Denel Presentation to The Public Enterprise Portfolio Committee

8 September 2004

2

Agenda

• Welcome and Introductions

• Denel Business Overview– The Defence Industry– Financial Highlights– Human Resources– BEE / Affirmative Procurement– Challenges facing Denel

• Discussion

• Product Development • Manufacturing • Procurement

LTD

In April 1992 Amscor’s manufacturing abilities were commercialised

Complete split in organisations and management objectives

•Companies Act

•Commercialise Manufacturing

•Maintain Technologies

•Economic Growth

•Armscor Act•Procurement

Denel created in 1992

ARMSCOR

4

Denel (Pty) Limited

• State-owned Enterprise reporting to DPE

• Government is sole shareholder

• No subsidies from Government

• Works with DoF, DoD, DTI, DFA, DoI, DST

• Commercial and Profit driven

5

Regulatory Regime

Denel is regulated by (among others): SA Companies Act PFMA Firearms Control Act Explosives Act NCACC Act International agreements / conventions, eg.

Nuclear Non-proliferation Missile Technology Control Regime (MTCR) Biological & Chemical Weapons convention

The Defence Industry

7

SA Defence Industry

MINISTER OF DEFENCE

ARMSCOR

• PROCUREMENT• MARKETING SUPPORT

SECRETARY OF DEFENCE

• POLICY• BUDGETS• CONTROL

NATIONAL DEFENCE FORCE

• ARMY• NAVY• AIR FORCE• MEDICAL

DEFENCE RELATED INDUSTRY

• AEROSUD • AFRICAN DEFENCE SYSTEMS (ADS)• ALTECH• AMS• ATE• ALVIS OMC• GRINTEK• IST• M-TEK• LOG-TEK• PLESSEY• REUNERT

• Service providers

MINISTER OFPUBLIC

ENTERPRISES

• DESIGN• DEVELOP• MANUFACTURE• SUPPORT• MARKETING

8

ADS4.2%

Alvis OMC 4.4%

Grintek8.5%

Reutech8.8%

ATE 9.2%

Denel 55%

10%Others

Estimated Share of Defence Turnover

9

Acquisition / Supply Process & Controls

• RSA strategic position• Foreign Policy posture• Formal Treaties / Agreements• Absence of conflict / Threat to peace• Needs determination• Design and Development• Proofing, Testing, Qualification• Bid permit system / NCACC

10

Global Defence Industry

•Dynamic and politically challenging

•Strong, protected domestic industries

•Highly competitive

•Domination by major powers

•Little reliance on foreign arms acquisitions

•Mergers & Acquisitions

11

Top 10 Defence Budgetsplus RSA (2002) US$ Billions

335.7

46.736 33.6 31.1 27.7

21.6 21.1 17.513.5

2.2

1

10

100

1000

USA

Japan U.K

.

France

China

Ger

man

y

Saudi A

rabia

Italy

Iran

South K

orea

South A

frica

Logrithmic scale

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Global Defence Sales

Arms Transfers to Developing Nations2002

USA48%

Russia28%

China2%

Others10%

Major Western

Europe - 12%

Business Overview

14

Board of Directors

Sandile ZunguChairman(Jun 2001)

Victor Moche(May 2003)

Pottie Potgieter(Jan 1997)

Executive Directors Non-executive Directors

Zodwa Manase(Jun 1998)

Ian Deetlefs(Oct 1995)

Lt GenLambert Moloi

(Jun 1998)

Dr Danisa Baloyi(Oct 1995)

Dr Sibusiso Sibisi(Jun 1998)

Alan Mukoki(Jun 1998)

Dr Chris Saunders(Jun 1998)

Thami Mazwai(Jun 2001)

Dr Khotso Mokhele(Jun 2001)

Denel Structure:

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Executive Committee

CEOVictor Moche

Group Director: MarketingZwelakhe Ntshepe

GED: Finance(Vacant)

Group Director: HREugene Martin

Group Director: Procurement & ITMalesela James Sekhasimbe

GED: Land Systems(Acting) Tony Simon GED: Aerospace

Knox MsebenziGED: Commercial & Acting FD

Pottie Potgieter

Chief of StaffCassandra Gabriel

Company SecretaryDr Tommy van Reenen

Chief Legal Counsel

Tanya Swiegelaar

Chief Technical Officer(Vacant)

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Operating Structure

Support Functions: Chief of Staff

Aerospace Systems

Engineering

Denel Optronics

Aircraft Logistics

M anufacturing

OTB: Test Range

DENEL AEROSPACE

Systems

Am m o: Sm all / M ed

Am m o: Large

Pyrotec / Expl.

