Letter to shareholders

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Trevor Munday Gerrit Pretorius
Trevor Munday - Chairman  Gerrit Pretorius - Chief executive
 

 

We are pleased to report that after a most challenging year our long-standing philosophy of managing the business conservatively yielded benefits and Reunert ended the year in a strong position. Our balance sheet and related ratios are sound, which is an enviable position to be in, considering the very difficult circumstances of the past financial year.

The results achieved across the different operating divisions were varied.

REUTECH

Reutech, our defence business, had a bumper year. Its revenue grew by 40% which led to operating profit increasing by 55%. Reutech contributed R212 million to group operating profit with higher exports being a notable contributor to its success. The anticipated award of certain key long-term local orders will, over the next three to five years, lead to a more balanced distribution between its local and export business.

Prospects for our defence division are good. All exports were repeat business and in many instances, we have supplied the same product to the same customer for more than five years; which is a good situation. However, predicting the timing of when orders will be placed is difficult. It is thus quite possible that the new year may not be as strong as 2009.

NASHUA

The Nashua group has shown surprising resilience despite its exposure to pressures experienced by consumers. Revenue was marginally lower at R6 365 million and operating profit declined by 27% to
R481 million.

In the current tough environment, office automation sales were only 1% down. Given the strengthening of the rand, which in turn led to a lowering of prices to the end customer, it was a pleasing achievement. Careful cost management limited the decline in operating profit to 12%.

Further to our strategy of owning a controlling interest in large franchises and so getting closer to the end user, Nashua Central was purchased on 1 July 2009 and enhanced group performance. Nashua Central is the fifth franchise owned by the group and most sales are now moved through channels that are majority owned by us. We will continue to increase our ownership of the channel in partnership with the existing franchisees. As competitive pressures increase further our position will be strengthened.

At Nashua, market share is imperative. The brand has once again demonstrated its value as we have clawed back market share previously lost. Favourable currency movements and access to more and better products served us well.

For Nashua Electronics, it was a year of repositioning. After more than 40 years in the business we finally exited the consumer electronics business. It was not an easy decision to withdraw but we believe it was the right one. The associated charges, which amounted to about R60 million, impacted on profitability. However, on a positive note, cash in excess of R70 million was released by reducing the inventory and receivables in line with this strategic change.

 

Nashua Mobile reached levels of performance close to its previous peak. As a service provider to all the networks, it currently serves over 720 000 customers countrywide with a network of 155 outlets.

 

The new Nashua Electronics will be a much smaller and leaner business. With estimated annual sales of R400 million, it will be focused on office systems and should be capable of achieving a 10% operating margin. More importantly, we believe that, in the medium term, we will have a business with a clear area of competency and will grow market share. Nashua Electronics will change from a general shop to a specialised vendor.

Nashua Mobile reached levels of performance close to its previous peak. As a service provider to all the networks, it currently serves over 720 000 customers countrywide with a network of 155 outlets. The year yielded strong sales numbers of 160 000 new contracts, resulting in the contract base increasing by 8,8% overall. A reduction in airtime spend per customer due to current economic conditions has been experienced by all cell providers. While revenue grew by 6%, operating profit declined by 9%.

Metrics, such as number of customers connected, may no longer be appropriate to judge the achievement of businesses in the cellular mobile field in South Africa. Rather, retaining good customers is the key to success in this highly competitive industry. We are investing to achieve just that. Nashua Mobile has set up a state-of-the-art call centre in Bloemfontein and overall client services handles more than 120 000 calls per month. Motivation and training of staff is essential and instant gratification is our aim. Our fleet of Nashua Mobile scooters is a familiar sight along our highways, which demonstrates our commitment to reach our customers faster despite the congestion on our roads.

Much is said about interconnect rates and the cost of communications in South Africa which are likely to be reduced significantly and quickly. The extent to which revenues will be negatively affected remains to be seen. Lower rates may stimulate increased traffic which may compensate, or even increase revenues.

The future of least-cost routing is equally debated. In a normal competitive situation, call rates will differ and customers should pursue the least expensive connection. Hopefully, our country will progress towards that level of sophistication.

RCCF, which supplies asset-backed finance to our customers, did not escape the hardship that has been experienced globally by financial institutions. Bad and doubtful debts exceeded the level of prior years by about R62 million, which significantly reduced profitability in the past year. Fortunately, a year ago, we decided to revise rates to reflect higher risk and to reduce the size of the book in an orderly way. Both decisions have turned out to be prudent.

We have decided to issue short-term commercial paper for a modest initial amount to add another source of funding. Once our credibility in the market has been established, we will issue longer-term paper with a view to deriving all our required future funding in this way. Indications are that the worst is behind us and that prospects are encouraging in the year ahead.

Subsequent to year-end, the enterprise business of SEC was acquired, augmenting our offering to corporate South Africa. With annual sales of around R450 million, this business has a big share of the market with the same customer base as the Nashua channel. Although profitability has been a problem with this business, we are confident that management will achieve results in line with what we expect of companies in the group.

             
Nashua Mobile     2009     2008     %  
change  
Contract connections for year      136 362     132 210     3,1  
3G/HSDPA connections      23 198     28 782     (19,4) 
Total connections      159 560     160 992     (0,9) 
Closing company base      722 638     663 787     8,8  
ARPU      488     472     3,4  
Churn %      13,6     12,8     (6,2) 
Net bad debts % turnover      1,24     1,34     7,5  
Number of retail outlets      155     152     2