Creating a Viable Denel

Presentation to:

Portfolio Committee on Public Enterprises

May 06 Agenda

• Key Events • Overview of the Global Defence Industry & Denel • Strategy Imperatives • Recapitalisation • Strategy Implementation Process & Status • Transformation • Head Office Developments & Changes • Non-Core Disposal

2 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

3 Key Events

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

4 Agenda

5 DEFENCE INDUSTRY AND DENEL [NOT A NORMAL COMPETITIVE MARKET]

Characteristics of the Defence industry Implications for defence contractors

– Many platforms developed for over 30 – Players reliant on captive markets Long business years of use – Must have guaranteed breakeven business from cycle – Consequently industry takes a holistic, domestic customer long-term perspective when making – Domestic upgrade and maintenance revenue is an investment and technology decisions important, stable income source – This requires close alignment and transparency with the national customer – R&D is a core part of the revenue model, and is largely funded by: – Government agencies – A large part of programme cost is – Guaranteed minimum order quantities DevelopmentDevelopment upfront R&D – which gets pre-paid or – Scale is essential intensiveintensive repaid through a minimum order – Allows for different revenue sources across industry quantity cycle – Allows partial self funding of R&D – Bulk of military spend kept in the country – governments will support – Pure export businesses seldom viable StrategicStrategic own industry, even when imported technologies are cheaper – Export margins are low and business is only pursued – Hence, much of global market not once initial development and industrialisation costs directly accessible for exporters funded 6 – Political support often a prerequisite – Major markets only accessible through alliances and for securing export contracts with consistent political support THE WORLDWIDE DEFENCE INDUSTRY WORKS ACCORDING TO A SPECIFIC MODEL WHICH NEEDS TO BE UNDERSTOOD BY STAKEHOLDERS IF THEY ARE TO ALIGN APPROPRIATELY

McKinsey Findings President Portfolio Ministers – and DPE, DOD, Foreign Domestic demand is the nucleus for Cabinet Affairs, Finance 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 Denel Denel select national programmes) and find Board Executive its place in an international alliance team network 7 ALIGNMENT PROFILE

• Marketing • Development • Production • After sales

• Political support • High development • Low margins driven • Long and often more costs funded by by increasing life important that domestic – “breakeven” cycles – in excess technological customer costing for of 30 yrs leadership for export • Usually regarded as domestic • Product support sales bona-fide revenue customer forms increasing • Export products • Very limited – “marginal share of revenues must be combat “export only” costing” for proven by development export market domestic customer Lengthening product/subsystem life cycles Hurdles to reach alignment Outcomes: • Government Capacity to Support • Strategic • Response Time to Issue Resolution Requirements Better • Long-term Planning & Commitment Defined Denel • New Culture from all Stakeholders Required • Economic Growth AMD • Viable Domestic 8 Government Workgroups – Develop Alignment Defence Industry Source: McKinsey SINGLE VISION ANYTHING ELSE WILL NOT HELP

From: Misalignment amongst stakeholders To: Single vision and purpose

President Portfolio Ministers – and DPE, DOD, Foreign Cabinet Affairs, Finance

One team • President and Cabinet Denel Denel • Portfolio Ministers Board Executive • Denel Board 9 team • Denel Executive team OEMs DRIVE VALUE ALONG FIVE KEY CRITERIA

Value drivers for global SouthPre-requisites African characteristics to integrate the supply chainAttractiveness as a global to supplier OEMs sourcing 1 – Sales support/market – Small– Large, market preferably for any growingproduct market for new systems access through off-set – Businesssales limited to off-set ratio of SA acquisitions type agreements Is SA more 2 – Driving procurement – South– Low Africa labour unable cost to compete with low labour competitive than savings by leveraging costs– High of Indiacapital and productivity China or high capital other emerging low cost production productivity of Japan and Asia markets? advantages – South– Unique, Africa distinctive still retains capabilities an innovative relevant to 3 – Accessing Does this driver new/relevant engineeringcommercialisation capability and a base of relevant technologies in areas (e.g. design engineering, provide a technology in specific – Leading edge IP composites) sustainable areas of excellence advantage in the 4 – Accessing cheap raw – No– Lowparticular cost highcost qualityadvantage raw materials long-term? materials supply – Specific patented alloys produced in insufficient scale cannot make SA competitive 5 – Currency hedging – OEMs– Large, not preferablyinterested ingrowing hedging market in minor 10 market currencies i.e. ZAR KEY MESSAGES

