PRESENTATION TO INVESTORS For the six months ended 31 March 2016 - - PowerPoint PPT Presentation

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

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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.

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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 STRATEGY

Alan Dickson

Transformation

Customers People

Efficiency Diversification Innovation

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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.

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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 OVERVIEW

Nick Thomson

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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

• ff 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 Electrical Engineering 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

10 10

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
• perating 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

• rders.

↑ Further margin gains from weaker ZAR.

Margin 14% Margin 13% 49% 49% 7% (5%) 503 564 11 6 87 (43) 2015 Electrical Engineering ICT Applied Electronics Other 2016 MOVEMENT IN OPERATING PROFIT (Rm) OPERATING PROFIT CONTRIBUTION* (%) Electrical engineering ICT Applied electronics

* From continuing operations

1H16 1H15

Other

11 11

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
• perations 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.

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FINANCIAL RESULTS │CASH FLOW

* Before working capital movement

650 234 177 (235) 70 (231) (20) (54) (16) 13 Cash generated from

• perations*

Working capital Net interest Tax paid Capex replacement Free cash flow Capex expansion Investing activities Financing activities Total cash generated 2 636 2 311 (502) 177 Opening balance Dividends paid Total cash generated Closing balance MOVEMENT IN CASH FLOW (Rm)

13 13

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 liabilities 62 (225) Advance payments (27) 319 (235) 166

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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

• perations

2 311 2 446 2 636 Net assets 6 718 6 361 6 725 Equity 6 718 6 361 6 725

ICT OVERVIEW

Mark Taylor

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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%

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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.

30 60 90 100 200 300 400 500 13 14 15 Total Clicks Multi-functional printers Printers Mar 16

TDV vs MFP and printer MIF

Millions Thousands

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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.

20 40 60 80 100 13 14 15 1H16 Millions

ECN number of minutes per call type

Inbound Outbound

APPLIED ELECTRONICS OVERVIEW

Peter van der Bijl

20 20

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%

21 21

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

22 22

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 OVERVIEW

Alan Dickson

24 24

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 March 2016 ZAR thousand per tonne 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

25 25

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.

20 40 60 80 100 1H14 1H15 1H16 Low voltage Energy cables Copper telecom cables Fibre telecom cables % FACTORY CAPACITY UTILISATION

PROSPECTS

Alan Dickson

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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