1. DENEL GROUP 1 Company Confidential PRESENTATION ON DENEL PUBLIC ENTERPRISES PORTFOLIO COMMITTEE WINTER SCHOOL 11 AUGUST 2009 DENEL GROUP

2. 2 Company Confidential CONTENTS The history of the SA defence industry Overview of Denel The global defence market The SA defence market Denel’s historical financial performance Implications of defence trends for Denel Denel’s turnaround strategy Progress: strategy implementation Denel’s growth strategy Denel’s values Denel priorities

3. DENEL GROUP 3 Company Confidential SOUTH AFRICA’S UNIQUE HISTORY HAS RESULTED IN THE DEVELOPMENT OF A DEFENCE INDUSTRY UNLIKE ANY OTHER NATIONAL MODELS End June 2009

4. DENEL GROUP 4 Company Confidential Overview of Denel

5. DENEL GROUP 5 Company Confidential DENEL IS A STRATEGIC DEFENCE COMPANY Personnel employed by Denel Group: Denel: 5 167 Ass. Companies: 2 129 TOTAL: 7 296 Includes approx. 1400 Engineers & Scientists With 6 X Multiplication factor on SA Economy End June 2009

6. DENEL GROUP 6 Company Confidential DENEL CONTRIBUTES TO NATIONAL SECURITY AND HIGH TECHNOLOGY MANUFACTURING Effective contribution to National Security – Local industry plays a vital role in security of supply, optimised acquisition, life-cycle support and cost of ownership – 1998 White Paper on Defence – 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 – High-end skills development and retention Denel Centre for Learning and Development (DCLD) Denel Youth Foundation Training Program focuses on upgrading mathematics and science Engineering bursary, internship and mentorship programmes – IP creation and cross-leveraging in other industries (globally defence industry is a key incubator) – Denel skills infusion across SA industries (e.g.. electric car programme of DST, PBMR, SALT telescope) – Supports an extensive local supplier base: 70%+ local procurement – Employment multiplier: X6 (6 jobs in the supplier base for every engineer employed) – Major Forex earnings through exports

7. DENEL GROUP 7 Company Confidential Denel, DoD and Client Collective 2009 R&D Investment – R1,2 billion Sovereign missile capability with niche design, development and manufacturing capacity within Denel, associate companies and local manufacturing base Security of supply of world-leading munitions range, with state of the art propellant, chemical engineering and metallurgical competencies Independence in brass/pure copper extrusions Advanced gearbox, composite structures, combat turret as well as artillery design, development, manufacture, qualification and certification World-leading landmine protection/clearance and ballistic protection technologies Certified local Maintenance, Repair and Overhaul capabilities meeting international accreditation standards State of the art photonics capabilities and associated product/component design, development and manufacturing capacity Development of an expanded local engineering and manufacturing supply chain Retention of appropriate wind tunnel and mathematical modelling capabilities Operational testing/certification and space launch vehicle support Active participation in DST technology forums: Optronics, photonics, UAVs, micro- electronics, autonomous guidance control and advanced materials. DENEL PLAYS A MAJOR ROLE IN TECHNOLOGY DEVELOPMENT

8. DENEL GROUP 8 Company Confidential R&D SPEND TOTALLED R1,2bn IN 2008/09 – NEED FOR STRATEGIC SPEND ON NEW PRODUCTS TO MAINTAIN COMPETITIVENESS EntityTotal Sales (RM) Own Funds % of Sales (RM) Client Funds (RM) Total (RM) Mechem Denel Aviation/Rooivalk Dynamics (Missiles) Dynamics (UAV) DISS DLS PMP DSA RDM (South/North/La Forge) Carl Zeiss Optronics Total R&D Spend 267,569 910,753 571,442 144,603 79,437 425,021 600,552 598,897 976,523 385,000 0.1 1.1 0.1 2.6 0.6 1.4 0.2 5.2 3.2 0,219 10,269 3,001 3, 868 2,731 8,654 1,111 50,824 12,253 92,930 109,788 299,042 79,697 210,301 399,307 18,700 1016,835 0,219 120,057 302,043 3, 868 79,697 213,031 8,654 400,418 69,524 12,253 1 209,765

9. DENEL GROUP 9 Company Confidential HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED Denel Aviation/Rooivalk Helicopter design, qualification and certification Certified MRO services and component repair to international standards Denel Dynamics Missiles Applied MEMS technology Missile design, development, manufacture and qualification Advanced aerodynamic modelling and simulation Micro-servos and flight control management Advanced materials technology application (carbon-carbon) Systems engineering and advanced systems integration Logistics engineering Denel UAVs UAV design, development, manufacture, qualification and certification Autonomous flight control management Mission planning and software certification