M ine Action

DENEL LAND SYSTEMS

Properties

SPP: Soybean Pr

Irenco: E lectr / P las

Dendustri

IT Interest

COM M ERCIAL & IT

CEO

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Denel Plants and Facilities

18

Aerospace Products & Services

Missiles & guided weapons

OTB multi-purpose test range

Aircraft parts manufacture / maintenance / refurbishment

Helmet sighting systemsUAVs / observation systems

Target drones

Rooivalk attack helicopter

19

Land Systems Products & Services

Aerospace

Artillery systems: 155mm & 105mm long range

Artillery propellant charges & projectiles Infantry weapons

Small / medium calibre ammunition

Plant manufacture

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Commercial & IT

• Denel Properties Group• Dendustri – Components Manufacturing• Irenco – Electronic & Plastic injection-moulding products• SPP – Soy-based protein-rich foodstuffs• IT Shareholdings – Cosource, Arrivia.kom, Sybase SA• Densecure – Captive Insurance company for the Denel

Group

Financial Overview

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Financial Highlights

2004 2003 % Change ITEM

Rm Rm Rm Gross revenue 4 442,2 4 372,4 1,6% Gross revenue – continuing operations 4 442,2 4 163,2 6,7% Gross profit 1 287,3 1 276,3 0,9% Loss before taxation (357,6) (43,6) (720,2%) Net loss (377,5) (72,6) (420,0%) Cash outflow before financing activities (200,8) (229,0) 8,8% Capital and reserves 834,5 1 368,3 (39,0%) Non-current borrowings 832,1 840,9 1,0% Total borrowings 907,8 849,6 (6,9%) Total assets 4 091,8 4 254,0 (3,8%)

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Sales Composition per region

0

10

20

30

40

50

60

2001 2002 2003 2004

Per

cen

tag

e

South Africa Africa South America

Asia Pacific Middle East Europe

North America

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Group Sales: Defence /Non Defence

0

500

1000

1500

2000

2500

3000

3500

4000

1998 1999 2000 2001 2002 2003 2004

Defence Non-Defence

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Gross Revenue Composition

0

10

20

30

40

50

60

70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Per

cen

tag

e

RSA Security forces Commercial-local Exports Other

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Revenues vs Capex / Opex / R&D

0

10

20

30

40

1998 1999 2000 2001 2002 2003 2004

Percentage of Revenues

Capital Expenditure R & D (Own funds)

Operating Expenses

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Investments

Description2003/04

Rm

Research and Development 239,8

Capital Investment 161,5

Social Investment 12,0

Investment in associates 16,5

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Business environment: Exchange Rate, CPI and salary increases

01020304050607080

1999 2000 2001 2002 2003 2004

Per

cen

tag

e

Rate of exchange CPI Salary increases

CPI Cum Salary Incr Cum

Human Resources

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People of Denel

• Employee headcount: 10925• 70% technical, engineers and scientists• Insufficient engineers and technicians • Ageing skills base• Lack of employment equity

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Employee Distribution

(25,6%)

1 4.5 5.6 0.8

13.2

49.7

18

7.2

Senior Management Management Engineers Scientists

Technicians Artisans Support Services Operational Support

49,7%

18%

7,2% 1% 4,5% 5,6%0,8%

13,2%

32

996

2341

764

1310

934

14557

4199

0

400

800

1200

1600

2000

2400

2800

3200

3600

4000

4400

WHITE MALE WHITEFEMALE

AFRICANMALE

AFRICANFEMALE

COL MALE COL FEMALE ASIAN MALE ASIANFEMALE

(39,1%)

(9,3%)

(21,8%)

(7,1%)

(12,2%)

(1,3%) (0,5%)

(8,7%)

Demographics

33

7995

2751

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

MALE FEMALE

(74,4%)

(25,6%)

Gender

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Employee Wellness (EWP)

A National Employee and Family Counselling telephone service

Emergency Care Centre Face-to-face Counselling Service Health Information and Advice HIV/Aids – Voluntary Counselling and Testing Medical Aid Retirement Fund & Financial Advice