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 11 across all business units Agenda

12 Strategy Imperatives

Engage State Agencies

Secure Privileged Access

Evaluate Commercial Viability (Fix or Exit)

Create Equity Partnerships / Alliances

Raise capabilities and Productivity to World Standards

Transformation & People

13 Strategy Imperatives – Guiding Principles

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 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

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 Create Equity Partnerships / Alliances • Identify potential partners and engage to find synergies • Conclude equity transactions • Identify strategic alliances to increase market share Raise Capabilities and Productivity to World Standards • Identify, initiate and coordinate management interventions to ensure capability & productivity gains

Transformation & People • Transform Denel’s people into a motivated, innovative and empowered workforce with a commercial and performance- based14 mindset within a truly representative and diverse environment Strategy Unfolded

Denel Turnaround: 6 Pillar Strategy Denel Recap requirement • Secure privileged access • Cannot fix without recap • Engage state agencies • Fix RYbn, Exit R3Y bn • Evaluate commercial viability Div X • Develop partnerships • Raise capabilities & productivity • Transformation & people Business Plan

Analyse divisions (Viability) Div X Unviable • Low risk business case • Unviable: exit business • Viable: consolidate, restructure & Viable Ring Fence right-size – efficiencies, overheads, costs Ö Business Plan (GP & EBIT Requirement for survival: hurdles) Pty A Pty B • Restructure – focused business • Recap – sins of past / investment Separation into NewCos for future • If A fails, B not affected Separate/Limit Liability • Skills • Unrelated business – focus on core •Markets • Risk mitigation Seek equity partner • Technologies • Governance15 • Attract capital Agenda

16 Recapitalisation Requirements “SINS OF THE PAST”

Division/BU 2006/7 2007/8 2008/9 2009/10 Total Restructuring

Denel Corp 547 825 0 0 1379

Non-Core -447 0 0 0 -450 Proceeds India 170 0 0 0 170 Guarantee Aviation 803 0 0 0 803

DAS Rooivalk 65 300 250 0 615

Munitions 80 91 348 125 644

LIW 528 0 0 0 528

Total 1750 1216 598 125 3689

17 Recapitalisation Requirements (Restructuring, Limited Exit and Investment)

Investment Potential 2006/7 2007/8 2008/9 2009/10 2010/11 Total Accu Company Partners All Years Total

Sins of the past 1750 1216 598 125 0 3689 3689

Aerostructures Saab A 482 245 0 0 0 727 4416

Dynamics Saab BD 315 175 63 40 26 619 5035

Dynamics Debt 127 72 70 2 271

Optronics Zeiss/Flir 20 20 20 20 20 100 5135

Logistic Support SAT, Saab, 0 0 0 0 0 0 5135 E/C

Munitions TBD 0 25 10 0 0 35 5170

Integrated Systems GRIDS/ ADS 0 0 0 0 0 0 5170

DLS Lyttelton BAES 0 0 0 0 0 0 5170

Rooivalk TBD 0 0 0 0 0 5170

18 Total – All BU’s 2567 1681 691 185 46 5170 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

19 Denel “Properly Managed” Closure Estimated Financial Impact

Major Items Total Business groupings Aero- Logistic Integrated Munitions DLS -L structure s Support Dynamics Systems Rooivalk Optronics Group Group Other R mR mR mR mR mR mR mR mR mR 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

Total would reduce by the revenue collected on forced sale of assets – net total estimated at R 12 billion 20 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 billion and 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. 21 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 going concern 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

22 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 and National Treasury and effect on recapitalisation request – current estimate that R5.1bn still required over the 5-year period

23 Agenda

24 Engage State Agencies

Area Outcomes Target Acquisition Policy and Defence Council (DoD, Armscor, Industry represented 30 Jun 06 Capex by AMD) to address defence spend Transparency of DOD budget Improved cooperation on system tenders DIP / NIP Changes proposed to policies for more effective 1 Apr 07 leverage on IP commitments for industry capability establishment Investments in DIP projects to carry NIP credits DERI Establish Research, Development, Test and Evaluation 1 Apr 07 structure. Defence Sector Strategy Draft Sector Strategy Document 1 Oct 06

25 Restructuring Overview

Current Core Divisions Denel Pty (Ltd)

