| Dear shareholder
Strong performances from Reunert's own managed
operations saw revenue for 2003 increasing by 21% to R6,1 billion. The group
has once again improved its margins that have resulted in strong operating
profit growth of 29%. This achievement was unfortunately not sufficient to
offset the substantial loss incurred by our associate company, Siemens
Telecommunications (Siemens). Consequently Reunert has reported a headline
earnings per share decline of 20% to 183,5 cents per share for the year ended
30 September 2003.
The group continues to generate strong positive cash-flows and this has enabled
Reunert to maintain its final dividend at 88 cents per share bringing the total
dividend for the year to 120 cents per share (2002:118 cents per share). Cash
holdings at 30 September 2003 amounted to R481 million.
Review of results
The group's results were adversely affected by the strong rand, losses incurred
in certain US dollar based contracts in Siemens and the introduction of the
AC133 accounting standard.
The impact on attributable earnings of applying AC133 was a charge of R31
million. This accounted for 7 of the 20% decline in headline earnings. The need
for this adjustment arose as a result of the interest rate reductions in the
last six weeks of the financial year and the strengthening of the rand in the
last week of September 2003.
Despite that, earnings before interest, tax, depreciation and amortisation
(EBITDA) as a percentage of turnover improved from 11,1% to 11,7%. The majority
of our businesses experienced increased demand for products and services. In
addition, the ability to react quickly to changes in a volatile market
environment enabled Circuit Breaker Industries (CBI), African Cables, Nashua
and Nashua Mobile to achieve record profit margins.
Group exports grew by 60% to R519 million, 9% of revenue, mainly due to the
significant export orders generated by the defence electronics division,
Working capital decreased by R210 million during the year, primarily as a
result of further improvements in working capital management at African Cables,
Nashua and Panasonic.
Electrical engineering had an excellent year with operating profit increasing
by 60% to R195 million.
CBI continues its drive to add new products to its portfolio. Management
resources and money are being invested in order to grow revenues outside their
traditional circuit breaker business. R28 million was spent during the year on
research and development for the further advancement of its own technologies,
and during the year Mitsubishi motor control and factory automation products
were added to its range. Export revenue increased by 13%, and with volumes
growing at a significantly higher rate, helped to offset the impact of the
rand's appreciation. Products are marketed in Africa, Europe, Asia and North
America and CBI is currently establishing a platform from which to penetrate
the Australasian market.
At the beginning of the year Reunert acquired Marconi's 50,9% and Pirelli
Cables and Systems' 10,5% stakes in telecommunications cable manufacturer ATC,
increasing its holding to 100%. The demand for telecommunications cables
worldwide has, for the time being, decreased considerably; nevertheless Reunert
is confident that the market will eventually return. A major restructuring
process was undertaken to align the cost structure with current demand. ATC is
therefore currently in holding mode, in anticipation that demand will gain
momentum. In the short term, the market is expected to remain sluggish until
the second network operator comes on stream. ATC is trading on a cash-positive
| As part of the group's commitment to
black economic empowerment, a 25,1% stake in ATC was subsequently sold to
Kgorong Investment Holdings.
| Power cable manufacturer African Cables
has had a good year and is entering the new financial year with a strong order
book. City Power Johannesburg recently awarded its cable supply requirements
for the next three years to African Cables. The demand for cables in the rest
of Africa presents a significant opportunity for African Cables to grow its
| Office systems performed strongly and
improved profit margins by a further 1%. Nashua's strong competitive position
is constantly being evaluated and benchmarked. Building the powerful Nashua
brand is a significant part of overall expenditure and is an investment which
we make with confidence. Nashua's distribution channel consists of a
well-established network of franchisees, which we have recently augmented with
the addition of a direct corporate outlet in the Midrand area of Gauteng.
| The consumer products and services division has had a
year of mixed fortunes. The strong performance from cellular service provider
Nashua Mobile was offset by weak performance from Reunert Consumer and
Commercial Holdings (RC&C).
