Leadership
 

Chief executive's report

 
 

Our people, our value

“The Reunert that enters 2012 is one that has profound confidence in its board, its management and its people.”

The past year has been a challenging one for the Reunert group.

We have undergone changes at operational leadership level while facing challenges at all of our operations and in all of our markets. These challenges have thoroughly tested our mettle. I am pleased to be able to report that in 2011 Reunert overcame these challenges and enters the new financial year in robust good health with reinvigorated leadership at the head of all its operations.

The Reunert that enters 2012 is one that has profound confidence in its board, its management and its people. The recent executive changes have confirmed the depth of management talent within the group. Our management teams have eagerly embraced the opportunities and responsibilities assigned to them. As group management, we are well aware that our ability to continue creating value into the future is in the hands of our talented and dedicated people.

We also emerge from the year confident of our products, our pricing, our solutions and our systems. As a result, we have confidence in the sustainable value we believe we can create for all of our stakeholders, notwithstanding the tough economic environment and specific risks we face in our individual markets.

The philosophy that underpins the group and that is part of the fibre of each of our operations is the “glue” that binds together the diversified businesses of the group. These Reunert values include respect for each other, our customers and partners and a deep-rooted desire to innovate and work harder to be the best, lowest-cost provider of world-
class products and solutions.

Given the important unifying effect of values-driven leadership and behaviour, in the year ahead we will develop our “common truths” through consultation and by entrenching our values across the group. In tandem with this values process, we will also strive to communicate respectfully and openly with our stakeholders, broadening this engagement beyond our shareholders and the investment community. To this end we will initiate a more structured, frank and mutually beneficial engagement with employees, suppliers and partners as well as communities, customers and civil society.

 

Electricity consumption                  
    2011   2010 2009
    kWh   GJ     kWh   GJ   kWh   GJ  
CBI-electric     42 065 890   151 437     42 738 432   153 858   47 421 624   170 718  
Nashua     8 435 572   30 368     10 667 080   38 401   8 152 779   29 350  
Reutech     5 093 818   18 338     5 277 569   18 999   5 074 523   18 268  
Other     970 203   3 493     1 065 217   3 835   930 115   3 348  
Total     56 565 483   203 636     59 748 298   215 094   61 579 041   221 685  

Transformation

The group is underperforming in certain of its transformation objectives. We will ensure progress on our transformation targets for management control, employment equity and skills development by sharpening our focus on these goals and by incentivising executives to reach these targets. These are areas that, given our reliance on human capital and indeed government business, have been prioritised for significant improvement.

Key performance indicators

Our reporting against key performance indicators has traditionally been dominated by financial values, although we have actively managed our environmental and social performance in each of our operations. In 2012 the group will begin to formulate broader non-financial key performance indicators to focus our reporting in these critical areas.

The environment

There were no material environmental incidents during 2011. Despite the fact that 36% of our business is in the manufacturing field, the group managed to lower its electricity consumption by approximately 5%. Since 2009 the unit cost of electricity has increased 50% and more focus will be placed on energy management in the year ahead.

Overview of group financial performance

Revenue for the year has remained relatively static, with an increase of 2% from R10,7 billion to R10,9 billion. Operating profit, on the other hand, increased by 10% to R1,4 billion, while normalised headline earnings per share rose 14% to 590,0 cents.

The abnormal item of R346,4 million relates to the gain on the sale of the NSN investment, which led to earnings per share increasing by 60% to 809,0 cents. Normalised headline earnings per share increased 14%, compared to a 10% rise in operating profit. This was due to the impact of the share buy-back programme concluded in February 2011.

The solid top-line earnings growth achieved by our electrical businesses demonstrated the counter-cyclical ability of these operations to contribute significantly to revenue and profit.

The Nashua operations were not able to achieve revenue growth mainly due to the reduction in the interconnect rates and Pansolutions exiting the Panasonic consumer business. Voice-over-internet-protocol (VoIP) specialist ECN was bought during the year and successfully integrated into the group.

CBI-electric

The CBI-electric group of companies recorded a strong performance during 2011. All operations performed well in light of the tough environment that has persisted over the past few years. Revenue increased by 13% to R3,3 billion and operating profit improved by 14% to R592,1 million. This is a pleasing performance with both the Cables and Low Voltage operations retaining or increasing market share. The stringent and ongoing focus on efficiencies and cost containment allowed the division to improve margins.

The demand for energy cables has continued at reasonably buoyant levels. The price of copper has remained at a high, but relatively stable level during the year. The higher revenue achieved at these copper prices has had a small impact on margins as we have continued to keep copper stocks at levels as low as possible. This strategy minimises stock losses should the price of copper reduce. In 2011 the power installation operation showed strong growth and is expected to contribute some 25% to revenue by 2014.

Low Voltage had a pleasing year, increasing turnover by 9% and operating profit by 18%. The export performance was good, given the state of markets that were – without exception – suffering the ongoing effects of the global financial crisis. While difficulties were encountered in Germany, where the sales office was closed and operations relocated to Sweden, the operation in Australia achieved record sales. Domestically the new housing, commercial, industrial and residential refurbishment markets all showed little growth.

In 2011 Low Voltage acquired ITmatic, a system design and system integrator with in-depth technical expertise and a presence throughout Africa. In the new year it is anticipated that ITmatic will make a healthy contribution to revenue and profits.

As expected, the slowdown in infrastructural spend in South Africa negatively impacted our joint venture operation, CBI-electric: Aberdare ATC Telecom Cables, in the past year. Revenues declined sharply in the first six months of the year but improved markedly in the second half. The overall result was a small decline in turnover and profits. The business is, however, well entrenched with major local telecoms operators including Telkom, Neotel and the mobile networks. Market share in the industrial, IT, mining and power sectors has been maintained and should expand in the short term with new projects, including the National Long Haul Project, coming on line.

