DISCUSSION POINTS

1. Review of strategy implementation progress

2. Human resources: Overview and achievements

3. Transformation: Overview and achievements

4. Programme management

4.1 A-Darter Programme

5. Business development

6. Financial performance

7. Impact of Denel in South Africa

DENEL GROUP STRUCTURE

Denel Group

DENEL GROUP

REVIEW OF STRATEGY IMPLEMENTATION PROGRESS

BUILD-UP TO DENEL’S STRATEGY FINANCIAL SUMMARY – PRE 2005/06

-600-400-2000

200

2001 2002 2003 2004 2005

Rm

-10000

10002000

2001 2002 2003 2004 2005

Rm

Losses

Cash utilised

Solvency

-2000-1500-1000-5000

500

2001 2002 2003 2004 2005

Rm

DENEL IN 2005

• Centralised conglomerate – lack of accountability and performance

• Major losses posted• Subsidy mindset• Salaries below market levels

- high attrition rate• Poor programme

performance• Diversification into non-core

businesses and assets - R1bn negative impact

• Significant decrease in domestic defence spend

• Global market access constraints

• Unfocussed export approach – no clear strategy to integrate into global supply chains

Key issues in 2005

Budget Burdens:

• High salary costs• Facility maintenance priority• Operations outside borders higher than budget• Military Veterans added to DoD• Border control added

Defence Budget as % of GDP

5.1%

4.5%

4.0%

1.5%1.3%

19811974 1989 1994 2010Source: Beeld, 5 May 2010

Expected DoD priorities:

• Border protection (surveillance, vehicles, ammunition, cyber, Command & Control)

• Landward defence renewal (vehicles, artillery, ammunition)

• Air Force (Maritime patrol, C-130 replacement, heavy lift, UAV’s)• Navy

The domestic defence budget has constricted considerably over the last two decades - need to leverage future opportunities

World bank recommendation: Defence should not be less than

2% of GDP

Country % GDPMalaysia 2.3%

China 1.5%

Saudi Arabia 9.3%

Brazil 2.6%

Country % GDPTurkey 4%

Pakistan 4.5%

India 2.6

Russia 3.9%

SA DEFENCE SPEND

DENEL IN 2005

• Centralised conglomerate – lack of accountability and performance

• Major losses posted• Subsidy mindset• Salaries below market levels

- high attrition rate• Poor programme

performance• Diversification into non-core

businesses and assets - R1bn negative impact

• Significant decrease in domestic defence spend

• Global market access constraints

• Unfocussed export approach – no clear strategy to integrate into global supply chains

Key issues in 2005 Strategy to “Fix” Denel

• Becoming a profitable, commercially viable and dynamic entity

• Overhauling governance • Attracting, developing, retaining

and appropriately rewarding world class skills

• Achieving world class productivity• Focusing on the areas where we

can compete credibly• Partnering with state agencies to

meet the defence needs of the country

• Developing partnerships/alliance ventures with global OEM’s to add true value and access markets

2006 STRATEGY PILLARS

Privileged Access

Partner with

State Agencies

Strategic Equity Partners

Grow

Com

mercially

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. 

These 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

4 years to 2010

10

Denel 2005/6 Challenges

- Workforce 8,000

- Export orientated company

- Centralised organisation

- Poor stakeholder alignment

- Governance challenges

- Poor programme management

- Ageing plant and equipment

- Poor human capital development and transformation

- Market access constraints

Denel 2007-2010 steps taken

Performance management

Denel operations decentralised

Entity boards, audit and risk committees, risk management and financial discipline

Restructuring

Defence – Loss R1.3bnAerostructures – Loss R300m

Denel 2010Defence – Profit before interest R200mAerostructures – Loss before interest R283m

Equity partnerships providing investment and access to markets

Disposal of non-core entities

Governance policies implemented, internal control systems and processes improved

Local client relationship and stakeholder alignment

improvements, 61% of revenue

Business development initiatives

Improved programme performance

Leadership development

Transformation initiatives

DENEL’S JOURNEY TO SUSTAINABILITY

ENTITY1 DENEL SHARE

MAJOR CLIENTS

INDUSTRIAL UPGRADING

REVENUE GROWTH2

NET PROFIT

R&D SPEND3

ORDER BOOK

Turbomeca Africa (Pty)

Ltd.(2003)

(TMA)

49% RSABotswana

Kenya Malawi

UKFrance

Major overhaulof plant and efficiencies

created

123% 11.2%

vs.

(55.6%) in 2002

N/A R320m

Carl Zeiss Optronics (Pty) Ltd

(2007)

(CZO)

30% UKUS

GermanyItaly

Turkey

New world class production

facilities established

122% 16.8%

vs.

(50%) in 2007

9% R795m

Rheinmetall Denel

Munition (Pty) Ltd

(2008)

(RDM)

49% RSAUSAUAE

ColumbiaGermanyTurkey

3 Year CAPEX programme:

R250m

28% 8.2%

vs.

(3.3%) in 2007

5.2% R2,2bn

1 Golden Share Agreements in place to ensure security of supply and retention of technology and business activity in SA

2 Since inception of the partnership3 Self-funded R&D spend as a percentage of total revenue per annum

ACHIEVEMENTS BY DENEL’S ASSOCIATE COMPANIES