10. DENEL GROUP 10 Company Confidential Denel Integrated Systems Solutions Systems engineering and advanced systems integration Logistic engineering Denel Land Systems Systems engineering and advanced systems integration Integrated ballistic systems design and development Turret and ballistic protection design, development and integration Main weapon (artillery/rapid fire) design development and manufacture Ammunition handling systems Logistics engineering Hydraulic/electrical/air conditioning/vehicle platform specification and design Landward mobility modelling and simulation Vehicle/combat system testing and evaluation Material and metallurgical specification/design HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)

11. DENEL GROUP 11 Company Confidential Mechem (Pty) Ltd Landmine protection and clearance Chemical Sniffer technology (inclusive of canine breeding and training) Overberg Test Range Flight test technologies and applications Satellite telemetry Satellite launch and orbital support Pretoria Metal Pressings Brass/copper alloy casting and strip extrusions Advanced explosives design and manufacture for military and commercial applications Applied detonics for military and commercial applications Tungsten carbide mining drill bit design and manufacture Powder metallurgy – tungsten-copper (missile grade/switch gear) HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)

12. DENEL GROUP 12 Company Confidential Denel Saab Aerostructures (Pty) Ltd Aero-elastic modelling and simulation (design and fatigue) Applied fracture mechanics Advanced aluminium/composite aerostructures design, manufacture, qualification and certification Thin-wall aluminium machining and assembly Fibrous/carbon composite layups, curing and machining Advanced fluid press extrusions Non-destructive testing Certified surface/heat treatment Rheinmetall Denel Munitions (Pty) Ltd Advanced propellant design, manufacture and certification Powder/ball/cast propellant manufacture Advanced materials technology application (composite/steel) Advanced forging technology HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)

13. DENEL GROUP 13 Company Confidential Carl Zeiss Optronics (Pty) Ltd Photonics research Optical design Optical payload manufacture, qualification and certification Opto-mechanical design, manufacture and assembly Certified opti-mechanical design, manufacture and assembly for space payloads Turbomeca Africa Advanced manufacturing Aerospace gearbox manufacturing, qualification and maintenance HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)

14. DENEL GROUP 14 Company Confidential The Global Defence Market

15. DENEL GROUP 15 Company Confidential GLOBAL DEFENCE SPEND IS LARGELY INACCESSIBLE TO INDEPENDENT CONTRACTORS SUCH AS DENEL

16. DENEL GROUP 16 Company Confidential BUDGETS ARE DECREASING AND MARKET REQUIREMENTS ARE SHIFTING MAKING IT HARDER TO COMPETE IN THE TRADITIONAL PLATFORM SALES BUSINESS Source: McKinsey (2009)

17. DENEL GROUP 17 Company Confidential EMERGING POWERS ARE SHOWING THE HIGHEST INCREASE IN DEFENCE SPEND – COMPETITION TO INTENSIFY IN DEVELOPING MARKETS Source: IIS (2007) and McKinsey

18. DENEL GROUP 18 Company Confidential The SA Defence Market

19. DENEL GROUP 19 Company Confidential SOUTH AFRICA IS SUB-SCALE FOR SUPPORTING A BROAD DEFENCE INDUSTRY Source: McKinsey (2007)

20. DENEL GROUP 20 Company Confidential DEFENCE EQUIPMENT SPEND IS LIKELY TO CONTINUE TO DECLINE Defence equipment expenditure will come under further pressure due to the recent R1,9bn cut and increased personnel and deployment costs Source: DOD (2009)

21. DENEL GROUP 21 Company Confidential Denel’s Turnaround Strategy

22. DENEL GROUP 22 Company Confidential DENEL RAN INTO FINANCIAL DIFFICULTIES IN 2005 Losses Cash utilised Solvency 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. Reserves and capital were significantly eroded due to these loses by 2004, necessitating a review and change of the strategy in 2005/06.

23. DENEL GROUP 23 Company Confidential DENEL DEVELOPED THE TURNAROUND STRATEGY IN 2006: ALIGNMENT WITH THE DOD AND ON-GOING REFINEMENT IS CRITICAL Implications for RSA and Denel Changing nature of conflict –SA now plays a major role as a peacekeeper in the Rest of Africa –Troop mobility and landward renewal expected to be priority for the DoD –SA industry plays a major role in supplying equipment for peacekeeping –Need to focus on growth pockets in traditional manned platform business, fire power support, munitions and log/maintenance support –Need for alliances and partnerships with global original equipment manufacturers (OEMs) in certain segments –DoD will need to prioritise capabilities and focus spend on strategically essential capabilities –Assist the DoD in maintenance and procurement saving –SA and Denel well positioned with Brazil eg A-Darter missile development –India impasse needs to be resolved –Pursue technology transfer to access growing markets – SA has exceptional design and engineering skills – Significant demand for unmanned platforms (UAVs) – pursue growth in this area – Level 5 systems engineering skills will be critical for the future – Explore other high tech areas eg. physical/digital security Decreased SA defence spend and inaccessible global markets Shifts in technology Change drivers Emerging powers

