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Creating a Viable Denel

Presentation to:

Portfolio Committee on Public Enterprises

May 06

2

• Overview of the Global Defence Industry & Denel

Agenda

• Strategy Imperatives

• Recapitalisation

• Strategy Implementation Process & Status

• Transformation

• Head Office Developments & Changes

• Non-Core Disposal

• Key Events

3

Key Events

• India withdraws business 04/05• Excessive losses – Announcement of Section 20(5) 05/05• Strategy presented to Board 05/05• Defence procurement & policy workshops with stakeholders 08/05• Engagement of Treasury for recapitalisation 09/05• Potential equity partners identified & discussions commenced 09/05• Section 189 process commences (corporate, DLS) 10/05• Initial non-core disposals 12/05• Treasury recapitalisation announced 02/06• NewCo strategy approved by Board 02/06• 1st tranche recapitalisation announced 02/06• Internal audit to PwC 03/06• Transformation program initiated 03/06• New corporate office location 04/06

4

Key Events

• Financial year end results being finalised• Current financial projections and challenges

5


Agenda




• Transformation



• Key Events

6

– Players reliant on captive markets– Must have guaranteed breakeven business from

domestic customer– Domestic upgrade and maintenance revenue is an

important, stable income source

Implications for defence contractorsCharacteristics of the Defence industry

Long business cycle

– Many platforms developed for over 30 years of use

– Consequently industry takes a holistic, long-term perspective when making investment and technology decisions

– This requires close alignment and transparency with the national customer

Development intensive

Strategic

DEFENCE INDUSTRY AND DENEL[NOT A NORMAL COMPETITIVE MARKET]

– R&D is a core part of the revenue model, and is largely funded by:

– Scale is essential

– Government agencies– Guaranteed minimum order quantities

– Allows for different revenue sources across industry cycle

– Allows partial self funding of R&D

– A large part of programme cost is upfront R&D – which gets pre-paid or repaid through a minimum order quantity

Development intensive

– Export margins are low and business is only pursued once initial development and industrialisation costs funded

– Major markets only accessible through alliances and with consistent political support

– Pure export businesses seldom viable

– Bulk of military spend kept in the country – governments will support own industry, even when imported technologies are cheaper

– Hence, much of global market not directly accessible for exporters

– Political support often a prerequisite for securing export contracts

Strategic

7

THE WORLDWIDE DEFENCE INDUSTRY WORKS ACCORDING TO A SPECIFIC MODEL WHICH NEEDS TO BE UNDERSTOOD BY STAKEHOLDERS IF THEY ARE TO ALIGN APPROPRIATELY

President and

Cabinet

Denel Executive

team

Portfolio Ministers –DPE, DOD, Foreign

Affairs, Finance

Denel Board

Domestic demand is the nucleus for success in the defence market – This includes a secure source of domestic

R&D funding

Although the international defence market is very large, only a small part

is accessible and this can only be grown through alliances

Denel needs to play in the second and third supplier tiers (apart from select national programmes) and find its place in an international alliance

network

McKinsey Findings

8

ALIGNMENT PROFILE

Source: McKinsey

• Marketing • Development • Production

• Political supportoften more important that technological leadership for export sales

• Export products must be combat proven by domestic customer

• High development costs funded by domestic customer

• Usually regarded as bona-fide revenue

• Very limited “export only” development

• Low margins driven by

– “breakeven” costing for domestic customer

– “marginal costing” for export market

• After sales

• Long and increasing life cycles – in excess of 30 yrs

• Product supportforms increasing share of revenues

Government Workgroups – Develop Alignment

DenelAMD

Hurdles to reach alignment• Government Capacity to Support• Response Time to Issue Resolution • Long-term Planning & Commitment• New Culture from all Stakeholders Required

Outcomes:• Strategic

Requirements Better Defined

• Economic Growth• Viable Domestic

Defence Industry

Lengthening product/subsystem life cycles

9

President and

Cabinet

Denel Executive

team

Portfolio Ministers –DPE, DOD, Foreign

Affairs, Finance

Denel Board

From: Misalignment amongst stakeholders To: Single vision and purpose

One team• President and Cabinet• Portfolio Ministers • Denel Board• Denel Executive team

