presentation to portfolio committee on public...

DENEL GROUP1

Company Confidential

PRESENTATION TO PORTFOLIO COMMITTEEON PUBLIC ENTERPRISES17 JUNE 200Mr. Fikile Mhlontlo, Group Financial DirectorMr. Zwelakhe Ntshepe, Group Executive: Business Development and Corporate Affairs

DENEL GROUP

DENEL GROUP2


AGENDA

• Denel today

• Financial summary

• Denel’s business environment– Domestic– International

• Denel’s strategyPhase 1: Restructuring strategy pillars and progress madePhase 2: Growth drivers and implementation

• Denel’s value-add

•Denel priorities

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DENEL GROUP STRUCTURE

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DENEL LEADING PRODUCTS

LANDWARDS DEFENCE

AIR FORCE PRODUCTS

NAVAL PRODUCTS OTHER PRODUCTS

• Artillery systems• Infantry weapons• Combat vehicle

system integration• Combat turrets• Missiles• Small & Medium

calibre ammunition• Laser range finders• Heavy calibre

ammunition• Pyrotechnics

• UAV systems• Missiles & stand-off

weapons• Medium calibre

ammunition• Aircraft MRO• Rooivalk helicopter• Aircraft

components and assembly

• GBADS• OTB test facilities• Helicopter turbine

engines –manufacture & MRO

• Umkhonto missile• DGP35 naval guns• Medium calibre

ammunition• Naval ammunition• Periscopes

• Mine clearing• Contraband

detection• Training school• Mining industry

products• Sporting & hunting

ammunition

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BUSINESS DEVELOPMENTDENEL’S GLOBAL MARKETPLACE

Current Markets No Go Markets New Markets

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DENEL AVIATION

Provision of Maintenance, Repair and Overhaul (MRO) services for rotary and fixed wing aircraft. Rooivalk helicopter qualification & MRO

Key customers: SAAF (92%) and selected international customers (8%)Order cover 2009/10: R584m (72%); Total order book: R758m (as at end May 2009)

07/08 08/09 09/10 10/11 11/12Annual sales: R721m R911m R818m R839m R856mProfit / (Loss): R31m R57m R35m R32m R41m

Employees: 1 270 (Direct: 79% Indirect: 21%)

Challenges:Denel Aviation is on track with its Growth and Business Development Strategy in terms of:• Fixing the Business - The focus going forward shifts to improving operational

efficiencies and reducing costs through LEAN and Supply Chain optimisation. • Partnering with SAAF and SAPS – Facility consolidation at Waterkloof Air Base, CAV

relocation and finalising the new Single Source/Cooperation agreement are key priorities.

• Grow New Markets - Sub-Saharan & North Africa and the Middle East are targets. OEM Strategic Alliances and Equity Partnerships will provide market access.

• Rooivalk - has made a significant turnaround with respect to delivery and solving challenging developmental issues. Integration with DA on track.

AchievementsClimate survey: 43% (2006) 53% (2008)BBBEE rating: Level 4 (Verified)Transformation Score: 78% (2008) 87% (2009)Significant improvements in internal and external audit reports

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DENEL SAAB AEROSTRUCTURES

An aerostructures facility which designs, manufactures, and assembles composites and metallic aircraft subsystem structures. in cooperation with aircraft OEMs.

Key customers: SAAB, Airbus, Agusta, etc.Order cover 2009/10 : R421m (138%) Total order book: R1 173m (as at end April 2009)

07/08 08/09 09/10 10/11 11/12Annual sales: R487m R598m R304m R335m R369mProfit / (Loss): (R143m) (R321m) (R179m) (R39m) -Employees: 835 (Direct: 57% Indirect: 43%)Climate survey: Not included in surveyBBBEE rating: Level 9 (Self-assessed)

Main Achievements:Completion of wing-to-fuselage fairings for A400MCompletion of manufacturing of structures for Hawk aircraftFirst NADCAP accreditations for composites and surface treatmentChallenges:Achieve financial turnaround

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DENEL DYNAMICS

A niche global competitor and local technology provider in the areas of Missiles & Guided Weapons, and Unmanned Aerial Vehicle (UAV) systems.