24. DENEL GROUP 24 Company Confidential DENEL’S STRATEGY SET OUT TO INCREASE MARKET ACCESS, OVERHAUL GOVERNANCE AND TRANSFORM THE COMPANY Privileged Access Partner with State Agencies Strategic Equity Partners Grow Commercially Viable Businesses Capabilities and Productivity Denel Corporate Governance Denel Corporate Office – managing 11 created Entities People and Transformation Denel Corporate Office Purpose – “The Role of the Centre” Secure privileged access to a minimum portion of South Africa’s defence development and procurement spend Partner with State Agencies to do joint business planning and to establish export marketing responsibilities. Th ese two factors translate into the ‘captive market’ and ‘political support’ that make international major defence prime contractors successful Secure equity business partnerships with major global players Focus on growing the commercially viable businesses where Denel has real technological leadership. Denel’s other businesses will be ring-fenced, operated under management contracts or exited Raise capabilities and productivity to world- class levels

25. DENEL GROUP 25 Company Confidential SINCE THE LAUNCH OF THE STRATEGY IN 2005, DENEL HAS MADE SIGNIFICANT PROGRESS WITH IMPLEMENTATION Denel operations restructured and ring-fenced to isolate risk and drive performance and accountability at business unit level Governance policies, systems and processes strengthened across Denel - this will continue to be prioritised Entity Boards and Audit and Risk Committees established Disposed of non-core businesses and properties to the value of R1bn All businesses have turned around except for Missiles and DSA. Denel Integrated Support Systems (DISS) remains a risk area until the Ground Based Air Defence System (GBADS) 2 contract has been secured Denel local / export sales mix changed from 40/60% to 60/40% Major DoD contracts secured include: – Hoefyster (Badger) Infantry Fighting Vehicle (total R8,3bn, R1,1bn development contract activated at this stage) – A-Darter 5th generation air-to-air missile development (R1,1bn: RSA and Brazil funded) – Aircraft maintenance, repair and overhaul (R600m per annum)

26. DENEL GROUP 26 Company Confidential Cooperation established with all RSA State Agencies and more being done to further improve situation – major focus on improving DoD relationship underway Three equity partnerships concluded with Carl Zeiss Optronics (Germany), Rheinmetall Defence (Germany) and SAA AB (Sweden). All equity partnerships showing a rapid turn around and significant export orders, except for Denel SAAB Aerostructures (DSA) Specific aggressive turnaround intervention launched at DSA Proactive technical management at Group level with successes achieved in the Ground Based Air Defence System (GBADS) programme, A-Darter and the C-130 and Oryx aviation programmes Transformation: – Drive launched in 2007 – Transformation committees established in each entity to drive programmes – Key part of entity stretch targets (management incentive programme) – Organisational climate index score of 50 (SA corporate benchmark score = 60) in 2008 for the Denel Group – Major emphasis on bursary, internship and youth training programmes SINCE THE LAUNCH OF THE STRATEGY IN 2005, DENEL HAS MADE SIGNIFICANT PROGRESS WITH IMPLEMENTATION (CONTD.)

27. DENEL GROUP 27 Company Confidential DENEL RECENTLY REFINED ITS STRATEGIC DRIVERS TO ENSURE INCREASED FOCUS ON CUSTOMERS, EFFICIENCY AND GROWTH Towards a Respected South African Company Transformation, BBBEE, 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

28. DENEL GROUP 28 Company Confidential DENEL HAS ALSO DEVELOPED CORPORATE VALUES TO UNDERPIN THE DRIVERS AND THE ORGANISATION Integrated multi- disciplinary approach to address culture, ethics, work practices and drive public awareness through internal and external stakeholder engagement Implementation

29. DENEL GROUP 29 Company Confidential Denel Priorities

30. DENEL GROUP 30 Company Confidential KEY PRIORITIES MUST BE IMPLEMENTED TO COMPLETE THE TURNAROUND Denel’s funding guarantees/recapitalisation Execute growth strategy – Finalise End State proposals – Achieve transformation goals – Strong political support for exports – Leverage SEP/Alliances to grow exports Interventions to ensure commercial viability – Measures to reduce working capital requirement – Build order cover and multi-year orders: local and international Denel’s missiles business – Conclusion of the equity negotiations with the global missiles company Denel SAAB Aerostructures: – Turnaround drive underway

31. DENEL GROUP 31 Company Confidential Thank You