PORTFOLIO COMMITTEE MEETING FUTURE OF DENEL SAAB AEROSTRUCTURES

PORTFOLIO COMMITTEE MEETING FUTURE OF DENEL SAAB AEROSTRUCTURES (PTY) LTD 24 MAY 2011

DENEL SAAB AEROSTRUCTURES (PTY) LTD Milestones DSA Vision, Mission and (DSA) Vision: The reliable African link in the global aerostructures supply chain Mission: DSA shall design and produce complex metal and composite aerostructures, supplying to OEM’s and Tier 1’s suppliers 2

D DSA is situated across OR Tambo International Airport DSAd. DSADSA is situated across OR Ta Shares facilities. Share facilities with Denel Aviation and TMA with Denel Aviation and Turbomeca Africa O. R. Tambo Int Airport n Denel Aviatio Composites Assembly Engineering Machining, Sheetmetal, Treatments, Stores, Planning TMA èSouth African Aerostructures Cluster: DSA, Denel Aviation and TMA 3

DSA specializes in Advanced Engineering and Manufacturing of aerostructures A 400 M Rollout June 2008 – DSA Wing Fuselage Fairing (WFF) DSA are concurrently designing and producing the A 400 M WFF Hail & ice damage, walk & snow weight loads, thermal loads, lightning protection, rapid decompression & under pressure doors, maintenance panels Max Dimensions Length 15. 5 m Width 7 m Height 2 m Surface Area ≈ 80 m² 80 different composite panels supported by an optimised 5 axis HSM machined and sheet metal sub structure 4

DSA Revenue and Profit/Loss Performance Note: 2010/11 financials still subject to audit 5

Current Status: • DSA remains loss-making and a key strategic challenge to Denel (EBIT Feb 2011 – (R 259 m); March 2010 – (R 283 m) and March 2009 – (R 444 m) • SAAB has exited the business in April 2011. SAAB owned 20% of the business since 2007. • Improved performance for 2010/2011 expected – Audit is in progress Restructuring: During the year under review, DSA exceeded Sales, Cash and EBIT performance targets through restructuring of the business including: • Significantly reducing labour costs. • Significant improvement in financial management and governance. • Reducing rental costs through space optimisation. • Implementing shared services with Denel Aviation and outsourcing non-core activities. • Transferring the steel-heat treatment facility to TMA. • Audited improvement in climate survey from 65% to 74%. Operations: The operational turnaround of the business continues with a marked improvement in delivery and quality. Airbus in particular has expressed satisfaction with DSA’s performance against key milestones on the A 400 M programme. Margins on all contracts however remain under pressure and are currently unacceptable. 6

DSA Highlights (1) - Achievements during 2010/11: Achievements during 2010/11 • Improved Governance • Established new Inventory Policy: Stock turn, Cycle counting and Buffer Stock. • Improved procurement management: Reduced annual net additional provisions for stock from more than R 20 m per annum over the previous 3 years to below R 1 m for stock procured during 2011. • Completed internal audit plan implementation. • Improved Asset Management process. • Complied with A 400 M contractual commitments • Passed WFF Final Design Acceptance and Bird-strike certification tests – first external supplier to achieve this status. • Maintained Green status on Programme Review Meetings with excellent performance rating by customer. • Delivered first WFF new design baseline unit and met Airbus delivery dates on both WFF and TS. 7

DSA Highlights (2) • Implemented Restructuring to Reduce Cost and Sustainable Transformation Enhancement Programme (STEP): • Implement LRA Sec 189 process – reduced headcount with more than 300 since March 2010. • Reduced Rental footprint by 32%. • Implemented shared services with Denel Aviation on Human Resource Management, payroll and IT. • Implemented outsourcing of non core activities including conventional machining, chemical stores, NC programming, Level 3 Inspection, plain sheet metal and tool manufacturing (convert fixed cost to variable cost). • Improved cost center management. • Removed/sold obsolete stock to reduce material management cost and stores efficiency. • Improved production flow: Improved on time full kitting point achievement from around 70% to 85% and deliveries to TMA from 30% to around 90% - steel heat treatment plant sales transaction with TMA completed. • Reduced scrap: Reduced workmanship related scrap (labour and material cost) to 1. 7% of total sales. • Improved Long Term Procurement Agreement coverage to > 70% with around 12% reduction in material cost. 8