SINGLE VISION ANYTHING ELSE WILL NOT HELP

10– Currency hedging

– Accessing cheap raw materials supply

– Accessing new/relevant technology in specific areas of excellence

– Sales support/market access through off-set type agreements

– Driving procurement savings by leveraging low cost production advantages

OEMs DRIVE VALUE ALONG FIVE KEY CRITERIA

Value drivers for global sourcing

1

2

3

4

5

Pre-requisites to integrate the supply chain as a global supplier

– Large, preferably growing market for new systems sales

– Low labour cost– High capital productivity

– Unique, distinctive capabilities relevant to commercialisation

– Leading edge IP

– Low cost high quality raw materials

– Large, preferably growing market

Attractiveness to OEMsSouth African characteristics

– Small market for any product – Business limited to off-set ratio of SA acquisitions

– South Africa unable to compete with low labour costs of India and China or high capital productivity of Japan and Asia

– South Africa still retains an innovative engineering capability and a base of relevant technologies in areas (e.g. design engineering, composites)

– No particular cost advantage– Specific patented alloys produced in insufficient

scale cannot make SA competitive– OEMs not interested in hedging in minor

market currencies i.e. ZAR

Is SA more competitive than other emerging markets?

Does this driver provide a sustainable advantage in the long-term?

11

1. Much of the global defence spend is inaccessible to independent contractors, making players highly reliant on their domestic markets. Furthermore, changes in the industry are forcing players to consolidate, build alliances and carefully focus their businesses

2. Denel is facing a funding crisis, and there is significant risk associated with the current financial projections

3. Denel is not viable under the current model. It no longer has the domestic market and scale to succeed as an independent systems integrator and exporter of a broad range of products

4. To succeed, Denel should pursue a strategy based on prime contracting in the domestic market and the export of systems and components though selective equity partnerships and alliances with global prime contractors

5. A process is underway to evaluate alliance opportunities and drive internal improvements across all business units

KEY MESSAGES

12


Agenda




• Transformation



• Key Events

13

Transformation & People

Raise capabilities and Productivity to World Standards

Create Equity Partnerships / Alliances

Evaluate Commercial Viability (Fix or Exit)

Secure Privileged Access

Engage State Agencies

Strategy Imperatives

14

Transformation & People• Transform Denel’s people into a motivated, innovative and empowered workforce with a commercial and performance-based mindset within a truly representative and diverse environment

Raise Capabilities and Productivity to World Standards• Identify, initiate and coordinate management interventions to ensure capability & productivity gains

Create Equity Partnerships / Alliances• Identify potential partners and engage to find synergies • Conclude equity transactions• Identify strategic alliances to increase market share

Evaluate Commercial Viability (Fix or Exit)• Evaluate business viability: capacity utilisation, sales, margins, overheads, markets, strategy• Exit unviable businesses & product lines• Restructure viable business: consolidate & right-size (focus on efficiencies, costs, overheads, productivity)• Define acceptable hurdles: gross profit, EBIT (productivity, capacity utilisation)• Business plan: “low risk” budgets & plans • Creation of NewCos to ensure risk mitigation, governance and business focus

Secure Privileged Access• Secure 70 % local spend of the defence acquisition budget as a policy decision (via a defence council)• Visibility of the defence budget to enable long term planning for industry

Engage State Agencies • Initiate and participate in forums to ensure stakeholder alignment (DPE, DoD, Armscor, Industry) in areas of Industry

Structure, Acquisition Policy, Industrial Participation• Initiate, guide and participate in the formulation of a Defence Industrial Sector Strategy• Appropriately communicate strategic principles and plans to ensure buy-in of all stakeholders

Strategy Imperatives – Guiding Principles

15

Denel Turnaround: 6 Pillar Strategy• Secure privileged access• Engage state agencies• Evaluate commercial viability• Develop partnerships• Raise capabilities & productivity• Transformation & people

Denel

Div X

Business Plan

Unviable

Viable

Analyse divisions (Viability)• Low risk business case• Unviable: exit business• Viable: consolidate, restructure &

right-size – efficiencies, overheads, costs

Business Plan (GP & EBIT hurdles)

Div X

Recap requirement• Cannot fix without recap• Fix RYbn, Exit R3Y bn

Requirement for survival:• Restructure – focused business• Recap – sins of past / investment

for future• Skills• Markets• Technologies• Attract capital

Seek equity partner

Separation into NewCos• If A fails, B not affected• Unrelated business – focus on core• Risk mitigation• Governance