Denel Denel Land Aerospace Systems

DLS- DLS/LIW Mechem Naschem La Forge Western PMP DAS Aviation Optronics Vektor Cape

Denel Proposed Core NewCos Holdings Pty (Ltd)

Denel Denel Aero- Mechem Land Munitions Dynamics ISS/C&C Rooivalk Aviation Optronics structures (Pty) Ltd Systems (Pty) Ltd (Pty) Ltd (Pty) Ltd (Pty) Ltd (ISS) (Pty) (Pty) Ltd (Pty) Ltd (Pty) Ltd Ltd 26 Denel Divisions

Pretoria Johannesburg

Potchefstroom

Bloemfontein

Cape Town ±10 000 Personnel

27 Bredasdorp Denel’s Technology Campuses

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

Aviation Campus • Aerostructures Pty Ltd • Logistics Support Pty Ltd

Potchefstroom Campus • Munitions Pty Ltd

28 Strategic Roadmap: DAS

Equity Partner Equity Partner EquityEquity Partner Partner Equity Partner Equity Partner

DAS Dynamics Rooivalk Command & Control (Pty) Ltd (Pty) Ltd (Pty) Ltd

RSA Main Contractor GBADS TacticalTactical Missiles Missiles RSA Main Contractor GBADS PM/SE Functions Command & Control UAV’sUAV’s PM/SE Functions Command & Control Integration, Certification WMS PGM’sPGM’s Integration, Certification WMS

IreneIrene Campus Campus Denel Aerospace OTBOTB (DERI?) (DERI?) ServicesServices Systems 29 Dynamics NewCo (1)

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

Umkhonto Surface-to-Air A-Darter Air-to-Air Missile Ingwe & Mokopa Anti- Raptor & Umbani Stand-off Missile Armour Missiles Weapons

TCU MCU FSS RPV3A

Seeker UAV Surveillance Skua High Speed Target Bateleur Surveillance UAV System Drone

30 Dynamics NewCo (2)

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

Item Notes/Status Plan % Status % Target 1 yr Budget & 5 yr Turnover de-risked, efficiencies 9 9 21 Feb 06 Forecast identified, costs reduced Ring Fence Ring fence for separate reporting 9 9 1 Apr 06 Business Operations Reduce Overheads At DAS level prior to transfer. 9 50 % 15 June 06 Initiated, R40m savings (DAS). Transfer to NewCo Due diligence process , Legal steps to 9 40 % 1 Oct 06 transfer operations to NewCo Equity Partner Secure equity partner 9 50% 1 Nov 06

31 Complete Pending/In Process Risk Item 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

WMS

GBADS 32 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

Item Notes/Status Plan % Status % Target 1 yr Budget & 5 yr Turnover de-risked, efficiencies 9 9 21 Feb 06 Forecast identified, costs reduced Ring Fence Ring fence for separate reporting 9 9 1 Apr 06 Business Operations Transfer to NewCo Due diligence process , Legal steps to 9 0 % Nov 06 transfer operations to NewCo (pending equity discussions) Equity Partner Secure equity partner 9 30% Jan 07

33 Complete Pending/In Process Risk Item Rooivalk NewCo (1) The main contractor for the SAAF Rooivalk Attack Helicopter conducting program and contract management along with system level engineering

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

Item Notes/Status Plan % Status % Target 1 yr Budget & 5 yr Turnover de-risked, efficiencies 9 9 21 Feb 06 Forecast identified, costs reduced Ring Fence Ring fence for separate reporting 9 9 1 Apr 06 Business Operations Transfer to NewCo Due diligence process , Legal steps to 9 0 % Nov 06 transfer operations to NewCo (pending Turkey bid) Equity Partner Secure equity partner 9 0% Apr 07

35 Complete Pending/In Process Risk Item Strategic Roadmap: Denel Aviation, TMA, DPS, Astro Park

Equity Partner EquityEquity Partner Partner TMFTMF Equity Partner

Aerostructure Denel Aviation (ISS) Technology of SA TMA (Pty) Ltd (Pty) Ltd (Pty) Ltd Structural Design, Fixed and Rotary Wing Structural Design, D2D2 Mechanical Mechanical Fixed and Rotary Wing Manufacturing, Support MRO Manufacturing, Support WorkshopWorkshop MRO Engines, TMF Strategic D2 Mechanical Assemblies Engines, TMF Strategic D2 D2 Mechanical Assemblies Workshop ContributionContribution Workshop SheetmetalSheetmetal EngineeringEngineering & & (focused)(focused) FlightFlight Test Test CompositesComposites AMGAMG Denel Aviation