Nashua

Nashua performed to expectation in a quiet market. A number of acquisitions were made in the division which added to revenue, enabling marginal growth of 1% to be achieved. These acquisitions, which included four franchises and ECN, together with substantial increases in the contributions from Quince Capital and Nashua Electronics, resulted in operating profit growth of 21% to R794,2 million.

One of the highlights of the year was the acquisition of ECN on 1 June 2011. The energy and expertise of the ECN team has been beneficial to the group. They have achieved good market penetration and are currently billing over 50 million minutes a month. The conversion of the least-cost routing (LCR) business to ECN’s VoIP network is meeting our customers’ expectations. While this migration will take another 24 months, we are confident that we will retain the majority of our LCR customers during this process.

Quince Capital’s profitability returned to normal levels with the reduction in bad debts. The business is now focussed on financing our office automation and telecommunications equipment customers. We are confident that bad debts will be negligible in the year ahead.

Nashua Electronics’ sales reduced due to the operation exiting the consumer market. The addition of Kyocera Mita to its product offering has been positive and the profitability achieved was very pleasing.

Nashua Mobile had a satisfactory year despite the reduction in interconnect rates. The conversion of its LCR business to ECN’s VoIP platform is ongoing. The focus on mobile data and voice resulted in more than 27 000 net connections during the year.

The Office Automation operations experienced increased unit sales but a competitive market resulted in margins remaining under pressure. Increased offerings in the print service, data management and storage areas increased the operation’s share of the tender business. Nashua acquired the Durban and Cape Town franchises during the year, two of our most important outlets. Customer service in these important markets will be emphasised and the strategy of purchasing our larger franchises will continue in order to get closer to our customers.

Reutech

Revenue for the year decreased by 19% to R639,3 million, while operating profit was reduced by 20% to R48,7 million. The contribution from Fuchs was substantially lower due to the late receipt of an export order. The Radar company, through its mining surveillance radars, has had a successful year while the other businesses performed as expected.

NSN

Reunert exercised its option to sell its shares in NSN in January 2011. The sale of the investment realised R793,5 million, which resulted in an abnormal profit of R346,4 million.

Capital investment and cash management

Capital expenditure investment of R99,4 million will ensure that we have both the capability and capacity to meet future demand.

Reunert has invested R306 million in acquiring four Nashua franchises, ITmatic and ECN in the past year. The acquisition of the four franchises is in line with the group’s strategy to acquire the larger franchises.

ECN has enhanced Reunert’s capability to successfully migrate LCR customers to a VoIP solution. ECN’s network enables us to provide customers with voice and data solutions while the ITmatic acquisition at CBI-electric: low voltage gives us the capability of being a systems integrator with extensive technical capabilities as well as a footprint in Africa.

Cash resources of R1 127,9 million were used to repurchase 17,1 million shares at an average price of R66,14. Returning cash to shareholders through the mechanism of share buybacks has proven beneficial to the group. We will continue to review our share buyback policy. Changes to the Secondary Tax on Companies, due to come into effect in April 2012, make this strategy more compelling.

Group cash currently used to finance the Quince asset rental book is accessible in the event that this cash is required for investment. There are various alternative mechanisms for funding the Quince book. However, using Reunert’s surplus cash to fund the book is the most earnings-enhancing method while the group has surplus funds.

The balance sheet has remained robust with cash and cash equivalents amounting to R564,6 million.

Strategic direction

The diverse nature and operations of the group have served us well during a period that has been trying for many active in the fields of electrical equipment, manufacturing, telecommunications and office automation.

The group’s executive leadership believes that its primary function is to manage and guide the extremely capable leaders at the helm of our various operations. The executive team and board will investigate ways to improve the allocation of capital and the streamlining of shared services while strengthening the federal organisational model as described in the chairman’s statement, and empowering strong operational leaders to keep improving and growing their businesses.

As I stated at the outset, Reunert’s greatest asset is its human capital and to this end we envisage investing more time and resources in creating a culture of excellence at all of our operations. To achieve this it is imperative that employees at all levels feel that their contributions to our success are valued and respected.

The year ahead

Prospects for the group are generally favourable although the economic outlook, both in South Africa and in our major export markets, remains uncertain at the time of writing. The strength of the rand favoured those operations (principally Nashua) which import and distribute products but counted against those with significant export markets, while fuelling imports of often inferior competing products.

Reutech is particularly well placed to grow revenues in 2012, having developed and improved a number of exciting new products and systems. This optimism was borne out by the signing of a number of sizeable new contracts towards the end of the year. The outlook for sales of our proprietary mining surveillance radar and radio frequency tracking technologies is especially positive.

The electrical generating capacity currently being built for Eskom has to be transmitted and distributed and this fact, together with the upgrading of the electrical networks required by municipalities, will ensure a steady demand for our electrical products into the future.

Nashua’s brand remains very strong among consumers and business customers, a fact that is recognised by those service providers with whom we will soon be entering into licence renegotiations. Convergence will continue to drive the industry and in this area, Nashua Mobile is, through the ECN acquisition, able to convert its customers to VoIP while enhancing the level and range of services. The Nashua group will continue to invest cautiously in its telecommunications convergence capability, mainly utilising ECN’s networks and development expertise.

Appreciation

My thanks are due to Trevor Munday and the board for their advice and support, as well as to the Reunert executives, operational management and employees who have energetically assisted me. I am proud to head a dynamic leadership team, one that faces the future with confidence in our ability to continue offering our shareholders, and other stakeholders, a compelling value proposition.

David Rawlinson
Chief executive
14 November 2011
Sandton