Key customers: SANDF (all services) plus Algeria, Brazil, Finland, Pakistan, Saudi, UAEOrder cover 2009/10 : R641m (80%) Total order book: R1 635m (as at end April 2009)

07/08 08/09 09/10 10/11 11/12Annual sales: R604m R716m R801m R841m R1 020mProfit / (Loss): R69m (R23m) (R53m) (R8m) R81mEmployees: 791 (Direct: 62% Indirect: 38%)Climate survey: 50% (2006) 54% (2008)BBBEE rating: Level 6 (Officially assessed)

Main Achievements & Challenges:• Attract & retain top technical talent: Dynamics remains one of few companies that

successfully provide young talent with design engineer career opportunities in RSA, but targeted for recruitment by most other hi-tech companies.) 54 engineering students on Dynamics’ bursary program, with internship for more than 20 engineers in the company.

• Technical & operational capabilities are truly world-class (confirmed by numerous international audits) but turnover remains sub-critical due to limited access to too few stable export markets.

• Excellent long-term relationships with core customers (SANDF & exports) resulting in continued follow-on orders. Particularly well-positioned in developing markets where USA & Europe are less welcome. More Denel / RSA Government collaboration in export campaigns is critical.

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DENEL INTEGRATED SYSTEMS SOLUTIONS

DISS is the sovereign entity within Denel dedicated to the delivery of Level 5 Ground Based Air Defence solutions to the SA National Defence Force.

Key customers: SANDFOrder cover 2009/10 : R70m (36%) Total order book: R77m (as at end April 2009)

07/08 08/09 09/10 10/11 11/12Annual sales: R78m R79m R138m R107m R45mProfit / (Loss): (R4m) (R15m) (R22m) (R13m) (R23m)Employees: 47 (Direct: 79% Indirect: 21%) Climate survey: Was rated as part of Denel DynamicsBBBEE rating: Not yet assessed

Main Achievements & Challenges:• Re-established confidence of the DoD in the DISS team.• Acknowledged expertises as a Level 5 systems capability.• Recognised by the DoD as sovereign capability.• Established DISS as an independent operating division (1 Apr 09)

– currently establishing governance structures.• Awaiting final approval of single source status for GBADS by the

MoD – approved and supported by Sec for Def.

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DENEL OTB (OVERBERG TEST RANGE)

Multi-purpose Test Range specialising in in-flight systems performance measurements for the local and international aerospace industries - the premier facility of its kind in Southern Africa.

Key customers: RSA DoD, German Navy and Air Force, Spanish and Singapore Air Force, Denel EntitiesOrder cover 2009/10 : R41m (58%) Total order book: R79m (as at end April 2009)

07/08 08/09 09/10 10/11 11/12Annual sales: R72m R64m R71m R63m R68mProfit / (Loss): R6m (R4m) R0m (R2m) (R4m)Employees: 172 (Direct: 61% Indirect: 39%)Climate survey: 47% (2006) 56% (2008)BBBEE rating: Level 5 (Self-assessed)

Main Achievements & Challenges:Transforming organisation with excellent track record, respectedin the domestic and international market.Able to maintain and enhance facility to satisfy market needs.To increase revenue to cater for high maintenance and technology renewal cost and to bridge the salary gap between personnel and the market.To attract and retain qualified young staff members to allow forskills transfer and succession implementation.

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DENEL LAND SYSTEMS

DLS is a design, development, integration and maintenance house for Gun Systems, including Artillery & Infantry systems, combat turrets, mortars, small & medium arms.

