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Distribution and Warehousing Network Limited (DAWN) is listed in the Construction and Materials - Building Materials and Fixtures sector of the JSE Limited.

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DAWN AND SOUTH AFRICA'S ECONOMIC LANDSCAPE DAWN experienced a very disappointing period in the nine months to March 2015. It was, however, a momentous year in which the strategy of partnering with a global player in manufacturing to obtain superior technology and access to global markets, while refocusing on our key strengths as distributor, unfolded.

As a major player in the supply to the domestic and commercial construction sectors, DAWN felt the effects of the weak market conditions in these sectors acutely. We are, however, optimistic that the apparent synergies flowing from the transaction, and the funds raised with the disposal of 51% of the Watertech companies, would in time realise a renewed impetus to the Group.

South Africa's economic landscape continued to be impacted by instability in the labour market, high levels of unemployment and low productivity, power disruptions, a weakening and volatile currency and rising inflation, with the outlook for domestic economic growth deteriorating as the year progressed.

The Gross Domestic Product (GDP) expanded an annualised 1,3% in the first quarter of 2015 compared with an increase of 4,1% during the last quarter of 2014, albeit a temporary spike after the NUMSA strike. Inflationary pressures have been created, mainly due to further possible electricity price increases and exchange rate fluctuations. Inflation, as measured by the Consumer Price Index (CPI), was 4,5% in March 2015 and is expected to average 4,9% for 2015 and breach the South African Reserve Bank's target range of between 3% and 6% at the upper end in the first quarter of 2016.

The civil confidence index, as measured by the FNB/BER, dropped dramatically in the first quarter of 2015, influenced to a large extent by a sharp slowdown in construction activity. In addition, the outlook for construction activity in the short-term, particularly for new work, deteriorated.

Consumer confidence fell back into negative territory in the first quarter of 2015, to -4 (0 in the last quarter of 2014), as consumers feel less optimistic about their finances, taking on debt and particularly the performance of the economy over the next twelve months.

Against this background of a slowing economy and with limited prospects of any significant improvement in domestic economic conditions to stimulate consumer disposable income, the trading environment is likely to remain constrained for the foreseeable future.

DAWN management is focused on reducing overheads to expand margins, working capital improvement and utilising existing trading and manufacturing infrastructure, with the partnership with Grohe as a cornerstone, to improve stock turn and volume throughput.

Management is increasingly driving strong delivery in the Group linked to performance measures.

DAWN's Remuneration Policy has been updated and will be presented to shareholders at the annual general meeting. Executive remuneration has been updated to link short-term incentives exclusively to financial performance, financial position and cash generation of the business unit. Long-term incentives take the form of deferred compensation, the details of which appear in the Report of the Remuneration Committee.

Having been a director on DAWN's Board since its inception in 1998, this is my last report to our stakeholders, as I will be retiring from the Board at the end of October 2015.

I thank Derek Tod and his team for their support, commitment to the cause and outstanding leadership during thriving and challenging times.

My fellow non-executive directors provide valuable insight and guidance - it was an honour working with you.

Thank you to our 3 064 employees who daily show their dedication.

Finally, to all our external stakeholders, including our customers, shareholders, suppliers, industry regulators and business partners - your ongoing support is invaluable to the Group.

RL Hiemstra
Independent Non-Executive Chairman

The Group delivered disappointing results for the nine months ended 31 March 2015, the outcome of operating in a challenging economic environment.

Group revenue for the nine months amounted to R3,6 billion. Gross margins at 23,4% reduced somewhat from those achieved during the first six months to 31 December 2014 (H1 F2015: 24,1%), but is much more resilient than in the prior year.

As reported in the interim results to December 2014, the results for this nine-month period were significantly impacted by two key factors - a NUMSA strike which affected both the Building and Infrastructure segments directly and indirectly, as well as 37 power interruptions which punitively constrained manufacturing capacity.

