Denel Presentation to The Public Enterprise Portfolio Committee 8 September 2004

2 Agenda Welcome and Introductions Denel Business Overview –The Defence Industry –Financial Highlights –Human Resources –BEE / Affirmative Procurement –Challenges facing Denel Discussion

Product Development Manufacturing Procurement LTD In April 1992 Amscor’s manufacturing abilities were commercialised Complete split in organisations and management objectives Companies Act Commercialise Manufacturing Maintain Technologies Economic Growth Armscor Act Procurement Denel created in 1992 ARMSCOR

4 Denel (Pty) Limited State-owned Enterprise reporting to DPE Government is sole shareholder No subsidies from Government Works with DoF, DoD, DTI, DFA, DoI, DST Commercial and Profit driven

5 Regulatory Regime Denel is regulated by (among others):  SA Companies Act  PFMA  Firearms Control Act  Explosives Act  NCACC Act  International agreements / conventions, eg.  Nuclear Non-proliferation  Missile Technology Control Regime (MTCR)  Biological & Chemical Weapons convention

The Defence Industry

7 SA Defence Industry MINISTER OF DEFENCE ARMSCOR PROCUREMENT MARKETING SUPPORT SECRETARY OF DEFENCE POLICY BUDGETS CONTRO L NATIONAL DEFENCE FORCE ARMY NAVY AIR FORCE MEDICAL DEFENCE RELATED INDUSTRY AEROSUD AFRICAN DEFENCE SYSTEMS (ADS) ALTECH AMS ATE ALVIS OMC GRINTEK IST M-TEK LOG-TEK PLESSEY REUNERT Service providers MINISTER OF PUBLIC ENTERPRISES DESIGN DEVELOP MANUFACTURE SUPPORT MARKETING

8 ADS 4.2% Alvis OMC 4.4% Grintek 8.5% Reutech 8.8% ATE 9.2% Denel 55% 10% Others Estimated Share of Defence Turnover

9 Acquisition / Supply Process & Controls RSA strategic position Foreign Policy posture Formal Treaties / Agreements Absence of conflict / Threat to peace Needs determination Design and Development Proofing, Testing, Qualification Bid permit system / NCACC

10 Global Defence Industry Dynamic and politically challenging Strong, protected domestic industries Highly competitive Domination by major powers Little reliance on foreign arms acquisitions Mergers & Acquisitions

11 Top 10 Defence Budgets plus RSA (2002) US$ Billions Logrithmic scale

12 Global Defence Sales

Business Overview

14 Board of Directors Sandile Zungu Chairman (Jun 2001) Victor Moche (May 2003) Pottie Potgieter (Jan 1997) Executive Directors Non-executive Directors Zodwa Manase (Jun 1998) Ian Deetlefs (Oct 1995) Lt Gen Lambert Moloi (Jun 1998) Dr Danisa Baloyi (Oct 1995) Dr Sibusiso Sibisi (Jun 1998) Alan Mukoki (Jun 1998) Dr Chris Saunders (Jun 1998) Thami Mazwai (Jun 2001) Dr Khotso Mokhele (Jun 2001) Denel Structure:

15 Executive Committee CEO Victor Moche Group Director: Marketing Zwelakhe Ntshepe GED: Finance (Vacant) Group Director: HR Eugene Martin Group Director: Procurement & IT Malesela James Sekhasimbe GED: Land Systems (Acting) Tony Simon GED: Aerospace Knox Msebenzi GED: Commercial & Acting FD Pottie Potgieter Chief of Staff Cassandra Gabriel Company Secretary Dr Tommy van Reenen Chief Legal Counsel Tanya Swiegelaar Chief Technical Officer (Vacant)

16 Operating Structure

17 Denel Plants and Facilities

18 Aerospace Products & Services Missiles & guided weapons OTB multi-purpose test range Aircraft parts manufacture / maintenance / refurbishment Helmet sighting systems UAVs / observation systems Target drones Rooivalk attack helicopter

19 Land Systems Products & Services Aerospace Artillery systems: 155mm & 105mm long range Artillery propellant charges & projectiles Infantry weapons Small / medium calibre ammunition Plant manufacture

20 Commercial & IT Denel Properties Group Dendustri – Components Manufacturing Irenco – Electronic & Plastic injection-moulding products SPP – Soy-based protein-rich foodstuffs IT Shareholdings – Cosource, Arrivia.kom, Sybase SA Densecure – Captive Insurance company for the Denel Group

Financial Overview

22 Financial Highlights

23 Sales Composition per region

24 Group Sales: Defence / Non Defence

25 Gross Revenue Composition

26 Revenues vs Capex / Opex / R&D

27 Investments Description 2003/04 Rm Research and Development239,8 Capital Investment161,5 Social Investment12,0 Investment in associates16,5

28 Business environment: Exchange Rate, CPI and salary increases

Human Resources

30 People of Denel Employee headcount: % technical, engineers and scientists Insufficient engineers and technicians Ageing skills base Lack of employment equity

