Denel Annual Report 2003/4
Agenda Financial Overview Reasons for Losses Restructuring Measures Six-month YTD trends Additional Turnaround Measures Regulatory Issues
Consolidated Results
Financial Overview Revenues Sales Operating Expense Financial Ratios Per product market Per region Sales Operating Expense Production materials Labour Support functions Financial Ratios
Revenues REVENUE 2003 (R millions) 2004 (R millions) Sales 4 292,4 4 321,0 Rental on investment properties 35,8 77,6 Interest income on advance contract payments 44,2 43,6 4 372,4 4 442,2
Gross Revenue Composition
Sales Composition per region
Sales by region North America R113m - 3% Europe R702m - 15% RSA Local Africa R158m - 4% South America R211m - 5% Asia R464m - 11% Middle East R872m - 20% Europe R702m - 15% North America R113m - 3%
Operating Expenses 2003 (R million) 2004 (R million) By Nature Materials 1 649,9 1 442,7 Consumables 63,6 54,7 Staff Costs 1 713,3 1 901,6 R & D 186,1 214,0 Depreciation 107,2 121,0 Other expenses & charges 431,2 611,5 Movement in inventories 63,1 (36,4) 4 214,4 4 309,1 By Function Cost of sales 3 096,1 3 154,9 Operating expenses 1 118,3 1 154,2
Investments Description 2003/04 Rm Research and Development 239,8 Capital Investment 161,5 Social Investment 12,0 Investment in associates 16,5
Revenues vs Capex / Opex / R&D
Foreign Exchange Losses 2003 (R millions) 2004 (R millions) Losses on settled transactions 203,8 97,9 Gains on settled transactions (120,0) (294,0) Losses on revaluation 113,4 629,5 Gains on revaluation (45,3) (178,9) Net foreign exchange loss 151,9 254,5
Reasons for current financial situation Decline in orders from the SANDF Decline in R&D funding Investment in and losses from the Rooivalk Programme (R2,0 billion plus over 9 years) Unsuccessful commercial diversification strategy (R900 million) Staff Reduction (over 5000) Writing down the values of obsolete equipment (Declining SANDF orders)
Reasons for current financial situation (2) Low margin/loss incurring Countertrade (DIP) contracts High overhead costs Operational inefficiencies Strengthening of the SA rand against the US dollar Losses at certain non-core businesses.
Turnaround Interventions
Exit non-core businesses (Commercial) Some have been disposed of Some were closed down Some still in the disposal process
Businesses / Investments to be disposed of Business/Investment Status Completion Date Share in Ariviakom (22,98%) Ministers approval requested 31/10/04 SPP (Pty) Ltd Offers are being considered 30/11/04 Irenco (Pty) Ltd - Plastics - Electronics J/V with Usabco currently neg. Currently being valued 31/03/05 Sybase (SA) (Pty) Ltd (51%) Waiting for offer Voltco Process to be initiated Bonearo Park (Pty) Ltd Vacant Land 30/09/05 Cosource (Pty) Ltd (51%) Dendustri
Vektor & Denel Aviation Restructuring Rationalisation Vektor integrated into LIW
Key turnaround strategies Operational efficiency (implemented 1/4/2004) Centralisation of support services Restructuring the businesses of Aerospace and Land Systems Cost cutting, rightsizing, business process re-engineering and contract re-negotiation Aggressive marketing (new sales contracts) Product rationalisation Zero-tolerance: Fraud/Corruption/Mismanagement Alignment of skills Performance management
Six-month YTD Trends Revenues Operating Expense Inventories Cash Flow Employees BEE
Six month YTD Trends Items Target (R millions) Actual (R millions) Achieved Revenues 1 743 1 477 Order coverage (2004/05) 80 % 82 % Operating Expenses 560 467 Cash outflow (556) (487) Inventories 1 452 1 495 Trade Debtors 522 733
Sales YTD vs 2003 Sales 2003 (R million) 2004 (R million) Land Systems 2 330,705 2 577,410 Aerospace 2 290,573 2 105,839 Commercial 264,809 316,279
Employee trends
Employee trends Employees 2003 2004 White 48,4 % 49,9 % Black 51,6 % 48,4 % 49,9 % Black 51,6 % 50,1 % Women 25,6 % 24,3 % Total 10 925 9 742
BEE year-to-date Comparison
Strategies/Actions to complete turnaround Executives/Board Completion of disposal of non-core businesses Finalisation of turnaround of Denel Aviation Continued restructuring for efficiency Continued cost reductions Joint ventures at business unit or product level Positioning for future major SANDF & global projects Incentivise and modernise the workforce
Regulatory Issues
Additional Strategies/Actions to complete turnaround Shareholder / Government Review Armscor preferential procurement policy to benefit local industry & secure a base load on consumable products Increased R&D funding to benefit Denel & local defence industry Recapitalisation of Denel Remove balance sheet risks Position Denel for future growth Divestiture and recapitalisation to renew certain critical plant Fund Rooivalk programme to frozen baseline and required deployment status Review Armscor’s requirements to assure bank guarantees on major Denel contracts
Income Statement (Projection)
Flight International Magazine (4 October 2004) Europe delays new rules to open defence markets “New rules designed to open up Europe’s defence market have been delayed after eleventh-hour wrangling over the extent of the reform. All military products are excluded from EU competition rules, allowing countries to favour national suppliers. EADS is pushing for a change in the rules to enable it to compete for Contracts in countries such as Italy, where projects are often defined as being military to avoid open competition.”
Denel Annual Report 2003/4