presentation on denel public enterprises portfolio committee winter school 11 august 2009

DENEL GROUP1

Company Confidential

PRESENTATION ON DENELPUBLIC ENTERPRISES PORTFOLIO COMMITTEE WINTER SCHOOL

11 AUGUST 2009

DENEL GROUP

DENEL GROUP2


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

DENEL GROUP3


SOUTH AFRICA’S UNIQUE HISTORY HAS RESULTED IN THE DEVELOPMENT OF A DEFENCE INDUSTRY UNLIKE ANY OTHER NATIONAL MODELS

End June 2009

* in 2005’s price levelSource: Global insight, DoD policy and planning

60’s and 70’s Late 80’s and 90’s Mid 1990’s Today

Arms race End of Cold War Rise of asymmetric warfareWorld

SA Self sufficiency build up

Industrial/technical leader Reprioritisation of defence spend

Industry re-focus

Total SA government spend*

R228b R280b R473b

Defence as % of gov spend

14% 7% 5%

Defence R&D spend

High Declining Low (less than 0.5%)

Export None Some success for SA in overseas markets

Export account for >60% of industry turnover

SADRI position

One of the most significant national activitiesLarge employment contribution (esp engineers)Leading technology development

Denel becomes the leading local companyGovernment purchased large complicated systems from overseas

Many new start upsIndustry reliant on export

Armscor controls production facilities and manufacturing

High

None

R110b

7.7%

DENEL GROUP4


Overview of Denel

DENEL GROUP5


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

DENEL GROUP6


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

DENEL GROUP7


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

DENEL GROUP8


R&D SPEND TOTALLED R1,2bn IN 2008/09 – NEED FOR STRATEGIC SPEND ON NEW PRODUCTS TO MAINTAIN COMPETITIVENESS

Entity Total Sales(RM)

Own Funds% of Sales

(RM)

Client Funds(RM)

Total(RM)

MechemDenel Aviation/Rooivalk Dynamics (Missiles)Dynamics (UAV)DISSDLSPMP

DSARDM (South/North/La Forge) Carl Zeiss Optronics

Total R&D Spend

267,569910,753571,442144,603

79,437425,021600,552

598,897976,523

385,000

0.11.10.12.6

0.61.4

0.25.2

3.2

0,21910,269

3,0013, 868

2,7318,654

1,11150,824

12,253

92,930

109,788299,042

79,697210,301

399,30718,700

1016,835

0,219120,057302,043

3, 86879,697

213,0318,654

400,41869,524

12,253

1 209,765

DENEL GROUP9


HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHEDDenel 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

DENEL GROUP10


Denel Integrated Systems Solutions


• Logistic engineering

Denel Land Systems


• 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.)

DENEL GROUP11


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)


DENEL GROUP12


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


DENEL GROUP13


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


DENEL GROUP14


The Global Defence Market

DENEL GROUP15


GLOBAL DEFENCE SPEND IS LARGELY INACCESSIBLE TO INDEPENDENT CONTRACTORS SUCH AS DENEL

Total spend on products in which Denel participates

Rest of World

NATO excluding USA

USA

$b

* FY2000 awards

Source: Forecast International; World bank; team analysis

• Near impossible for independent contractors to serve USA and NATO countries

• Competition to serve remaining markets is intense:– Exports from major

US and European players

– Development of domestic industries (e.g., India, Israel)

– Political constraints and alignments

• Near impossible for independent contractors to serve USA and NATO countries

• Competition to serve remaining markets is intense:– Exports from major

US and European players

– Development of domestic industries (e.g., India, Israel)

– Political constraints and alignments

~55

~81

~170

~190

~34

~360

23% 9% 15%

ROUGH ESTIMATES

100%

Total military purchases

Spend on products in which Denel does not participate

47%53%

Contracts awarded by US Department of Defence*

US companies 89%NATO companies 11%Other companies 0%

Contracts awarded by US Department of Defence*

US companies 89%NATO companies 11%Other companies 0%

NATO land vehicle example

National companies 76%Other NATO companies 22%Non-NATO companies 2%

NATO land vehicle example

National companies 76%Other NATO companies 22%Non-NATO companies 2%

DENEL GROUP16


BUDGETS ARE DECREASING AND MARKET REQUIREMENTS ARE SHIFTING MAKING IT HARDER TO COMPETE IN THE TRADITIONAL PLATFORM SALES BUSINESS

Source: McKinsey (2009)

DENEL GROUP17


EMERGING POWERS ARE SHOWING THE HIGHEST INCREASE IN DEFENCE SPEND – COMPETITION TO INTENSIFY IN DEVELOPING MARKETS

Source: IIS (2007) and McKinsey

DENEL GROUP18


The SA Defence Market

DENEL GROUP19


SOUTH AFRICA IS SUB-SCALE FOR SUPPORTING A BROAD DEFENCE INDUSTRY

Source: Economist intelligence unit, The International Institute of Strategic Studies, SIPRI; military expenditure database, SIPRI; yearbook 2006, HSS; military balance

• Overall spend too low to sustain complete range of capabilities

• Only China, India, Russia can support defence industry on mid-low GDP

Equipment spend Percent of total defence expenditure (2005)

24.5

26.8

31.5

20.2

41.0

19.0

29.8

58.3

37.0

Defence spend Percent of GDP

Defence equipment budget 2005US$ Billions

4.0

2.2

1.7

2.5

2.6

2.7

2.9

2.6

1.4

123.3US

12.4France

11.9China

11.2UK

8.4India

4.0Russia

3.1Turkey

1.4Eqypt

1.2RSA 1990: 2.2

Source: McKinsey (2007)

DENEL GROUP20


DEFENCE EQUIPMENT SPEND IS LIKELY TO CONTINUE TO DECLINE

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

Defence equipment expenditure will come under further pressure due to the recent R1,9bn cut and

increased personnel and deployment costs

Source: DOD (2009)

DENEL GROUP21


Denel’s Turnaround Strategy

DENEL GROUP22


DENEL RAN INTO FINANCIAL DIFFICULTIES IN 2005

-1300

-800

-300

200

2001 2002 2003 2004 2005 2006 2007 2008

Rm

-5000

500100015002000

2001 2002 2003 2004 2005 2006 2007 2008

Rm

Losses

Cash utilised

Solvency

-2000-1500-1000-5000

500

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.

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

DENEL GROUP23


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

andinaccessible

global markets

Shifts in technology

Change drivers

Emerging powers

DENEL GROUP24


DENEL’S STRATEGY SET OUT TO INCREASE MARKET ACCESS, OVERHAUL GOVERNANCE AND TRANSFORM THE COMPANY

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nd

P

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ityDenel Corporate GovernanceDenel Corporate Governance

Denel Corporate Office – managing 11 created EntitiesDenel Corporate Office – managing 11 created Entities

People and TransformationPeople and Transformation

Denel Corporate Office Purpose – “The Role of the Centre”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

DENEL GROUP25


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)

DENEL GROUP26


• 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.)

DENEL GROUP27


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

DENEL GROUP28


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

Imp

lem

en

tatio

n

DENEL GROUP29


Denel Priorities

DENEL GROUP30


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

DENEL GROUP31


Thank You

presentation on denel public enterprises portfolio committee winter school 11 august 2009

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