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LETTER to shareholders   cont.  
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Our electrical engineering business, CBI-electric — consisting of telecommunications cables, energy cables and low-voltage products — experienced mixed fortunes during the review period. Overall revenue increased by 29% to R3,3 billion. However, operating profit showed no real growth from R552 million last year to R554 million in 2007.

Effective 1 February 2007, we merged our telecommunications cable business with the same business of Aberdare, in the Altron group. Copper telecommunications and optic fibre cables are manufactured at our site in Brits, while instrumentation cables are manufactured at the Rosslyn site that belonged to Aberdare.

The merger significantly increased capacity, which stood us in good stead during the year. Demand from existing wire line operators increased, while new entrants like Neotel (the second network operator in South Africa) started to add volumes to the business. The mobile operators, Vodacom and MTN, announced plans to self-provide and started rolling out fibre optic networks on an experimental scale.

Industrial expansion in South Africa and the Middle East created a healthy demand for instrumentation cables. Capital invested will ensure we meet the requisite quality and delivery expectations.

Telkom announced its intention to source copper cable from two suppliers signalling the end of our short-lived, single-supplier status. Given that the merger between ATC and Aberdare stemmed from two independent suppliers not being viable because of Telkom’s erratic buying behaviour, the decision to again have more than one supplier is disappointing. From our point of view, the answer lies in developing markets outside Telkom, which is a priority.

The financial result of the merger was what we were anticipating. Revenue and operating profit increased by 45% and 7% respectively. We now have 37,5% of a viable business whereas before we had 75% of a business that was marginal. Despite having to part with 37,5% of the income, we are confident that telecommunications cables will enhance earnings in the 2008 financial year. Demand is expected to remain strong and efficiencies should increase as most of the disruptions of the merger are now behind us.

Energy cables, located in Vereeniging, south of Johannesburg, had the highest order intake in its history of over R2 billion. The high and expensive copper content further contributed to a strong rise in revenues. The average copper price increased by 37% to R54 364 per ton over the comparable prior period.

The programme, initiated two years ago to modernise the facility is nearing completion. Replacing old machines with new and much faster plant increased capacity by approximately 20%. The installation of new lines added an additional 10% to our high-voltage capacity.

During the year, we commissioned an upcasting facility enabling us to convert copper cathode into copper rod. We are no longer dependent upon a single supplier of copper rod but can, instead, now source copper cathode from multiple sources, a strategic necessity.

The order book is healthy and, in some instances, we have a full load for the next year. In these cases, we were careful to ensure we could pass variations in the copper price on to customers.

Margins remain good and should stay that way. Limited imports are entering South Africa and, provided severe overcapacity does not develop in the world, should remain at these levels. Our policy of providing value-added services further entrenches our position in the local market.

Various new product lines were added in the past year. Capacity was installed to deliver aluminium conductor steel reinforced overhead cables to Eskom and we secured a contract for five years. We are also starting to supply house wire to the general market. Both initiatives should contribute in the coming year.

Ideally, we would like to run our plants at maximum capacity all the time. To achieve that is very difficult. Care will be taken not to react to unsustainable spikes in demand while at the same time ensuring that customers are not disappointed and opportunities missed. To date we have managed to achieve that.

Revenue and operating profit increased by 38% and 21% respectively. Although industrial action affected financial performance that is behind us now and performance should improve.

Low voltage had a difficult year. Revenue increased by 8%, but operating profit declined by 21%.

Costs, mainly material, escalated while our ability to pass these increases on to customers was curtailed by a competitive marketplace.

To address this, we are increasing efficiency in the manufacturing process. Product lines are being streamlined by reducing both the number of products and variations. Procurement practices are being reviewed to drive costs down. We are confident that the results will be favourable.

In the South African market, especially on the residential side, Chinese imports presented CBI-electric with a pricing challenge. We have taken action to safeguard our strong position in the residential market and initial results are positive.

On the mining and industrial side, our position improved marginally. We decided to exit the local Eskom prepaid meter market given its nonexistent margins while continuing to supply meters to other segments of the market.

We made good progress in building market share in motor control equipment and automation components. Wiring accessory sales continued on its growth path and increased by 31% albeit from a low base.

Export revenues improved by 6% and now constitute 28% of low voltage’s turnover. Margins, understandably, were tight given the strong rand. This situation is likely to continue for the time being.

The performance of our Australian unit was disappointing and changes were made to the management structure to rectify the situation. Demand and margins in Australia are good, but our inability to get the product to customers cost us dearly. We are determined to guarantee timeous delivery.

Overall, we are confident CBI-electric will meet the challenges it faces. The scale of South Africa’s proposed infrastructure programmes has attracted global attention giving Reunert significant opportunities. However, it will be naïve to expect an easy ride. We will only succeed if we have competitive or better facilities and products managed by capable people. Capital investment will be directed accordingly with R25 million planned for the new year, on top of R45 million in the review period.

LETTER to shareholders   cont.  
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