Denel Annual Report Presentation To
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DenelDenel Annual Annual ReportReport PresentationPresentation toto thethe PortfolioPortfolio CommitteeCommittee onon PublicPublic EnterprisesEnterprises 2424 OctoberOctober 2007 2007 AgendaAgenda •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion 2 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• YearYear EndEnd ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion 3 4 5 6 7 8 9 DenelDenel OffersOffers anan ImpressiveImpressive ProductProduct andand ServiceService Portfolio.Portfolio. .. .. 10 OverviewOverview ofof AviationAviation BusinessesBusinesses DEVELOPMENT AND AIRCRAFT COMPONENT AIRCRAFT LOW VOLUME DESIGN, MANUFACTURE MAINTENANCE AND PRODUCTION AND ASSEMBLY UPGRADES Unmanned Aerial Vehicles Helicopters Gripen fighter Missiles HawkHawk trainertrainer Fixed-wing transport Agusta A109 Optical and A400M Fighters laser technologies 11 DLSDLS LytteltonLyttelton hashas SeveralSeveral WorldWorld ClassClass ProductsProducts in in ItsIts PortfolioPortfolio DEVELOPMENT AND DEVELOPMENT AND PRODUCTION OF LARGE PRODUCTION OF MAINTENANCE AND CALIBRE ARTILLERY MEDIUM AND SMALL UPGRADES CALIBRE WEAPONS 12 FixedFixed CostCost ProblemProblem •• Insufficient Insufficient locallocal salessales •• Export Export businessbusiness takestakes placeplace toto fragmentedfragmented exportexport markets,markets, mostlymostly developingdeveloping countriescountries •• This This exportexport businessbusiness isis start-stopstart-stop typetype businessbusiness •• Generally Generally lessless politicallypolitically stablestable marketsmarkets •• High High salessales costscosts •• These These marketsmarkets buybuy mainlymainly onon priceprice andand nono longlong termterm repeatrepeat orderorder businessbusiness isis achieved.achieved. 13 AA ProcessProcess of of DiscoveryDiscovery •• Legal Legal agreementsagreements •• Legacy Legacy contractscontracts •• Poor Poor deliverydelivery cultureculture •• Poor Poor managementmanagement skillsskills •• Governance Governance issuesissues •• Labour Labour issues.issues. 14 AA ProcessProcess of of DiscoveryDiscovery •• Discussions Discussions withwith stakeholdersstakeholders toto improveimprove orderorder covercover •• Discussions Discussions withwith industryindustry toto improveimprove synergiessynergies •• Legal Legal agreementsagreements andand LegacyLegacy contractscontracts –– renegotiaterenegotiate oror terminate terminate •• Sell Sell offoff non-corenon-core assetsassets R1bnR1bn •• New New and/orand/or improvedimproved managementmanagement skillsskills •• Improved Improved governancegovernance issuesissues andand controlscontrols •• Labour Labour issuesissues resolved.resolved. 15 FinancialFinancial IndicatorsIndicators 600600 400400 200200 00 -200-200 -400-400 -600-600 -800-800 -1000-1000 19961996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 PROFITPROFIT (LOSS)(LOSS) 16 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion 17 OurOur ChallengeChallenge ‘Fixing’‘Fixing’ Denel Denel means means .. .. .. •• Becoming Becoming aa profitable,profitable, commerciallycommercially viableviable andand dynamicdynamic entityentity •• Delivering Delivering consistent,consistent, realreal growthgrowth •• Attracting, Attracting, developing,developing, retainingretaining andand appropriatelyappropriately rewardingrewarding world-classworld-class skillsskills •• Achieving Achieving worldworld classclass productivityproductivity •• Focusing Focusing onon thethe areasareas wherewhere wewe cancan competecompete crediblycredibly •• Partnering Partnering withwith statestate agenciesagencies toto meetmeet thethe defencedefence needsneeds ofof thethe countrycountry •• Developing Developing partnerships/alliancepartnerships/alliance venturesventures withwith truetrue valuevalue add.add. 18 KeyKey MessagesMessages 1.1. Much Much ofof thethe globalglobal defencedefence spendspend isis inaccessibleinaccessible toto independentindependent contractors,contractors, makingmaking playersplayers highlyhighly reliantreliant onon theirtheir domesticdomestic markets.markets. Furthermore,Furthermore, changeschanges inin thethe industryindustry areare forcingforcing playersplayers toto consolidate,consolidate, buildbuild alliancesalliances aandnd carefullycarefully focusfocus theirtheir businessesbusinesses 2.2. Denel Denel nono longerlonger hashas aa largelarge domesdomestictic marketmarket toto provideprovide thethe scalescale toto succeedsucceed asas anan independentindependent globalglobal systemssystems integratorintegrator andand exporterexporter ofof aa broadbroad rangerange ofof producproductsts onon thethe internationalinternational marketsmarkets 3.3. To To succeed,succeed, DenelDenel isis pursuingpursuing a a strategystrategy basedbased onon primeprime contractingcontracting inin thethe domesticdomestic marketmarket andand thethe exportexport ofof systemssystems andand componentscomponents throughthrough selective selective equityequity partnershipspartnerships andand alliancesalliances withwith globalglobal primeprime contractors.contractors. 