Denel Annual Report

PRESENTATION TO THE PORTFOLIOCOMMITTEE ON DEFENCE ON THE 2 NOVEMBER2004

Agenda

SA Defence Industry Annual Report Issues & Challenges Strategic repositioning

SA Defence Industry

Defence Review White Paper on Defence White Paper on Defence Related

Industry

ADS4.2%

ALVIS OMC 4.4%

GRINTEK8.5%

REUTECH8.8%

ATE 9.2%

DENEL 55%

10%OTHERS

Share of SA Defence Industry Turnover

Denel Products: Aerospace

Missiles & guided weapons

OTB multi-purpose test range

Aircraft parts manufacture / maintenance / refurbishment

Helmet sighting systems

UAVs / observation systems

Target drones

Rooivalk attack helicopter

Denel Products: Land Systems

Aerospace

Artillery systems: 155mm & 105mm long range

Artillery propellant charges & projectiles

Infantry weapons

Small / medium calibre ammunition

Plant manufacture

Denel Markets

RSA Local R1 855m - 42%

Africa R158m - 4%

South America R211m - 5%

Asia R464m - 11%

Middle East R872m - 20%

EuropeR702m - 15%

North AmericaR113m - 3%

Denel People

(25,6%)

1 4.5 5.6 0.8

13.2

49.7

18

7.2

Senior Management Management Engineers ScientistsTechnicians Artisans Support Services Operational Support

49,7%

18%

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

13,2%

Denel 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

Denel Plants and Facilities

Denel Finances: 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%)

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

Sales Composition per region

0

10

20

30

40

50

60

2001 2002 2003 2004

Per

cent

age

South Africa Africa South America Asia Pacific

Middle East Europe North America

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

Denel Investments

Description2003/04

Rm

Research and Development 239,8

Capital Investment 161,5

Social Investment 12,0

Investment in associates 16,5

Current Operating Situation

• Decline in orders from the SANDF

• Decline in R&D funding

• Losses from the Rooivalk (R2,0 billion plus)

• Unsuccessful commercial diversification strategy

(R900 million)

• Staff Reduction (over 5000 since founding)

• Writing down the values of excess assets

Current Operating 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.

• Balance sheet over-borrowed / uncapitalised

Current Operating Environment (3)

• Unfair global competitive environment

• Unfair local competitive environment

• Armscor acquisition policy

• NCACC

Denel turnaround (1)

• Focus on core

• Restructure business & processes

• Aggressive cost-cutting / rightsizing

• Product & skills rationalisation

• Development of new markets

Denel turnaround (2)

• Recapitalisation

• Increased R&D funding

• Review of defence acquisition policy

• New SANDF programmes

• Effective programme funding

Conclusion

• Denel central to SANDF defence capability• Denel is key to SA technology capabilities • Incubator of expert science & engineering skills• Denel is a strategic foreign policy instrument• State-owned and supported defence industry• Proudly South African acquisition policy required

Thank you