Ring Fence

Pty BPty A

Separate/Limit Liability

Strategy Unfolded

16


Agenda




• Transformation



• Key Events

17

-450000-447Non-Core Proceeds

170000170India Guarantee

137900825547Denel Corp

125

0

125

0

0

2009/10

598

0

348

250

0

2008/9

1216

0

91

300

0

2007/8

36891750Total

528528LIW

64480Munitions

61565DAS Rooivalk

803803Aviation

Total2006/7Division/BU Restructuring

Recapitalisation Requirements“SINS OF THE PAST”

18

27127072127DebtDynamics

Potential Partners

36893689012559812161750Sins of the past

5170

0

0

35

0

100

619

727

TotalAll Years

185

0

0

0

0

0

20

40

0

2009/10 AccuTotal

2010/112008/92007/82006/7Investment Company

Total – All BU’s

TBD

BAES

GRIDS/ ADS

TBD

SAT, Saab, E/C

Zeiss/Flir

Saab BD

Saab A

2567

0

0

0

0

0

20

315

482

466911681

5170000Rooivalk

5170000DLS Lyttelton

5170000Integrated Systems

517001025Munitions

5135000Logistic Support

5135202020Optronics

50352663175Dynamics

441600245Aerostructures

Recapitalisation Requirements(Restructuring, Limited Exit and Investment)

19

Legal liability in event of closure

Legal liability for Government

• Government Guarantees R 1.515 billion• Letter of support for corporate bond R 0.825 billion

Possible impact should Government allow Denel’s legal limited liability to define the funds available for closure

• Credit rate listing of country• Industrial reputation – especially impact on A400M• Employee loss of benefits

20

Denel “Properly Managed” Closure Estimated Financial Impact

Major Items TotalAero-

structuresLogistic Support Dynamics

Integrated Systems Rooivalk Optronics

Munitions Group

DLS -L Group Other

R m R m R m R m R m R m R m R m R m R m

Liabilities exceed assets 1,470 365 108 - 475 622 (71) (113) 360 (276)

Loss of assets probably not realisable 2,332 236 93 212 97 239 166 524 98 667

Prepayments/ performance bonds 1,689 33 14 199 201 - 155 827 175 85

Personnel lay-off costs 806 95 95 56 14 46 62 319 56 63

Rehabilitation costs 1,004 20 20 25 25 - 30 824 60 -

Counter trade obligations 966 1 - 202 87 - - 220 456 -

Contractual obligations (Guarantees, maintenance etc) 1,147 23 23 25 25 - 135 681 236 -

Potential claims against contracts (Rooivalk, A400M, Augusta) 3,619 1,119 - - - 2,500 - - - -

Total estimated impact 13,032 1,890 352 719 925 3,407 477 3,280 1,442 539

Business groupings

Total would reduce by the revenue collected on forced sale of assets – net total estimated at R 12 billion

21

Recapitalisation (1)

• A large portion of the recapitalisation request (R3.7 billion) relates to Denel’s legacy and represents a sunk cost in economic terms (although the cash outflows occur over four years).

• The remainder (R 1.4 billion) is required for property plant and equipment and product development to access future markets – which would allow Denel to achieve the sustainable turnover level of R 4 billionand an EBIT of 8% (achievable after year 3 when the restructuring will be concluded).

• The future cash flow funding for Denel as a going concern cannot be subdivided as Denel does not have separate legal entities. Therefore separate actions cannot be taken for individual business units without those actions affecting Denel as a whole.

22

Recapitalisation (2)

• First tranche of recapitalisation received in Mar 06 (R2bn) • R600m still outstanding for current financial year• R2bn utilised to repay loan of R1.5bn and certain restructuring activities• Monthly reports on cash flow provided to DPE and National Treasury• At financial year end 2006/07 Denel is forecast to be technically

insolvent therefore Government commitment required to meet goingconcern status and avoid Section 20(5) insolvency act

• Certain major contracts require performance guarantees that Denel (given its potential technical insolvency) cannot provide – these may require Government guarantees on a case by case basis

23

Recapitalisation (3):Government Performance Monitoring

• Approval of and submission of Corporate Plans to DPE and National Treasury in accordance with PFMA and National Treasury regulations

• Monthly performance evaluation of businesses and progress on strategy implementation - reports submitted to DPE and National Treasury

• Half yearly review of future cash flow requirements with DPE andNational Treasury and effect on recapitalisation request – current estimate that R5.1bn still required over the 5-year period

