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CORPORATE ACTIVITY The following significant transactions and corporate developments took place during the year under review: > The acquisition by Altech of Fleetcall, effective 1 March 2009, for a maximum purchase price of R75 million of which R35 million is held in escrow to be released to the vendors on Fleetcall achieving certain profit warranties, with a reduced payout if these warranties are not met. > The acquisition by Altech of a further 9.8% of Kenya Data Networks (KDN) as a result of Altech funding the majority of the capital expenditure in that business in the current year and through acquiring an additional 1.8% of equity from a KDN minority for US$3.3 million. > The disposal by Altech of Altech NamITech’s South African operations to Gemalto for approximately R82 million, effective 1 April 2009. > The acquisition by Altech of Technology Concepts, effective 1 March 2009, for a maximum total consideration of R45 million of which R7.5 million was paid upfront and R37.5 million is held in escrow to be released to the vendors on achieving certain profit warranties, with a reduced payout if these warranties are not met. > The acquisition by Altech of a 50% plus 1 share interest in NuPay for R53.5 million, effective 1 June 2009. > The acquisition by Altech, through its subsidiary KDN, of an 8.5% stake in The East Africa Marine System Limited (TEAMS) cable for an amount of US$11 million. This investment gives KDN a 10% voting right in TEAMS. > Power Matla’s 25% holding in the Desta Power Matla distribution transformer business was converted, together with a capital contribution of R25 million, into a 20% holding in the combined Powertech Transformers and Desta Power Matla operations, effective 1 March 2009. > Altech entered into a strategic alliance with Seacom, for the acquisition of bandwidth capacity on each other’s cable systems in East Africa.

EXTERNAL FACTORS The year under review commenced with the South African economy moving into a recession which lasted through to the third quarter of 2009. While the economy as a whole moved out of recession in the second half of 2009, the improvement was largely due to certain key sectors, influenced by a recovery in commodity prices. A more broadbased recovery of the economy only became evident in the first quarter of 2010 with signs of sustainable growth. Within the sectors relevant to our businesses: consumer confidence remained weak throughout the period; vehicle sales were subdued; the building and construction sector continued to contract, particularly in respect of residential property; the mining sector delayed capital projects and limited its operating expenditure; and corporate expenditure on information technology spend was closely controlled. The rand strengthened significantly during the first half of the financial year against the currencies of our primary trading partners and in the second six months the currency traded in a fairly narrow range of between R7.20 and R7.60 to the US dollar. While this has clearly benefited local inflation rates, it does, together with the current interest rate environment, affect the competitiveness of South African exports in the global market place and exposes local business to increased import competition in our local markets. This was reflected in our results which were negatively impacted by the strong rand at the end of our financial year. The positive impact of the lowering of interest rates, which started 18 months ago, is still lagging with property prices remaining subdued and the demand in the building and construction industry not showing any material improvement. Our power infrastructure businesses have felt the decline in demand from this sector. However, the need for the continuation of investment in power infrastructure and building projects is expected to improve demand and we expect these sectors to improve over the medium term. In the information technology sector several large corporate customers delayed IT projects, but this practice is unsustainable in the long term and we are starting to see companies reinitiate these projects. The telecommunications market both locally and offshore remained robust, however, proposed changes to the regulatory environment in South Africa will require certain actions to be taken to mitigate the effect. INCOME AND GROWTH In reviewing Altron’s performance of the past year, the benefits of our diversified portfolio of operations and our focus on building annuity income streams became clear with the strength of the Altech annuity businesses partially shielding the group’s results from the challenges faced by Powertech and, to a lesser extent, Bytes. Overall, our group results reflected a pleasing performance by Altech, maintaining its revenue and enhancing its profitability. Bytes also managed to achieve revenue levels consistent with the prior year, but did experience margin pressure with some operational issues reducing its profitability. Powertech continued to face challenging market conditions and weak demand. The combination of these adverse conditions resulted in Altron’s revenue declining by 10% from R24.8 billion to R22.3 billion and EBITDA reducing by 11% from R2.2 billion to R2.0 billion. After taking into account the additional depreciation charges on recent capital expenditure, a net interest paid position and dilution from our B-BBEE minorities, Altron reported a 22% reduction in adjusted diluted headline earnings per share. The adjustment to earnings excludes the effect of the amortisation of intangibles arising from recent acquisitions, as management considers this to be the measure most representative of the group’s operational performance. The group maintained its dividend cover at 2.5 times based on adjusted headline earnings per share, declaring a dividend of 90 cents per share. Our financial performance is addressed in more detail in our chief financial officer’s report.

