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For the six months ended 31 March 2016
PRESENTATION TO INVESTORS
2
AGENDA
• GROUP OVERVIEW AND STRATEGY UPDATE
• Alan Dickson, CEO
• FINANCIAL OVERVIEW
• Nick Thomson, CFO
• SEGMENTAL OVERVIEW
• ICT – Mark Taylor
• Applied Electronics – Peter van der Bijl
• Electrical Engineering – Alan Dickson
• PROSPECTS
• Alan Dickson
3
OVERVIEW
• Reunert has delivered a good half-year operational performance in challenging local
economic and political conditions.
• The performance is characterised by
• The business segments with high South African exposure are experiencing growth commensurate
with that of the local economy.
• An excellent performance on the execution of export contracts in Applied Electronics contributed to
strong export revenues.
• Resulting in strong financial performance from continuing operations
• Revenue up 2% from R3,9 billion to R4,0 billion.
• Operating profit up 12% from R503 million to R564 million.
• HEPS and NHEPS up by 12% to 271 and 268 cents per share respectively.
• 7,6% increase in interim dividend to 113 cents per share declared out of free cash flow.
4
OVERVIEW │CONTINUED
• Good progress has been made on strategy execution
• Operational efficiencies across the group have been realised.
• Bolt-on, complimentary acquisitions have been concluded.
• B-BBEE transactions in the key subsidiaries, in line with the new B-BBEE Codes,
are nearing completion.
GROUP
STRATEGYAlan Dickson
Transformation
Customers People
Effi
cien
cy
Div
ersi
ficat
ion
Inno
vatio
n
6
STRATEGY REVIEW │ DIVERSIFICATION
• Acquisition activity has resulted in the completion and successful integration of
complementary bolt-on acquisitions
• Deals in Electrical Engineering and Applied Electronics segments have been concluded.
• The acquisitions have resulted in
• Leveraging of existing expertise in industries in which we have key competitive advantages.
• Improved revenue streams with geographic diversification.
• Access to operational efficiencies through vertical integration.
• Creation of a solutions offering for traditional component sales.
• Zamefa acquisition is progressing through regulatory approval at the Competition Commission.
7
STRATEGY REVIEW │ EFFICIENCIES AND TRANSFORMATION
• Efficiencies
• Continued focus on operational efficiencies and waste.
• Total cost increases held below inflation.
• Transformation
• Ownership
› Electrical engineering transaction concluded in May
» Notional IFRS2 B-BBEE charge of R92 million in 2H16.
› A further subsidiary deal is expected to be completed before financial year-end.
FINANCIAL
OVERVIEWNick Thomson
99
FINANCIAL RESULTS │REVENUE
ELECTRICAL ENGINEERING
↓ Product mix favoured aluminium cable.
↓ Local circuit breaker market under pressure.
↑ Circuit breaker export gains.
↑ Increased optical fibre cable demand.
ICT
→ OA flat with market pressure volume
off set by price increases from weak currency.
→ VoIP volume growth offset by lower
interconnect rate.
APPLIED ELECTRONICS
↑ Large volume increase through fuze
factory assisted by weaker exchange rate.
→ Service and maintenance components under
pressure in line with local economy.
3 935 4 022
(180)
(9)
272
4
2015 ElectricalEngineering
ICT Applied Electronics Other 2016
MOVEMENT IN GROUP REVENUE (Rm)
41%
42%
17%
1H16
46%
43%11%
1H15
% REVENUE CONTRIBUTION*
Electrical engineering
ICT
Applied electronics
*From continuing operations
1010
46%
44%
22%(12%)
FINANCIAL RESULTS │OPERATING PROFIT
• Operating profit margin improved from
12,8% to 14,0%.
• M&A and B-BBEE transaction costs impacted
operating margin by 0,8%.
ELECTRICAL ENGINEERING
→ Volumes consistent with prior year, but
change in mix of products.
↑ Improved export margins in circuit breakers.
ICT
→ Segment margin intact.
↑ Efficiency gains across the segment.
↓ OA volumes under pressure.
APPLIED ELECTRONICS
↑ Excellent execution of high volume export
orders.
↑ Further margin gains from weaker ZAR.