24


Agenda




• Transformation



• Key Events

25

1 Oct 06Draft Sector Strategy DocumentDefence Sector Strategy

1 Apr 07Establish Research, Development, Test and Evaluation structure.

DERI

1 Apr 07Changes proposed to policies for more effective leverage on IP commitments for industry capability establishmentInvestments in DIP projects to carry NIP credits

DIP / NIP

30 Jun 06Defence Council (DoD, Armscor, Industry represented by AMD) to address defence spendTransparency of DOD budgetImproved cooperation on system tenders

Acquisition Policy andCapex

TargetOutcomesArea

Engage State Agencies

26

Mechem DLS/LIWVektor Naschem La Forge

DLS-Western

CapePMP DAS Aviation Optronics

Denel Land

Systems

Denel Aerospace

Denel Pty (Ltd)

Current Core Divisions

Restructuring Overview

Mechem(Pty) Ltd

Denel Land

Systems(Pty) Ltd

Munitions(Pty) Ltd

Dynamics(Pty) Ltd

ISS/C&C(Pty) Ltd

Rooivalk(Pty) Ltd

Aero-structures(Pty) Ltd

Denel Aviation

(ISS) (Pty) Ltd

Optronics(Pty) Ltd

Denel Holdings Pty (Ltd)

Proposed Core NewCos

27

±10 000 Personnel

Denel Divisions

Cape Town

Bredasdorp

PretoriaJohannesburg

Potchefstroom

Bloemfontein

28

Denel’s Technology Campuses

Irene Campus• Denel Head Office• Dynamics Pty Ltd• Optronics Pty Ltd• Land Systems Pty Ltd ?• Mechem Pty Ltd

Potchefstroom Campus• Munitions Pty Ltd

Aviation Campus• Aerostructures Pty Ltd• Logistics Support Pty Ltd

29

Denel Aerospace Systems

Strategic Roadmap: DAS

OTB (DERI?)OTB (DERI?)Irene Campus

ServicesIrene Campus

Services

PGM’sPGM’s

UAV’sUAV’s

Tactical MissilesTactical Missiles

DAS Dynamics (Pty) Ltd

Equity PartnerEquity Partner

Rooivalk(Pty) Ltd


Integration, Certification Integration, Certification

PM/SE FunctionsPM/SE Functions

RSA Main ContractorRSA Main Contractor

WMSWMS

Command & ControlCommand & Control

GBADSGBADS

Command & Control (Pty) Ltd


30

A-Darter Air-to-Air Missile Ingwe & Mokopa Anti-Armour Missiles

Umkhonto Surface-to-Air Missile Raptor & Umbani Stand-off

Weapons

TCU MCU FSS

RPV3A

Seeker UAV Surveillance System

Skua High Speed Target Drone

Bateleur Surveillance UAV

A niche global competitor and local technology provider in the areas of tactical missiles, guided weapons and UAV systems

Dynamics NewCo (1)

31

1 Oct 0640 %Due diligence process , Legal steps to transfer operations to NewCo

Transfer to NewCo

1 Apr 06Ring fence for separate reportingRing Fence Business Operations

21 Feb 06Turnover de-risked, efficiencies identified, costs reduced

1 yr Budget & 5 yr Forecast

1 Nov 0650%Secure equity partnerEquity Partner

15 June 0650 %At DAS level prior to transfer. Initiated, R40m savings (DAS).

Reduce Overheads

TargetStatus %Plan %Notes/StatusItem

Risk ItemPending/In ProcessComplete

A niche global competitor and local technology provider in the areas of tactical missiles, guided weapons and UAV systems

Dynamics NewCo (2)

32

WMS

GBADS

Command & Control (ISS) NewCo (1)A local main contractor for integrated level 5 air defence systems, and a specialized local and international supplier of C3 products with GBADS as flagship program

33

Jan 0730%Secure equity partnerEquity Partner

Nov 060 %Due diligence process , Legal steps to transfer operations to NewCo (pending equity discussions)

Transfer to NewCo






Command & Control (ISS) NewCo (2)A local main contractor for integrated level 5 air defence systems, and a specialized local and international supplier of C3 products with GBADS as flagship program

34

The main contractor for the SAAF Rooivalk Attack Helicopter conducting program and contract management along with system level engineering

Rooivalk NewCo (1)