Key customers: SANDF, UAE, Malaysia, Saudi Arabia, Indonesia, ColombiaOrder cover 2009/10 : R401m (70%) Total order book: R1 030m (as at end April 2009)

07/08 08/09 09/10 10/11 11/12Annual sales: R327m R425m R571m R717m R875mProfit / (Loss): (R25m) R1m R17m R37m R64mEmployees: 431 (Direct: 55% Indirect: 45%)Climate survey: 43% (2006) 49% (2008)BBBEE rating: Level 7

Main Achievements:• Business was refocused & right sized and is now profitable• Good progress on Hoefyster with spin-offs to local Industry• Various Local & International orders; growing turnover• MoU with Rheinmetall to exploit Artillery opportunityChallenges:• Timely multi year orders, specifically Hoefyster production order• Position DLS as preferred supplier of Landward Def Solutions

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DENEL PMP

PMP manufacturers small and medium calibre ammunition for the SANDF, SAPS and overseas markets as well as niche products like power cartridges for the SANDF and other commercial products used in the Local industry

Key customers: SANDF, SAPS, UK, UAE, various othersOrder cover 2009/10 : R414m (61%) Total order book: R530m (as at end April 2009)

07/08 08/09 09/10 10/11 11/12Annual sales: R522m R600m R679m R701m R710mProfit/(Loss): (R14m) (R25m) R28m R29m R33mEmployees: 1 218 (Direct: 69% Indirect: 31%)Climate survey: 35% (2006) 41% (2008)BBBEE rating: Level 8 (Verified)

Main Achievements & Challenges:• The company has continued the turnaround process of the last two years.

With good purchases from the S A Police and the resumption of small calibre sales to the S A National Defence Force, a healthy local baseload is anticipated which will enhance the sustainability of PMP.

• Good delivery and quality performance on the largest contract in PMP’s 68 year history, i.e. The supply of brass cups to BAE Systems worth over R350 million during the 2007 – 2009 period.

• Installation of a third melting furnace for R8 million at the Brass Foundry.

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MECHEM

MECHEM a world leader in creating a safer environment through providing: mine action services; battle area clearance solutions; contraband detection services; mine protected vehicles and ancillary equipment.

Key customers: United NationsOrder cover 2009/10: R47M Total order book: R47M

07/08 08/09 09/10 10/11 11/12Annual sales: R176m R267m R263m R205m R210mProfit / (Loss): R16m R31m R25m R15m R15mEmployees: 54 (Direct: 0% Indirect: 100%)Climate survey: 43% (2006) 66% (2008)BBBEE rating: Assessment in process

Main Achievements & Challenges:- Maintenance of share of UN mine action and BAC work.- Sale of 60 remanufactured CASSPIR vehicles for AU/UN Hybrid Force in

Darfur.- Expansion of existing client base and global footprint.- Acceptance and use of the MECHEM Explosive and Drug Detection

System by local law enforcement agencies.- Closer cooperation with Gov Departments to ensure access to local

markets (range clearance, etc) and international exposure.

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CARL ZEISS OPTRONICS (PTY) LTD

Carl Zeiss Optronics is a global supplier of a wide range of optronics (optical-electronics) products.

Key customers: FLIR (USA) BaE Systems (UK) SA Police, SAAF, etcOrder cover 2008/09 : R480m (100%) Total order book: R680m (April 2009)

07/08 08/09 09/10 10/11 11/12Annual sales: R264m R480m R450m R500m R550mProfit / (Loss): (R80m) R50m R45m R50m R55mEmployees: 283 (Direct: 77% Indirect: 23%)Climate survey: Was not included in surveyBBBEE rating: Level 7

Main Achievements & Challenges:Achievements :

– Company returns to profitability in 08/09Challenges :

– To become a world class company in terms of products, quality and efficiency.

– Long term orders

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RHEINMETALL DENEL MUNITION (PTY) LTD

RDM is an integrated supplier of munitions (artillery ammunition, mortars, bombs, large calibre ammunition, pyrotechnics, missile motors and warheads)

Key customers:Order cover 2009/10: R733m (65%) Total order book: R866m (as at end April 2009)

07/08 08/09 09/10 10/11Annual sales: R773m R1 124m R1 259m R1 449mProfit / (Loss): (R35m) R70m R83m R124mEmployees: 1 575 (Direct: 63% Indirect: 37%)Climate survey: 43% (2006) 47% (2008)BBBEE rating: Level 9 (Self-assessed)

Main Achievements & Challenges:RDM laid a solid foundation for turnaroundSuccessful integration of activities with Rheinmetall Waffe Munition GmbH’s strategies, policies, procedures and reporting.Consolidation of manufacturing facilities well underway

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FINANCIAL SUMMARY

-1300-800-300200

2001 2002 2003 2004 2005 2006 2007 2008

Rm

-5000

500100015002000

2001 2002 2003 2004 2005 2006 2007 2008

Rm

Losses

Cash utilised

Solvency

-2000-1500-1000-500

0500

2001 2002 2003 2004 2005 2006 2007 2008

Rm

• Denel was set-up in 1992 with a capital of R2 billion.