Our focus on investment in growth has been concentrated within Altech given the challenges faced by Bytes and Powertech. This focus is evident in the R1 billion invested in expanding Altech’s operations over the past year, representing the expansion of the East African data infrastructure network, the acquisition of significant international bandwidth capacity and several niche acquisitions. These acquisitions include Fleetcall, Technology Concepts and NuPay, all of which are operating profitably and are either matching or exceeding initial expectations. Together, these new acquisitions have made a significant contribution towards Altech’s enhanced profitability.

Altech’s significant investment in East Africa includes the expansion of its network as well as providing value-added services, such as a state-of-the-art data centre. The business has been enhanced by the purchase of a significant amount of bandwidth in the Seacom undersea cable, which has replaced expensive international satellite connectivity.

This, combined with the 10% stake in the TEAMS undersea cable, provides the East African businesses with significant international bandwidth to complement our terrestrial network in this growing market.

The international cable operations in Iberia have performed above expectations and delivered a commendable set of results, after achieving significant project wins in the Spanish highspeed train rollout.

The Bytes international operations saw a contraction in revenue of 11%, primarily on the back of a stronger rand which saw a 16% appreciation against the sterling. Our Microsoft software business had a record year in local currency terms. Overall, however, EBITDA margins in the UK declined as a result of a poor performance from the Bytes Document Solutions UK businesses. Significant restructuring as well as a change in senior management of this division has occurred and the business is now well placed to take advantage of improving conditions in that economy.

COSTS AND CASH MANAGEMENT

In our last report we indicated that our focus during the year under review, particularly in Powertech, would be on cost control and working capital management. Our progress in these areas is dealt with fully in our chief financial officer’s report, but I am pleased to be able to report that good progress has been made in this regard.

Our cost management is most evident in respect of our headcount reduction of over 1 000 employees this year. The reduction of 881 staff in Powertech and over 200 employees in Altech is a reflection of changed market dynamics and will result in a significantly lower cost base for our 2011 financial year.

Insofar as cash management is concerned, the group generated R384 million as a result of our reduced investment in working capital. Overall net working capital days improved from 21 days to 18 days. The group’s cash position improved in the second half to R1.2 billion, broadly in line with prior year levels despite the R1.2 billion invested into the future growth of the group through acquisitions and capital expenditure.

BUSINESS PARTNER AND CUSTOMER RELATIONSHIPS

In placing our customers first, we significantly emphasise technology innovation, international partnerships, quality, productivity and distribution efficiency. As a supplier, our commitment to excellence and attention to detail remains our highest priority. We see this as the foundation to providing superior value through our many products and services.

Relationships with our strategic business customers are managed at an operational level by managers within each division. Key issues relating to the top 10 customers are regularly reviewed by senior management and the group recently created the position of group alliances manager to manage strategic alliances with the group’s most important customers.

Altron’s philosophy to foster and maintain partnerships with technology and software leaders in the world arena forms an integral part of the group’s foundation and is also part of the group’s acquisition strategy.

In our retail operations, customer service statistics remain excellent at Altech Netstar. Recent initiatives to improve the customer’s understanding of our products and to consolidate the call centre and help desk at Altech Autopage Cellular are bearing fruit. This focus on the consumer becomes even more relevant given the tightening legislative environment designed to entrench consumer rights and protect against unscrupulous behaviour. Both companies are preparing to comply fully with the new Consumer Protection Act, 2008 (CPA), ensuring customers are well informed.

Where we hold confidential consumer information, particularly at Bytes Outsource Services, we have strict protocols in place to protect this information from being compromised in any way.

HUMAN CAPITAL

Altron recognises the value of the development of our people and the central role that our employees fulfil in terms of the group’s prosperity and sustainability. We therefore embrace our duty to treat them in a responsible, fair and humane way and not to engage in any activity that exploits or causes them harm. Reducing our headcount at various operations was unfortunate and a very difficult process for management, but we followed the principles of meaningful and constructive employee engagement through the senior management teams concerned. It is through this approach of transparency and ongoing communication that we aim to maintain company morale in the affected operations.

Bytes SA was restructured and streamlined through an internal reshuffling of the leadership of the operational units. Following the retirement of David Redshaw as chief executive officer of Bytes, Rob Abraham, previously managing director of Bytes Document Solutions (BDS), was appointed to this position on 1 March 2010.

TRANSFORMATION

I am delighted with the group’s overall progress in terms of transformation. Altron achieved its Transformation Vision 2012 goal of becoming a Level 4 contributor during the year under review, not only improving its overall B-BBEE score (from 65.30% to 71.58%), but also being ranked number 2 in the General Industrials Sector as per the Financial Mail/Empowerdex Top Empowered Companies in South Africa 2010 survey. Altron’s commitment to skills development was also recognised in this survey by being ranked number one in South Africa. The group’s skills development programme is discussed in more detail in the corporate responsibility report.

