A very warm welcome. Just by way of quick logistics, I've got about 20 minutes, something like that, just as a quick introduction. There's a few late starters, so we'll probably stop for five minutes after that before we go into the rest of the day's proceedings, just to allow a few extra people to come in who may have come in, sort of 10 or 15 minutes whilst I'll be, I'll be talking. It's a fairly full day, but there's a lot of time for engagement, a lot of time for questions, so I don't think it's gonna get too rushed on our way through it. Thank you all for taking time to spend time with us today and taking time out of your schedules to be here.
For those who are on the webcast, a warm welcome to yourselves. I just wanna do a very quick introduction of a few people here. First of all, I just wanna introduce you to the Reunert executive directors. For those of you who don't know me, I'm Alan Dickson. In the corner with his hand up is Nick Thomson, our CFO. Next to him or close to him is Mohini Moodley, our HR and sustainability director, who will be talking a little bit more about sustainability later. Then we have all three of our segment chief executives here today. I'm just gonna start on the left, Terry Lawrenson. Terry, if you stand up quickly just so that we can see. He'll be leading the renewable energy discussion later on.
I've got Trevor Raman, who is our Chief Executive of the Applied Electronics segment, who'll be taking us through the defense business. Next to him, Graeme Eddey, who is the Chief Executive of the ICT segment. They will be introducing their teams, so there are more team members here that you'll be listening to and taking some, or be able to pose some questions from. And also perhaps a special welcome just to the IQbusiness team. When we last spoke to you a couple of weeks ago, the Competition Commission approval was still pending. That has now come through. The effective date is the July 1st.
So actually one of the discussions today or one of the sessions today is actually on IQbusiness, to help you unpack that and to give you some insight into that, and the Chief Executive of IQbusiness, Adam Craker, will be taking us through that a little bit later on. Just a couple of house rules, if I can just put them out there up front. It'll be Reunert's leadership teams that will be presenting all of the content today. The segment heads will be sort of giving an introduction, and then we have the chief executives of the business units, then talking about, about their business units. They will be doing the bulk of it. There will be Q&A after each and every presentation.
Each presentation, somewhere 20 minutes, 30 minutes, something of that order, and then we'll have a period for Q&A. If I could please ask, if you could just hold onto your questions for that particular section, just until the end, and then we'll do a Q&A after that. I'll chair the Q&A. So we've got some questions potentially coming in on through the webcast, and then obviously from everybody here. I'll chair those, and then I'll push the questions to wherever the appropriate person is to answer those. You will have free access to the management, particularly during the breaks. We've got a factory walk around, both here at lunchtime and later on at BlueNova at our storage factory a little bit later on.
So you're welcome, and I encourage you to speak to them, ask them about questions that you may have. My only request is, as is always the case, our disclosure only goes to segment level. Please don't sidle up to them and ask them for their management accounts and what their GP margins are and what does the budget look like for next year. Don't put them in that position. They're under strict instructions, obviously, not to give it to you, but please don't put them into a difficult position. Just in terms of the objectives today, what I'd like to what I'd like you to leave with, as best as possible, is we're gonna really try and articulate the Reunert's investment case broadly.
And then we're going to do a deep dive into several sections to help shareholders and potential investors unpack what those, particularly the growth elements of our investment case mean. We'll be doing it in the ICT segment. We'll be looking specifically where our key investment is into our solutions and systems integration business. We'll be getting an update from +OneX, IQbusiness, the newest acquisition, we'll be taking you through. In terms of our internationalization drive, we're looking specifically at the Applied Electronics segment or our defense businesses today.
We're not doing electrical engineering today, but we'll be doing specifically at that, and then doing some deep dive into three of the key growth areas in that business, or in that segment, which is our fuses, our radars, and our new acquisition of Etion Create, which is an exciting business, and we'll give you a chance to dig into that in some more depth. Then we'll be doing our renewable energy businesses. We call it our renewable energy cluster, so it's got our solar, the solar generation. It's got our storage, it's got our wheeling, and it's also got our energy management, so we'll be dealing all of those. We'll be looking also into that renewable energy cluster for that. Another objective that we've got is lots of you will typically speak to myself and to Nick.
This is an opportunity to see the management underneath. We're looking to show you the depth of management, the quality of management, the experience with management that we have around Reunert, so that you can actually see those that really do the hard work and the level of expertise and quality of people and knowledge that sit in those underlying assets and actually drive the profit that comes out of it. And other than that, we'd like you to enjoy it. This is a working facility. We're in our radar facility today. One of the, one of the investors or shareholders was just asking me a little bit earlier, you know, what did we do here? Harald will share with us a little bit later.
Just as a, an interesting aside, this business was started 31 years ago. 35. So there was nothing here 35 years ago. South Africa had no radar, no local indigenized radar capability at all. If you, it's hard. It's probably not a bad proxy for what it's about, that what you see here today, every brick, every piece of IP you're gonna see, every piece of equipment you're gonna see, every example of the future that Harald will take you through, has all been developed by local engineers, locally funded. And there's that sort of thread typically runs through on it. You're sitting in a, in a homegrown facility, where everything that we sell just about is goes offshore.
We do have a good local market here as well, but much of it goes offshore, and we compete with the very best out there and often beat them. But you are in that working facility, and a little bit later on, we'll go across to BlueNova, and we'll see the storage facility over there, and have an opportunity to see what that looks like. Just very quickly, that's the schedule. Like I say, roughly two hours a slot, there'll be a time for a bathroom break and a walk around and a leg stretch sort of every hour and 45 minutes or so. We'll put a Wi-Fi pin up in just a moment.
When I break here just to let the late starters in, we'll pop up a Wi-Fi connection, and you'll be able to connect from that. Just quickly to just remind everybody what and where Reunert finds itself just at the moment. At the end of last financial year, we had ZAR 11.1 billion worth of revenue. An important metric that we increasingly talk about is what we call segment operating profit. Now, that's the operating profit that emerges directly from the businesses. The BUs that you're gonna talk to today, that segment operating profit is a profit that's generated by them before any accounting adjustments or any once-offs or fair measurement and any other elements that come through it from an accounting point of view.
It's our view that that is a very strong and probably the best metric around looking at what the cash-generating capability of Reunert is all about. At the end of last year, that was ZAR 1.1 billion, and the dividend we paid, ZAR 2.99. When I was reflecting on that and putting the slide together earlier and going through it last night, I thought that was quite a good discount on ZAR 3. Quite how we ended up on ZAR 2.99, I'm not entirely sure, but be as it may, ZAR 2.99 was the dividend that we paid last, last year. The two-year CAGR I've just given comes out of COVID. That starts from COVID. We took a bit of a kick through COVID.
It was a tough period for us. If you just look at the two full years that we had, from the end of COVID, bearing in mind that that year only started six months past the first lockdown in COVID. You know, that was October 1st, 2020. One is on that measurement period. Good recovery in terms of revenue, segment operating profit and dividend growth through those two years, rolling forward to this half year. And we've had a good performance again in the half year, where we sit now at the half year of ZAR 6.2 billion, ZAR 625 million worth of segment operating profit at the half year, and the dividend up by 11% at the half year.
The prospects that we had given, we positioned Reunert, and the prospects we gave were that we would deliver a improved year performance over the 2022 year. That would give us three very solid years after the COVID knock that we took in 2020. I'd like to then just share with you how we are positioning the Reunert investment case in the minds of potential shareholders and investors. In fact, just before I do that, How do I go back on this? Is it the red one? Thank you. Two quick comments on the numbers in the half year that I wanted to share. First of all, the bulk of that performance came out of what I would call the core of Reunert, and that talks to us about the quality of those assets.
So what we find ourselves in Reunert today is not with a set of assets that are collapsing in these growth initiatives that we're gonna talk about, but the actual core assets shape are in really good shape. So those, that core and much of the growth came out of the Electrical Engineering business. The cables, the circuit breakers, came out of the ICT and came out of our Defense businesses that we have. That, in our view, talks about two elements of quality. Firstly, on those South African businesses, they face the same macro environment, largely that much of what the rest of the South African Inc. faces.
We took some pain, but I think in our view, what it shows is about the quality of management and the way in which we were able to reset those assets to deliver good and strong earnings, despite a weak macro South African environment. I think that talks about the quality of the management and our ability to scale those assets almost independent of what the market situation looks like. Those are good results in a very tight market. Then secondly, in my view, it talks about the quality of the assets that go out into the international market and are able to compete there.
If we look at the IP, we look at the products, we look at our customer relationships, none of those disappeared through the COVID period, where effectively we weren't able to travel for the guts of 18 months, and that, those export order books were run down almost to zero. We were able to retain the quality of what we've got, and you'll see a little bit later how that's built back up. I think it talks about the quality of the IP, the products, and the relationships we have in the international market, that we can retain those also despite difficult periods to that. I think that, both in the core specifically, talks about the strength of that and how we believe that will continue into the, into the future.
There's five key elements that if we were to put a hook on for the Reunert investment case, I'm gonna take you quickly through those. The first of those is we believe we've got a diversified group of quality assets. They are centered in the three segments that we have, which is the electrical engineering, the ICT and applied electronics, which includes our renewable energy business. Historically, those businesses have delivered good, solid results over a long period of time. Typically, we have good market positions within the markets that we, that we participate in. Quite importantly, on those traditional assets, the amount of capital that needs to be allocated into those assets is relatively muted.
You can look around about the depreciation rate, and a little bit more is what we need to invest into those assets to keep them at the quality and delivering the quality of earnings that you see in this year. Secondly, on the back of that strong core, we have got three key growth initiatives within Reunert that we are driving at the moment. The first of those is the investment into our ICT segment, where we are looking through acquisition to build out a new-age set of assets that are more focused to higher growth rates and better margins, and that we've put into what we call our solutions and systems integration cluster. Through acquisition is the key growth driver in our ICT segment for that. Second, is our investment into renewable energy.
Third, is into the growth of our international revenues, specifically in our defense businesses and in our electrical engineering businesses. What you will see is increasingly, not increasingly, the capital that we're allocating is going into one of those three areas as we drive, typically, those growth initiatives across, across the group. Thirdly, our cash generation remains strong and intact. We have a little bit of cash trapped up just at the moment in working capital, but that will unwind. Typically, and if you look back over, our ability to convert EBITDA to fresh free cash flow, sits around 65% to 70% on an annual basis. That allows us not only to invest into our strategic growth, into our existing assets and maintain those, but also to be a strong and reliable dividend payer.
At the end of last year, we had a dividend yield of about 6.5%. The share price has moved a little bit better, so at the half year now, still in excess of a 5% dividend yield. Importantly, that dividend remains firmly entrenched in the minds of the board and executive management in terms of the integrity of that dividend and how importance of part it plays in the overall Reunert investment case that we have. Thirdly, sorry, fourthly, on the back really of those three reasons I've just given, we believe that where Reunert is sitting at the moment, there is still strong shareholder value creation that can come out of Reunert, even priced where it is at the moment.
All three of our core businesses, Electrical Engineering, ICT, and Defense, have got market trends behind them that we think are sustainable, medium-term, and positive, irrespective of what we see in the macro environment within South Africa today, which we believe gives that core growth that is sustainable in the future. On top of that, these growth initiatives, the full impact of those still have to come. We think that combination of strong core with good growth, market fundamentals behind it, coupled with the full impact of growth still to come, positions Reunert well to deliver shareholder value creation over the longer term. And the final part of our investment case is really our ESG credentials. Now, we've run factories for many, many years, so we have deeply ingrained ESG in all of our operations.
We run detailed quality systems, detailed health and safety systems, and the like. What we are specifically in, that's why Reunert, we've elevated sustainability to an executive director responsibility. We perhaps haven't communicated that as well in the investor market as we should have done in the past, or is perhaps certainly is needed now as we look forward. We are in the process of escalating that. We think there is a green benefit to come out of it or an ESG benefit to come out of it. It isn't that we have to redo what we do in Reunert. We need to package it correctly. We need to make sure we pick the right criteria against which to measure ourselves, and we need to set some good objectives around which we're gonna pursue.
On the back of those five credentials, we think we've got a fairly compelling investment case for shareholders. That's my lot, other than just to highlight, this is the group structure. Those are the three segments that we have. In electrical engineering, power cables, and circuit breakers, we won't be talking to those today. In our ICT business communications, total workspace provider, which has got the Nashua brand in it. Excuse me, rental-based finance, and then solutions and systems integration. There, we'll be dropping into the solutions and systems integration for the deep dive within that ICT segment, which will be the first part of the session today. Then in applied electronics, we have secure comms, which is basically radios, and encryption.
Not talking to that today, but we will be talking to fuses, radars, Etion Create, and renewable energy as part of the Applied Electronics segment. Ladies and gentlemen, thank you. That's my introduction done. We're going to take five minutes to see if there's any other people we can get in and to get ourselves a Wi-Fi and the like. The ICT guys will then position themselves for the next section, and we'll kick off with Graeme Eddey, who will take us then through the ICT segment from there.
Thank you for taking the time again. As Alan introduced, my name is Graeme Eddey, and I'm the Chief Executive for Reunert ICT segment. We'll be taking you through primarily our solution systems integration cluster, and in particular, the strategic rationale for IQbusiness, or our strategic rationale behind the IQbusiness, how it will fit into Reunert ICT, how we see it fitting in, and then the key opportunities that we believe it'll bring to the Group. Yeah, from my side, I know you're all eager about renewable energies, given where the country is at the moment, but I promise you, ICT is just as exciting, and we've got a good story to share with you. I'm then gonna hand over to Adam Craker, on my left over here, and Adam is the Chief Executive of IQbusiness.
Adam will give you a good detailed overview and insight into IQbusiness. Then we're gonna hand over to Rob, the Chief Executive of +OneX. I'm sure many of you know Rob, and Rob's gonna give us a good update on what we've been doing at +OneX over the last year or so. Also very exciting. So yeah, let's get into it. IQbusiness. Why? What was the strategic rationale behind it? First and foremost, it supports the Reunert ICT growth strategy, and it enhances our vision of solving our clients' needs with innovative, high-tech solutions. Importantly, though, it's the leading South African independent management and technology consulting firm that has 25 years, roughly, of trading.
It's got a strong, well-known brand in the South African market, and more importantly, IQbusiness has a team of over 1,000 people, and they are guided and led by a very experienced management team who've got a proven track record of delivering growth and profitability. I think from the outset, though, it was important for us, and you'll see on the wall there, we've got our group values, to really find the alignment between the culture and the values of the two organizations, and is there a good fit? I'm pleased to say, most definitely, and I'm sure Alan, Adam will talk to that in his presentation as well. We'll see that through...
It's manifested itself through the partners and the management of IQ Business, continuing to hold 25% of the shareholding in IQ Business going forward. I think that's very encouraging for us. I'm sure as many of you know, probably about IQ Business to some degree, they've got quite strong capability in technology and management consulting, especially in the financial services industry, but other industries as well. That opportunity, so the consulting-led offerings, opens up additional access to clients that allows for the sale of additional solutions and services. They're very well-positioned to enable their clients' initiatives around the digital transformation space, and many organizations have had to accelerate that post the COVID-19 pandemic. Likewise, the acquisition of IQb usiness Solutions some time back, I think about four years ago, Adam?