Margin
14%
Margin
13%
49%
49%
7% (5%)
503
564
11 6
87 (43)
2015 ElectricalEngineering
ICT Applied Electronics Other 2016
MOVEMENT IN OPERATING PROFIT (Rm)
OPERATING PROFIT CONTRIBUTION* (%)
Electrical engineering
ICT
Applied electronics
* From continuing operations
1H16 1H15
Other
1111
FINANCIAL RESULTS │GROUP INCOME STATEMENT
1H16 1H15
%
change
Revenue Rm 4 022 3 935 2
EBITDA Rm 622 559 11
Depreciation & amortisation Rm (58) (56) 4
Operating profit Rm 564 503 12
Net interest income Rm 70 57 23
Profit before tax Rm 634 560 13
Tax Rm (190) (157) 21
Share of JV profit Rm 9 6 50
Profit from continuing operations Rm 453 409 11
Profit from discontinued operation Rm - 67 (100)
Profit for the period Rm 453 476 (5)
HEPS from continuing operations Cents 271 242 12
NHEPS from continuing operations Cents 268 239 12
• Revenue from continuing
operations increased by 2%.
• 12% operating profit
improvement due to
• moderate growth
• positive impact from exports
• efficiency & cost management.
• Tax rate 2% higher due to
non-deductable M&A costs.
• Last year that Nashua Mobile
discontinued operations will
need to be reported.
12
FINANCIAL RESULTS │CASH FLOW
* Before working capital movement
650
234 177
(235)
70
(231)
(20)
(54) (16) 13
Cashgenerated
fromoperations*
Workingcapital
Net interest Tax paid Capexreplacement
Free cashflow
Capexexpansion
Investingactivities
Financingactivities
Total cashgenerated
2 636 2 311
(502)
177
Openingbalance
Dividendspaid
Total cashgenerated
Closingbalance
MOVEMENT IN CASH FLOW (Rm)
1313
FINANCIAL RESULTS │EFFICIENCY
INDICATORS AND WORKING CAPITAL
Inventory increases are mainly due to
• Raw material buy-in for 2H16.
• OA purchase opportunity.
• Radiate preparation increased both scale and lead times.
• Effect of weaker exchange rate.
1H16 1H15
Inventory turnover Times 4,5 5,8
Trade receivables Days 65 50
Trade payables Days 125 115
Net worth (NAV) per share R 40,38 38,32
Gross profit margin (%) % 36,2 32,9
Net profit margin % 11,3 10,4
Bad debt as % revenue % 0,1 0,5
Cash generated by operations
vs operating profit% 74 143
WORKING CAPITAL MOVEMENT (Rm) 1H16 1H15
Inventory and contracts in progress (257) 95
Accounts receivable and derivative assets (13) (23)
Trade and other payables, provisions and
derivative liabilities62 (225)
Advance payments (27) 319
(235) 166
14
FINANCIAL RESULTS │BALANCE SHEET SUMMARISED
1H16 1H15 FY15
PPE and intangible assets 766 710 745
Goodwill 671 648 653
Non-current investments and loans 247 248 253
Net assets of discontinued operation - (178) 2
Rental and finance lease receivables 2 239 2 273 2 191
Net working capital 919 674 691
Long and short-term liabilities (448) (415) (440)
Deferred tax 13 (45) (6)
Net cash and cash equivalents of continuing
operations2 311 2 446 2 636
Net assets 6 718 6 361 6 725
Equity 6 718 6 361 6 725
ICT OVERVIEWMark Taylor
1616
ICT │SALIENT FEATURES
• Overall market conditions are tough with
many long-term contract decisions deferred
by customers.
• The rapid devaluation of the ZAR in
December 2015 placed pressure on new
sales and margins in the OA and PBX
business units.
• Focus on improving operational efficiencies
across all business units.
• The voice business unit performed well, with
good growth in customers and voice traffic.
• Good profit growth in Swedish operating unit.
(Rm) 1H16 1H15
%
change
Revenue 1 689 1 698 1%
Operating profit 250 244 2%
Profit margin 15% 14%
17
ICT │OVERVIEW
• Asset finance business
• Total discounting reflected slower OA sales – 11% down on previous year, however the loan book still
increased by 4% to R2,1 billion.
• No material increase in credit losses, despite challenging economic conditions.
• Office automation
• MFP unit sales reflected overall pressure on the market.
• Deteriorating ZAR impacted on costs for hardware, parts
and consumables and price increases were unavoidable.
• Some pressure on total document volume of 2,2 billion,
however colour copies showed a modest growth over 1H15.
• Diversification of channels into voice services progressing
well with good growth in PBX and voice minutes sales.
• Prodoc business has stabilised with strong profit growth
recorded over previous financial year.
• Pansolutions performing according to expectations.
0
30
60
90
0
100
200
300
400
500
13 14 15
Total Clicks Multi-functional printers Printers
Mar 16
TDV vs MFP and printer MIF
Mill
ions
Tho
usan
ds
18
ICT │OVERVIEW
• Enterprise telecommunications
• Sales decreased as a result of low growth and downsizing of many medium and large
enterprises.
• Cost pressures at customers result in service level agreement increases being marginal.
• Increased competition in the Unify product set due to appointment of alternate distributor of
entry-level products.
