Letter to shareholders  
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Martin Shaw - Chairman  
Gerrit Pretorius - Chief executive  
 
     
   
Reunert’s diversified nature and the quality of its businesses enabled
it to increase operating profit and revenue for the eighth consecutive year.
 

  DEAR SHAREHOLDERS

The past year can be described, at best, as volatile. This volatility saw higher interest rates, fluctuating currency exchange rates, extreme commodity prices and erratic equity markets. In the latter half of the year, the fear of a systematic banking collapse, with the inevitable associated recessionary worries, gripped the world. Reunert has not escaped this environment and, since February 2008, bad debts have been increasing markedly, indicating the severe levels of financial stress being experienced by the public.

Nonetheless, Reunert’s diversified nature and the quality of its businesses enabled it to increase operating profit and revenue for the eighth consecutive year. Normalised headline earnings grew by 10% to 630,1 cents per share. Cash generation was strong and debt, excluding the finance book, was nonexistent. Net cash resources at the end of the period, excluding RCCF, were R782 million. Operating margin, excluding the commission income received from our 40% investment in NSN, decreased marginally from 13,8% to 13,1%. EBITDA as a percentage of revenue increased from 14,5% to 15,2%, mainly because the NSN commission is now included in other income and operating profit. Previously Reunert’s share of NSN income was reflected as income from associates.

A final cash dividend of 241 cents per share has been declared, which together with the interim cash dividend of 78 cents per share makes a total distribution of 319 cents per share (2007: 314 cents).

The electrical group, CBI-electric, had a good year. Revenue increased by 19% to R3,95 billion, while operating profit grew from R554 million to R675 million, an increase of 22%. Both the low-voltage and energy cables businesses experienced buoyant market conditions. Our cautious approach to increasing capacity, in the light of recent developments, certainly proved to be appropriate.

Continued emphasis on quality and efficiency was evidenced by good margins. The low-voltage business in particular benefited from strong exports and operating profit improved by 45%. Towards the latter part of the financial year low voltage sold more products outside South Africa than within its borders. The Australian operation, under new management, has been turned around and should start contributing meaningfully shortly.

The acquisition of the Moeller business strengthened our position in the motor control market. By bolting-on businesses in related areas of activity, the low-voltage business has, over a period of 10 years, turned into a supplier of a diverse range of products in the electrical engineering field as opposed to being a supplier of residential circuit breakers only.

Cheap imports, especially from China, have been successfully countered for the time being. After some bad experiences, industry, mining and the public are more safety–conscious, insisting on reliability rather than compromising personal safety.

The energy cable business had an excellent year and for most of the year, capacity was stretched in order to cope with demand. Despite the high copper price, users had a seemingly insatiable demand for a wide range of energy cable. The increase in sales boosted margins, resulting in a record-breaking performance improving revenue by 43% and operating profit by 18%.

Despite the high copper price, users had a seemingly insatiable demand for a wide range of energy cable. The increase in sales boosted margins, resulting in a record-breaking performance improving revenue by 43% and operating profit by 18%.

 

 

 


Towards the latter part of the year demand softened noticeably, while the copper price collapsed in line with most other commodity prices. The rapid weakening of the rand will tend to keep the rand copper price more stable.

Capital investment in our factories will continue as planned. During the past year R31 million was spent at the factory in Vereeniging and we intend to invest a further R25 million in the 2009 financial year.

Telecommunications cables, in our joint-venture company, had a subdued year due to Telkom buying less copper cable than previously. Revenue decreased by 19% and operating profit declined by 18%. Sales of fibre cable picked up and this trend is expected to continue. Capital is being invested to increase capacity for instrumentation cable, which is experiencing strong domestic and foreign demand.

From being predominantly a supplier to Telkom this business is now earning less than 40% of revenues from this source. Exports, specifically instrumentation and fibre cable, are expected to continue growing offsetting the decline in demand from Telkom. Neotel, MTN and Vodacom are all buying fibre-optic cable and escalating quantities are being ordered. The relocation of fibre-optic manufacturing capacity from Port Elizabeth to Brits was completed.

At this stage it is difficult to gauge what impact global economic conditions will have upon infrastructure development in South Africa although early signs indicate that revenue in CBI-electric may decline.

The Nashua group, being more directly exposed to the consumer, had a tough second half year. Revenue grew by 11% to R6,4 billion for the year, but operating profit declined by 3% to R653 million. Bad debts have become an issue, emphasising the need to concentrate on quality rather than the number of deals.

In office automation, Nashua increased volume sales as well as operating profit. More than 40% of total volume sold was via outlets in which we hold the majority interest. This is in line with our stated goal of moving closer to the end-user. We have acquired a 51% interest in the Nashua West Rand franchise this year.

 
 
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