The Panasonic consumer business within RC&C has
felt the brunt of the strengthening rand. Some imported products had to be sold
below their rand cost as a result of forward cover being taken out in
anticipation of a weakening rand. A review of this strategy has reduced risk in
this regard, whilst also ensuring the elimination of unacceptable exposure
should the rand weaken again.
The division is in a much better position than a year ago. An improved
Panasonic product offering is being sourced at lower exchange rates and shorter
lead times. Management anticipates that the reduced interest rates will
stimulate demand. The Panasonic business systems division is growing
consistently. The establishment of branch networks in Johannesburg, Cape Town
and Durban has improved the distribution channels. RC&C is confident of
good performance in 2004.
Nashua Mobile was not influenced by currency fluctuations and enjoys the
benefit of a strong customer base at the upper end of the market. The average
revenue per user increased to an all-time high of R575 while "churn"
rates of customers not renewing contracts after 24 months decreased to 11,6%.
The information and communication technologies division reported an operating
loss of R65 million with revenue down by 28%. Delays in anticipated contracts,
combined with a stronger rand, contributed to Sietel reporting a significant
decline in revenue. In certain cases, contracts had to be executed below cost.
Difficulties with accessing customer sites and delays in the erection of base
stations resulted in substantial cost overruns.
For 2004, the outlook for Siemens has improved. Although the fixed-line
business is under pressure, the mobile business continues to grow. Cell C has
contracted Siemens for the next phases of its network expansion programme.
Vodacom's strong drive into other African markets, notably Mozambique and
possibly Nigeria, whilst challenging the resources of Siemens gives us
confidence that they will achieve acceptable levels of profitability in the new
The defence electronics division, Reutech, entered 2003 with a strong export
order book, only to see excellent profit margins being steadily eroded by the
Reutech, which is a significant exporter, will find it difficult to be
profitable at current exchange rates as its products are priced and sold in US
dollars. Companies such as Fuchs Electronics no longer enjoy a competitive
price advantage and will be marginally profitable. Reutech Radar Systems will
continue to do well with a strong order book and the majority of its business
based in South Africa. Reunert Defence Logistics is pursuing several exciting
prospects, some of which are expected to materialise in the new financial year.
The recently announced acquisition of a minority interest of 31,7% in CS
Computer Services Holdings (CSH) increases our presence in the information and
communication technologies sector. Opportunities exist to leverage the
synergies between certain of Reunert's operations and CSH. A very similar
client base to that of Nashua should lead to exciting cross-selling
opportunities over time.
Siemens Telecommunications, ATC and Panasonic are all expected to return to
profitability and should therefore influence group results positively for the
new financial year. All other businesses are expected to produce moderate
growth over the past year's high base with the exception of Reutech, which will
be hard-pressed to repeat its recent past performance. Consequently, in the new
financial year headline earnings per share should show acceptable growth.
Black economic empowerment
Black economic empowerment (BEE) transactions have been concluded in Reutech
Radar Systems, Reunert Defence Logistics and ATC. It is envisaged that further
BEE partnerships will be established over the next two to three financial years
and at the Reunert Limited level, the feasibility of introducing BEE partners
is constantly evaluated. Your board is committed to BEE as a means of
redressing inequities of the past and as a critical factor in South Africa
realising its full economic potential. We welcome the Department of Trade and
Industry's broadly-based scorecard approach to black economic empowerment.
Employment equity plans are being implemented in all our businesses and at
community level, the work done by the Reunert College continues. Another 30
well-equipped black students will move on to receive tertiary education in 2004
thanks to our commitment.
We would like, on your behalf, to thank all our employees who have excelled
themselves in the past year in serving all our stakeholders.
We are privileged to enjoy the support of an able and strong board of
directors. It is comforting to know that they are always available, sometimes
at short notice, to participate and contribute to the well-being and prosperity
of the company.
We would like to take this opportunity to wish all our stakeholders a peaceful
and prosperous 2004. At Reunert we shall endeavour to add to your prosperity in
the new financial year.
For and on behalf of the board
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