35

Apr 070%Secure equity partnerEquity Partner

Nov 060 %Due diligence process , Legal steps to transfer operations to NewCo (pending Turkey bid)

Transfer to NewCo






Rooivalk NewCo (2)The main contractor for the SAAF Rooivalk Attack Helicopter conducting program and contract management along with system level engineering

36

Denel Aviation

Strategic Roadmap: Denel Aviation, TMA, DPS, Astro Park

DPSAstro ParkAviationRumpAviationRump

DPS RemainderDPS Remainder

Astro ParkLand/FacilitiesAstro Park

Land/FacilitiesManage Sale/Lease of property

Provide interim services“Package” & dispose/exit

Manage disposal & closure

Denel Aviation (ISS) (Pty) Ltd


AMGAMG

Engineering &Flight Test

Engineering &Flight Test

D2 Mechanical Workshop


Fixed and Rotary Wing MRO

Fixed and Rotary Wing MRO

D2

TMA(Pty) Ltd

Engines, TMF Strategic Contribution

Engines, TMF Strategic Contribution

TMFTMF



Aerostructure Technology of SA

(Pty) Ltd


CompositesComposites

Sheetmetal (focused)

Sheetmetal (focused)

AssembliesAssemblies

Structural Design, Manufacturing, Support

Structural Design, Manufacturing, Support

37

Rotary and Fixed Wing Aircraft Maintenance

A service provider leveraging its strategic SAAF business to support the local & selected international rotary & fixed wing aircraft markets in the provision of MRO services

Denel Aviation (ISS) NewCo (1)

38

Aircraft Component Maintenance and Engineering Support

(and Manpower Support)



39

1 Oct 0650 %Due diligence process, Legal steps to transfer operations to NewCo

Transfer to NewCo

30 May 06Ring fence for separate reportingRing Fence Business Operations



Jan 0720%Secure equity partnerEquity Partner

31 May 0690 %Plan complete, labour notified, engaging unions

Reduce Overheads





40

HAWK

GRIPEN AGUSTA

AIRBUS - A400M

MAJOR

CUSTOMERS

An aerostructures facility, in cooperation with suppliers of aircraft such as Airbus and Boeing, which designs, manufactures, and assembles composites and metallic aircraft subsystem structures

Aerostructure Technology of SA NewCo (1)

41

GRIPEN – REAR FUSELAGE

GRIPEN – MAIN LANDING GEAR UNIT HAWK - FLAP

SHEETMETAL, COMPOSITE & MACHINED PARTS



42

AIRBUS A400 M – WING TO FUSELAGE FAIRING

A400M – Wing to fuselage fairing

A400M- Top shell

LARGE SIZE COMPLEX STRUCTURES



43

1 Sept 0690%Secure equity partnerEquity Partner

1 Aug 0680 %Due diligence process , Legal steps to transfer operations to NewCo

Transfer to NewCo




31 May 0690 %Plan complete, labour notified, engaging unions

Reduce Overheads





44

Military SightsMilitary Sights

Surveillance SightsSurveillance Sights

Targeting SystemsTargeting Systems

PeriscopesPeriscopes

LasersLasers

Helmet TrackingHelmet Tracking

SensorsSensors

Strategic Roadmap: Optronics

Optronics (Pty) Ltd


45

A global supplier, leveraging its expertise in Optronics products(Sensors, Helmet Tracking, Lasers, Periscopes, Targeting & Surveillance Systems & Sighting Systems)

Optronics NewCo (1)

Goshawk 350Argos 550

LEO II-A1

LEO II-A3

LEO II-A5 (UItraForce II)

Argos 410-A4/Z

Argos 410-M

Argos 410-A5 (Star Q)

GPA 410

BRITE Star

46


Optronics NewCo (2)

LH40 LRF

Eagle Eye

LH40C

LP16 EYESAFE LRF

LM30 / LM40 LRF

Periscope Systems

Scout

Noctua

Archer

Kenis Thermal Imager – 3 to 5 µm

47

Oct 0640%Secure equity partnerEquity Partner

1 Sept 0620 %Due diligence process , Legal steps to transfer operations to NewCo

Transfer to NewCo

30 May 06Ring fence for separate reportingRing Fence Business Operations



30 Sept 0610 %80%Process to be initiatedReduce Overheads




Optronics NewCo (3)

48

Small & Medium CalibreSmall & Medium Calibre

PyrotechnicsPyrotechnics

Shell ManufactureShell Manufacture

Ordnance Plant & Equipment

Ordnance Plant & Equipment

DetonicsDetonics

Energetic Raw Materials

Energetic Raw Materials

Munitions (Pty) Ltd

Product Partnerships & TeamingBOWAS

New LachausseeNitrochemie

GD OTS

Product Partnerships & TeamingBOWAS

New LachausseeNitrochemie

GD OTSNaschemLa ForgeSomerset WestWellingtonPhilippiPMPBrass Plant

Philippi Recommended Closure

Philippi Recommended Closure

Equity Partner ?Equity Partner ?