Three years ago, added significant annuity revenue and also diversified their offerings, and it added to their project-based revenue and created a further platform for additional growth. Their blue-chip client base, they've got a very strong blue-chip client base, and again, Adam will take you through that. They are very well-entrenched in the financial services sector, and they have a very strong position in the financial services sector. Overall for us, we see that together with +OneX, IQbusiness will add complementarity and synergy, and I'll talk to that, and it'll position Reunert ICT and increase our presence, quite notably in the South African ICT market. All right, so how do we see it actually fitting in? We see it sitting alongside +OneX in our solutions and systems integration cluster.
What it really allows us to do is cover all four of the dimensions of solutions and systems integration. As many of you know, over the last about three years, we've been building our +OneX through acquisitions and through organic growth, and as I said, Rob will take you through that, to really have strong capability in managed services, in the digital transformation services, and in digital consulting. What IQbusiness will then bring to this as well is additional managed services capability, very, very strong capability in technology and management consulting, as well as then digital consulting. Again, it positions us and enhances our client value proposition and our go-to-market. We see two key opportunities that this will then bring to Reunert's ICT segment. The first of these being around enhanced complementarity. This really is about-
...it's centered on enabling our clients and enabling them to win in this digital economy and around their digital transformation strategies. What does it give us? I've already mentioned that expanded offering, the coverage around the four dimensions, that there's a lot of complementary skills sitting inside IQ and +OneX that we can cross-leverage. Additionally, on top of that, there's deeper skill sets. Within both organizations, we can cross-leverage the additional skill sets and the deeper skill sets in some of those key areas that I've mentioned over there. That, we see, will position us better and enhance our ability to go and offer our clients a total end-to-end value proposition.
The second key opportunity that we see with IQbusiness and the acquisition of IQbusiness, again, sitting alongside +OneX in the solution systems integration cluster, is around synergy, and that's really how we go to the market and the customer base that we are servicing. There's a lot of opportunity to cross-leverage the customer base within both organizations. There's the opportunity to expand into both the enterprise and the small medium enterprise space, and it also positions us well from an economy of scale perspective. It really allows us to leverage the service offerings and increase our presence quite notably within the South African market, and also expands into international markets. Yeah, I've got the brief part today because overall, that is our strategic rationale. That is how we saw the opportunity of IQbusiness becoming part of Reunert ICT.
To wrap up, we see really that it'll allow us additional capability, enhanced complementarity and synergies and significant scale, and position our ICT segment, but overall, our solutions and systems integration cluster as a strong end-to-end system integrator in the South African market space. Sweet and short, I've left lots of time for Adam and for Rob, who will give you a lot more overview, a lot more in-depth, and I'm more than happy to take some questions right now, if you'd like to go through those, and before I hand over to Adam to take you through an in-depth overview of IQbusiness.
Can I ask a question?
Yeah, sure.
Just on a comment there, that you look at offshore markets, maybe you can give us the state your vision. I mean, obviously, you are in the last cycle.
Sure.
What timeline do you have?
I'm gonna let Adam talk to it through his presentation as well, just quickly, IQbusiness has international opportunities at the moment. They actively in certain areas. In their research and insight analytics, they're providing certain services into clients. In the financial services, they've been providing consulting-led and technology-led services into some of the financial banks up in Africa. We see through that platform and through those opportunities and through those entrenched relationships, the opportunity to grow further. I think, Adam, you'll talk to it in your presentation as well.
It's more potential to a business like that.
Yeah.
Official businesses in Nashua Business Communication, because a workspace provider, those are local.
Local base.
Yeah. It's only in the SNSI cluster.
Okay. Any further questions? Yes.
Yeah, just maybe on this question around ICT, the whole previous year of guidance as well. This is still a new kind of business, but how should we think about that on the course of the integration services?
Well, that didn't take long. No, no worries. Am I on? Just on the guidance that we have historically given are based on the assets before IQ Business has come on board. The guidance that we've traditionally given, and typically the performance that we have is that the ICT segment, we view those earnings to be a CPI plus GDP plus a little bit type growth. They're not, it's not 25% type numbers. If you take CPI around about six, you take GDP, say one, seven, plus a little bit eight. Sort of an 8% per annum is the traditional assets that we have in there, which excludes the IQ Business leg to it.
The IQbusiness obviously brings a binary step change. we'll disclose the quantum of IQbusiness in the year-end ad. There'll be a full disclosure on that as we are required to do, and you'll be able to see what the quantum of that binary would be. Our view would be that combination, and with the accelerated growth that we now see in the SNSI cluster, we would be aspired to be slightly better than that, call it that 8% that we had spoken about. I don't think it doubles the growth rate. We're not in that type of space, but it gives us a binary step on the back of that acquisition coming in, and then accelerates the growth of that SNSI cluster.
Good. Thank you. Any other questions? No. Okay, I think we're running a little bit ahead of time, Adam, you've got lots of time there to answer all the questions. Thank you, and over to you, Adam. Welcome. Officially not part of the family until about a week or so's time, but we welcome Adam already, thank you.
Thanks, Graeme. Are you the Steady Eddie that we were referring to there? That might be most appropriate. It's really wonderful to be here as Alan and Graeme have said, we're just about a week away from concluding the transaction, which, believe it or not, has been initiated in March of 2021. Just over a two year, two year process. I'd like to say up front that in that, in that process, we, I think certainly Alan and I had a view that this was a transaction, this was a relationship that we could see the potential of, and that we wanted to really accelerate and move forward with as quickly as possible.
When you're part of a private equity-backed structure, the private equity investors had to run a very extensive process of engaging with potential suitors to take up their equity stake. That actually took one year, just over one year, to conclude that process. The outcome at the end of that was that, of course, we're now lined up for the transaction that we absolutely wanted to do from from the outset, even having met about 12 other potential suitors. I hope this morning, that'll become a little bit clearer for you why we felt so positive about the chemistry, the opportunity, and the relationship between two South African enterprises to come together to really forge a future.
This morning, I have the pleasure of taking you through a little bit more of a detailed introduction to IQbusiness. An understanding of what we see then as the market and the market opportunity that we're operating in locally and internationally. What our approach is to value, and how we go about really engaging with our clients in the local and international marketplace, and how we've built a very successful business over the past 25 years. And then really just to round up on what do we see moving forward together.
As Graeme has said, the relationship with +OneX and the other businesses that form the ICT segment, and then also more broadly, the Reunert Group and the opportunity that's there. Just by way of introduction, I'm going to play our corporate overview, our corporate advert, and just give you a sense and a feeling of the organization.
Where do you go to start? To pursue growth, to move forward with confidence, to play a greater part in Africa? Where do you go with the power of agility, the fitness of purpose, with compliance in your corner and the delight of your audience? Go to transform your digital game, to become better and better, to be faster, more accurate, and impactful, to go for the win, whatever that means for you. Go to the people who can make it happen. IQb usiness, where's your go-to?
When we engage with our clients, there tends to be a business problem, an issue, or an opportunity that our clients are seeking to pursue, and we like to position ourselves in the conversation as their go-to. We want to be the very first organization that they turn to. What really underpins that is our purpose as an enterprise, which you can see presented before you. Essentially to grow people, grow business, and grow Africa. Our purpose was inspired in 2015, when we really started to recognize, as an organization, that we should be, as a nation, feeling very, very uncomfortable about the growth trajectory of our economy. Excuse me.
In 2015, we started an initiative called growth.co.za, that initiative was an annual focus that we brought to really dealing with the opportunities that we think our clients face, and we have in South Africa, to really pursue a greater growth trajectory than being a zero-growth economy that we are today. That emphasis in our purpose, really underpins and undercuts everything that we do. It's part of our value system, it's part of our method of engagement, it's part of our philosophy as an organization to really look towards how do we stimulate growth locally and internationally. We're very proud of the fact that we turned 25 on the July 9th.
Shortly after, hopefully, when Nick makes the transfer to our existing shareholders, we will then become part of Reunert in our 25th year going forward. What's very exciting, I think, in building a local enterprise here over that length of time, is that we really have established, we believe, a presence in the business services sector in South Africa and building that internationally. The statistics that you can see before you are really, I think, testament to what has been achieved in that time. What hopefully stands out, though, is how we bring our purpose and our organization into life. You'll see that there are two brand names or ecosystems that are represented there.
The COBRA ecosystem stands for the Covid Business Rescue Assistance initiative, which was launched, two days after the announcement by President Ramaphosa, that we were entering the first stage of lockdown. If you remember back to that announcement and the fact that we were all in shock, that, we were entering a 21-day period of national lockdown, imagine if he'd have stood there and said: "Well, actually, it's going to be over 700 days of lockdown." We recognized very quickly that, we needed to do something about the threat that was represented by lockdown, in particular to small, medium, and micro enterprises. We launched COBRA together with 120 partner organizations that came together, supported technologically by Microsoft-
...and expanded by a range of financial organizations, legal services, business services, technology services, organizations. The ecosystem provided support to over 600 enterprises during the period of lockdown. The second brand that you can see there is SAtion, and SAtion is a Business Unity South Africa initiative. We were asked by Cas Coovadia in response to what we had done with COBRA to put together a growth initiative that really leverages the Fourth Industrial Revolution. SAtion is really a fantastic example of, once again, how we can bring together a group of partner organizations into a single ecosystem and really drive engagement around a particular issue, opportunity, or challenge. The 4IR is really in the epicenter of what we've done with SAtion.
With those two initiatives as examples, just the last two things on this slide that are worth just pointing out. In 2018, we were very proud of the fact that we were recognized as the winners of the Conscious Companies Awards in South Africa, which really brought to the fore that whilst we are obviously a business that works for profit, we apply our profit in areas of purpose that really are going to drive an impact. Secondly, you may be aware of the Global B Corporation movement. When Alan talks about Reunert's ESG focus, we started in 2017, a focus using the B Corporation community. B Corporation now is around 7,000 enterprises in about 150 countries.
And we're very proud of the fact that IQbusiness is the largest B Corporation on the African continent, where we really bring into focus how we impact society, the economy, and the environment. And we go through a regular certification process, which involves about 200 different criteria that evaluate our performance using the B Corporation criteria. In terms of how we gear for growth, how we really drive forward, as I mentioned, our purpose is really what underpins our decisions, our direction, our strategy, the opportunities that we pursue.
I will talk a little bit more about our vision, where we see the opportunity to really impact our clients and bring value to our clients through bringing together the various elements of our business into creating what we think the African continent needs, which is a homegrown business services capability. I'll touch a little bit more on what we see with some of our international competitors. Bringing that mission then into play to help shape our clients' growth, help our clients find new growth and opportunity. In terms of our development over time, just to share with you the period that I'm most familiar with.
I joined IQbusiness in 2009, and was appointed as CEO the following year in 2010. In 2011, I led the management buy-in that brought together three partners that invested in the equity, underlying equity of IQbusiness. Today, we have 22 partners, and these are owner-operators in our business that have each invested, put skin in the game, and participated in driving the growth trajectory of IQbusiness. That management buy-in led to a period of significant organic growth, and that organic growth in 2016 attracted the interests of our current private equity investors, Capitalworks and Tiso Investment Holdings. They came on board for a fixed seven year investment term.
Their focus was really initially to capitalize on our organic growth trajectory, but then also their influence was really to help us launch our acquisitive growth trajectory. That led in 2019 to the first acquisition in the consumer insights space with the acquisition of Genex, which was followed shortly thereafter with our second acquisition in consumer insights with the acquisition of Nudge. Those two have now been fully merged together, we refer to the new entity as IQb usiness Insights. That's a team of about 120, which makes us now the largest South African consumer research organization, which it really is a differentiator that we believe is really forging a new direction and a new value proposition for our clients.
As Graeme mentioned, we follow that with our ITQ and iSolve acquisition, which brings a new dimension to our business in terms of longer-term, annuity-based projects that tend to run over a 3 to 5 year period. Lastly, the acquisition of Kryptonite in the digital space, which essentially brought many new methodologies and approaches that really are forging a new way of engaging with our clients. Extensively, Kryptonite was developed during the period of lockdown, where strategic planning, digital engagement really underpinned the Kryptonite methodology for bringing together groups of leaders in organizations to develop digital transformation agendas. Lastly, at this point then, in 2023, we are hugely excited about the next chapter ahead.
If we look back over the 25 years, in fact, IQb usiness has pretty much been in private equity structures for the entire 25-year period. So I say to my partners, I think we really do deserve the long service award to private equity, and it's time to move into an institutional investor and a structure as part of a listed enterprise, which is really what we're so excited about with this new chapter with Reunert. In terms of the markets, the market opportunity, and I guess, if I can just pause for a moment and give you a little bit of a personal background.
I'm sure by now you've picked up that my accent is not entirely local, and I position myself as leading the largest or the leading management and technology consulting firm in South Africa. I came to South Africa for the first time in 1996, and then decided in 1997 that I would come down for a couple of years. By now, I've completely overstayed my welcome, and this has really become, over the last 26 years, home for me and my family. I'm doing something very unusual at this point, and that is that I'm currently a permanent resident, but I'm applying for South African citizenship.
You might say, "Well, that's a good idea, because the queue must be very very short at this point." I can tell you, there's a lot of Zimbabweans that are in that queue, and they deserve, before I do, to get their citizenship. It's very important, I think, to reflect that firstly, when I came in 1996, I came because I believed that there is and still is a significant market opportunity here in South Africa, on the continent, and more broadly. I've really decided that that needs to be reinforced at this point, although I can share with you perhaps over a coffee, that it's not very easy to do.
Despite having a chairwoman at this point who is an ANC stalwart and very connected, when I spoke to her yesterday, she said that she is very much in contact with Aaron, this will be done. I'm still 18 months into a process that. By the way, it took seven years to get my permanent residency in South Africa, I'm not holding out for a short process. Let's talk about the market and the market opportunity, I think in our, in our sector, very much that opportunity is driven on a global basis, and it's driven, of course, by some very large brand names, the Gamma brand names, which I'm sure you're familiar with, the Googles, the Amazon, Microsoft, Meta, and Apples.
If you saw earlier on in the week on the back page of Business Day, there's an excellent article there about Microsoft. It's an article from Bloomberg that are basically saying that it's quite a shock and a surprise to see Microsoft as potentially positioned as the leading AI beneficiary in the, in the global marketplace at this point, and that this feels like 1995 all over again, when Windows 95 was launched and released. They really are driving a major wave, a major wave of change. And we see that coming through in terms of local and international opportunities.
