Chief executive officer’s report

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Although 2013 has been a challenging year for the group, the strategic actions and direction taken have ensured that Reunert has emerged in a strong position.

DAVID RAWLINSON  CHIEF EXECUTIVE OFFICER

 

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OVERVIEW

Varied results were achieved by our operations with economic conditions impacting each of our businesses differently. Revenue declined by 3% to R11,4 billion and operating income was down 24% to R1,3 billion.
 

NASHUA

The Nashua segment had a mixed year. Revenue was down by 6% mainly due to Nashua Mobile but operating profit declined by 24% to R636 million.

Revenue at Nashua Mobile decreased due to the loss of the least-cost routing business and competitive market conditions. Saturation in the voice mobile phone market led to increased amounts of voice and data being bundled into most packages offered by the networks. This had the knock-on effect of reducing out-ofbundle airtime spend, which was a major source of revenue for Nashua Mobile.

Our Vodacom service provider agreement expired in December 2012 and Vodacom reduced its base discount rate from April 2013, which effectively reduced our income by 4%. Nashua Mobile’s current incentive structure with MTN expires on 31 December 2013 and indications are that incentive discounts will decrease in a manner similar to Vodacom’s. These agreements, together with various other options, are being negotiated with the networks. Nashua Mobile was further affected by bad debts as consumers continue to face difficult financial conditions.

Nashua Office Automation had a reasonable year but was impacted by a marked deterioration in the rand-euro exchange rates. Part of the increase was passed on to customers, but much of the cost price inflation was borne by Nashua, resulting in lower margins. Nashua North, our biggest franchise was purchased with effect from 1 July 2013.

We invested in human capital during the last year providing a steady base to grow our work flow and solutions business. We also augmented our product portfolio to meet the changing requirements of the market.

We merged Nashua Communications’ voice switching business with ECN’s voice over internet protocol (VoIP) operation at the beginning of the financial year to cohesively offer our customers the products of both companies in one converged package. The merged business has taken some time to bed down. Technical issues with Telkom networks slowed subscriber acquisitions, but this has largely been overcome with the help of Telkom. The enterprise business, offering mainly large Siemens systems, suffered due to the market moving to IP-based platforms and we have right-sized the business to maintain sustainable profitability.

CBI-ELECTRIC

The electrical market, with the exception of the renewable energy sector, was quiet and major projects planned across all markets encountered delays. Some of these projects were subsequently awarded late in our financial year, and we hope that orders for the remainder of the planned projects will continue. We expect the mining sector, apart from essential maintenance, to remain subdued.

The renewable energy sector was the notable exception and we were pleased to secure a sizeable share of the electrical equipment requirements for renewable energy projects via the Renewable Energy Independent Power Producer Procurement (REIPPP) programme. We expect this demand to continue for the next three to four years as Window 3 has just been approved. There is an expectation that an additional renewable energy window may be approved.

A world class high-voltage line is in the process of being commissioned at African Cables, with the first cable to be supplied to the market during the first quarter of next year. This line enables African Cables to meet virtually all the high-voltage insulated cable requirements of our customers and considerably enhances our Power Installations business.

CBI-electric: Low Voltage’s export of electrical protection equipment continues to grow and now accounts for 32% of gross sales. The consolidation of the various project-based business operations into a single, comprehensive solution business has been completed. Order intake is encouraging and this is a strategic area of focus for our electrical business.

REUTECH

Reutech, our technology division, enjoyed another very good year. Both revenue (up 27%) and operating profit (38%) showed solid growth and the investment in product and system development, both in commercial and defence markets have yielded results.

The radar operation had another record year. While the defence side was quiet, the solar tracker and the movement surveillance radar performed well. Based on radar technology, the solar tracker enables the concentrated photovoltaic (CPV) panels mounted on the tracker table to be optimally aligned to the sun at all times, which enhances the performance of these panels.

Reutech Communications also performed well; with both sales and operating profit nearly double that of the year before. The Saab Grintek high frequency (HF) radio business we acquired in the previous year has been bedded down and the wider product range has markedly improved export sales. The local programme to re-equip South Africa’s ground forces with latest generation communication equipment is expected to be launched in 2014.

Fuchs had a good year with pleasing orders from Europe. The business depends on ongoing export orders and we are hopeful that the significant tender activity this year will be converted into business in the new financial year.

Reutech Solutions has continued to grow and, in addition to the support and maintenance of customers’ communications systems and equipment, we have enhanced our capability in systems and solutions design, implementation and commissioning.

THE YEAR AHEAD

Reunert foresees a number of challenges in 2014. Saturation of the mobile voice market and the increasingly competitive packages being offered by the networks, together with the reduction in the interconnect termination rate, are unlikely to be offset by an increased use of data in the market. Network operators are seeking to control costs in all areas and service providers will be impacted. Ongoing negotiations with the networks to agree on the way forward will be finalised over the next few months.

African Cables has secured some of the tenders delayed in 2013. The new high-voltage line will contribute positively in 2014 and we are seeing increased expenditure by some municipalities to upgrade electrical infrastructure. We also anticipate an increased contribution from the segment’s solutions business.

Reutech should have another good year but this would be significantly enhanced if Fuchs receives a large export order early in the new financial year. We also expect that the set-top box orders for the digital terrestrial migration will be awarded early in 2014.

Office Automation continues to perform well with print solutions and document management driving a sustainable business. The business is aiming to grow market share and our acquisition of Nashua North is expected to contribute favourably.

After a disappointing year, Nashua Communications has right-sized its business and resources have been refocused on accelerating growth in our VoIP business. The reduction in the interconnect rate is positive for this operation.

APPRECIATION

Reunert management and staff have had a very difficult year and I thank them for their efforts, enthusiasm and loyalty to the group. It has not been easy. My thanks also go to the Reunert chairman and the board for their wisdom and support.
 
 
DAVID RAWLINSON CHIEF EXECUTIVE OFFICER
Sandton, 20 November 2013