining, construction and building industries and, more recently, agriculture. Add to that a global financial crisis and the lack of countercyclical spend in major infrastructure by SA’s government and you have a trifecta for disaster.
In its annual results to March 2016, Dawn posted a net loss of R758m. It has now posted an attributable loss of R637m in the year to March 2017.
As a maker of materials and tools for these sectors, including branded bathroom and kitchen fixtures, the company has been buffeted by lower mineral resources prices, foreign exchange volatility and years of political and labour instability.
Dawn is a complex business made up of about 32% manufacturing turnover and 68% from distribution. The trading arm of the company manages about 50,000 different product lines.
For many years it has been "right-sizing". New CEO Edwin Hewitt is unequivocal: the company has long been operating below its fixed-cost breakeven point.
To remedy this, significant investment has been made to bring its manufacturing technology up to date.
Recently, though, amid continuing poor market conditions and the effects of widespread drought, the group has also been pummelled by political and economic turmoil in its Mozambican, Zimbabwean and Angolan markets, where currencies have plunged and foreign exchange has been scarce.
In SA, Dawn says, delayed government spending on major water projects has been a big obstacle to growth. Meanwhile, China has stepped on the toes of just about every market the majority shareholders of its associate company Grohe Dawn Watertech (GDW) operates in.
In late 2014, Dawn, the maker of Cobra taps and Vaal sanitaryware brands, sold 51% of GDW to Germany’s Grohe. This happened just as Europe’s biggest sanitaryware maker was being sold to Japan’s Lixil building materials company. At the time, Dawn, then headed by founder CEO Derek Tod, had been looking to globalise its manufacturing operations.
But with the multibillion-dollar merger of Grohe and Lixil, GDW became worth less than 1% of the new group’s turnover. Tod has since retired.
"As a result of that takeover, they took their eye off the ball in SA," former Dawn CEO Stephen Connelly has said. This left Dawn critically short of working capital for a substantial period, adding to its woes.
Connelly, CEO of JSE-listed industrial products supplier Hudaco Industries for 22 years, was drafted in to stabilise Dawn during a 12-month contract period from mid-2016.
When Hewitt took over in April this year, Connelly became executive deputy chairman.
At the time of Dawn’s interim results to September 2016 Connelly said: "The results are not pretty, but the bleeding has stopped." His comments came after a flood of top executives left the group. This followed years of insipid trading conditions and high operating costs amid prolonged labour unrest both in Dawn’s manufacturing divisions and in its major markets. But now with the R637m loss in the year to March 2017, the group has racked up a total loss of about R1.4bn in the past few years.
According to Hewitt, Dawn has been in trouble since 2009. After closing and consolidating businesses in financial 2017, staff numbers have been cut by 643 out of a total workforce of 3,200.
Despite management having taken significant costs out of the business from as far back as 2011 and reducing gearing from up to 70% to about 10% at one stage, Dawn’s position has become ever more precarious.
Meyrick Barker, an analyst at Kagiso Asset Management, says the company’s latest results comprise "yet another very poor set of numbers". He says Dawn continues to suffer the consequences of bad decisions made by the previous "weak management team".
Hewitt says Dawn is looking to achieve breakeven in financial 2018 — as long as SA’s economy does not stall further — and is budgeting for a profit in financial 2019. But first it has to bring its net gearing ratio down.
This shot up to 87% in financial 2017, from about 30% in financial 2016, forcing Dawn into a R358m rights issue that closed in April to help repay bridging finance and fund future operations.
Dawn’s strategy in offering to sell its remaining 49% share in GDW will leave it as the long-term "master distributor" of all Grohe products in sub-Saharan Africa, Hewitt says.
He also says there has been significant investment in GDW’s businesses.
"We now have teams of Japanese manufacturing experts in SA. Yields [on products] have already improved. The Japanese are very good at this type of thing."
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.