19 20 TheThe GlobalGlobal DefenceDefence IndustryIndustry Has Has UndergoneUndergone SignificantSignificant Change Change Over Over thethe PastPast Decade,Decade, andand thethe PacePace of of ChangeChange WillWill IncreaseIncrease FORCESFORCES FORFOR CHANGECHANGE IMPLICATIONSIMPLICATIONS • Lengthening product life cycles and Declining defence reducing demand for new platforms spend • Shift to smaller, more mobile weapons and increasing use of electronics • Increasing consolidation to achieve minimum scale • Smaller players forming global alliances Changing nature of and focusing on: conflicts and shifting – Supply of systems, sub-systems and customer needs components to alliance partners – Fulfilling maintenance and upgrade role for domestic customer 21 DecliningDeclining DefenceDefence SpendSpend andand IncreasingIncreasing R&DR&D Costs Costs HaveHave DrivenDriven ConsolidationConsolidation ofof PrimePrime ContractorsContractors AcrossAcross AllAll SectorsSectors US AEROSPACE EXAMPLE 1992: Over 30 companies 2005: Five consolidated groups • Lockheed Martin • General Dynamics A/C In 1992, the US Defence • Martin Marietta GE Aerospace • Loral Department encouraged • Computer Affiliated Svc. Inc. manufacturers to merge • Rockwell Aerospace • McDonnell Douglas in order to cope with • Hughes Space drastic budget cuts: • Continental Graphics • Jeppesen • Flight Safety Training “By 1996, American • Raytheon • BAE Corp Jets defence budget • E-Systems expenditure on • Texas Instruments (Def.) • Hughes Defense equipment procurement • General Dynamics • Bath Iron Works and R&D will fall by over • NASSCO Holds. 40%, from $117b to • Gulfstream • Galaxy Aerosp. $68b” • Motorola IISG • GM Defense •Veridian • Northrop Grumman • Grumman • Westinghouse ESD • Logicon • Aerojet EIS • Newport News Ships •TRW •XonTech 22 LookingLooking Ahead,Ahead, SuccessfulSuccessful PlayersPlayers WillWill RequireRequire BothBoth PrivilegedPrivileged AccessAccess andand aa CommercialCommercial OrientationOrientation PRIVILEGED ACCESS •• LargeLarge domesticdomestic demanddemand andand guaranteedguaranteed accessaccess toto domesticdomestic programmesprogrammes Captive Market •• ReliableReliable multi-yearmulti-year R&DR&D fundingfunding toto retainretain aa techno-techno- logicallogical edgeedge inin anan increasinglyincreasingly globalisedglobalised market market Political Support •• Consistent,Consistent, activeactive supportsupport fromfrom governmentgovernment forfor exportexport salessales COMMERCIAL ORIENTATION Focus •• SpecificSpecific productsproducts oror rolesroles inin thethe valuevalue chainchain withwith defendabledefendable positionspositions Alliances •• IntegrationIntegration intointo aa networknetwork ofof OEMsOEMs andand sub-supplierssub-suppliers toto gaingain marketmarket access,access, skillsskills andand minimumminimum scalescale Excellent Execution •• WorldWorld classclass capabilitiescapabilities andand productivityproductivity 23 DenelDenel hashas LargelyLargely LostLost itsits CaptiveCaptive DomesticDomestic FundingFunding BaseBase .. .. .. Rm, Real 2005 RSA Defence Spend Recovered Since 2000 . .. But Denel did not participate in this recovery 14 000 • Recent spend increase 14 000 not in areas where Denel has capabilities 12 000 • Spend levels will decline 12 000 by 2010 10 000 10 000 8 000 Total SA 8 000 defence 6 000 spend 6 000 Total Denel 4 000 4 000 revenue* Denel exports 2 000 2 000 Denel local sales 0 0 1985 1990 1995 2000 2005 1985 1990 1995 2000 2005 *Pre-1992 figures estimated from Armscor and defence industry data ESTIMATES 24 .. .. .. TheThe FiveFive IndustryIndustry SuccessSuccess FactorsFactors ShouldShould FormForm thethe FoundingFounding PrinciplesPrinciples ofof thethe FutureFuture DenelDenel WHATWHAT THISTHIS MEANSMEANS PRIVILEGED ACCESS 1.1. Secure Secure privilegedprivileged accessaccess toto aa guaranteedguaranteed minimumminimum proportionproportion ofof RSARSA defencedefence developmentdevelopment