Employee Analysis Job Category Heads May 2011 7 Management 37 Engineer No of people Senior Management 25 Technical 85 Planner 20 Artisan 113 Operator 35 Administrative 55 Apprentice 20 Total 397 9

DSA Highlights (3) • Stock accuracy: Improved from 65% in 2008 to better than 96% accuracy in 2011 • Completed in-depth WFF profitability review and initiated production ramp up as a focus area within STEP • Quality • Maintained NADCAP accreditations within Composites, Heat Treatment, Non Destructive Testing, Surface Treatment/Paint and Shot Peening. • Business Development: • DSA was down selected by Business Jet OEM to supply Business Jet Winglets (Negotiations ongoing) 10

Strategic Scenarios • Domestic Transfer to Aerosud • Aerosud submitted an unsolicited conditional proposal to acquire DSA in December 2010. • Discussions are on-going. • Further announcements can be made once the discussions have been finalised. • Revised Business Plan (in Process) The latest DSA revised business plan includes the following key interventions: • Building a robust revenue pipeline. International OEM’s targeted: • Spirit Aerosystems • Hondajet • Gulfstream • Lockheed Martin • Contract negotiations with key customers • Cash flow management • Improving balance sheet solvency • A further reduction in the rental footprint from 52 000 m 2 to 25 000 m 2 through consolidating all activities into the A 2 building including the composites facility. • Further outsourcing of non core activities to reduce fix costs to variable costs. 1

Rental Space Optimisation B 10 and D 4 Reduce rental footprint from 52 000 sqm to 25 000 sqm Composite Facility B 10 TMA D 4 B 2 + B 3 A 5 B 1 Denel Aviation A 7 A 2 B 9 A 2 and A 1 Facility A 6 A 1 12 12

DSA Revised Business Plan Value Criteria Comment ROI • Positive from year 6 Job Creation • Around 3000 direct and indirect Governmental Strategies Support and alignment: • Leverage national benefits on the back of Government fleet procurements • National Industrial Policy Framework (NIPF) • Industrial Policy Action Plan (IPAP 2) – Aerospace focus • The ‘ 10 year Innovation Plan’ Future Prospects • Airbus – A 400 M Price renegotiation • New Business Opportunities with Tier 1 OEMs > R 1. 6 bn Export Earnings • >95% Export Sales (Euro) Advanced Manufacturing • Strongly supports the transition to a knowledge based economy • Modern, qualified, world-class state of the art manufacturing facility Technology • Aero-elastic modelling and simulation (design and fatigue) • Applied fracture mechanics • Advanced aluminium/composite aerostructures design, manufacture, qualification and certification • Production of ultra light weight structures, through: • Thin-wall aluminium machining and assembly • Fibrous/carbon composite layups, curing and machining • Advanced fluid press forming • Non-destructive testing • NADCAP Certified surface/heat treatment èDSA’s operations in a high technology- and advanced manufacturing sector such as Aerospace strongly supports the transition to a knowledge based economy and the national objectives stipulated in above policies 13

Revised Business Plan: End State Organogram Indirects: 24 Directs: 234 Total: 258 HR (Outsourced) CFO (1) IT (2) Legal (1) Finance (9) Business Control (6) CEO (1) Marketing & Comms (3) 258 COO (1) Quality (22) Engineering (24) Industrialization (24) Sourcing & Supply (26) Production/Planning (138) • Based on steady state production of 24 A 400 M WFF Ship Sets per year • Outsourcing of non core activities 13

A 40 DSA Economic Impact • DSA’s total economic impact is conservatively estimated to be: • Around 3000 jobs • R 760 million consumer revenue • R 180 million in taxes • Around R 400 million of future export revenue per annum. • IPAP 2 2011/12 – 13/14 released by the DTI in April 2011 has identified Advanced materials and Aerospace under Cluster 3 – Sectors with Potential for Long-Term Advanced Capabilities: • Aerospace and Defence sector profile is a critical and pervasive generator of new technologies and is crucial to future innovation in South Africa. • Significant progress has been achieved in developing recognition by and confidence from global original equipment manufacturers (OEM’s) in aerospace. • With DSA’ operating in a high technology- and advanced manufacturing sector such as Aerospace, falls within the ambit of IPAP 2 long term advanced manufacturing capabilities 15

Way Forward • Discussions with Aerosud continuing • Implementation of revised business plan • Funding for DSA remains a critical issue 16

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