AstroAstro Park Park Manage Sale/Lease of property Land/FacilitiesLand/Facilities Provide interim services DPS Remainder DPS Remainder DPS “Package” & dispose/exit 36 AviationRump Astro Park Manage disposal & closure AviationRump Denel Aviation (ISS) NewCo (1) 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

Rotary and Fixed Wing Aircraft Maintenance 37 Denel Aviation (ISS) NewCo (2) 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

Aircraft Component Maintenance and Engineering Support

(and Manpower Support)

38 Denel Aviation (ISS) NewCo (3) 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

Item Notes/Status Plan % Status % Target 1 yr Budget & 5 yr Turnover de-risked, efficiencies 9 9 21 Feb 06 Forecast identified, costs reduced Ring Fence Ring fence for separate reporting 9 9 30 May 06 Business Operations Reduce Overheads Plan complete, labour notified, engaging 9 90 % 31 May 06 unions Transfer to NewCo Due diligence process, Legal steps to 9 50 % 1 Oct 06 transfer operations to NewCo Equity Partner Secure equity partner 9 20% Jan 07

39 Complete Pending/In Process Risk Item Aerostructure Technology of SA NewCo (1) 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

M A J O R

C U HAWK AIRBUS - A400M S T O M E R S

40 GRIPEN AGUSTA Aerostructure Technology of SA NewCo (2) 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

SHEETMETAL, COMPOSITE & MACHINED PARTS

GRIPEN – REAR FUSELAGE

GRIPEN – MAIN LANDING GEAR UNIT HAWK - FLAP

41 Aerostructure Technology of SA NewCo (3) 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

AIRBUSA400M A400 – M Wing – WING toTO fuselageFUSELAGE fairingFAIRING A400M- Top shell

42 LARGE SIZE COMPLEX STRUCTURES Aerostructure Technology of SA NewCo (4) 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

Item Notes/Status Plan % Status % Target 1 yr Budget & 5 yr Turnover de-risked, efficiencies 9 9 21 Feb 06 Forecast identified, costs reduced Ring Fence Ring fence for separate reporting 9 9 1 Apr 06 Business Operations Reduce Overheads Plan complete, labour notified, engaging 9 90 % 31 May 06 unions Transfer to NewCo Due diligence process , Legal steps to 9 80 % 1 Aug 06 transfer operations to NewCo Equity Partner Secure equity partner 9 90% 1 Sept 06

43 Complete Pending/In Process Risk Item Strategic Roadmap: Optronics

EquityEquity Partner Partner

Optronics (Pty) Ltd

SensorsSensors

HelmetHelmet Tracking Tracking

LasersLasers

PeriscopesPeriscopes

TargetingTargeting Systems Systems

SurveillanceSurveillance Sights Sights MilitaryMilitary Sights Sights 44 Optronics NewCo (1) A global supplier, leveraging its expertise in Optronics products (Sensors, Helmet Tracking, Lasers, Periscopes, Targeting & Surveillance Systems & Sighting Systems)

LEO II-A1

Argos 410-A4/Z GPA 410 LEO II-A3

Argos 410-A5 (Star Q) BRITE Star LEO II-A5 (UItraForce II)

Argos 550 45 Goshawk 350 Argos 410-M Optronics NewCo (2) A global supplier, leveraging its expertise in Optronics products (Sensors, Helmet Tracking, Lasers, Periscopes, Targeting & Surveillance Systems & Sighting Systems)

Scout

LP16 EYESAFE LRF LH40 LRF

Noctua

LM30 / LM40 LRF Archer Eagle Eye

46LH40C Periscope Systems Kenis Thermal Imager – 3 to 5 µm Optronics NewCo (3) A global supplier, leveraging its expertise in Optronics products (Sensors, Helmet Tracking, Lasers, Periscopes, Targeting & Surveillance Systems & Sighting Systems)

Transfer to NewCo Due diligence process , Legal steps to 9 20 % 1 Sept 06 transfer operations to NewCo Equity Partner Secure equity partner 9 40% Oct 06

47 Complete Pending/In Process Risk Item Strategic Roadmap: Munitions

EquityEquity Partner Partner ? ?