We, at this point, are perhaps not proud of the fact that despite being the largest South African management technology consulting firm, we have a single-digit market share. Therein lies the market opportunity. Why are we so dependent in our home market on international firms? Why is that? Why have client organizations decided to provide their support to firms that perhaps have damaged their reputations in recent times? Why have we not grown a solid business services sector for our own use, and for that matter, for the international marketplace? We really see a significant opportunity to grow in that, in that regard. Secondly, if we think about the trends that we're seeing-
...in areas like software development, the IT service market, the data sector, the AI sector, there really are significant growth opportunities, and we are very well positioned for that. As Graeme was saying, the opportunity to really leverage and connect and look for synergies between ourselves and +OneX is what really is very, very exciting for us. I think between +OneX and IQbusiness, certainly we've been very impressed by the trajectory that Rob and the team have led from a consolidation perspective, looking for businesses that really would benefit from having a bigger brother or bigger sister to engage with and be part of a growth trajectory. We obviously have seen the same, the same opportunity.
If we're critical of our home market, it is a very fragmented marketplace with typically in the business services sector, organizations that are 5-10 years old, are teams of up to 30, 40, 50 people. Some make it to 100 or 150. Getting through that ceiling is a real challenge for business services organizations. You have to invest significantly to get through the 150 threshold. Rob and the +OneX team have done that with the support of the Reunert team. We did that many years ago, and we see a real opportunity to continue that growth, that growth trajectory in the market.
In terms of our business, strategy, we refer in IQbusiness to what we call the three horizons. The three horizons, internally, we talk about the three economies, the gig economy, the solutions economy, and the digital economy. We've organized ourselves around these structures because we see a fundamental shift that's happening in the marketplace. If you're, if you're familiar with the strategic planning methodology using the three horizons framework, what we've seen is that typically in the gig economy, we are responding to requests for skills, and we very much operate in a scarce skills marketplace, locally and globally.
We really target areas, of course, where we can be ahead of our clients, by having the scarce skills that they need, to really embrace the opportunities that they see. In the solutions economy, using our insights team and our consulting team, that's where we go beyond just providing skills into shaping our clients' agendas. In the digital economy, which is a very new frontier, it's really about defining new digital enterprises. What we see there are significant growth opportunities. In the gig, we move from selling those skills to solutions by solving overarching problems.
In the digital economy, what we evolve and develop with our clients, our clients are saying, "Well, we want you to partner." That really presents a whole new way of leveraging our competence and capability. We started with a largely specialized workforce. We've then, in solutions, got a group of specialists and generalists, and now in the digital space, we're onboarding industry experts and digital experts that really have got great insight and great perspective. The underlying commercial or the business model shifts from an hourly rates business model to new commercial constructs and solutions, where very often we're getting opportunity to put at risk our fees in return for higher reward against those fees. But then in the digital space, what's really interesting is the co-investment opportunity.
Once again, I think that's where, in our conversations together, that's where we see a lot of opportunity to really from a IQbusiness, +OneX, and Reunert ICT perspective, is to say, well, if we back ourselves, our ideas, and the clients that we're engaging with, then why not co-invest and see the opportunity to really drive new value arrangements with those clients? Lastly, we move from the expertise and scarce skills space, which is still, as you'll see in a moment, a high-growth sector, into the insights and solutions space, into digital transformation. In terms of that changing landscape, we refer to what we call our world in 2025. Since 2010, we've had a five year planning horizon that changes each five year cycle.
When we reach the end of that cycle, we then set a new theme, a new direction, a new set of business goals. I'm sure you'd agree with me that at the moment, five days can be a long time, five months can be very difficult to predict. Five years is really challenging, but we've stuck to this methodology, and it's really helped us to define direction and achieve the growth trajectory that we spoke about earlier on. From a gig perspective, over the last five years, we've been achieving in what some would say is actually quite a saturated marketplace, a decent compound annual growth rate in that segment.
Probably the biggest challenge, if I'm absolutely honest with you, of course, from a South African perspective, is that we're seeing people emigrate and semigrate like they've never done before. That movement in terms of the workforce is a real challenge, and I'll talk to you in a moment about how we're responding to that. Secondly, as I mentioned before, the stagnation in our local economy, and then the fact that so many of the very strongly branded competitors in our market sector have really damaged their brands in the local marketplace. Our clients are saying to us, "We want a strong local alternative. We want an organization that can engage with us without being compromised by state capture.
We want an organization that is not looking for quarterly dollar-based profits in the home marketplace, because, of course, as our rand weakens, our market becomes less and less attractive to those international firms who are trying to consolidate quarterly dollar-based profits. We really see that landscape shifting and changing, and we've created a business model that we think really has adapted to that. Perhaps this will help you understand a little bit more about the mix of the commercial models in our business. I've mentioned the research and insights focus that we've brought into play over the last four years.
Those insights are being delivered to clients like MultiChoice, FNB, Nando's, Diageo, where we do local and international research, and in particular, we've developed a very strong reputation now with multinationals for our knowledge and experience of our home market and the African marketplace, and the methods that we're using to gather information relating to consumer trends. That's getting close to about 10% of our business. The next two, in terms of our consulting capability, really split between management consulting and technology consulting. Pretty much everything that we do has got a technology element to it, even in the pure management consulting space, even in the risk and governance space that we engage with our, with our clients.
That really at the core of our business, and then with the addition of ITQ, the managed services capability that we've really brought into play there. Whereas on the research side, we tend to be signing 2-3 year contracts with our clients, and on the managed services side, 3-5 year contracts. In that mid space, these tend to be more project-based contracts that are shorter term, over a one year or 18-month cycle. We've aligned our business model across those, and I'll just reflect for a moment, perhaps, on the core at the moment, between the gig economy and the shift that we're seeing over to the solutions economy.
The digital economy has just completed its first year. We've broken even in the first year. We've never done that before in any new area or investment. It's typically a three year investment cycle, but we've really landed with the team very, very solidly. The underpin in our business model is that each of these descriptors that you see here represent P&Ls or lines of business within our organization, each headed up by a partner or an associate partner that has an equity stake in the business, that is an owner-manager of these areas of focus. That's repeated in the solutions space, and then once again, in the digital space. A very tight bond between each of the elements of our business.
The makeup from a client-facing perspective, and an industry perspective, again, as Graeme was saying, historically, we've come from a very strong banking background. When I first came to this building, as part of our discussions, I was very familiar with driving to the top of the hill and turning left, to go to Capitec. I'd often wondered what this interesting-looking building with all these things on the roofs that were spinning around and stuff that was going here. Banking really is at the core of our focus. More recently, we've seen significant growth in the insurance sector, locally and internationally.
And then because of the convergence that we're seeing, between financial services, retail, telco, again, we're seeing an extension of our role and activities in that space. If I'm really honest with you, we weren't expecting to see the growth in the manufacturing space. Our clients started asking us to come and engage with them, and over really a three-year period, we've seen a very significant step forward in really bringing into play our manufacturing capabilities there. In terms of our approach to value, here's probably one of the slides that I'm certainly most proud about when we look at the brands and the organizations with whom we provide support and service.
It's very rare to see a brand name in our organization, once it appears, for that to not continue with us. Unlike our international counterparts, that actually, you know, really do. Once you invite them in, they stay forever. We continue to focus on the value that we deliver and the next role that we can play in really driving that forward. The brands that you can see there, that really make up our client engagement focus. When we engage with our clients, we take a content-led approach. We really deploy our visible experts and the teams into play.
We rely on, of course, our case studies, our advocates, in our clients, our referenceability, and then the role that we play in really leveraging our own perspective around digital media content and engagement, and thought leadership. What our clients are asking for, really, we've clustered into five, into five, themes. Purpose, as I mentioned at the beginning, is very important for us. Something happened during COVID globally that really shifted the dial in terms of organizations and their employees looking for more than just profit and looking to pursue purpose, and we're often asked to exemplify, exemplify that. In fact, we've only got to think for a moment in the past week, here we are in Stellenbosch.
Thank goodness we're on top of the hill, because I think at the bottom of the hill, there was a lot of damage that was done, if it's not clear to us now, that SDG, ESG, rather, needs to be very focused on the environment, and the organizations need to be purposeful in that regard, then I think it's too, it's too late. Client centricity and the focus on, again, in a zero-growth economy, there aren't new clients or customers coming into the economy. If you want to grow, you need to go and steal somebody else's customer, or you need to go and offer them an extended value proposition that takes greater share of wallet. Being agile is not about running around quickly or in a frenzy.
We've built the continent's largest agile consulting team. We've got a team now of about 70 agilists, as they call themselves, and we've trained in the last eight years, about 12,000 clients have gone through our agile training programs. Governance, risk and compliance, despite the fact that it's really tough out there competitively, of course, government is imposing new regulations, new requirements, new steps, and we are often asked to assist our clients to, in some instances, keep their directors out of jail, they say. Let's make sure that we put the compliance steps into place, but it's really important that that is undertaken.
Lastly, and probably the fastest growing and the most exciting, and the least steady, I would say at this point, is in the digital transformation space. The last couple of slides, firstly, just to round up that we do, of course, have a very simple business model. It's a demand and supply business model. We look for demand with our clients. We have to be able to provide a supply of talent and capability to really be able to engage with our clients. From a supply perspective, we really focus on our employee value proposition and making sure that we get an unfair share of great talent in the local marketplace.
I won't go through each of the various dimensions here, but these really do represent the focus that is constantly evolving. One thing, perhaps just to reference, is that IQbusiness was the first company in South Africa to register in the four day week pilot, which is currently underway, that we embrace the opportunity. Our clients were asking us, "You know, is this coming? Should we prepare? How do we adapt?" We said, "Well, the best way to find out is to put 100 of our team members into the pilot," which is being monitored by Stellenbosch University, Stellenbosch Business School, and is currently about four months into execution.
We're getting some very, very interesting results and output from that mirror what has taken place in the U.K., the U.S., Australia, and New Zealand so far. We really do embrace change and opportunity to be at the leading edge of that. And then lastly, where are we going? Where are we going together? Well, we certainly recognize the opportunity that presents itself of being part of Reunert ICT, Reunert Group, partnering with +OneX and Rob and the team are there. We're really excited about moving forward in developing the business services sector in South Africa, for South Africa, for the African continent, and more broadly than that. Thank you very much. Any questions?
Any questions for Adam? There might be some more. Yes, sure. Okay.
Can you give us some practical examples of the kind of context, kind of jobs? The clients and banks have been talking for probably two years. It's hard for us to get our minds on what we actually do.
What we actually do. That's, that's a great question, and I'm often asked that question by my family, in fact. They say to me, "You know, what exactly do you do on a daily basis?" Give you a couple of examples. I'll start with the banking sector. We're very actively involved in the digital transformation, digital products, the rollout of new customer-centric systems. At Nedbank, for example, we've been very involved over recent years in their latest customer propositions. We have user experience teams that work in the design and development of those systems for our clients, and then the rollout of those systems.
In the insurance space, we're currently working with one of the leading insurers in the development of their new banking application and the rollout of that. We have a team that are running the agile iterative process, which goes through a whole series of very short cycles of developing concepts, and then piloting those concepts and using those to then develop the underlying banking application that's there. In the manufacturing aspect, we're working very actively with Bridgestone, the world's largest tyre manufacturer, on a combination of activities in the governance, risk, and finance space, helping them to really build out their controls, their procedures, their financial management, and so financial compliance activities, as well as their supply chain activities.
Really looking at optimizing the supply chain activities, how they source product into the Bridgestone manufacturing environment, but then also how they then distribute that on a national basis. Our data and systems teams have basically put together the modeling structure and approach for controlling the supply of products that leaves the factory. Does that answer your question, three examples?
Yep. Just a comment. Standard Information for as long as you do, without mentioning AI.
I did it deliberately because everybody mentions AI now, and it, then, you know, it's. It's very, very important. It, it really is. I mean, I mentioned Microsoft, who have, I think certainly, been very highly regarded. They've invested about $13 billion to date in the OpenAI AI space. I mean, would it help if I explained to you what we're doing in the AI space, or?
Can you push forward to us, is like, are there threats to the business or it's going to create an opportunity for you?
Yeah.
Just to know where you see it.
I like, I like Graeme Codrington's perspective on this, which is that it's not AI that's the threat that's gonna put you out of business, it's the people that understand how to use AI that are the threat. And so our approach is very much about ensuring that we're on the leading edge, that we're that we're learning, we're applying AI. The good thing about AI is that all of us can on your phones, on your laptops, can get access to it and start learning right now. Despite the fact that some of the major internationals are putting billions of dollars into advancing AI, it's really the application of that that we think is presenting many opportunities.
Our software development team, for example, is working on the use of copilots, what are called GTM hub copilots. That it's a bit like having your phone with Waze on in your car, that directs you where you want to go to. The copilots are actually looking over the shoulder of our software developers and prompting them on the next line of code or a better way of doing things. You may have seen that Microsoft, they're gonna be launching their own copilots for Outlook, for Word, for PowerPoint, and Excel, which is very exciting. The second area is in our insights space, in terms of the consumer research and insight space, where we have an AI team that are really driving the data and insights analysis using AI.
And then thirdly, I'll give you a very personal example. I had a PA for 20 years, and 18 months ago, my PA resigned and left me, and I decided that I wouldn't replace her, and I've replaced her with an AI software-enabled PA. It really has changed the way I work and the leverage of tasks and activities, and we apply those principles into a number of areas that we're seeing opportunity to automate repetitive tasks or activities.
Do you see it as a supporting driver in IQ Business's future or a risk to it?
It's both the greatest threat and the greatest opportunity simultaneously. We very much want it to be on the opportunity side. That's why we've taken the steps we have in leveraging the tech that we see there. We really are very excited. The team are very excited about how those opportunities are opening up. I mean, let's face it's a very confusing space out there. Where there's confusion and change and adversity like that's where, in the last 25 years, we have really excelled in being just several steps ahead of the market, learning, applying, developing, and stepping forward in the role that we play in creating value for our clients.
Can I just ask, in terms of, like the rest of Africa?
Mm-hmm.
Oh, sorry. Thanks. In terms of your strategy with the rest of Africa.
Yes
... is that any different, especially since you've luckily been with the company over the past few years?
Mm-hmm
You understand how the South African strategy worked and played out. And how is that, is there, like, a different strategy for the rest of Africa in terms of your goals?
Yeah. We, we very much, I think, prior to COVID, saw-... opportunity on a project-by-project basis. We've worked in 13, 14 countries across Africa, mainly for organizations, South African organizations that were expanding internationally, where we would follow them into those markets and provide project-based support. We then interestingly enough, during COVID, we started to get calls from Kenya, Nigeria, Ghana, Mauritius, to provide remote support to clients, local clients in those markets, on digital transformation projects, where they were looking to have new channels of engagement with their customers or to enable their teams to work remotely.
We've established now, in excess of 10% of our business is Pan Africa at this point, and seeing very good growth opportunities in each of those markets. We're at a point now where we have local teams that are in Kenya, Ghana, Mauritius, and Nigeria. When I say local teams, they're nationals on the ground, because we very much believe that this isn't about exporting, with the greatest respect, South Africans into those markets. It's about having locals there.
We've seen good momentum building, and certainly we look forward now that we're out of the competition tribunal and commission process, really sharing that information now and seeing how we can jointly leverage and grow and establish proper physical presence in those markets. Then Grant touched on the fact that we've seen other international opportunities from an insights perspective. Insights, we've just signed a very significant three-year deal with Diageo to cover the Diageo market for consumer research for their products. Then Nando's, who we've worked with locally in South Africa, have asked us to provide the same service in Australia. MultiChoice, we provide all of the sub-Saharan African consumer research analytics to MultiChoice.