• The company posted significant losses year on year since 1998, except in 2001 when it posted R40 million profit owing to a once off pension fund holiday. Losses from 2005 to 2008 caused by:

• Loss of export markets• Inadequate orders resulting in

under-utilisation of labour and facilities.

• High interest cost resulting from loans.

• Loss making contracts –Umkhonto, Raptor, UAV’s, Airbus, Agusta & Rooivalk.

• Equity partnership restructuring starting to have effect from 2007.

• The reserves and capital had been significantly eroded due to these loses by 2004, necessitating a review and change of the strategy in 2005/06.

DENEL GROUP17


DEFENCE SPEND AS % GDP

1.00%1.10%1.20%1.30%

1.40%1.50%1.60%1.70%

00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12

YEARS

% G

DP

RSA DEFENCE SPEND

YEAR 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12DEFENCE 14.37 15.80 17.11 17.32 22.06 23.41 23.8 25.1 27.75 32.01 32.39 34.42GDP 897.9 987.2 1,069.3 1,154.9 1,575.8 1,585.9 1,810.6 2,067.8 2,304.1 2,474.2 2,686.2 2,952.9 DEFENCE AS % GDP 1.60% 1.60% 1.60% 1.50% 1.40% 1.48% 1.31% 1.21% 1.20% 1.29% 1.21% 1.17%

DEF SPEND % GDP

COUNTRY AVERAGEUS 4.50%BRAZIL 1.50%TURKEY 5.00%MALAYSIA 2.50%JORDAN 5.00%INDONESIA 1.50%EGYPT 3.00%

DEFENCE SPEND

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DEFENCE SPEND

-

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

Rm

DEFENCE SPEND ALLOCATION

Capital 412.6 434.3 497.7 585.9 660.7 555.1 713.4

Spec Def Acc 9,715.9 8,882.8 8,926.9 8,787.8 11,114.5 10,061.6 9,725.6

Operational 5,085.6 5,444.9 5,987.4 7,467.2 8,497.4 9,463.2 10,833.8

Salaries 8,196.4 9,037.6 9,735.9 10,908.1 11,751.9 12,309.4 13,145.9

05/06 06/07 07/08 08/09 09/10 10/11 11/12

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DEFENCE SPEND

0%

20%

40%

60%

80%

100%

DEFENCE SPEND ALLOCATIONSPECIAL DEFENCE ACC

Other 944.7 1,202.6 1,374.9 1,589.9 1,674.1 1,867.7 1,879.6

Navy 1,804.7 1,306.9 948.2 255.5 272.1 268.3 188.5

Air Force 5,427.9 4,729.6 4,537.9 4,924.1 6,886.4 5,252.8 5,172.2

Army 1,538.6 1,643.7 2,065.9 2,018.3 2,281.9 2,672.8 2,485.3

05/06 06/07 07/08 08/09 09/10 10/11 11/12

DENEL GROUP20


DOMESTIC MARKET: PROCUREMENT SOURCES

ORDERS PLACED BY ARMSCOR 2007/08:

Foreign45%

Other SA36%

Denel19%

R4,173mR4,173m

R2,218mR2,218m

R5,064mR5,064m

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DENEL PHASE I STRATEGY FOR TURNAROUND

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DENEL PHASE I STRATEGY: PROGRESS MADE