ProductProduct Partnerships Partnerships & & Teaming Teaming BOWASBOWAS Munitions NewNew Lachaussee Lachaussee (Pty) Ltd NitrochemieNitrochemie GD OTS Naschem GD OTS EnergeticEnergetic Raw Raw La Forge MaterialsMaterials Somerset West Wellington DetonicsDetonics Philippi OrdnanceOrdnance Plant Plant & & Munitions Plants: PMP Equipment Brass Plant Equipment Somerset West ShellShell Manufacture Manufacture Somerset West KrantzkopKrantzkop PyrotechnicsPyrotechnics PretoriaPretoria West West SmallSmall & & Medium Medium Calibre Calibre (incl.(incl. Brass Brass plant) plant) Boskop plant PhilippiPhilippi Recommended Recommended Boskop plant (incl. La Forge) 48 ClosureClosure (incl. La Forge) Munitions NewCo (1) An integrated supplier of selected munitions (artillery ammunition, mortars, bombs, large & medium calibre ammunition pyrotechnics; missile motors & warheads) to local & international customers

ROCKET & MISSILES SUBSYSTEMS

ARTILLERY PROPULSION

PROPELLANTS FOR SMALL ENERGETIC RAW MATERIALS POWER CARTRIDGES CALIBRE & POWER CARTRIDGES FOR MILITARY & CIVILIAN 49 APPLICATION Munitions NewCo (2) An integrated supplier of selected munitions (artillery ammunition, mortars, bombs, large & medium calibre ammunition pyrotechnics; missile motors & warheads) to local & international customers

ARTILLERY AMMUNITION ARMOUR AMMUNITION AIRCRAFT BOMBS

RIOT CONTROL 50 PRODUCTS 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 51 Munitions NewCo (4) An integrated supplier of selected munitions (artillery ammunition, mortars, bombs, large & medium calibre ammunition pyrotechnics; missile motors & warheads) to local & international customers

Item Notes/Status Plan % Status % Target 1 yr Budget & 5 yr 2006/07 Budget remains as per Plan. 9 50 % 31 May 06 Forecast Update next 4 yrs Ring Fence Ring fence for separate reporting 9 9 1 Apr 06 Business Operations Reduce Overheads Operations and management plan for 50% 5% 31 Aug 06 NewCo Transfer to NewCo Due diligence process , Legal steps to 0% 0% 1 Apr 07 transfer operations to NewCo Equity Partner Secure equity partner 0% 0% 1 Apr 07

52 Complete Pending/In Process Risk Item Strategic Roadmap Denel Land Systems

DLS-Lyttelton Vektor

EquityEquity Partner Partner

Denel Land Systems (Pty) Ltd

InfantryInfantry Turrets Turrets

ArtilleryArtillery Development Development

MaintenanceMaintenance

SmallSmall Arms Arms 53 Denel Land Systems (DLS) NewCo (1) Denel Land Systems is a consolidated, project based design & development house for Combat Turrets, Artillery Development, Maintenance and Upgrades and Small Arms

MCV Infantry Fighting System

Acrobat 81mm Mortar Fighting System 54 Denel Land Systems (DLS) NewCo (2) Denel Land Systems is a consolidated, project based design & development house for Combat Turrets, Artillery Development, Maintenance and Upgrades and Small Arms

155mm 45 Calibre G6 SP 155mm 45 Calibre G5 Towed Howitzer System Howitzer System 155mm 52 Calibre G6T6 SP Howitzer System

155mm55 52 Calibre G5-2000 155mm 52 Calibre G5-2000 105mm 52 Calibre LEO Light Towed Howitzer System Towed Howitzer System Towed Howitzer System Denel Land Systems (DLS) NewCo (3) Denel Land Systems is a consolidated, project based design & development house for Combat Turrets, Artillery Development, Maintenance and Upgrades and Small Arms

Item Notes/Status Plan % Status % Target 1 yr Budget & 5 yr Turnover de-risked, efficiencies 9 9 21 Feb 06 Forecast identified, costs reduced. Hoefyster contract NB! Ring Fence Ring fence for separate reporting 9 9 1 Apr 06 Business Operations Reduce Overheads Completed 9 9 Dec 05 Transfer to NewCo Due diligence process , Legal steps to 9 50 % 1 Sept 06 transfer operations to NewCo Equity Partner Secure equity partner 9 20 % Jan 07