We're starting to see those propositions really, really building. As part of the emigration and semigration theme, we now have two of our partners. One is based in Perth, the other one is based in London, and they both work remotely back. What we're really looking at at this point is how we start to grow opportunity in those marketplaces locally. You know, it's interesting to note that client organizations in those markets are very familiar with South Africans. There's a lot of South Africans in Perth and Sydney and Melbourne and London and New York.
We've got a lot of our team, ex-alumni, that are in those markets. And so we're using those networks to establish a pipeline of opportunity, and to then open a remote delivery model from South Africa, even considering how we might help some of our team members to relocate into those markets if there is client demand, that's there. It's just part of the fluid model that we see. I hope that answers your question. Okay.
Let's take one more, and then we'll move on to IQ Business, and then we'll save more time at the end of it.
Yeah.
Hi, Adam. Thanks very much for the presentation. I picked up from your presentation some numbers, might be dated, and I'm very cognizant when I talk about numbers. I saw EBITDA margins of 14%, I think 2002-2018, something like that. I think in the last presentation, Alan, you spoke about the ZAR 1 billion being generated from IQbusiness. Can you just maybe, number one, just give us a sense of, is that number still there? Also, I mean, if I look at ICT, margins are around 24%, at least over the last couple of years. How should we think about that going forward? Probably more a question for Alan.
Yeah. I mean, the guidance we've given is the revenues are in excess of ZAR 1 billion, that we have specifically given. I didn't actually catch... Did you mention something about it? Was it a growth for the, for instance, or was it a margin, the first part?
It was margins, about 14%.
Okay. I'm not sure of the margins.
Mm-hmm.
We haven't given any guidance on the margins themselves. The revenues are in excess of ZAR 1 billion, and we think that's sustainable going forward. The guidance we've given around the billion is correct. As I said in the S, at the end of the year, we'll actually give the prior year's numbers, so you'll actually see the exact numbers that are in there, so you'll be able to work the margins out in terms of that. Broadly, however, if you take that, say, 20% operating profit margin that sits in the ICT segment operating profit, the margins that will be generated by IQbusiness will be slightly below that, but they are above, I would argue, the typical ICT margins you would see in many of the other large businesses that are out there.
We're seeing margin growth, as I said, in the... If we go back to the three economies, there's a different margin model that applies to the three economies, as there does, in terms of the different business models, from insights to the managed services structure that we've put together. There's certainly good opportunity to continue to see that growth move forward.
Perfect. Thanks. Rob?
Good morning, everybody, and welcome. Mine is an update, not a deep dive. Thanks very much to Adam. Really, looking forward to working with Adam in the IQbusiness. What Adam didn't tell you a bit about his history and his story. Obviously, when he came to South Africa, it was with Accenture. I first met Adam at Dimension Data, and we worked together for four years. It's nice to have him as a colleague and working with him again. As I mentioned, mine is an update. I'm not gonna go into as much detail as Adam has around +OneX.
It really is an update on the growth of our new age systems and solutions integrator on the back of the +OneX platform. Adam made an interesting comment around, you know, how do you scale businesses and the opportunity to scale businesses. He mentioned that, you know, you get to a certain level, and it's difficult to scale exponentially. What we built from a +OneX perspective is that ability to bring on businesses to deliver services to our clients to scale their businesses further. I'll talk a little bit about that and how we're doing it. Firstly, just a quick video, a reminder about +OneX, what we are about and how it operates, and I'm just looking where those...
The most important thing that you can learn from watching this is that we are obsessed by our clients in solving their problems through our amazing people, using technology to achieve. We founded +OneX with a purpose: to create opportunities to improve people's lives, the lives of our clients, our people, and the society that we live in. +OneX is a new age systems and solutions integrator, solving our clients' problems using technology and people to achieve.
Let's talk solutions. What does that mean? How do we solve our clients' problems? When we founded +OneX, our approach was to build a business based on our clients' requirements, utilizing cloud and digital platforms to scale the business. For example, at a leading bank in South Africa, we are modernizing and transforming their Forex applications into Microsoft's cloud, which creates scalability, resilience, and improved security for their clients. At many of the leading universities in South Africa, +OneX manages the unified collaborations and communication platforms, which has enabled the students to partake in hybrid learning that actually works. At another leading bank, we are working with them to optimize their technology investment to give their clients and staff a better end-user experience. In all these examples, these solutions have been enabled by our amazing people.
This aspect of the business is so important to us that we have a chief people officer leading +OneX.
For us, our people are the oxygen of +OneX. There's no other way to put it. This mantra is literally written in our name. If you look at the word +OneX, the Plus speaks to inclusivity. The One in the middle means there's always room for one more, and the X is the X factor in our people. At +OneX, our culture is defined by the ELEMENTS Way. We have five core elements, the first one being leading without a title. What this means is that you don't need to have an acronym in front of your name to do the right thing. You do the right thing because it is the right thing to do. This empowers our people to be at the forefront of decision-making with our clients. As a result, we are client-obsessed.
The third element is trust, which is the foundation on which we build long-term relationships with our clients and our people. Next is humility. That means there's no room for egos or arrogance. We love what we do, and we're purpose-driven. The last one is discovering, which is all about our people learning and growing in order to ensure that we can continue to deliver unbelievable solutions to our clients.
In line with the +OneX purpose to create opportunities to improve people's lives, we have embarked on a program to accelerate the learning and development and the work experience in the technology field in South Africa. We have built out the +OneX Work Experience platform, where we are partnering with leading enterprises to address the skill shortage in South Africa in the technology field. At +OneX, we are extremely proud of what we've achieved, delivering solutions to our clients using technology platforms and our people to achieve. We would love you to be our +One and join us on the +OneX journey to create opportunities to improve people's lives.
Thank you very much. Really, my session today is just giving you an update of what we've done and where we've got to. I'm gonna address the AI question straight away for you, because just if you look at our last element, which very much our elements align to the Reunert values, is around always discovering. What's happened within our organization, given the nature of the people that have joined it, being entrepreneurial and making things happen, the teams we've got together are ready to work out how do we utilize AI in our various businesses. Within our software dev business, for example, very much like Adam said, you know, with the Copilot and what Microsoft's have working on, you know, the opportunity is there. I'll just give you a real example. An opportunity and a threat to a business that does online training.
We are able to take training that would have cost us a fortune and six months, and within six minutes, put together collateral for our software developers to learn, whether it's Python or Java, off the back of that, using AI models. What is that doing for us? Just using AI has accelerated our ability to upskill and train our software engineers. Other parts of our business are looking in our managed services side of things. Basically, how do we use AI to connect machine to machine? Because actually, managed services is all about monitoring machines, devices, and we're using AI in there. We see it as a great opportunity for us.
I think one of the beauties of being in technology for so long, I've lived through you know, the Y2K and all the implementations of SAP and Oracle and PeopleSoft created opportunities. The dot com, cloud, and now AI. For us as technologists, it really does create opportunities for us to scale our businesses further. I'm very excited about what's happening in that space. It is all about how do you embrace it, how do you utilize it? Having the expertise and the knowledge to use that to solve business problems for our clients. You know, that's always been our mantra, and that's where I see the opportunity from an AI perspective.
So, you know, my update is just the developments. What's happened since we last had our investment update? From a +OneX perspective, as I mentioned, you know, we've built out the platform, we're scaling the platform, but ultimately what are we looking to do is to deliver services to our clients, and that's where the alignment between ourselves and IQbusiness is so good. You know, they in the business consulting side of things, we in the technology side. We've continued to build out our service offerings through what we call. We don't call them acquisitions, we call it companies joining us to scale out. I'm gonna talk a little bit later in a little bit in detail around the service offerings that we've built out.
The second round, second one is around our brand awareness. You know, I felt quite young, you know, when Adam said 25 years that they've been around. As a brand, we've been around for three years. And we've, you know, as Kia said in the video, our brand is all about our people and agility. You know, what we say is we've got the agility of a startup with the scale of the enterprise. The scale of the enterprise is the business and the backing we have with Reunert. And we scaled up to, you know, we've got around 400 consultants in the business, a mixture between permanent and contractors. We've built that out. The brand's out there.
You'll see later on, I'll talk about the clients that we've onboarded, that ability to deliver services. You know, from a key talent perspective, again, attracting people. Again, some very similar to IQ. It's all about making sure that we, that we get the people on board, and it's a big challenge for us. We're seeing our competitors having attrition rates of around 30%. We've kept ours at about 7.5% - 8%. So retaining that talent is critical, because if you want to deliver services to your clients and you've got a, you know, a revolving door, you've got some real challenges. So we've retained our key talent in the organization.
Uh, from a clients perspective, again, um, you know, through, uh, the relationships we have out with our clients, through the fact that we, uh, over, over 50% Black-owned, 30% , uh, Black female-owned, uh, level one, uh, uh, organization, you know, we've been able to onboard with enterprise clients. So, so we've got a great, uh, a great, uh, credentials, uh, with our clients. Um, you know, if I look at, uh, again, IQb usiness, where's the op- where are the opportunity? Their client base, our client base, uh, you know, and we- we're strong in banking, but we're very strong in, uh, other services, manufacturing, uh, mining, um, and u- the universities. The one area that we're not strong in is in, in insurance. Um, so great opportunity to take our services into, uh, the IQb usiness, uh, um, insurance clients.
Then we've seen the growth. Again, I can't talk about the specific numbers, but you'll see some of the leading indicators that show you that we as +OneX are growing the business. You know, when we set up the business three years ago, it was all about that client focus as +OneX, and being able to deliver those end-to-end services to our clients. Because a client just doesn't buy AI, or just doesn't buy cloud, or just doesn't buy digital media. Some do, and there's some where. Sometimes we're in there, but most of the time they're buying a set. They've got a problem, and they need a set of technologies to solve those problems.
Whether that's our unified communications and collaborations business, with some data insights, with some digital consulting. Whether it's us taking our unified communications platforms that we're delivering to clients and moving that onto the cloud side of things. You know, from a cloud perspective, you build out your applications, so your software dev, you need to host that. Do you put it in the hyperscalers? That's whether it's Amazon Web Services, Google, or Microsoft. How do you go about doing that? Do you put it on onto a local cloud and platform?
Here in South Africa, from a +OneX perspective, we have our own cloud platform, so we're able to offer our clients either the opportunities to go into the multiscalars or into the South African cloud platforms. We're seeing actually more and more people either moving it from their own current data centers or from the hyperscalers into our cloud platform. So we've got one of the leading manufacturers of glass, where they've moved their SAP workloads onto our, onto our cloud platforms, and all the rest of their infrastructure is sitting on our cloud platform. The leading airline that flies to about 42 countries. Airlink also moved all their workloads onto our cloud platform.
The reason for not going to hyperscalers for them is a couple of challenges with the hyperscalers. Great, you know economies of scale, cost is great if you've got the people to manage what goes into the hyperscalers. Part of that challenge in South Africa, you know, even if you're a mid-sized organization, you know, having those people to manage those workloads. If you don't manage those workloads, the costs go up, and they invoice in dollars, which is another challenge, and why we're seeing such a demand for our cloud services here in South Africa. You need to be the bank around the corner here. We are moving into AWS to have all that expertise and knowledge to manage it cost-effectively.
From a managed services perspective, again, you know, just to understand between ourselves and IQ Business, our managed services is very much around the technology side of things. Their managed services is around the software side of things. Again, when you look at Graham's slide that he put up, you know, we're in the technology managed services side. That's what we do, wrap any of the services, whether it's cloud, whether it's data, whether it's the technology with a managed service. That's looking after supporting and maintaining those devices. End user computing, you know, obviously in our sister company, Nashua, do the end workspace side of things.
Ultimately, we're seeing more and more opportunity in that end user computing space, where a company that joined us, EUCafrica, are delivering the services from a platform perspective on your devices. That, again, with the security challenges that we're facing, is becoming more and more: How do you connect with your devices? You're sitting here with your iPhone or your Samsung. You're connecting to your enterprise applications, and how do you manage that? What happens when, not if, you lose your device or your device gets stolen or it gets hacked, how do we, from a technology perspective, manage that for you? Great opportunity in from that, in that business.
Around the digital media services, and again, you know, that in the last slide, Adam put up, you know, their go-to-market. Well, as part of their go-to-market, is using digital media. Underpinning that digital media is our digital media services, helping them make the most of Facebook, Google, TikTok. I mean, it's unbelievable. You know, at first I'd say, "Well, that's just my 13, 14, those young kids that are on TikTok." Now you're seeing TikTok as coming into the enterprise space, influencing that side of things. You know, but so what? You know, if you've got your ads out there, how do you make sure that you're getting your return on investment?
That's where our digital media services, and our, and our data businesses are working very closely. For us, we do, we built the Kia e-commerce site. We do. There, we're doing our digital consulting, digital media, data, and they host their applications on our cloud. From a software dev perspective, you know, that is the design, build, and operative systems, whether that's banking systems, building society systems, whether that's, as I mentioned, Kia, Coricraft. What we do there is we design them, we build them, and then that's where our managed services, and IQbusiness managed services are similar.
You know, ITQ, which is mainly their business doing that, is in the healthcare side of things. Ours is in the banking and retail side of things. Our technology, security services. We as you would have seen in the market, we acquired a business called MMC. That was because we realized that everything we do from a technology perspective needs to have the security side of things. MMC, very, very strong on the Microsoft platform. Microsoft being the largest cybersecurity vendor in the world by double the second place. You know, whilst they've got massive investment in AI, you know, what's sort of gone unnoticed, is their massive investment in, excuse me, their massive investment in security.
A large petroleum company in South Africa has decided that they're going wall to wall Microsoft in the security space, which is a big decision. You know, when you, when you back Microsoft like that, you know, the complexity of the cybersecurity landscape for organizations to manage it end to end, you know, we'll see some dominated players there. Because of that complexity, there will become the consolidation. Those are our service offerings that we've built out. You know, the next slide, it is part of your pack. I'm not going to go through each one of them. It's just explaining them in a little bit more detail.
I'm also looking just to make sure I didn't miss any of them. I've covered all of the service offerings from a +OneX perspective. Really, where we sit now, we're very comfortable, besides a few that I'll talk about now, very comfortable that as a new age systems integrator in the technology space, we'll be able to deliver to our clients needs. As mentioned, with IQbusiness, being in the business consulting side, with a flavor of technology, and us being on the technology side, it's a great partnership going forward. Just to explain to you know, how did we scale out in three years, you know, +OneX to where we are today? You know, we acquired capabilities.
As I mentioned, we don't like to use the word acquisitions. We got people to join the business. We did buy them, yes, but we call them joiners because we don't want to lose them. It's about keeping that key talent on board. Plus we acquire key talent, people out in the industry to come lead parts of the business as subject matter experts. You know, it was those two together that gave us our scalable new age systems integrator. You know, what is the platform for success? Our Chief Finance and Operations Officer, Renee Breeden, come said to me, "Robert, you can't put it all out there. That's the secret sauce.