Our newly formed human capital council (HCC) is addressing the ongoing skills shortages within the group, concentrating on growing the pipeline of key technical and leadership skills, especially black and black female candidates, to ensure sustainable succession in a transformed workforce.

We have maintained and even expanded our firm B-BBEE partnerships within our group, some of which are long-standing. These include Pamodzi and Thebe within Altech; Izingwe and Power Matla within Powertech; and Kagiso within Bytes.

Power Matla, an investment consortium, has for many years been Powertech’s partner in Desta Power Matla (DPM). In 2009, DPM was integrated into Powertech Transformers and Power Matla increased its involvement to a 20% stake in Powertech Transformers comprising both power and distribution transformers. Post year end, Thebe Investment Corporation and Identity Capital Partners jointly acquired a 25.1% shareholding in Altech Netstar.

PROGRESS TOWARDS TRANSFORMATION The Financial Mail/Empowerdex Top Empowered Companies in South Africa for 2010 survey indicates that Altron has made significant progress in terms of its black empowerment transformation process. In this regard: > Altron was ranked number 1 countrywide in terms of skills development with a total of 15 points. This ranking reflects our commitment to the training and development of our people which, in turn, is aimed at empowering the future leaders of our company through leadership training: in the Altron Young President’s Club; through the Powertech Leadership Programme and the Altech Academy, as well as the role Bytes People Solutions fulfils throughout the Altron group. > Altron was ranked number 2 in the General Industrials sector, indicating a strong position among the leading industrial companies in our country. > Overall, Altron was ranked the 34th most empowered company in South Africa with an improved overall score of 71.58%, up from 65.3% last year while Altech was ranked number 49 in South Africa and 7th in the ICT sector.

THE ENVIRONMENT Climate change will undoubtedly affect every sector of the economy, including the markets in which the group operates. Altron recognises that it has a responsibility towards society and its stakeholders to reduce its environmental impact, and to find ways to profit from smart innovations – such as green energy solutions. For the second year we have calculated the group’s carbon footprint, concentrating on including as many emission scopes as possible, and refining their measurement. We have now established benchmarks against which we can set realistic targets for future progress in this area. Altron has also been a participant in the Carbon Disclosure Project (CDP) for the last three years, and was ranked 17th out of the JSE Top 100 in the Carbon Disclosure Leadership Index (CDLI) in 2009. Important contributors to our environmental impact are energy and water usage, pollution and harmful emissions, the usage of material and the handling of waste (throughout the product lifecycle). Audits (some independent) and standards ensure that we comply with legislation and continue to reduce our environmental impact. CORPORATE GOVERNANCE AND BUSINESS RESPONSIBILITY IN FOREIGN OPERATIONS Governance and ethics are vitally important to our integrity as a public listed company and to our ongoing sustainability as a brand. To further protect minority shareholder rights, the Altron board appointed Mr Mike Leeming, an independent non-executive director, as lead independent non-executive director on 3 August 2009. During the period under review, we adopted a group-wide code of ethics and updated our corporate code of conduct to align with the principles of King III. These are being reinforced across the group through various awareness campaigns and training programmes. We are particularly aware that we operate in regions regarded by human rights focus groups as being high risk for fraud, corruption and human rights violations. As a signatory to the United Nations Global Compact, we are committed to upholding fair labour and decent work practices, particularly in our foreign operations, and have introduced a confidential communications channel for employees to use without fear of recrimination.

 

OUTLOOK

The South African economy is clearly in the early stages of recovery, though much of the growth recorded to date has only occurred in certain sectors’ and we have yet to see any meaningful recovery in the mining and building and construction sectors. A successful Soccer World Cup will boost the nation’s confidence which should enhance consumer confidence, but it is unclear what effect it will have on industry both during and after the event. We believe that the recovery should continue through the year ahead and a sustained period of low interest rates is expected to filter through into the sectors of the economy that we service. Following the rationalisation actions implemented during the past year in terms of restructuring and rightsizing the businesses, I believe the group is well positioned to capitalise on what is likely to be a gradual recovery in the years ahead.

 

APPRECIATION

I wish to take this opportunity to express my appreciation to the Altron executive and board members for their unfailing commitment and support during a challenging year. A special word of thanks to our chairman, Dr Venter, whose experience and strategic direction proved invaluable during these difficult times. My appreciation also goes out to all our customers, staff, business partners, shareholders and other stakeholders for their continued loyalty and support towards the group.

 

 

Robert Venter – Chief Executive
May 2010

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