The severe delays in the implementation of government work in the infrastructure sector of the economy, as noted in the first half report, have reversed to some extent, but not to anticipated levels indicated by the strength of the Incledon order book. With the lack of expansion in mining activity, the Group experienced a major shortfall in HDPE demand with these order books also not reflecting the activity on the horizon. Pleasingly though, PVC pipe demand has improved towards the end of March 2015 and is expected to continue at acceptable levels because of further consolidation in the PVC manufacturing market.

These factors, combined with once-off transaction costs and a net gain relating to the Grohe DAWN Watertech transaction, resulted in:

  • headline earnings per share, which includes the abovementioned Grohe DAWN Watertech transaction costs, declining by 151% compared to the 12 months ended 30 June 2014. This represents a loss of 25,5 cents per share;
  • core headline earnings per share, excluding the impact of these factors, declining by 64% compared to the 12 months ended 30 June 2014, mainly due to the effects of the delays in government infrastructure spend; and
  • earnings per share, when compared to the 12 months ended 30 June 2014, increasing by 547% to 204,7 cents per share.


Industry overview
Private building activity declined by 3,1% for the quarter to March 2015 (+1,1% for calendar 2014), whilst Additions and Alterations declined by 13,1% over the same period (-23,2% for calendar 2014). New residential building activity improved by 6,6% for the quarter to March 2015, whilst new non-residential building activity declined by 13,8%. In real terms (m2) recorded private building activity declined by 10,2% for the first quarter of 2015 (-9,8% for calendar 2014).

Building plans passed grew by 0,7% for the quarter to March 2015 (+11,9% for calendar 2014), with building plans for new residential buildings growing by 14,5% (21,1% for calendar 2014) and Additions and Alterations growing by 8,7%, whilst building plans passed for new non-residential buildings declined by 31,3%. The conversion rate of buildings completed to building plans passed is, however, declining every year, indicating an ever increasing "building work in the pipeline".

On reviewing the statistics, it is clear that the real value of building plans passed (m2) moved sideways for the last six years and buildings completed declined and remained static for the last four years. It is, however, pleasing to note that improved availability of mortgage finance contributed to a 63% improvement in the real value of building loans granted during 2014 for the building of new houses, with further relaxation in banks' lending criteria in 2015. This positive trend is further supported by statistics indicating an increase in the average house size from 86 m2 to 105 m2, as well as a rapid expansion of house builders' profit margins.

Building segment performance
The Building Segment, excluding Grohe DAWN Watertech which is accounted for as an associate, achieved a pleasing growth in revenue of 15,5% for F2015 (nine-months comparable), supported by an improvement in gross margins from 23,6% to 23,7%. Trading businesses were affected by the indirect impact of the strikes, mainly through lack of supplier deliveries and resultant stock shortages during July and August 2014. Action was also taken by closing loss-making business units, Nigeria and Mauritius, which had no short-term expectation of returning to profits. Earnings before interest and tax performance improved by 13,1% to R21 million, before the effects of the year-on-year differential from IFRS adjustments for unearned profits in stock of R6,9 million.


Industry overview
The first quarter of F2015 was heavily impacted by the NUMSA strike, which affected most of the companies in this industry from a manufacturing and/or supply point of view. It also partly impacted the August 2014 results, due to some manufacturers stocking up again after July 2014, with trading businesses unable to purchase sufficient product to meet their demands.

Tender activity continued to deteriorate during the fourth quarter, affecting both the building and civils industries, with the number of tenders down by 33%. This continued into the first quarter of 2015 and had an impact on Sangio Pipe and Incledon. Some key tenders already awarded were delayed for delivery until the first quarter of 2015. Statistics show the civil tender postponement rate progressively increasing from 1,7% in the third quarter of 2014 to 10,5% in the first quarter of 2015, mainly due to planning deficiencies and availability of funds.