1. PRIVILEGED ACCESS TO LOCAL DEFENCE SPEND– The principle of “buy South African” established with RSA DoD– Joint planning forums established with DoD– 50% to 60% of DoD spend now directed to domestic suppliers– Progress being made in terms of placing multi-year orders– Denel local / export sales mix changed from 40/60% to 60/40%– Limitation: currently 1.2% of GDP ( recent MTEF cut of R1.9bn)

2. PARTNER WITH STATE AGENCIES– Good cooperation established with all RSA State Agencies and

more being done to further improve situation– Visible support by Government for Denel marketing efforts locally

and abroad

DENEL GROUP23



3. COMMERCIAL VIABILITY• Non-core businesses sold

– Disposal of properties and non defence related businesses– Cash proceeds R1bn (Repaid corporate bonds - R815m)

• Significant and steady decrease in bottom line losses– 2005: (R1,560.7m)– 2006: (R1,363.4m)– 2007: (R549.1m)– 2008: (R347.2m)– 2009: Figures to be released by August 2009

Note: Denel financial year-end: 31 March

DENEL GROUP24



• Revenue increased– 2006: R3 035m *– 2009: R5 553m * (2009: Provisional figures)

• Revenue per employee increased– 2006: R361 595 / employee *– 2009: R7466 134 / employee *

• Improved Group order book– 2006: R3 749m *– 2009: R16 048m * (Including confirmed contracts)

* Figures of associated companies included

DENEL GROUP25



4. EQUITY BUSINESS PARTNERSHIPS

• Four equity partnerships entered into – Turbomeca Africa (51%)– Denel SAAB Aerostructures (20%)– Carl Zeiss Optronics (70%)– Rheinmetall Denel Munition (51%)

• Three of the four companies are already turning around• Denel SAAB Aerostructures

– Aggressive turnaround plan– Major capital investment program– Legacy contracts being managed out– Board and management team strengthened– Exploring collaboration with industry– Leveraging capability to increase exports

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5. RAISE CAPABILITIES AND PERFORMANCE

• Proactive technical and risk management approach• Programme level successes include

– A-Darter air-to-air missile joint development programme with Brazil– Lockheed Martin OEM accreditation – Badger combat vehicle contract– 6 Rooivalk aircraft delivered to SAAF after upgrades with

unrestricted interim qualification– SAAF contracts to upgrade Oryx helicopters

• Operating level successes– Performance in most Business Entities improved– Programme management improved – Customer focused culture established

DENEL GROUP27



6. PEOPLE AND TRANSFORMATION

• Improved company organisation climate– 2006 survey: overall index 43– 2008 survey: overall index 50

(Industry norm is 50)

• Transformation programme started in 2007

• Implemented a performance management system in 2007

• Strong focus and increased spend on skills development and retention

• Inculcation of a culture that fosters:– performance – commercial mindset– understanding and celebration of diversity

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PEOPLE AND TRANSFORMATION: SKILLS PROFILE(INCLUDING ASSOCIATED COMPANIES)

WHITE53%

AFRICAN30%

COLOURED16%

INDIAN1%

M F M F M F M F TOTAL

MANAGEMENT 383 35 43 18 20 2 17 3 521

ENGINEERS 377 20 21 1 3 0 24 3 449

SCIENTISTS 39 7 2 4 2 0 0 0 54

TECHNOLOGISTS 742 61 93 22 66 21 17 2 1 024

ARTISANS 1187 64 756 179 152 88 14 2 2 442

OTHER 414 494 730 264 505 277 15 9 2 708

TOTAL 3 142 681 1 645 488 748 388 87 19 7 198

DENEL GROUP29


DENEL PHASE II STRATEGY: DRIVERS FOR GROWTH

Towards a Respected South African Company

Transformation, BBBEE, Employment Equity, CSI, Branding

Deepen Relationship with DoD and State Agencies

Joint planning, International Marketing Support, Technology and IP Development, Skills Transfer, Programme Delivery

