Presentation to the Portfolio Committee for Department of Public Enterprise Review Committee

1. Presentation to the Portfolio Committee for Department of Public Enterprise Review Committee Recapitalisation of Denel Aerostructures 29 May 2012 RESTRICTED

2. Executive summary • Denel Aerostructures (DAe) has undertaken fundamental restructuring during the past 2 years which has resulted in improved financial and delivery performance, and contracted key performance indicators being met. • DAe has successfully renegotiated its Airbus A400M work packages, subject to formal contract amendments. The A400M programme now supports a viable and sustainable business case for the Aerostructures entity in the long term. • Further Industrial restructuring is underway to reduce rental costs and improve productivity. On-going interventions are being implemented to achieve operational excellence, a high performance culture and continually improve commercial competiveness. • The strategy going forward is to scale capabilities to A400M requirements and to simultaneously secure new orders aligned to such A400M technologies & capabilities. The Business Development function has been strengthened to target revenue growth. • Within the context of the New Growth Path (NGP) and Industrial Policy Action Plan (IPAP2), DAe must fulfil its strategic responsibility as a SOC to mature and deepen the world class Aerostructures advanced manufacturing capability in South Africa, integrated into the global Aerostructures supply chain. • DAe remains in a turnaround phase, and due to the historic structural misalignment between its revenue and cost bases, it will continue to post losses in the short to medium term, before achieving breakeven in 2016/17. The entity has been renamed to Denel Aerostructures (DAe) to reflect the exit of SAAB as shareholder.

3. Entity Overview

4. Outcome & Impact of A400M Negotiations NB – Prior to the A400M contract re-negotiation the DAe Business Plan remained unsustainable and required continued Indemnity funding for the duration of the Program. Following renegotiation breakeven is achieved in Fin year 2016/17 with improved net margins going forward. The contract amendment process is in an advanced state and is expected to be concluded by June 2012.

5. Restructuring Summary

6. DAe Turnaround Restructuring 2012/13 #1 • OPERATIONAL EXCELLENCE • Meet all contractual commitments including (A400M WFF and TS, Gripen RF and MLGU, G150, A109 and Rooivalk) • Implement A400M WFF early Production Ramp-up (8 in 2012/13 and 16 in 2013/14) • Sustainable Transformation and Enhancement Project (STEP) • Interrogation of programme performance and improvement of programme management methodologies • Strengthen bid room management and processes • AIRBUS A400M NEGOTIATION • Time frame (Term Sheet concluded end November 2011) • Review and agree RC Prices and treatment of NRC and Modification Cost • Review and agree contractual Terms and Conditions #2 • RESTRUCTURING • Contract negotiations with key customers • Further reduction in the rental footprint from 50,000m2to 25,000m2through consolidating all activities into the A2 building - including the composites facility • Reduction in key cost drivers • Further outsourcing of non-core activities to reduce fix costs to variable costs • Enhance cash flow management • SALES & • MARKETING • Pursue potential new • business from Airbus, • Embraer, Spirit • Aerosystems, Small Business • Jets and Gulfstream • Secure strong • Government • support for new • orders (MPA/SAX) • Focus on the Airbus • Tier 1 supply chain • Repositioning and • rebranding • DAe #6 #3 • LEARNING CULTURE & SKILLS RETENTION • Critical skills mapping, retention incentives and reward and recognition programs • Promote a high performance learning culture • Revised skills development plan, mentorship and coaching including Young Leaders Forum #4 • LONG TERM SUPPORT & STRATEGIC ALIGNMENT • Align DAe to DPE ‘s national strategic goal linked to IPAP2 and Aerospace Sector Development Plan • Ongoing restructuring and negotiations to reduce funding requirement • Improving balance sheet solvency #5

7. Turnaround Financial Trend Impact of restructuring costs

8. Restructuring of Balance sheet • The Minister of Finance announced during his budget speech on 22 February 2012 that the budget includes R700 million in the 2012-13 financial year to recapitalise Denel Aerostructures. • The DAe balance sheet will be restructured as follows: • Convert a portion of the Denel Shareholder loans to equity. • Recapitalised the DAe balance sheet in order to: • Fund the 5 year business plan of DAe during the production ramp-up phase. • Fund the operational net working capital requirements. • Fund the capital equipment required for production ramp-up. • Fund non-recurring cost investment to secure new business. • Fund the essential restructuring including the rental footprint reduction. • The benefit of the balance sheet restructuring of DAe are as follows: • With a solvent balance sheet, going concern risk is mitigated and compliance to Companies Act regulations. • Prospective customer’s perception of DAe being a sustainable business partner is considerably enhanced to ensure improved business prospects. • Normalised finance costs through capitalised shareholder loans. • Supports commitment to long term planning.

9. Business Development Strategy • Targeted new business • DAe is targeting Tier 2 Aerostructures work of similar technology and light weight as industrialized for A400M, such as advanced composites, thin web machiningsetc • Possible products are fuselage primary structure (such as Topshells), Fairings (such as WFF), control surfaces (flaps, ailerons etc), detailed parts (composites, complex machinings) etc. • Focus on European and US OEM and Tier 1 suppliers, where Airbus agreed on marketing support • Fleet procurement offset prospects, such as SA Express acquisitions of Embraer • Why can we win it? • World class facilities & technology. Several customer (Airbus, Lockheed Martin, Embraer) facility visits over the past 18 months has confirmed this view. • Very strong Engineering skills – from concept design to type certification. Strong positive track record and accolades from Airbus • Several advanced technologies such as ultra-light composites and large thin web machinings were successfully industrialized as part of A400M program • DAe has obtain NADCAP accreditations for all major disciplines required • Airbus has agreed to introduce DAe to major Tier 1s in their supply chain and support with letters of reference to confirm DAe as one of their most reliable suppliers on A400M program. • DAe has good government support from DTI & DPE for fleet procurement offset prospects.

10. Business Prospects and Government Support Required • NB: Improving Market Intelligence and Competitive Price Benchmarking in support of bidding activities. • Focussed government support for DAeis required to: • Leverage potential Government-related fleet procurement offset prospects including: • Transport requirements by SAAF. • Maritime Surveillance requirements by SAAF. • VVIP helicopter requirements by SAAF. • Regional Jet requirements by South African Express (SAX). • Future lease or buy requirements by South African Airways (SAA). • Finalize and implement the IPAP2 Aerospace Sector Development Plan. • Implement the aerospace cluster policy framework

11. Why Governments Invest in Aerospace Governments invest in their aerospace sectors for reasons of: • National security • Preservation of high tech employment in an area where many developing nations are as yet unable to compete • The economic and social benefits of investment in aerospace technology that also spill over into other sectors • Shareholder interests – some governments are shareholders in their aerospace industries • Political ambition No one country can afford to abandon state support; it’s not possible to compete unilaterally without it.

12. Government Support Spectrum • Educational, defence and research infrastructure. Well trained R&D personnel is driving large transfers of R&D from high cost nations such as the USA to lower cost nations such as Russia, China and India. • Government grants for fundamental (blue sky) and pre-competitive research • Many governments support the launch of major projects with a form of limited recourse debt financing known as Repayable Launch Investment (RLI) at competitive rates of interest rolled up until the product starts to sell • Governments use offset mechanisms to ensure that purchases made by state organs result in a proportionate share of output, technology and employment for the acquiring country • Military projects