For the last three years, the Department of Water Affairs and Sanitation (DWS) spent on average +24% per annum more on water infrastructure, but there seems to be a current impasse in releasing new projects. The Hakskeenpan project, however, has recently caused increased demand in the PVC pipe market. A growing concern is that the latest DWS PVC pipe and related products annual contract has still not yet been awarded and contracts are only awarded on an ad hoc basis. During the most recent government budget review, the DWS budget was slightly adjusted, but is still clearly a priority spend. Infrastructure spend by government is projected to increase marginally in 2015/16, compared to an increase of 14,1% in 2014/15. The provinces with proportionally higher water spend are Limpopo, KwaZulu-Natal and the Eastern Cape. Recently, Johannesburg Water has started upgrading water reticulation in Soweto with good orders procured by DPI.

Infrastructure industry - Africa
The infrastructure spend in African markets has been affected by some important factors:

  • The lower oil price impacted on countries such as Angola, with government pulling back on infrastructure projects and a shortage of foreign exchange causing operational problems for businesses.
  • The lower copper price also impacted on mining spend in countries such as the Democratic Republic of the Congo and Zambia.
  • Tanzania's infrastructure spending has been negatively affected by withdrawal of donor funding due to increased uncertainty in the run-up to their elections in October 2014.

However, these factors are deemed to be temporary and DAWN expects markets to stabilise by the fourth quarter of 2015.

Infrastructure segment performance
With some price inflation, the Infrastructure segment's businesses in South Africa improved gross sales by 7% for the comparative nine months to 31 March 2015, but did not achieve budget mainly due to the strike action in July 2014, lower demand and electricity problems in especially the fourth quarter of 2014. As a result, profit before interest and tax decreased to R11,6 million against the R72,6 million in the previous comparitive period - a year-on-year decrease of 84%. To counter the threat of further power disruptions, internal power supply is being installed at all key manufacturing operations, with Swan Plastics already completed and the balance to be in place by August 2015.

DPI International on aggregate had a similar performance, growing sales by 4,2% year-on-year, but did not achieve budget. As a result, the profit before interest and tax performance was very disappointing at R6,2 million versus a prior year performance of R23,6 million. Pipex Plastics Botswana was restructured during the last quarter in order to reduce its operating costs and to return this business unit to profit.


Additional volumes will be driven through the existing trading and logistics infrastructure by aggressively improving stock turn and volume throughput.

Working capital management will be improved through a strong focus on improved stock management, cash extraction and volume throughput.

The Group has embarked on a significant expense cutting drive in order to remove inefficiencies and sustain margins at current levels of trading volumes.

To counter the possibility of further operational disruptions due to load shedding, the Group has embarked on the commissioning of 20 generator sets, which will be completed by September 2015.


On 13 February 2015, Mr OS Arbee resigned as independent non-executive director. The Board would like to thank Mr Arbee for his valuable contribution during his tenure as a director of DAWN.

On 13 February 2015, Mr OS Arbee resigned as independent non-executive director. The Board would like to thank Mr Arbee for his valuable contribution during his tenure as a director of DAWN.

On 29 May 2015, Mr S Mayet was appointed as independent non-executive director and Chairman of the Audit and Risk Committees.

On 2 June 2015, as announced on SENS, Mr DJ Fouché was appointed as non-executive director and Chairman of the Board of Directors with effect from 1 November 2015. Accordingly, Mr RL Hiemstra has postponed his retirement until 31 October 2015.

The Board welcomes the new directors and looks forward to working with them.

Mr RL Hiemstra has been with DAWN since its inception and over this time his unstinting efforts and strategic guidance were invaluable and the Board of Directors wishes him well in his future endeavours.


A sincere thank you to the management and team members in every DAWN operation for the effort and energy they put in daily.

The support of the Board of Directors is deeply appreciated in another challenging year.

Thank you to our customers for your support and to and suppliers for the collaborative efforts we share to improve supplychain efficiencies.

Together we embrace the year ahead, with its challenges, but also with the opportunities that are presented.

DA Tod
Chief Executive Officer