Alec Hogg interviews Boel Pretorius
Friday, 28 November 2003
Posted: 2003/11/27 Thu 21:00 | Moneyweb 1997-2003
MONEYWEB: We welcome Boel Pretorius, chief executive of Reunert. Financial results out today for the year to end-September, Boel, and the top line looks great, revenues up 20%, operating profits up just more than 20%. Headline earnings per share are down, though, by a similar amount. And when you look into the details of the numbers and I am sure you can explain more to us now it was all to do with the Siemens telecoms division. What's your relationship with that company?
BOEL PRETORIUS: Alec, we own 40% of Siemens Telecommunications and, despite the fact that last year was a bad year for us, it is and remains an excellent business. It's a very strong business, supplying most of the mobile networks in this country.
MONEYWEB: With what kind of things?
BOEL PRETORIUS: Infrastructural equipment, the switches, the base stations, the base station controllers. We did all of the Cell C network, we probably did 80% of the Vodacom network. And, in addition to that, we supplied most of the Telkom core network equipment, probably 70% of their switches, 100% of the transmission backbone. We supplied some of the access equipment.
MONEYWEB: Sounds like a fabulous business - what went wrong?
BOEL PRETORIUS: It's a big business. What actually went wrong, we took dollar-based contracts at a time when the rand was flirting with R12 to the dollar. When we came back in January this year, it was below R9 to the dollar, if I remember correctly, somewhere in that region. And we were actually executing contracts below cost. We took a big knock as a result of that. But, in addition to that, we had slightly reduced volumes. But again, related to the strengthening of the rand, we also experienced some contractual difficulties, gaining access to sites. And it all combined into rather a bad year for Sietel.
MONEYWEB: Let's just go back a little because, again, people don't always understand exactly how the changes in the currency can affect a company's profit. You did contracts at R12 to the dollar. So you would then presumably have priced at R12 to the dollar.
BOEL PRETORIUS: Right. Let's suppose our cost was sitting at R10/$, which would have given us an adequate margin - but when the rand strengthened to below 10, clearly, we were beginning to execute below cost.
MONEYWEB: So the more it strengthened, the more you lost money, because you were buying the products in dollars and then translating it into a higher rand price.
BOEL PRETORIUS: The supply of the products wasn-t really the problem, because we bought them and paid in dollars. It was actually the rand-based execution, the local part of it, where we took a big knock.
MONEYWEB: How does that work?
BOEL PRETORIUS: Let's suppose we had a $100m contract - $50m related to equipment, and $50m to provision of services. The $50m, when we took it, we thought it was worth 50, multiplied by 12 - R600m. When we started executing, we discovered it was only worth 15 multiplied by 9 - R450m. And our costs were probably sitting at somewhere like R500m. So immediately we had a loss of R50m. That is just to explain it in nice and simple terms.
MONEYWEB: A good explanation. But at R6.40 to the dollar, are you still in trouble then?
BOEL PRETORIUS: No, no, what we've done now is we've stopped taking dollar-based contracts for execution in rands. So if we deliver in rands, we make sure we get paid in rands. So that risk is no longer around.
MONEYWEB: All right. So the next year, the next financial year, Siemens Telecommunications, of which you own 40%, presumably will be back in profit?
BOEL PRETORIUS: Yes. Like we said in the prospects going forward, we had another business, Panasonic which, for another reason, also lost money. And the reason there simply was we bought equipment, we took forward cover at a rate of roughly R12/$. When we started to move that equipment into the trade, we had to do it at somewhere like R9.50. So immediately that resulted in losses for us too. ATC, another one of our companies, as a victim of the slump in demand for telecommunications cables, took a big knock there. So what we said is, just those three companies returning to profitability which, by the way, all three have will result in a very positive margin for Reunert the current year.
MONEYWEB: That's good news going ahead, but being the chief executive of a business like this, and the impact that the rand has had on your business, it almost seems as though you have to be more of a currency trader than a motivator of people nowadays. How do you address this?
BOEL PRETORIUS: I think that's a bit of an overstatement. What caught us here is the volatility. We are fortunate in the sense that I think we can adapt to any rand level, within reasonable limits. What we cannot handle is a yo-yo up and down, because you don't know where you are. We would like it to stabilise, and a little bit of certainty around current levels is adequate for us.
MONEYWEB: My question, though, is the way that you address this issue, the volatility issue, with your suppliers, in future, it's almost like when you take out a contract with the bank, they will usually link the interest rates to the movement in interest rates. Is there even a consideration of doing that with your clients in future linking the cost of contracts to the movements in the rand?
BOEL PRETORIUS: What we had to do was to review some of the policies that we had adopted for many years. For instance, in the case of all imports, we immediately took forward cover so that we weren't exposed to any weakening of the rand. What we had never foreseen was the strengthening to the extent that it did. We have reviewed that policy and what we are doing now is we have got stop-loss mechanisms in place, but we are no longer are taking forward cover. And that is actually standing us in very good stead, especially as far as Panasonic is concerned, where we are importing huge volumes of equipment.
MONEYWEB: Circumstances change and you must change the business along with it?
BOEL PRETORIUS: Absolutely. And, you know, I think we could have been more agile, we could have reacted faster. It took us between January and May this year to get our act together.
MONEYWEB: The final dividend per share was held, which meant that for the year as a whole Reunert paid out more this year than last year, even though your headline earnings were down by 20%. Are you sending a signal out?
BOEL PRETORIUS: Yes. The cover has dropped. It's sitting at 1.53. Last year it was at 1.98. But we are sitting with cash of close to R500m. For more go to http://m1.mny.co.za/BusToday.nsf/UNID/BVRN-5TPKAM?OpenDocument