That's what makes us successful." I said, "Yeah, it's, it's almost impossible to copy and paste, because there's a lot of things you've got to get right to make it happen, and fortunately, we've got it right." Firstly, it's around that one brand from day one with +OneX. When we acquired Code Maven, the software dev business, when they joined, they automatically became +OneX software dev. Just as an example, when they joined, there were roughly 80 software developers. They're close to 200 software developers within +OneX. How did they scale so fast? A couple of key ingredients there. Firstly, was access to clients that they wouldn't have had, because they didn't have.
They weren't onboarded at Investec or at Absa, or at FNB, or at Swaziland Building Society. Firstly, it gave them access to clients, secondly, it gave them access to do design build of large solutions where they were doing the smaller solutions. They were able to scale up very quickly, plus the working capital that we provide them. You know, they were able to do that and improve their gross margins. The second one is that go-to-market as an end-to-end business. We're, you know, we're in it doing the cloud side of things. You add the software dev and you're able to solve the client's challenges from day one. The next one around it is moving to the +OneX system.
We've built out a robust front-end Microsoft CRM systems, SAP from an ERP perspective, HR systems, and then the governance and frameworks that we have from a Reunert perspective. When they came on board, we didn't acquire the entity. We moved their client contracts onto our platforms, onto our contracts, moved their people onto it. We have one system, we've got total visibility. They continue to run their businesses, but on our platform. Again, the financial control's in place from day one. Really, what it is we allowing the leaders of those businesses to come on board and to scale their businesses.
As Adam mentioned earlier on, you know, when you're 30, 40, 50 people, it's very hard to go from 50 people to 180 people. Like I've given you the example with Code Maven or our software dev team. Access to enterprise clients, and I'll show those to you a little bit later as well. You know, they got great access to whether it's the Standard Banks, the Investecs, they didn't have to go to procurement and onboard on that side of things. That's one of the toughest things to do as a startup, is how long it takes to onboard with enterprises. You know, as I mentioned, our black ownership and Level 1 also helps them.
The Reunert governance and frameworks that are in place, ensuring that there's a delegation of authority, so they know they can continue to run their businesses, to scale their businesses. I say to them, their focus is solving clients' problems and making sure that you've got the right platforms and people to solve those problems and to scale the business. You know, what we do from a Reunert perspective, it gives them the frameworks to allow them to scale the business through the delegation of authorities. And then most importantly as well, is those people that have joined, you know, are retained in the business to lead, because those are the people that really understand the client's challenges.
They, you know, they understand the technology, and they understand the platforms that they're utilizing to scale the business. Further scaling of our, of +OneX, the security one, so that acquisition of MMC is completed. We're building out and scaling that. Adam, who heads up that business, another Adam W. Whittingham, joined with his business. Deep knowledge of security, in the... as I mentioned early on, in the Microsoft space. We now, because when he was on his own, his ability to onboard and have other technologies, that he could partner with was difficult.
As part of +OneX, by default, we are able to partner with other technology providers in the security space based on our client requirements. The security side is done. The digital agency side, again, myself and Adam have been talking about, you know, where, how do we do that? It's in his third horizon, but we do believe there's an opportunity to create scale by bringing on a digital agency, and we've seen Accenture do that. Why would we want to do that? Is going back to that business consultancy, what's happening around, you know, the marketing, sorry, and the business problems that our clients are facing. By having that front end, it allows you to pull through the technology.
Same logic for having a business, a business service, business consulting, IQbusiness, we need to have the digital agency side. The other areas in our managed services side, and that's our technology managed services. That's further being expanded through EUCafrica, which is our end-user computing platforms, and MMC, we'll drive a dedicated sales focus on that. That's the technology managed services side. And then you know, by taking parts of the business that are doing managed services as +OneX, we are able to scale that, scale that further. What is the leadership team of the business look like? I call it the exponentials, because these are the people that are engaging with the clients.
We have a small sales team that own the relationships, get us in front of the clients, and then we have by each of the service offerings, or Adam called them the lines of business. We call them service offerings, but again, they're the same thing. We have our service offerings that I've talked through. Karind Ori runs the cloud services, Grant, the digital media services, Paul, managed services, Norman and Annette, the EUC as a service. That's a platform on Citrix and Azure, that we just deliver services into our clients. Really on the data side of things, Adam, security, and Pumi and Johnny, the unified comms. Why Pumi and Johnny?
That business is scaled out, so Pumi has the sales team, Johnny has the design build, and the managed services sits in Paul's world, and then Darby and Morgan on the software dev side. On the right-hand side, we have optimization as a service, and that's looking at helping clients to ensure that they've optimized either or any of the services that we've delivered or all the services that they have in there. That's our business model, the team that scales it up. It's underpinned by Kia, our Chief People Officer.
You know, as she said in the video, you know, "People are the oxygen of our business, and critical." The most important person that actually I say to people within +OneX, the real boss of +OneX, is Renee Beardenkamp, who runs finance and operations. That's the team that's, has grown the business exponentially, and I will show you a little bit of the growth numbers. From a brand awareness side of things, you know, obviously, a young brand, and I do feel this...
I'm probably the older one in the room here, but the younger one from a brand perspective, you know, very, you know, we look at what we've done well, you know, I say to people, we've drunk our own champagne from getting our stories out there, and then using our digital media on a limited budget, because we keep the founder's mentality in the organization, so we get Grant and the digital media team. These are just some stats of the coverage that we've had. I'm not gonna read through every single one, and we'll share it with you. You know, out there, we have, through LinkedIn, Facebook, Google, created that a great persona out in the market.
We've got to just share a quick story there as well, that, you know, goes back to that security side of things that, you know, people say, and it's the truth: It's not a case of if you're gonna be hacked, it's a case of when you're gonna be hacked. One of the services we deliver is, how do you recover once you've been hacked? What reminded me about it is that there is a fake +OneX Facebook site out there. Somebody has taken the time and effort to build a +OneX digital media presence on Facebook. We don't know yet, because we found out on Tuesday.
We don't know yet why they've done it or who's done it, but I'm just giving you the anecdotes, you know, having, you know, having our digital presence and then somebody going out on Facebook and creating a look-alike +OneX. The only reason I can think about it's gonna happen is, it's part of somebody doing some security hacking or fraud thing. Just the awareness there could be brand awareness, but we've got other awareness. Really, where did I go to that one? For us, as a +OneX, you know, again, it's around the security offerings and services that we deliver out to our clients. You know, just some of the great stories and again, the alignment between ourselves and IQbusiness, where Adam put in.
You know, for them, it's around understanding what that client's problem, same for us. How do we solve it? What's very important is actually, how do we then tell the stories to our clients about our capabilities and what we've done, you know, to in the market? You know, for example, Exaro, run the unified comms platform, is run by +OneX. Harmony's unified platform is also done by +OneX. You know, I can again, go through many of the stories that I mentioned, Kia running their platforms, Airlink. You know, great stories out there. Like IQbusiness, it is all about telling the stories and the case studies of what we've done. It's the proof points. Our clients want to know-...
that if they're gonna move to our cloud, you know, where have you done it before? How have you done it? How have you kept and ensured that your cloud stays up 99.999% all the time? Because if it goes down, obviously there's business repercussions. Again, from a +OneX perspective, you know, we're getting our brand out there, our stories out there, and most importantly, we're delivering to our to our clients' requirements.
Examples of enterprise clients that we've onboarded, and again, I was saying to Nick earlier on, one of the good things about our business model and the way we do it when we have businesses being acquired into +OneX, we don't take on the legal entities. They automatically join onto our platform, but what they get is access to these clients and the ability to go do work. As I mentioned, the software dev side of things, you know, we're doing some great work in, at FNB. They would never have had access to FNB. In the optimization and the end user computing side of things, we're doing work with CUP. Same with Home Choice. You know, Airlink, I've touched on a couple of times.
You know, Sasol, we're doing a whole optimization project with them. ShopRite, we're involved in the end user computing side, and on the ShopRite X side of things. Pick n Pay, working on the data side of things. These are just examples of net new clients that we've been able to onboard through our relationships, through our ability from our BE side of things to deliver, and then through our case studies and stories. Just the last one is a slide on our growth. You know, revenue, you know, growing nicely, 39%, 35%. Again, I can't talk exact numbers. You know, clients that we've invoiced, so we... It says solutions there.
We do have two legal entities, a historic one of the communications one and a solutions one. Most of our work comes through the solutions one. You know, we've increased the number of clients that we've invoiced from 64 - 264, the exact number is 200. Growing nicely. The number of employees, you know, has gone from 211 - 321. Those are fixed, permanent employees that are working in +OneX. We are roughly about 400 consultants that are delivering services. We have +OneX in India that delivers services. We own +OneX.
India was Code Maven India, and there we have about 40 software dev engineers that deliver services into South Africa. It's directly into building out our squads within South Africa. We have the rest of those that we call them associates or people call them contractors. That gives us our roughly 400 people that are delivering services into South Africa. Majority of our work is in South Africa, in the digital media space. We do some work into the U.K. and into the U.S.. Again, the opportunity for +OneX and IQbusiness is around the international side of things.
As part of the original business plan that, when it signed off, you know, we we look to, just w'ere looking to set up in the U.K. and in Europe. The reason for that is twofold, is being able to deliver those services from South Africa in there. Second one is, you know, we. For us, it's all about keeping key talent, and we wanted to ensure that we, you know, invest in that talent. If they want to leave and go to the U.K. or somewhere in Europe, that they were still gonna stay with +OneX to deliver those services, either back, like Adam's done, or, you know, we would have acquired and done the same model for...
that we've done, or +OneX would have done in the U.K. side of things. Obviously, now with the opportunity with working together with IQbusiness, they are a little bit ahead on that side of things, we'll leverage off that. Majority of our services are based here in South Africa. That's, that's my story. Any questions for me, I'll.
One of the larger limiting factors like growth for a lot of these ICT companies is the staff component. What are you doing to keep the staff, and how do you see it limiting you going forward on all the expansion that we hear through the presentation?
Excellent question. There's two answers to that question. Firstly, around, you know, that skill shortage we have in South Africa. Back to the video, you know, we have to create our own staff here and, you know, our own people here in South Africa. What I mean by that, there are a lot of organizations that are doing the education part of getting people up to speed on Python or Java. You know, it's very much in that digital side of things. There's lots of rethink code, Codex, Michael, your, you're done doing it. The challenge is actually getting the work experience. So you know, people get that education qualification, but how do you get that gap?... to get that work experience.
That's one of the things that as part of +OneX, what we do is we bring people in on the work experience platform. It's like the good old days of a, like a boot camp, so that they sit and work with the experienced people, so that in six months' time, they can say to you either, or we can say to our clients, "We've got a more experienced person", or actually, we, you know, we don't mind if they go out into the industry and get a job. That's, that's what. This is, was what Code Maven or the SoftwareDev Morgan and Darby had built. They call it the missing middle line, we need to solve for that missing middle line. We haven't solved for it.
We've accelerated it. We need to accelerate it further and again, see the opportunity with the scale that we'd have between IQ and ourselves. You know, that opportunity will allow us to do more of that. That's the first part of it. The second part of the question, which is the more difficult one to do, is how do you retain, retain those skills? Within +OneX, for us, it's retaining that entrepreneurial mindset of the team, that ability to do work on different projects and also to work for the right people in the leadership side. It sounds, you know, that, you know, I don't know, trite, but it's like it is about the people connection and that sort of thing. That source is working because we've-
...most of our competitors are running between 20% and 30% of staff turnover. Then there's a whole lot of lots of obviously little things that you need to do around that staff engagement, you know, the team building, the getting them together, working on cool projects, having the right mentors. It's a lot of small things that have, that have added up. When I talk to my colleagues/competitors in the industry, they cannot believe that we're below 10% on attrition in this market, and we're growing as fast as that. You know, the easy answer is to throw more money at it, but that's not the answer, because our profitability goes would go down.
Then we argue, "Well, okay, well, then, you know, we're not gonna have a sustainable business." You know, I'm a big believer that you've got to get that engagement of the different leaders in the business with their teams, and you've got to... It's got to happen on a smaller scale, that all adds up within a framework. You know, there's. There isn't a magic formula, but there is a lot of little things that the teams are doing, and it's about that engagement with the teams to ensure that they don't leave, because, you know, the demand is there. That's also why that international expansion is also important. We are seeing, you know, the younger generation wanting to go get that experience, and ultimately, if you.
You know, as a South African, I'd love to, you know, you get that experience, but you want them to come back into South Africa to do good and to scale the economy.
Any other questions for Rob? Yeah.
Just maybe more of a broader question. We've seen quite a few acquisitions recently. Just want to get a sense of, you know, what do you think from here? I think Adam spoke about a fragmented market. Rob is speaking about, you know, a lot of joiners.
Yeah.
just what's your overall thinking about more acquisitions in the future?
I mean, I'll answer that, yeah. At the opportunity, you know, from a, from a, call it Reunert perspective, you know, there are certain areas where we, even when you look at the, call it the roadmap or of +OneX and IQbusiness, that we are subscale. There are opportunities, and Adam and I talked about one yesterday, where I said to him, "Well, have you got this? You know, there's a great opportunity to get this business on board. It will create scale." He said, "Yeah, we've got a little bit of that." You know, there is this opportunity to bring on more businesses because I believe between ourselves and Reunert, we've got the formula right.
You know, when we set up +OneX, you know, as part of our business plan, we worked very closely with Corinne, who runs the M&A side, to get that formula right. We can plug in very quickly, businesses to scale. An example, MMC, we started on the December 1st with the discussions on the April 1st, because it would be April Fools. We made it the April 2nd. Sorry, it was actually the third, because the Saturday was the April 1st. That's the time from engagement, full due diligence by our, by external and by party to actually onboarding them, that we can do it there.
To answer your question, it will be where we see between us, gaps in the market, because it is fragmented, and that's what we have as +OneX, Plus IQbusiness. Now we have scale, and we have the opportunity to identify it. A good example, and again, we discussed it, you know, your question around AI. You know, if we can find somebody that's ahead of the market, that's done work in the AI side of things, you know, they'll probably want to be paid a fortune, but that's not gonna happen. You know, how do they scale if they've got some solutions they can plug in very easily into this ecosystem and scale it further? We'll continue to look for the like we've said in our space, the digital agency side.
Sorry, just to add on to that, though. If we just take the. If you look at the next 12 months, it's really important for IQ business to come in and get integrated and deliver on that business case. That's a really key focus for us. If you just look at the relative scale, the likelihood of us doing another is unlikely.
Whereas the opportunity within the complimentary bolt-on that of the nature of what we've done in IQbusiness, and if you look there, you can look at the typical scale of those. They're relatively small, that they do bolt-on. They're very specific at targeted areas, and because of the size of them, they're actually really cheap. We get them at we very, very rigorous in terms of what we pay for those. I think it would be, I wouldn't expect it to be an acceleration of what we do, but there are still opportunities that sit in there, and I wouldn't expect any of them to be of the scale of IQbusiness.