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Social Plan

• Personal Counseling

• Financial Counseling

• Job Search

• Denel SMME Funding and Incubator

• Denel Business Opportunities

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Training & Skills Development

Denel Centre for Learning and Development: The School of Business Leadership The School of Aerospace The School of Land Systems The Denel Youth Foundation Training Programme

Skills Development Projects: Through eight sector education and training authorities Focus on Engineers, Scientists and Technicians External training within South Africa & Abroad External training in Nepad countries

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Corporate Social Investment

• GET SET Programme

• Schools’ Outreach Programme &

Science Popularisation

• SEDIBA Teacher Development Project

• Apprentice Training

• Bursaries

BEE / Affirmative Procurement

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BEE categories:

• Black Influenced (>5.1% Shareholding) 8% = R 81,876,258

• Black Empowered (>25.1% Shareholding) 3% = R 30,173,669

• Black Owned (>50.1% Shareholding) 2% = R 24,464,164

• Non-Empowered Companies (<5.1% Shareholding) 87% = R936,858,707

BEE as a percentage of total spend: R1,073,372,798

BEE % of Total Spend

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BEE: Women Spend

• Male Owned 98.14% (R1,053,356,023)• 1 – 25.1% Woman Owned 0.58% (R 6,247,580)• 25.2 – 51% Woman Owned 1.02% (R 10,903,153)• 52 – 100 % Woman Owned 0.27% (R 2,866,041)

Spend Awarded to Woman Owned Enterprises

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BEE Achievements

• Training for BEE entrepreneurs• Verification of BEE credentials• Publicising the opportunities in Denel• Punishment of fronting - withholding of Denel business

Strategic Interventions

43

SA Defence Industry Issues

• Decreased defence budget & local purchases • Declining R&D funding, reliance on highly

competitive export markets• No direct capital injection • Denel at a competitive disadvantage • Unfair competition / protected markets

44

Technology Issues

• Denel develops high technology systems• World class products and systems• 60% of revenue from exports• Immense development costs• Under-funding in R&D• Technology edge under threat

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Policy and Regulatory Issues

• Defence Review• White Paper on Defence Related Industries• Armscor Act & Procurement Policy• BEE Charter• NCACC Processes• Fragmented governing legislation

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Strategic Interventions

• Aggressive programme of cost cutting and financial control

• Zero-tolerance: Fraud/Corruption/Mismanagement• Hi-tech integrated skills development programme• Alignment of skills• Performance management culture / system

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Strategic Interventions (2)

• Disposal of non-core businesses and investments• Business process re-engineering• Consolidation of support functions• Product rationalisation • New markets for higher-margin systems • Strategic alliance and partnerships• Review of all contracts

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Strategic Interventions (3)

• Review of Defence procurement policy• Higher R&D spend• Investment in training and development• Need for recapitalisation

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Strategic Objectives

• Revitalised balance sheet• Restoration of national defence capability• Sustainable and growing export business• High level skills incubator for national economy• Leading technology house • Global partner in niche markets

Thank you

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BEE: Direct & Indirect Material Spend

BEE Share % Direct Indirect• Non-Empowered Companies (<5.1% Shareholding) 90.48% 88.70%

• Black Owned Companies (>50.1% Shareholding) 0.94% 0.95%

• Black Empowered Companies (>25.1% Shareholding) 2.25% 0.55%

• Black Influenced Companies (>5.1% Shareholding) 6.33% 9.80%

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BEE Suppliers

• Non-Empowered Companies (<5.1% Shareholding) 94% (8977)

• Black Owned Companies (>50.1% Shareholding) 4% (334)

• Black Empowered Companies (>25.1% Shareholding) 1% (56)

• Black Influenced Companies (>5.1% Shareholding) 1% (142)

Number of Suppliers by BEE Category

54

BEE Challenges

• Continue to verify BEE credentials• Reward achievement of BEE targets• Focus on developing current and potential BEE companies

• Strengthen the supplier development function• Increase the BEE spend on direct/production materials

• Educate employees on the important role BEE initiatives play in the economy

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BEE: Next Steps

• Strengthen and grow the State Owned Enterprises Forum (SOEPF)

• Finalise the Defense BEE Charter led by AMD• Target all indirect materials and services for BEE and woman owned companies