• Voice business
• Voice minutes usage continued growing by
14% to 550 million minutes
• The further reduction in interconnect rates in
October 2015 resulted in flat revenue growth,
but strong operating profit growth.
• Virtual PBX product launched in order to
transition PBX business into the cloud. 0
20
40
60
80
100
13 14 15 1H16
Mill
ions
ECN number of minutes per call type
Inbound Outbound
APPLIED
ELECTRONICS
OVERVIEWPeter van der Bijl
2020
APPLIED ELECTRONICS │SALIENT FEATURES
• Excellent performance underpinned by
successful delivery of large scale export
fuze order boosted by a weak ZAR.
• Good progress has been made with the
upgrade of production lines for the Radiate
tactical radio production order
• Full production to commence in 2H16 in fully
equipped facility.
(Rm) 1H16 1H15
%
change
Revenue 696 424 64%
Operating profit 122 35 248%
Profit margin 18% 8%
2121
APPLIED ELECTRONICS │OVERVIEW
• Ongoing pressure in mining surveillance radar market due
to slump in commodity prices
• Increased competition resulted in further pricing pressure
and less market share.
• Traditional project businesses were in line with
expectations
• Expect market conditions to tighten as private and public
sector adjust budgets in line with prevailing economy.
• Rogue platform exports proceeding well.
19%
66%
15%
Commercial Defence SOEs
27%
43%
30%
1H15
1H16
MARKET SECTOR
2222
APPLIED ELECTRONICS │OVERVIEW
• Expansion of direct product sales into the African,
Middle East and Asian markets
• Security radars supplied in DRC and in Kruger National Park.
• Rogue, radar, radio and fuze systems to Middle East position are
improving.
• Long-term radio contracts orders won in Asia.
• Innovation
• Client-funded R&D will yield a new generation technology radar for
the SA Navy.
• First export sales achieved on the new generation airborne radio.
• Acquisitions
• Vertical integration acquisition for electronic manufacturing has been
successfully integrated and export revenue expanded.
• Communications security acquisitions are progressing.
REVENUE DISTRIBUTION
Exports Local
49%
51%
51%
49%
1H15
1H16
ELECTRICAL
ENGINEERING
OVERVIEWAlan Dickson
2424
ELECTRICAL ENGINEERING │ SALIENT FEATURES
• Market conditions remain challenging with lower
GDFI rates experienced.
• Revenue reduction due to
• Product mix at power cables business.
• Restructure at Low Voltage reducing revenues in
project business.
• Profits have increased resulting in a
positive 1H
• Realised benefits at Low Voltage after the
restructure.
• Export volumes have increased with associated
margin enhancement due to weaker ZAR.
• Good operational efficiencies achieved.10
30
50
70
90
Sep 2012 Sep 2013 Sep 2014 Sep 2015 March2016
ZA
R th
ousa
nd p
er to
nne
COPPER VS ALUMINIUM PRICE
(Rm, includes
portion of JV) 1H16 1H15 % change
Revenue 1 824 1 965 7%
Operating profit 272 257 6%
Profit margin 15% 13%
Cu
Al
2525
ELECTRICAL ENGINEERING │OVERVIEW
The segment has enjoyed a solid performance.
• Maintained volumes despite tough local challenges by
• Growing market share in our key markets.
• Fibre-to-the-Home roll-out.
• Good export growth with recently released product range.
• Good execution of the strategic targets, specifically
around the diversification pillar
• Export volumes into our targeted geographies at Low
Voltage.
• Conclusion of the sale purchase agreement for African
cable assets.
• Completed our B-BBEE ratings under the new Codes
resulting in the retention of market leadership position.
• Market disruption expected as new entrants emerge in
the cable manufacturing businesses.
0
20
40
60
80
100
1H14 1H15 1H16
Low voltage Energy cables
Copper telecom cables Fibre telecom cables
% FACTORY CAPACITY UTILISATION
PROSPECTSAlan Dickson
27
PROSPECTS
• The overwhelming consensus is that the South African economy is not expected to show any material
improvement in the near future.
• Reunert expects to deliver a positive financial performance for full year from continuing operations
• Improved order intake in key businesses.
• Augmented by execution of secured long-term contracts and the conclusion of the current export fuze order in
the Applied Electronics segment.
• Due to the good growth in 2H15, the comparative growth in 2H16 will not be at the same level as 1H16.
• The non-cash impact of the B-BBEE transactions will mute earnings per share.
• Execution of Reunert’s strategy
• Continued focus on niche acquisitions that improve our competitive position, service offering and export sales.
• Dividends
• Reunert’s cash resources are sufficient to support both the execution of the Reunert strategy and the
distribution of sustainable dividends.
www.reunert.co.za
QUESTIONS & ANSWERS