I think you have answered one of my questions. I was going to ask about the debt criteria in your sort of acquisitions, but I suppose for the bolt-ons, you don't really disclose that, right?
You'll probably see them in the apps. I they're in, you'll see the nature of the last couple of reports. If you go back through the last two apps, you'll see them there. You'll see the multiples that we've paid, they are well below the Reunert multiples.
They'll be bolt-ons to scale up?
Yeah.
I mean, I'm gonna put myself as say, Alan says to me, "Rob, why? So small." I say to him, "Well, it's key in this area, and it's gonna scale." The nice thing is, we've proved that it will scale, also we've proved the model by plugging them in. It does scale quickly. Sometimes Alan is right. It's like, "No, that's too small." It is those bolt-on, what's most important is that it needs to meet a client need. It's, you know, we're not doing the acquisitions just to do the acquisitions. You know, needs to meet a client, specific client need, and then, obviously, it needs to be in the technology. The last one, most important, has to be the right people fit into the culture and stay within the business to scale it further.
Any final questions? Yes, sir.
Yeah, just one for me, please. I was wondering, maybe generally across the Reunert ICT business, and just with the Looking at, I mean, at IQbusiness, it seems that 50% of your revenues is generated through projects, project-based services. I was just wondering, I mean, what is your view on the robustness or your continued ability to generate growth in that part of your business? Just to provide context, I think you said in IQbusiness, one of your big clients is MultiChoice. I mean, they're one of many businesses in South Africa that's really under pressure. I'm thinking businesses like that is probably, you know, going through their cost lines and saying: Where can we cut the next round of costs? Just on that basis, I mean, where's your competitive edge in bidding for sustainable growth in that business?
Maybe I'll ask what. Answer the first question. You can. I'll let Adam answer the one about multiple MultiChoice. Yeah, to answer your question, around a large portion of our business is managed services. Managed services on the tech, managed services on the unified comm. We do have the new tier side of things. What's important about that as well is, you know, if you're doing the managed services, you are able to spot the opportunities where you can drive out efficiencies and get more work based on those efficiencies. You know, at Airlink, we were just doing unified comms to start with. We were able to go, "Okay, well, we'll move, you know, your current platforms onto our cloud platform.
We'll then take over, the device management as well. Yeah, that cost pressure creates opportunities for us if we're there, and we can solve the problems for us. You know, I'll leave Adam to answer the MultiChoice, but it probably also creates opportunities.
Well, perhaps offer a thought first. That is that the marketplace in South Africa has got tighter in the last six months, principally driven, as we know, by the impact of load shedding, the pressure of inflation, the uncertainty from a sociopolitical perspective that we find ourselves in at this point. On the one hand, we're seeing a number of clients implementing austerity measures, as you suggest, curtailing external costs. Some of our clients, we're seeing cutbacks on investment initiatives that are really focusing then on utilizing internal talent as opposed to external talent. On the one hand, we see that happening in a group of clients. Others are actually upwardly investing and doing the opposite.
What we have to do is make sure that we've got a very diverse portfolio of activities, projects, and many of those projects, particularly in the governance risk and compliance space, just can't be stopped. They have to deliver on time. It's in the other areas of customer acquisition or centricity that perhaps we see things being curtailed. The good news is that many of our clients actually go too far in their austerity measures too quickly. That then results in an opportunity to be part of their growth trajectory when it starts. We typically see a 3-6 month cycle of these kind of sharpening of the situation and then a reopening up. We've just got to make sure that we've got that presence and activity.
Without talking specifically about MultiChoice, there are instances where we're seeing the termination of international consulting projects, and we're being asked to replace them because we have a much more compelling proposition price point to actually step into those environments. Again, it creates opportunity for us.
Well, I guess, you know, two points on that, which is, you know, for us, it's exactly the same. One is that the fact that with austerity comes the fact, you know, is using expensive, our competitors, the global firms that are pricing global, either global dollars or they're looking at this. That creates an opportunity because they're looking for who can deliver it more cost effectively locally, and that for us is a big opportunity. Then the second one, as Adam said in the beginning of his slide, it is a fragmented market, and we've got a small percentage point of that.
The opportunity for us is really now with the two organizations alongside each other, is to go get our unfair share of the market, and I really believe we can do that, as you know, under what we're doing. That's where our also our opportunity comes from, is to take market share from the competitors. We're fortunate because the competitors are not doing a great job, and they're not client-centric. They've got their own challenges looking internally.
Sean, last one.
Maybe one to Adam. Just curious, did you assume that the introduction of TISA Capital Works, from my understanding, it was the acquisition of the managed services model that came on board post that you are currently in, and within that, you're continuing to spend more really to drive other things in managed services. Safe to assume that those acquisitions have doubled your business during that last quarter, you know, post private equity being involved. I suppose the follow-on question for Alan is that, you know, M&A is obviously a major source of risk for us as equity investors, and, you know, almost M&A on M&A, from what I can see. What guardrails are in place for you to give us confidence that there's not something that's going to jump up like an EOH or something like that, since that's the case with M&A?
Do you want to answer that?
Yeah.
You want to answer the first one?
Sean, firstly, we've been developing an M&A target list for a couple of years as part of our organic growth trajectory. When Capital Works TISA came on board, they brought a very professional engagement model and structure that helped us start to realize that. In the first instance, the acquisitions of Genex and Nudge were really a test case. What we were able to do was to refine our organic growth model of the partnership that we created as we, and I like the term joiners, that Rob uses here.
As the leadership of these enterprises joined us, part of the transaction was that they joined the partnership, and they became equity owners in the overall IQbusiness structure, which was a very important step in terms of the bond that we created with them, the longevity of their time. We weren't just gonna create an earn-out structure and then enrich them and say, "Well, emigrate now." We created a structure that really brought them into the bigger enterprise, gave them again, using Rob's term, that bigger platform, and they participate as leaders in a much bigger enterprise model, which I think was very positive.
With the managed services acquisition, it wasn't a 50%, it was more 25%, because the organic growth that was coming through. ITQ has been a really good step forward because although it's a low growth trajectory, it's a very solid, we call it the metronome, because each month, it just continues to apply the skills and capabilities on a longer term, longer term model. The deals in that space tend to be what we refer to as longer, larger, and more leveraged. three year term, larger scale, and they leverage back into the organization. They also take longer to negotiate.
Whereas a project is, can be fairly instant, you know, on a 3-6 month cycle, the negotiations with ITQ can be six months to 12-18 months of a tendering process. The prize at the end is longer, larger, and more leveraged. We see the scaling trajectory and that growth curve, although it's with the existing projects, it's when the next project comes in and you're able to then move to a new cycle with it. We're very excited about what's happening there. As Rob says, the combination of our software focus with their more infrastructure focus, really presents some good opportunities for us.
Maybe just to close it off, Sean. If, if we just look, I think we've done with Rob five. There was three in the run-up to that, so we're talking eight over, let's say, a four year period. It's that type of number. Again, if you just to pick the example that you used, you know, they were probably doing that every six months or one year or something like that. That's not the nature of the acquisitions that will be going on. I think I've sort of indicated that if I was to look at the scale going forward, the scale of something of the IQbusiness is unlikely to take place.
In terms of the size, they would very much fit into that complementary bolt-on, so it would be small in nature. Let's just talk around perhaps the guardrails that go into it. First of all, which I think has been successful in all cases- The leaders of the organization own roughly 26%, both in the case of +OneX and in the case of IQbusiness, in IQbusiness. In the case of IQbusiness, none of the partners were able to take any equity off the table at all. They were motivated and happy to join Reunert, that they have just transferred all of their wealth across in its entirety. It's not our intention to water that down over time.
Whilst we have a call, in particular, events that we may invoke, the intention, in both cases, is to keep that management participation at a very meaningful level. I think not. It's even from the management, their wealth sits in this. A adverse acquisition blows everybody. I think there's very strong alignment between us, let's call it as the Roynet shareholder with the leaders of the business. I think that's the first element to it. Within +OneX, we followed a very rigorous element to it. We, by the company, there is a question from Slangon. When we acquire, we have not bought the company in any case. There is no legacy threat that comes with that.
It takes a little bit longer, but we bring the people across, we bring the contracts across, but they all come across, and we leave the legal entity behind. Any skeletons that are in the closet get left in the closet. Nothing that comes across with that. Rob spoke quite a lot at length about the systems that they come onto. They come onto in its entirety, so there's not a single bid that can go out from anyone in +OneX without it going through the single bid system, which has got the Roynet governance attached to it. It's not possible to bid without that governance and those criteria being followed. They come onto our accounting system, so there's nothing that can be billed outside of that.
All of that Reunert governance is in from day one, and it all comes into that in terms of it. I think those, for me, would be probably the stronger guardrails that we've got to it. The evidence, I think, of that working well, has been every single. We haven't lost a joiner yet, so every single person that's come in, they all still work for us. We do also then warrant them, so we typically pay about 50% up front and call it 50% over a three-year period. Not one of those businesses is behind its warrant. Every single one of them is at its warrant or ahead. The evidence of the process we followed has actually been pretty successful going forward. My sort of guidance would be, we're not trying to build through acquisition.
I think what we've got here is highly synergistic, I don't see a buy and a buy and a buy and a buy and a buy to generate growth. The scaling comes from within. We're not looking to acquire to scale. Sorry, the reason to scale is not through acquisition. There will be pick, and that helps, but I think, my guidance to shareholders would be the likelihood of something that we've seen in the other corporate challenges, I think is low.
Our strategy at Reunert ICT is not to be a perpetual acquirer. That is not what we're doing. We've identified the key areas of how we want to grow Reunert ICT, does it align to the strategy, and then how do we scale those businesses once we've got them on board? That's the strategy.
Okay, good. Folks, let's stop for tea. If I can ask, it's just before quarter past now. If we can all be back in by 10:30 A.M., and then we'll kick off on the defense side of the business. Trevor, who's a segment CEO, and Marcus Capuzzimati, who we'll introduce as a segment CFO, will give us a segment overview. That will give you the overall view of all of the businesses as a whole, and then we'll drop down into the company level presentations thereafter. The segment portion will complete, get some questions in, and then we'll go into the individual businesses thereafter. Trevor, over to you.
Thank you, Alan. Is the mic on? Okay, good. I must say it's a tough task to follow on from that ICT presentation. Even tougher when we talk about defense. When Alan said to me, "Trevor, you and your team are gonna be included in the capital market stay," I said, "Yes, no problem. He's my boss." Believe me, we were anxious. I'm in the defense environment for 28 years, and this is my first time I'm talking to an audience, an investor audience. Don't get me wrong, we do these presentations fairly often. It's just a different audience, an audience that likes slides, that have three and four letter abbreviations and acronyms, and lots of pictures. Very different pictures from what you've seen in the ICT segment.
At the end of the presentation, Trevor says, "Yes, that's what we want." If any one of my team and myself included, goes into defense mode, and we slip in an abbreviation or an acronym, feel free to stop us and say, "What do you mean by that?" That's the first part. The second part is, I have to confess, we don't have any good videos. Well, we do have good videos, but maybe we don't want to show them. The second thing is, this is one slide I'm definitely gonna skip through. We're not as square as this. I'm skipping it. Here's my team. We smile, and, yeah, I'm gonna take Rob and Adam out for a dinner, and I'm gonna say: Listen, help us with this whole thing about smiley pictures, especially Rob.
Also, help us with the videos. I think, key takeaways from us is that, yes, we need to do this more often, as we do it more often, we'll get better at it. We need to understand that there's various stakeholders and audiences, not the traditional audience that we have. Let me start by introducing the team. I have a CFO who has got a fairly difficult Italian surname, Marcus Capuzzimati. Got it right? And then I've got Petrus Pelser with us. He is the founding member of Etion Create and also the CEO. Etion Create is an exciting new addition to the segment. We've got some mainstays. Mike Tucker, he's the CEO of Fuchs Electronics. Last but not least, our host for today, Harald Bielfeld, the boss of Integrated Systems, Mining and Defense.
Let me get the difficult part out first. The narrative in South Africa with regards to the defense industry and stakeholders is fairly negative, yet we want to come out and talk about our story. We believe it's a very positive story. We have come out of COVID, we've come out of a global electronic component crisis. We've come back fighting. We are doing better than our pre-COVID levels, and the future is looking extremely positive. What I will do is, I'll unpack first the global market, the global defense market, its dynamics, the impact that that has on our key markets, why we believe we're attractive, and why we believe we'll continue to grow in those markets, our competitive advantage, our strategic imperatives to continue to win markets and to execute and grow profitability.
Last but not least, I'm gonna take some time to explain why we believe that we do operate in a stringent regulatory framework and why we believe that we do responsible business in defense. If I can start with the global defense market. throw some numbers out there, fairly intimidating. The world defense expenditure is now sitting at $2.2 trillion. Over the last 10 years, it has increased by 19%. In just this year, it has increased by 3.7%. Yes, it's an arbitrary number. For me, what's important is you have to look at where the growth is, in which market area, and when in that market area, in which countries.
This is where it comes, where we believe we have a positive outlook because we are in those market areas and in those countries that are growing their defense spending. You may ask why. Well, it's driven by geopolitical instability and tension. It's very seldom that when we put the TV on these days, we don't hear about U.S. and China tension. Is it gonna go away soon? No. That's what we believe. It's here for the medium term, if not the long term. Defense spending is going to grow. What's the main takeaway? It's actually changing the way our customers do defense acquisition. Fundamentally, if you look at a country with increasing global stability, they look to their readiness levels when it comes to a potential conflict.
That means they don't necessarily have to be involved directly in a conflict, but they do need to do more training, more exercises, and that automatically means they therefore need to consume more defense equipment. The readiness levels of all the countries, this is ubiquitous, is increasing. I guess South Africa is the one country, it's declining. I'll talk about our diversification from the local market later on. I think, what does that mean? Well, if your demand is outstripping your global supply chain, there's opportunities. Let's talk about this transition in market. What happens is you have companies that are, that are based in different countries. When the demand outstrips the supply, they tend to focus on their companies and their regional affiliations. Well, that opens up markets that we never thought we were entering into.
That's we see happening. We see greater opportunity for growth in those markets. That's the global perspective. Let's zone in to the key market areas. Let me just go into that slide. If you look to the right of the graph, you've got growth in Middle East and Africa, Southeast Asia, North America, Europe. These are the market areas that we are actually targeting outside South Africa. Let me take a step back and talk a little bit about defense acquisition and how it has changed over the last 40 years. If we go back some 40 years, you had to be in the privileged club to be able to buy modern defense equipment.
When you did acquire that equipment, the seller determined the level of participation with regards to that equipment, whether it was maintenance, repair, and overall in country, whether it was participation in technology transfer to produce in country. The game was very different then. The buyer decides how you're going to participate in their market. They've introduced things like Offset, National Industrial Participation Offset, Direct Defense Industrial Participation. These are all sub-elements of internationalization. When Alan spoke about us unpacking our internationalization strategy, one would immediately think, "Okay, this is market diversification. You're gonna go out." It's a little bit more complex than that. It is actually understanding the customer market, understanding what they really want.