31 Employee Distribution (25,6%) 49,7% 18% 7,2% 1% 4,5% 5,6% 0,8% 13,2%

32 (39,1%) (9,3%) (21,8%) (7,1%) (12,2%) (1,3%) (0,5%) (8,7%) Demographics

33 (74,4%) (25,6%) Gender

34 Employee Wellness (EWP) A National Employee and Family Counselling telephone service  Emergency Care Centre  Face-to-face Counselling Service  Health Information and Advice  HIV/Aids – Voluntary Counselling and Testing  Medical Aid  Retirement Fund & Financial Advice

35 Social Plan Personal Counseling Financial Counseling Job Search Denel SMME Funding and Incubator Denel Business Opportunities

36 Training & Skills Development Denel Centre for Learning and Development:  The School of Business Leadership  The School of Aerospace  The School of Land Systems  The Denel Youth Foundation Training Programme Skills Development Projects:  Through eight sector education and training authorities  Focus on Engineers, Scientists and Technicians  External training within South Africa & Abroad  External training in Nepad countries

37 Corporate Social Investment GET SET Programme Schools’ Outreach Programme & Science Popularisation SEDIBA Teacher Development Project Apprentice Training Bursaries

BEE / Affirmative Procurement

39 BEE categories: Black Influenced (>5.1% Shareholding) 8% = R 81,876,258 Black Empowered (>25.1% Shareholding) 3% = R 30,173,669 Black Owned (>50.1% Shareholding) 2% = R 24,464,164 Non-Empowered Companies (<5.1% Shareholding) 87% = R936,858,707 BEE as a percentage of total spend: R1,073,372,798 BEE % of Total Spend

40 BEE: Women Spend Male Owned98.14% (R1,053,356,023) 1 – 25.1% Woman Owned 0.58% (R 6,247,580) 25.2 – 51% Woman Owned 1.02% (R 10,903,153) 52 – 100 % Woman Owned 0.27% (R 2,866,041) Spend Awarded to Woman Owned Enterprises

41 BEE Achievements Training for BEE entrepreneurs Verification of BEE credentials Publicising the opportunities in Denel Punishment of fronting - withholding of Denel business

Strategic Interventions

43 SA Defence Industry Issues Decreased defence budget & local purchases Declining R&D funding, reliance on highly competitive export markets No direct capital injection Denel at a competitive disadvantage Unfair competition / protected markets

44 Technology Issues Denel develops high technology systems World class products and systems 60% of revenue from exports Immense development costs Under-funding in R&D Technology edge under threat

45 Policy and Regulatory Issues Defence Review White Paper on Defence Related Industries Armscor Act & Procurement Policy BEE Charter NCACC Processes Fragmented governing legislation

46 Strategic Interventions Aggressive programme of cost cutting and financial control Zero-tolerance: Fraud/Corruption/Mismanagement Hi-tech integrated skills development programme Alignment of skills Performance management culture / system

47 Strategic Interventions (2) Disposal of non-core businesses and investments Business process re-engineering Consolidation of support functions Product rationalisation New markets for higher-margin systems Strategic alliance and partnerships Review of all contracts

48 Strategic Interventions (3) Review of Defence procurement policy Higher R&D spend Investment in training and development Need for recapitalisation

49 Strategic Objectives Revitalised balance sheet Restoration of national defence capability Sustainable and growing export business High level skills incubator for national economy Leading technology house Global partner in niche markets

Thank you

51 BEE: Direct & Indirect Material Spend BEE Share % DirectIndirect Non-Empowered Companies (<5.1% Shareholding)90.48%88.70% Black Owned Companies (>50.1% Shareholding) 0.94% 0.95% Black Empowered Companies (>25.1% Shareholding) 2.25% 0.55% Black Influenced Companies (>5.1% Shareholding) 6.33% 9.80%

52 BEE Suppliers Non-Empowered Companies (<5.1% Shareholding)94% (8977) Black Owned Companies (>50.1% Shareholding) 4% (334) Black Empowered Companies (>25.1% Shareholding) 1% (56) Black Influenced Companies (>5.1% Shareholding) 1% (142) Number of Suppliers by BEE Category

53 BEE Regional Spend Black Influenced (>5.1% Shareholding) Potchefstroom 26,383 Black Influenced (>5.1% Shareholding) Bredasdorp 308,856 Black Empowered (>25.1% Shareholding) Potchefstroom 0 Black Empowered (>25.1% Shareholding) Bredasdorp 246 Black Owned (>50.1%) Potchefstroom 5,897,229 Black Owned (>50.1%) Bredasdorp 160,889 Non-Empowered Companies (<5.1% Shareholding) Potchefstroom28,203,630 Non-Empowered Companies (<5.1% Shareholding) Potchefstroom 3,489,924 Regional Spend (North-West & Bredasdorp)

54 BEE Challenges Continue to verify BEE credentials Reward achievement of BEE targets Focus on developing current and potential BEE companies Strengthen the supplier development function Increase the BEE spend on direct/production materials Educate employees on the important role BEE initiatives play in the economy

55 BEE: Next Steps Strengthen and grow the State Owned Enterprises Forum (SOEPF) Finalise the Defense BEE Charter led by AMD Target all indirect materials and services for BEE and woman owned companies