Improved Access to Sustainable Markets

Equity Partnerships: Existing and New

Local Spend: Home Market Support

Operational Excellence

Performance, People, Skills Development, Outsourcing, Supplier Development

Strengthen Governance and Financial Management

Risk Management, Compliance, Cash Flow Management and Contracting

CUSTOMER FOCUS

EFFICIENCY

GROWTH

DENEL GROUP30


DENEL PHASE II STRATEGY: IMPLEMENTATION

Driver Desired Future State

Complete key outstanding equity partnership transactions

Consolidation of local landward defence capabilities and foreign equity partnership

Improved Access to sustainable Access

• Grow existing markets • Enter focused new markets


Operational excellence • Operational excellence achieved across Denel:• Contracts delivered consistently to specification, • on time and within contracted costs• Sustainable long-term order book secured • Correct contracting models within product lifecycle• Appropriate investment in R&D• Integrated skills development• Sound succession planning • Optimised utilisation of BBBEE/SMME and wider RSA supply chain • Appropriate alliances established with OEM’s

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Driver Desired Future StateDeepening relationship with DoD and State Agencies

•Home market support: Increase intake of local orders to form sustainable baseline•70% of total order intake from local client•Joint DoD/industry planning forum•Monthly programme reviews•Quarterly strategic meetings•Regular meetings with Chiefs of Armed Services


• New financial reporting system to: – Improve real time reporting to management and stakeholders– Ensure continued robustness of reports

• On-going centralisation of the Treasury function to:– Pool financial resources– Optimise cash holding– Interest rate and forex management

Strengthen Governance and Financial Management

• Corporate policies and risk management to ensure:– Sound risk management systems– Sound corporate governance

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Towards a Respected South African Company

A commercially, self-sustainable entity• All entities are profitable and self-sustainable• Creator and custodian of proprietary IP

A transformed organisation• B-BBEE• Positive Organisational Climate• Substantial investor in employee training and development

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DENEL’S VALUE ADD (1)

Effective contribution to National Security• Security of supply in an environment where the major Western players limit access to advanced

defensive weapons by non-NATO developing countries• Integrity of SA’s defence stature, particularly in the G20 environment where it elevates Africa’s stature• Optimised acquisition and cost of ownership - able to service weapons procured offshore in-country• Extensive manufacturing and support base• Sustainable technology base to enable DoD to acquire products uniquely suited to the African theatre

of peacekeeping

Contribution to the economic and manufacturing base• Skill intensity: opportunity for deep, applied scientific and engineering base in contrast to an academic

approach in most developing countries without an indigenous defence industry• High-end skills development and retention

– Denel Centre for Learning and Development (DCLD)– Denel Youth Foundation Training Program launched focusing on upgrading mathematics and

science skills. – Engineering bursary & internship programmes

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Contribution to the economic and manufacturing base (contd.)

• IP creation and cross-leveraging in other industries. Internationally confirmed that defence industry remains the number one incubator for industry at large.

• Denel skills infusion across SA industries (examples include the electric car programme of DST and the PBMR programme)

• Supports an extensive local supplier base: 70%+ local procurement

• Employment multiplier: X6 (6 jobs in the supplier base for every engineer employed)

• Major forex savings in acquisition and earnings through exports

But everywhere in the world, the incumbent government (through its DoD or DST) has to assume ultimate responsibility for:

• Funding the core technology & capability base in its own country

DENEL GROUP35



Denel collective 2009 R&D Investment – R1,095 billion

Key technologies and human capital supported by this investment:

• Sovereign missile capability

• Security of supply of world-leading munitions range and strategic material supply

• Independence in brass/pure copper extrusions

• Advanced gearbox and composite structures manufacture

• World-leading landmine protection/clearance technologies

• Certified local Maintenance, Repair and Overhaul capabilities

• State of the art photonics capabilities

• Development of an expanded local supply chain

DENEL GROUP36


DENEL PRIORITIES

• Interventions in areas where turnaround has not yet been achieved– Denel SAAB Aerostructures

• Conclude missile equity transaction

• Finalise outstanding recapitalisation package / funding guarantees

• Build order cover and secure multi-year orders (Local and international

• Embed new strategic drivers across Denel

• Achieve transformation goals

• Define impact and mitigate potential risks associated with the A400M cargo aircraft project

DENEL GROUP37


Thank You

www.denel.co.za

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