They may be chasing self-sufficiency, they may be chasing self-reliance, they may be chasing security of supply, and in certain instances, they are passionately promoting an indigenous defense industry that not only will supply to their local customers, but it'll also encourage them to go into export customers. This may scare some people, but in reality, it's actually an opportunity, and I'll unpack that a little later. What is important is that we see a push, or rather, a move towards what we call a smart buyer and a smart user. Our willingness to interact with smart buyers and smart users is what makes us attractive. When you do this and you migrate to just-
...not just buying product, but also starting to look at things like requirements and how to change requirements and how to do concepts and self-design, you introduce something in the buyer, in the customer environment called make-or-buy decisions. That's important because normally, a customer would look to a local company to advise on make-or-buy decisions, and if you partner well with local industry, then you automatically take him into that process of make and buy, and that gives you longevity. Let's talk about Europe. Europe is being pushed to something like 2% of the GDP spend on defense. They were sitting at 1.1%, now they're ramping up to 2%, and that's excluding all the special programs that they have to support the Ukraine crisis.
You look at Southeast Asia, the Southeast Asia-China seas tension is still there and continues to drive that market. You look at India, the Make in India campaign, the strategic imperative of the Modi government, is something that's on the lips of every Indian businessman, also it has been embraced by the customer. Let me just put out the first acronym, IDDM: Indigenous Design, Development, and Manufacturing. You have countries like India, that have previously had defense policies that drove indigenization. That's a little bit offensive, because indigenization means that it was designed somewhere else, and all they're doing is doing a build-to-print on somebody's ideas and innovations. They're transgressing, they're moving towards indigenization, now, or rather, indigenous. Indigenous allows you to participate in a build for solutions for customer requirements, which is local customer requirements.
If you partner right, you involved in programs that continue for 5- 10 to even 15 years. When those products are brought into operation, they have a life of 30 - 40 years. Another area, you have in the Middle East, Saudi Arabia, you talk about Vision 2030. It's diversification away from the oil economy. The defense industrial complex of Saudi Arabia is integral to the diversification away from oil. Saudi Arabia has got a large population. Job creation in Saudi Arabia is extremely important. Unlike the UAE. In the UAE, job creation is not very important. Automation is more important, for sure. Self-reliance is important, and indigenous is important.
We take a lot of time to analyze these markets and what the country and the customers want, and we position ourself very well with local partners so that we can win more market. I can tell you, if you don't have this as part of your business model, then you're not gonna enter these markets. The one thing that is quite a good indicator is actually to look at the big importers of defence equipment. India and Saudi Arabia are in the top five. What you'll notice is that even though their defence spending has increased, their imports are decreasing. That translates into that they are pursuing localization. Our strategy is built around meeting the customer localization requirements. Let me go to the next slide. Let's start with our diversification away from the declining South African market.
Today, we sit with Armscor contracts, that's the acquisition agency for South Africa, a reliance of about 12%. It's very different from five years back. We've diversified. What is important is we diversify to foreign markets, not via government-to-government agreements. We've gone in with our product offering, which is high quality, high tech. We've competed in the global market space, we have won. We've won markets not only in Southeast Asia or in the Middle East, we've also won market in Europe. That's extremely important to us. The United States, Russia, and China, they're fairly self-reliant, we don't pursue those markets. We have a finite amount of resources that we have to use and deploy to win markets, we choose our markets very carefully. Once again, our focus area is the Middle East, Africa, Europe, Southeast Asia, and India.
All those markets have got localization as their key policies. What makes us attractive to the partners? Our willingness to indigenize, our willingness to co-develop. We do technology transfer that covers production technologies, et cetera. Also, our products, our product mix. We've got an endorsed product portfolio, endorsed by the customer environment. Our competitive advantage. Let me start with, it is extremely advantageous if you've got a friendly face in a country talking to the end user. In a recent campaign that we did in one of the Middle East countries, we were working very close with another company that's been designated as a strategic and sovereign capability of that country. We've been working with them for some five years.
We sat there, it was the local person that stood up, did a presentation on our products, got the key messages across to the user, and got the buy-in to let's continue on the next phase of that product. We term it, to be local in a market, you have to be local. Our key competitive advantages. We have trusted capabilities in radar, in fusing, in communications, in encryption, now recently adding into navigation and into remote controls, weapon stations. If you look at the segment, that's a fairly impressive span of capabilities. It gets even better when you draw on the synergies in those different business units and elevate your product offering to a solutions offering. We have long-standing relationships, these are both B to B relationships and B to C relationships.
We considered mainly as a Tier 2 supplier. We work with Tier 1, what we call platform suppliers. They make vehicles, they make ships, they make aircraft, et cetera. We have excellent B to B relationships with them. I can tell you, if you've got a radio qualified on an aircraft, the cost associated with taking that radio out of that aircraft and putting something in is huge. Once you're in, you're in for 30 years, and that's where we tend to work very closely with what we call platform OEMs, Tier 1 suppliers. Then you have the relationship with customers. There as well. Once a customer is confident of a product, whether it's an electronic fuse, whether it's a radar system, it is extremely difficult to move that product from that market.
There are sometimes political situations that force customers to do that, and they will embark on that, and they will do it. Once again, our look, our openness to localization and co-development, we consider as an advantage. Our pricing and our quality is extremely competitive, and we're willing to work in developed and developing nations. We definitely take product to market fairly rapidly. When it comes to entering a market, I spoke about to be local, you have to be local. The other thing is, when you look at our partners, they are engaging in programs that are fairly lucrative, and when they have the support of their end user, they become what is called single source responsible. If you're in that partnership, automatically, the flow run comes to you. It for sure reduces the effort required for marketing and winning a market.
Your launch customers are definitely guaranteed. Now I'm gonna talk a little bit about R&D spend. On average, we spend about 8%-10% on revenue on our R&D, and that's made of two components: privately funded or partner funded. In privately funded, we wholly own the intellectual property. In partner funded, we co-own the intellectual property. The key attribute to this partnering agreement is to also talk about market share and work share. We prefer to do the difficult decision upfront, and in majority of our co-development initiatives, we have an equal share in markets as well as in ownership of intellectual property. The other thing that's extremely important is, because we have a partner that's close to the customer, we are able to understand the changing needs of the customer much earlier than our competitors.
The discussions go about what is working in the field, what's not working in the field, how the conflict is changing. How does this help us? Well, with that sort of information, you can very cleverly design your R&D spend. You will be investing in the right projects, you'll be investing in the right product portfolios. That helps to not only guide your technology foresight, planning, your product portfolio, it also allows you the opportunity to shape the market you are trying to get into. Sometimes the clients don't really understand all the technologies, and you're allowed to bring in and say, "But we are working on this, and we think we can address your requirement with these key technologies and these few products." That, for me, is extremely important.
We collaborate with tertiary institutes and with the research institutes on some, let's say, much further looking technologies, so that we're prepared for whatever changes are coming. When it comes to people, we have strong retention policies in place, In reality, we're a bunch of engineers. What really excites engineers is getting them involved in groundbreaking technologies and products. We're all around here, and we've been in the industry for 30, 40 years, and we haven't left the industry yet. We do some exciting stuff, that's for sure. Let's just go now to. A very important area. We're working on our ESG, we're working on our image. The next time that Alan decides to invite us to another capital markets day, we definitely will have a different look and feel.
We participate in a lot of CSI programs, from assisting with building of schools, to upgrade of schools, to building of creches, et cetera. I'm gonna touch on three flagship programs, I have a team per program. The first one is, we focus on improving math and science and improving the intake of previously disadvantaged individuals into the high-tech space. The Reunert Learning College, it's a matric bridging course that's afforded to the students that enter the institute. The institute is at Fuchs, in Eloff. Are we very proud of this endeavor? It has produced excellent results. When Mike has his talk, he'll talk about doubling the capacity of Fuchs. He, in that, he's also gonna talk about how this program is going to also double, I think, moving to something like 60 students from 20.
It's extremely exciting. It also affords the students the opportunity to get workplace experience. You're located at the factory. The second theme, I like to call it closer to the customer. This we are extremely passionate about, and it's endorsed by the Ministry of Defense. We provide bursaries to the children of fallen soldiers via the South African National Defence Force Education Trust. There's nothing better than going to the annual event and having these students come up from previously disadvantaged communities and say, "Today, I'm a medical doctor, because I got a bursary from this education trust." We also take care of the military veterans. It is extremely difficult when they do enter into retirement, how to continue and have a support to their pensions, et cetera. We've embarked on entrepreneurship programs, training them to become entrepreneurs.
We've looked at their communities, and we've started what is called Rogrow. This addresses or teaches them farming techniques to have food self-sufficiency, and we continue to expand those programs. Our key strategic imperatives. Internationalization is the cornerstone of growth. Where we started with just business development offices, we're looking forward now to operations in those countries. Some of our customer countries demand that we do foreign direct investment, if anything, to address the whole issue with regards to security of supply. We have established a footprint in every one of those market areas, not necessarily in every country within a market area, but at least within the countries that are main parts of those market areas. The successful integration of Alteon.
When we looked at Alteon, we realized very quickly that they have got a very, very good foothold in a key market. And we started, we thought that this was an excellent acquisition, we must definitely pursue this and allow them to take us into this market. You're saying you've got to go on. We spoke about market diversification, we continue to invest in our key business units to improve execution of our order book and to drive up efficiencies and become more sustainable and profitable. Let me go into the next slide. Helen introduced me early in the morning. We divided into four clusters. I'm not gonna go down into the eight companies that make up the four clusters. I'll leave that to my colleagues.
Just to recap, we have the radar and sensors company that look at defense offerings of radar and navigation, and also commercial offerings of mining safety equipment, as well as wireless detonation. Petrus will go into detail with that. We have Fuchs Electronics, who is one of the few electronic fusing companies in the world that deliver fusers to various caliber of ammunition. We have secure communications that offer tactical, secure communications products and solutions to land and sea markets. We also have Nanoteq that does encryption products that are afforded to the commercial sector. Last but not least, we have logistics, and they focus on maintenance, repair, and overhaul. Their business model is product agnostic.
That allows them not only to support, the segment products that the SANDF require, but also other products, including competing products, like, for example, the Thales radar, they would support it. They also support legacy systems for network management in ISK. Let me get to the difficult slide. I said when I started that we conduct business in a professional and responsible manner. We operate in a highly regulated environment. We have the National Conventional Arms Control Committee. That is the issue of import and export permits. They have to obviously comply to various acts, both the local acts, which is the NCAC Act, the United Nations Security Council Arms Embargo, et cetera...
What is very important is that if you look at the NCEACC construct in South Africa, you have the minister that's not part of the security cluster, that chairs the organization. You have a Secretary of Defense, which is a civilian, that chairs the scrutiny committee. You have a secretariat function, which is, we call the directorate, that is also chaired by a civilian. All these committees and bodies, this is a lot. I'll just try and summarize it. When discussing an export permit or an import permit, you have to take into consideration, firstly, the upholding of human rights and fundamental freedoms. You have to ensure that you don't supply to a country where you will escalate a conflict. You have to comply to arms embargoes, to ITAR regulations.
You have to make sure you're not contributing to terrorism and crime, and you've got to know your customer. In fact, in our environment, every end user has to sign an end user undertaking. Only will they get an export permit. To summarize and to close, Glass Lewis is a leading provider of global governance solutions. I think it's important for us to note that Glass Lewis does not rate any of the Reunert defense offerings as controversial. I think this is extremely important. I'm now gonna hand over to Marcus. I'm sorry, I took too much of time?
It's all right.
Okay.
Thank you, Trevor. Is the mic on? Can you hear me? Morning, everyone. It's a pleasure to be here this morning. It's nice to see some familiar faces in the room, and for those who I've not met, not yet met, I look forward to engaging with you all during the course of this afternoon. Just I know Trevor introduced me a little earlier, but a little bit more about myself. I obviously support Trevor Raman as the segment CFO, focusing largely on the defense clusters within the segment. My role, I've been in an executive role within the Reunert Group for the last eight, nine years.
Majority of my time in the Reunert Group has been spent at or as CFO, alongside Mike Tucker at Fuchs Electronics, and I transitioned into a segment role during the course of last year. It's a pleasure today to be able to stand here and take you through the financial highlights of the segment, especially coming out of the post-COVID era. There's two slides I'm gonna take you through. My presentation will be short and sweet and to the point. There's really a couple aspects I wanna highlight to you this morning. The first slide will really focus on order book, order book backlog, the growth of that order book over the past few years, as well as the change in diversity and diversification of that order book.
The second slide will really focus on revenue, and I'll try and highlight the perspective of how order book translates into revenue and really operating profits within the segment, and how operating leverage is a key factor for us in our businesses. Okay, so what you see on the first slide is really pointed into two areas. Before I go into it, let me just start to say that revenue in the segment is predominantly driven through order book backlog. Okay, there are some exceptions. We have, for example, the mining radar sales within the Reutech Radar Systems, which doesn't necessarily follow the same pattern.
However, coming from a contract manufacturing, majority segment, order book backlog, the size of that order book, the as well as the diversity of that backlog, is really a leading indicator to the financial health of the segment and where we're going. Two key messages from this slide. The top half and the bar chart that you see there, as well as the bottom charts with the pie chart. On the top, the order book backlog. The thing to note is you'll see the significant growth in order book backlog that we've had. you know, not just coming out of COVID, which is a given, but even since before the pre-COVID era, 'cause that's really a notable point. The second aspect is in the pie chart.
I know those colors are somewhat difficult to point out, and I'll highlight that. On the one on the left, you'll see a limited diversity of that order book backlog, whereas going into the current order book, there's a far more significant diversity in our market of that order book. If we talk about the quantum of that order book backlog, the top part of the graph, you see that the growth has come from two aspects. It's been both organic as well as inorganic, the growth in the order book.
That's really the core businesses have delivered growth in the order book on the back of what Trevor has spoken about and the opportunities in the market, as well as the successful acquisition of Etion Create, bringing in, at the end of last year, around ZAR 600 million of order book. Even so, continuing to maintain that strong order book, given a strong financial performance in the first half of the year. Both of those aspects are really positive. This really sets up the segment nicely to be able to grow back to and beyond those pre-COVID levels that you see there in 2018 and 2019. It's important to note also that the order book that we're seeing now, which Trevor also alluded to, was the fact that this is not just...
The order book is multi-year order book now. This gives us sustainability in our results and also helps reduce the somewhat lumpiness nature that you would have known in the defense contract manufacturing industry previously. This is really around the customer buying behavior that helped us grab this type of order book. The second, but the bottom part of the chart, where it talks to the diversity of the order book, I've really highlighted two years. September 2018, I chose, as well as our current order book backlog. Those two years, really because they both have strong order book backlogs going into those periods. 2018, really, that backlog of order book resulted in strong 2019 financial year performance. However, it was reliant on two key markets.