56 Complete Pending/In Process Risk Item Strategic Roadmap Mechem

EquityEquity Partner Partner

Mechem (Pty) Ltd

DeminingDemining

MineMine Awareness Awareness Training Training

VictimVictim Assistance Assistance

StockpileStockpile Destruction Destruction

BattleBattle Area Area Clearance Clearance

57 Mechem NewCo (1) 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

58 Mechem NewCo (2) 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

Item Notes/Status Plan % Status % Target 1 yr Budget & 5 yr Minimal changes. 9 9 21 Feb 06 Forecast Ring Fence Business Ring fence for separate reporting 9 9 1 Apr 06 Operations Transfer to NewCo Due diligence process , Legal steps to 9 40 % 1 Aug 06 transfer operations to NewCo Equity Partner Secure equity partner 9 5 % Jan 07

59 Complete Pending/In Process Risk Item Denel Holdings (Pty) Ltd

Denel Aviation Aerostructures Dynamics TMA (ISS) (Pty) Ltd (Pty) Ltd (Pty) Ltd (Pty) Ltd

An aerostructures facility, in A service provider leveraging its A niche global competitor and local TMA’s focus is to be the centre of cooperation with suppliers of aircraft strategic SAAF business to support technology provider in the areas of excellence for manufacturing and such as Airbus and Boeing, which the local & selected international tactical missiles, guided weapons and product support of selected; gears designs, manufactures, and assembles rotary & fixed wing aircraft markets in UAV systems and shafts; gearbox casings; and composites and metallic aircraft the provision of MRO services engines and gearbox assemblies subsystem structures

Denel Land Mechem Optronics Systems (Pty) Ltd (Pty) Ltd (Pty) Ltd

Mechem is a global leader in cost A global supplier, leveraging its Denel Land Systems is a consolidated, effective mine action, including expertise in Optronics products project based design & development house demining, mine awareness training, (Sensors, Helmet Tracking, Lasers, for Combat Turrets, Artillery Development, victim assistance, stockpile destruction, Periscopes, Targeting & Surveillance Maintenance and Upgrades and Small clearance of battle areas & unexploded Systems & Sighting Systems) Arms ordnance

Command & Munitions Rooivalk Control (Pty) Ltd (Pty) Ltd (Pty) Ltd

Denel Munitions is an integrated The main contractor for the SAAF A local main contractor for integrated supplier of selected munitions (artillery Rooivalk Attack Helicopter conducting level 5 air defence systems, and a ammunition, mortars, bombs, large & program and contract management specialized local and international medium calibre ammunition along with system level engineering supplier of C3 products with GBADS pyrotechnics; missile motors & as flagship program 60warheads) to local & international customers Agenda

61 Transformation & People

Objective: Organisational Effectiveness Transform our people into a motivated, innovative and empowered workforce with a commercial and performance-based mindset within a truly representative and diverse environment

Diversity Skills Retention & Development Culture •Race • Technical career paths • Performance culture • Gender • Leadership development • Commercial mindset •Age • Succession planning • Diversity tolerance • Disability • Motivated personnel

Process • Situation analysis (internal situation vs external benchmarks and criteria) • Identify transformation goals & objectives • Formulate & implement action plan to address shortcomings within an 62 aggressive timeframe Agenda

63 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.

64 Agenda

65 Status on Non Core Asset Disposal

Share- Expected date of Entity Current status holding completion

Ariviakom (Pty) Ltd 22.98% Completed 27 Feb Completed 2006 SPP (Pty) Ltd 100% End June 2006 Recommendation to Board on 3 May 2006

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

Voltco Business unit Completed Contract signed. Payment received 18 April 2006 Bonaero Park (Pty) Ltd 100% 30 June 2006 Contract signed on 31 March 2006. Competition Comm application filed 18 April 2006 Dendustri Division End Feb 2006 Payment for business received 28 Feb 2006. Transfer of related properties in process

Cosource (Pty) Ltd 51,7% End June 2006 Revised transaction presented to Board/Minister. Board risk review on exit from Cosource 3 May 06. PFMA approval outstanding Irenco Plastics (Pty) Ltd 100% Nov 2005 Completed Only retention money received on 4 April 2006 66TOTAL Thank you