Boskop plant (incl. La Forge)Boskop plant

(incl. La Forge)

Pretoria West (incl. Brass plant)Pretoria West

(incl. Brass plant)

KrantzkopKrantzkop

Somerset WestSomerset West

Munitions Plants:

Strategic Roadmap: Munitions

49

ARTILLERY PROPULSION

ROCKET & MISSILES SUBSYSTEMS

PROPELLANTS FOR SMALLCALIBRE & POWER CARTRIDGES

ENERGETIC RAW MATERIALSFOR MILITARY & CIVILIAN

APPLICATIONPOWER CARTRIDGES

An integrated supplier of selected munitions (artillery ammunition, mortars, bombs, large & medium calibre ammunition pyrotechnics; missile motors & warheads) to local & international customers

Munitions NewCo (1)

50

ARTILLERY AMMUNITION ARMOUR AMMUNITION AIRCRAFT BOMBS


Munitions NewCo (2)

RIOT CONTROLPRODUCTS

51

Munitions NewCo (3)Denel Munitions Strategy

• Initial strategy required consolidation of operations to one or two sites• Consolidation and relocation study completed• Relocation to single site is costly (up to R2 Billion)• Manufacturing processes are interdependent “all or nothing” and have

downstream implications for Munitions and Denel Dynamics (motors, warheads)

• Overheads are high due to replicated management• Operational efficiencies can be improved with updated plant and improved

processes• Munitions should be a sustainable business at minimum turnover of R1.15

Billion p/a and with cost cutting• Strategy therefore to continue operations at four explosive sites with

consolidated management• Implement tight controls with annual review of sustainability of Munitions

business

52

1 Apr 070%0%Due diligence process , Legal steps to transfer operations to NewCo

Transfer to NewCo


31 May 0650 %2006/07 Budget remains as per Plan. Update next 4 yrs


1 Apr 070%0%Secure equity partnerEquity Partner

31 Aug 065%50%Operations and management plan for NewCo

Reduce Overheads




Munitions NewCo (4)

53

Strategic Roadmap Denel Land Systems

DLS-LytteltonVektor

Small ArmsSmall Arms

MaintenanceMaintenance

Artillery DevelopmentArtillery Development

Infantry TurretsInfantry Turrets

Denel Land Systems(Pty) Ltd


54Acrobat 81mm Mortar Fighting System

MCV Infantry Fighting System

Denel Land Systems is a consolidated, project based design & development house for Combat Turrets, Artillery Development, Maintenance and Upgrades and Small Arms

Denel Land Systems (DLS) NewCo (1)

55

155mm 45 Calibre G6 SP Howitzer System

155mm 45 Calibre G5 Towed Howitzer System

155mm 52 Calibre G6T6 SP Howitzer System

155mm 52 Calibre G5-2000 Towed Howitzer System

155mm 52 Calibre G5-2000 Towed Howitzer System

105mm 52 Calibre LEO Light Towed Howitzer System



56

Jan 0720 %Secure equity partnerEquity Partner

1 Sept 0650 %Due diligence process , Legal steps to transfer operations to NewCo

Transfer to NewCo


21 Feb 06Turnover de-risked, efficiencies identified, costs reduced. Hoefyster contract NB!


Dec 05CompletedReduce Overheads





57

Strategic Roadmap Mechem

Mechem (Pty) Ltd

Battle Area ClearanceBattle Area Clearance

Stockpile DestructionStockpile Destruction

Victim AssistanceVictim Assistance

Mine Awareness TrainingMine Awareness Training

DeminingDemining


58

Mechem is a global leader in cost effective mine action, including demining, mine awareness training, victim assistance, stockpile destruction, clearance of battle areas & unexploded ordnance

Mechem NewCo (1)

59

Jan 075 %Secure equity partnerEquity Partner

1 Aug 0640 %Due diligence process , Legal steps to transfer operations to NewCo

Transfer to NewCo


21 Feb 06Minimal changes. 1 yr Budget & 5 yr Forecast



Mechem is a global leader in cost effective mine action, including demining, mine awareness training, victim assistance, stockpile destruction, clearance of battle areas & unexploded ordnance

Mechem NewCo (2)

60

Munitions(Pty) Ltd

Denel Land Systems(Pty) Ltd

TMA(Pty) Ltd

Dynamics(Pty) Ltd

Command & Control(Pty) Ltd

Aerostructures(Pty) Ltd

Denel Aviation (ISS)

(Pty) Ltd

Optronics(Pty) Ltd

Denel Holdings (Pty) Ltd

Mechem(Pty) Ltd

Rooivalk(Pty) Ltd

A local main contractor for integrated level 5 air defence systems, and a specialized local and international

supplier of C3 products with GBADS as flagship program

A niche global competitor and local technology provider in the areas of

tactical missiles, guided weapons and UAV systems

A global supplier, leveraging its expertise in Optronics products

(Sensors, Helmet Tracking, Lasers, Periscopes, Targeting & Surveillance

Systems & Sighting Systems)

Mechem is a global leader in cost effective mine action, including

demining, mine awareness training, victim assistance, stockpile destruction, clearance of battle areas & unexploded

ordnance

Denel Land Systems is a consolidated, project based design & development house for Combat Turrets, Artillery Development,

Maintenance and Upgrades and Small Arms

Denel Munitions is an integrated supplier of selected munitions (artillery ammunition, mortars, bombs, large &

medium calibre ammunition pyrotechnics; missile motors &

warheads) to local & international customers

A service provider leveraging its strategic SAAF business to support

the local & selected international rotary & fixed wing aircraft markets in

the provision of MRO services

An aerostructures facility, in cooperation with suppliers of aircraft such as Airbus and Boeing, which

designs, manufactures, and assembles composites and metallic aircraft

subsystem structures

TMA’s focus is to be the centre of excellence for manufacturing and product support of selected; gears and shafts; gearbox casings; and engines and gearbox assemblies

The main contractor for the SAAF Rooivalk Attack Helicopter conducting

program and contract management along with system level engineering

61


Agenda




• Transformation



• Key Events

62

Process• Situation analysis (internal situation vs external benchmarks and criteria)• Identify transformation goals & objectives• Formulate & implement action plan to address shortcomings within an

aggressive timeframe

Diversity• Race• Gender• Age• Disability

Skills Retention & Development• Technical career paths • Leadership development• Succession planning• Motivated personnel

Culture• Performance culture• Commercial mindset• Diversity tolerance

Objective: Organisational EffectivenessTransform our people into a motivated, innovative and empowered workforce

with a commercial and performance-based mindset within a truly representative and diverse environment

Transformation & People

63


Agenda




• Transformation



• Key Events

64

Head Office Developments & Changes

• Convert and align accounting standards with International Financial Reporting Standards (IFRS)

• Contracted Internal Audit function and Risk Management to PwC to ensure alignment with best practice

• Pension fund – currently healthy, showing good returns, tax efficient and forces employees to save for retirement. Denel to retain current fund arrangements.

• Umed – closed medical scheme with ageing members. Investigating a transition to an open scheme involving amalgamation with another scheme over medium term.

65


Agenda




• Transformation



• Key Events

66

Status on Non Core Asset Disposal

TOTAL

Revised transaction presented to Board/Minister. Board risk review on exit from Cosource 3 May 06. PFMA approval outstanding

End June 200651,7%Cosource (Pty) Ltd

CompletedOnly retention money received on 4 April 2006

Nov 2005100%Irenco Plastics (Pty) Ltd

Payment for business received 28 Feb 2006. Transfer of related properties in process

End Feb 2006DivisionDendustri

Contract signed on 31 March 2006. Competition Comm application filed 18 April 2006

30 June 2006100%Bonaero Park (Pty) Ltd

Contract signed. Payment received 18 April 2006

CompletedBusiness unitVoltco

Contract signed on 27 February 2006End May 2006Business unitIrenco (Observer)

Recommendation to Board on 3 May 2006End June 2006100%SPP (Pty) Ltd

CompletedCompleted 27 Feb 2006

22.98%Ariviakom (Pty) Ltd

Current statusExpected date of completion

Share-holdingEntity

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