The local market, back in the day, was really a key reliance for us, as well as the India and Southeast Asia market. And that came off the back of two significant contracts, both in the secure communications cluster as well as the fuses cluster. Whilst that resulted in strong 2019 performance, it was difficult to maintain that level of order book and the consistency of those revenues going forward. Now, of course, COVID exaggerated that as we went into 2020 and 2021. But what that fundamental reliance on two fewer markets drove us into the key strategy of diversification and internationalization. And that effort was really done over those three years, 2019 - 2021, quite strongly.
Even though during COVID, the inability to travel, the inability to actually land significant contracts, there was a lot of work done to set us up in the market such that where the opportunities exist now, we have been able to travel, land those contracts again, and really increase our order book quite sizably in the last couple of years. Slide two really just points out the I guess you can kind of talk to the correlation between revenue and order book, what I was getting to. You can see that going into the COVID era, once the order book fell away, the revenues struggled to maintain those high levels. Key aspect here, two key points I wanna note from this slide is that really within our segment, operating profit is significantly impacted by factory throughput in the manufacturing environment.
Fundamentally, we are well geared to be able to execute revenues in excess of ZAR 2 billion without materially increasing our fixed cost base. Where back in 2018, you would have seen from the financials that fundamentally the segment can deliver operating profits around the 15% mark, you know, we are set up at the moment to be able to, as the heading points out, grow back to and beyond those pre-COVID highs from a revenue and hopefully a profit generation perspective as well. One other aspect I really wanna point out in the determination of profit and revenues and the impact, is that our diversification into the four key markets now being Europe, Southeast Asia and India, the Middle East, as well as the local market, there's a greater emphasis on export.
And so we are able to capitalize on the weaker exchange rates where we sell predominantly in USD and euros into those markets. A large portion of our cost base is still rand-based, with labor, both in the manufacturing and R&D space, predominantly in the rand side. That really allows us, on a weaker rand perspective, where it may negatively impact some other businesses, it sets us up both financially and competitively in the market to be able to capitalize on that. In summary, basically two slides. What I'm trying to point out and our case here in the market, is that, one, we have excellent order book coverage going into the medium term.
Two, is that this should result in a much improved factory throughput that we're seeing, which in turn will result in improved margins from the last couple of years. Finally, the diversity of that order book means that there's less reliance on the local market, there's less reliance on one or two markets, which gives us better sustainability and better, effectively, less lumpiness into the medium term going forward. Thank you.
Any questions for the segment team? Stay seated. Sit down there. We'll steer it to you if you need. Any questions for Trevor and Marcus? Did such a good job. Here we go. Okay, hang on. I'm going to. There's been some challenges on the webcast hearing the questions, so I'll repeat the questions, if you don't mind, before I answer them or before we answer them. Go for it.
All right. Thanks. Thanks, Trevor and Marcus. I think my question is just on your third bullet there. Do you have a sense of, like, the timeline, just in terms of when you think the revenue and operating profit will go up you know, beyond the pre-COVID?
Yeah.
Is it just that over the long term, you expect it?
No, no, I don't think it's over the long term. So those pre-COVID highs had effectively all of the businesses running at full capacity. The only one that isn't really running at full capacity at the moment is the radio plant, because we don't have the local order. We're well positioned to get back to the pre-COVID highs in the short term, or to escalate, to get towards the pre-COVID in the short term. If you look at that order book coverage, I would expect us to exceed that in, you know, in the next one or two financial periods. This is not a medium-term trend that we see. We see it as a relatively, because of that coverage, we expect to get back to that quite quickly.
In terms of the order book coverage, are those the levels going forward that we're looking at, or is there a bit of cyclicality there that we should expect?
The question is, are we at, call it, stability on those order books? Because I'm in charge, those order books are nowhere near full enough. The guys are under strict instructions to double it. Yeah, no, absolutely not. On a more serious note, the trend that we give, if you look at those three macro trends up front, which really relate to that insecurity that we see from a geopolitical point of view, we think these are medium to long-term trends that support the activity inside of our business. Even though the businesses are project-driven, we think we have access to enough markets and enough products to be able to replace the project nature of them by new orders going through. You may have some flexibility around that, but I think we're in an elevated stage of order book receipt.
For your CFO, and thanks for the numbers. My question is around the margins for the division, the segment. Even pre-COVID, I think it was around 2016. Your margin was around 20%. If I look at the trend, it's been in the downward. They've been declining. Why is that? Why have they been declining?
I think, as I mentioned, a big factor of the margin is factory throughput, at the end of the day. Where are we positioned? How much capacity do we have to deliver revenues, and what is our fixed cost base at? The order book you would have seen in those years, and there is an element of exchange rate variability in there that we can capitalize on or not. Fundamentally, when I'm talking about the defense aspect of the segment, you know, from a 14%-16% operating margin is where typically you would see it, and 2018 was a good year of that. There may have been one or two other factors in there that can change that, but that's not a sustainable level that we would expect to target going forward. If that makes sense.
All right. Cobus?
Cobus from All Weather Capital. Trevor, I've actually got a question for you. On the R&D spend of 8%-10%, it's either private or you're doing with a partner. What's the split of that, roughly, over the past few years? If you do it with a partner, is there a two year exclusivity where you do a cost plus only to that partner, or? I just want to understand how that R&D or that IP gets monetized.
Okay. We currently, I would say, work at between 3% and 5% with the partner development and 3% private. The contracts that we enter into with regards to co-development are fairly fixed contract expenditures. We definitely build a business case on that expenditure. Our expectation, as I explained before, based on our interactions with certain of their customers, is that we realize that market in about 2-3 years. That's what we focus. That's how we work.
Well, yeah.
Sorry, just a quick one. Essentially, since 65% of the revenues in this segment is now generated offshore, do you have a hedging policy in place?
We don't hedge accounts, but we have governance procedures around how we take our forward cover, when we take it out. We have management meetings monthly. They're a firm point in what we discuss at every management meeting across every business unit. It's a critical part of what we discuss on a ongoing basis, and fundamentally, the bigger decisions we take within the segment or within each business unit is discussed with group treasury and the key management in those businesses, as well as segment and group.
Maybe just two things to add on to Marcus's question. When we bid, we tend to escalate the escalation, or the exchange rate, so we tend to overcost, and underbook in the bidding process. We're quite conservative in the bidding process, where we, call it, amplify any margin risk that's there. The second part, fundamentally, within that governance that Marcus has described, the intention is not to speculate. Whilst we're on a steady declining environment, you're going to pick up some margin enhancement. We don't play, don't play margin, so we don't, you know, we don't sit with big open hedges where we fix all the cost at, let's say, contract stage, and we hope that the rand's gonna blow out at the end. We keep tight control over that, with the general principle being, we're not trying to speculate on a weakening rand.
Sorry. In your defense, in the defense of Applied Electronics segment, how are you viewing AI? How is the segment adopting AI, and how is it adapting to AI? Are you seeing it as a greatest opportunity as the ICT segment stated earlier, or is it a threat for your business?
Sorry.
Have a go. I don't know the answer.
I do. AI is not new to defense. We've been building sensor systems that help us with decision support. It's not something new and exciting for us. I can, I can give examples of passive systems that today. I mean, we were speaking to AWS 8-10 years ago about pattern recognition with regards to what's the difference between a shirt and a T-shirt. We would take that technology, that AI, and we put into a passive sensor system to differentiate between somebody shooting you, at you with a missile versus a bullet. We've already been part of that entire artificial intelligence much earlier than the rest of the segments and the trends that we see now.
Nick, did you wanna add something? Oh, you look like you're standing there, ready to say... Okay. No. Oh, sorry. I thought you took one 'cause you wanted to add to something. Yes, Debbie.
Sorry, just a question. Hi, I'm Debbie from Standard Bank.
Got you.
Let me project my voice there.
I'll repeat it, I'm sorry.
I think it's a question that, I have sort of briefly asked, but with S.A.'s greylisting, have there been any issues with your offshore contracts or contracts that you're looking to secure?
Yeah. Marcus can handle that very comfortably.
Maybe...
Sorry, let me just repeat the question. The question for the webcast was: With the gray listing, is there increased challenges in the manner in which we bank and book our international contracts?
Debbie, there's no doubt we've seen increased challenges, with the gray listing. You know, I think the environment and the industry we're in, together with the gray listing, gives us a greater challenge than others would probably experience. However, you know, though we do sit on the backbone of the strong governance requirements, and that really supports us. It's leading from a global perspective, our governance and regulatory control, which helps us and supports us, where the environment that we sit in from a gray listing, kind of contradicts that. We have to find ways, and we do, to work around that. Yes, we engage. If we can't find one solution, we'll engage with other parties or other banks, other institutions that can assist. Yeah.
Any final questions before we go into the deep dives? Perfect. Petrus, are you up?
Thank you, Alan.
Sure.
Before I start, maybe just to correct something that Trevor Raman said, I'm not the founding member. I was one of the founding members. Otherwise, I may run into some of my ex-colleagues that feel offended. Just a quick brief history before I go into the company and try and explain what we do. We founded the company roughly 25 years ago. A couple of young engineers, still had hair at that point in time, decided to start a company. Didn't have a strong strategy. We're going to build widget X, Y, Z. We just said, "We will start a company." We very quickly found ourselves into a environment where we were firefighters, I'll come back to the firefighters a little bit later.
In other words, people came to us with items that they were struggling to get designed and manufactured, so we ended up being the firefighters that solved those problems. We fairly soon after that said we need to develop our strategy, and I'll show you how we developed the strategy from there. In that 25 years, we changed our name. We started as a company called Parsec, and about seven years ago, we rebranded to Etion Create, the name that you see today. Last year, we were acquired by Reunert. One of the questions I faced quite regularly in the last couple of months is, "So now what happens? You're the part of Reunert, and how is Reunert?" I think it's important to unpack that very quickly.
When the decision came that we must find a new home for Etion Create, it was quite important for us to get a home or an environment that understand the type of technology that we do. We're a high-tech company. We have to operate in an environment that understands exports, defense business, and non-defense business. At the same time, we wanted to have a cultural fit and the same values. I must say, I'm quite happy to say that we really enjoy the Reunert environment. The cultural fit, the environment from a technology point of view, it's a perfect fit, and the same message gets conveyed by my executive team quite regularly. Let's talk about how this journey ended up a bit. Unlike, I don't have as many slides as Adam, we've got stuff to show.
Adam, his business is a bit more conceptual, there's a lot of slides that explain the business. We just show pictures, we point at stuff. From a firefighting point of view, we moved on and we said we have to finalize our strategy. If you look at the engineering environment, there's typically two directions that you can go, either you're a services company or you're a product company. In our world, you call it a OEM, original equipment manufacturer, or you're a services company. The route that we followed, it became clear that we don't actually want to box ourselves into one of those areas. You'll see that we use the words original equipment manufacturer of design and manufacturer, ODM. What it implies is we design and manufacture. I'm gonna talk a little about it.
What it allows us to do, is we can either go into our clients and we design a product for them and we manufacture it, or we can do our own product, sorry, and manufacture it and supply it into our clients. The fact that we can work with our clients and design and manufacture a product for them, implies that we get deeply embedded into their value stream. I'll show you the examples a little bit later on. These clients are not clients for a year or two or three. We took multiples of decades. Okay. We end up doing full start to finish solutions for them.
If you look at the ODM element of it, and you'll see the examples when I go into that, this firefighting principle that we had stuck with us a little bit, in the sense that the stuff that we do are not Mickey Mouse. It's complex solutions that we have to provide. That's where our key competitive environment is. We don't compete with somebody operating out of the garage. We compete where people really need a strong engineering team that can stick through a very complex product problem, solve it, and ensure that it gets industrialized and manufactured. The fact that we not a OEM and we're not a service company, also allows us flexibility of our sectors. We don't have to be certain to one sector. We operate in defense, in aerospace, mining and industrial, cybersecurity, and rail.
If you think about it, that's actually a quite a broad spectrum, and it would be difficult to do that if you were a OEM, as an example, equipment manufacturer. Again, the ODM model supports various revenue streams. It's important to understand that when we talk about various revenue streams, they don't just flow out. This is actively driven in terms of how we operate. The one revenue stream is where we go with clients. These clients have a requirement, and they leverage off our capability to develop the product and to manufacture the product. I'll show you examples. This is not a once-off type of item. It becomes a long-term, typically 20+ years relationship, where we develop the product, we remain the design authority, and we manufacture and enhance the product as we go on. That's the one revenue stream.
That's effectively what we call an ODM service model. We design and we manufacture, and we become the strategic partner that's deeply embedded into our client's value stream. The other one is where we do our own products. Typically, what we would do is we would not look at an environment where we compete with our services business. We would do products that's either in a different segment or complementary, so that our services clients don't feel threatened by the business that we do, from a product point of view. These two live quite comfortably together. The other advantage that we have as an ODM is when we go into clients, and David spoke about localization, we're quite open to the client needs. If they want a product, and we have the product or we can develop the product and we can provide it.
If they say, no, they actually want their own product, but they don't have the capability to take it further, we're also comfortable with that. That enable like localization for us, and that's part of the reason why we had success, and I'll show you a little bit about that. We're quite open and able to adapt to our clients' needs. We don't go in with a very stringent business model. From a geographical point of view, we operate in South Africa. In South Africa, we typically focus on what we call golden clients, and it's clients that's big, and they have an international focus. There's a indirect international route for us as well. The other region that's a key region for us is the Middle East.
We've got a strong brand. We've got a strong track record in the Middle East, operating there for many years. This is the easier portion, and this is now where we have a cheat sheet. We don't do what Adam was doing. We show pictures, but I can't point to them, so you have to follow my instructions. If we start on the left, right at the top, you'll see a small picture of what we call the CheetahNAV. It's a tactical navigation system. The vehicle that you see there is a typical land systems vehicle, and this is where these units go into. Now, if you think about it, a navigation system, that's a GPS. It sounds silly, and it sounds silly that we're doing huge business with this unit.
A normal GPS is not going to work in a military environment. You need something that's ruggedized, that's military qualified. There's various standards that you have to adhere to be able to go into those vehicles. Another key element associated with it is if the GPS signal is being denied, and in warfare, that can actually happen, you wanna make sure that you can continue to navigate. This system will continue to navigate into up to a very accurate position without any GPS signal. It uses an INS or inertial navigation system to do that. From a defense point of view, that's quite crucial, so that you know if your signal is being spoofed or if you are not getting any GPS signal, you can continue to navigate.
What we've also done with this, it's already designed into a couple of programs, and when we talk to the growth opportunities, I'll touch a little bit on this. We've already got this designed into a couple of big programs, and we've supplied. This middle left is now an example of what I would call a pure ODM type model. That's the Eurofighter helmet tracker that you see there. What you can see, that little black box is a camera, and the electronics that go into that camera is something that we designed. I'm just going to come back to the firefighting role, which is the easiest portion to understand our business. I'm going to contradict Trevor a little bit. He said you take product to market quickly.
I'm going to have multiple examples that show the opposite, remember, I'm talking about difficult stuff. When we designed that, it didn't exist. When our client approached us, they wanted to show an international client. They wanted to do a POC, a proof of concept, to show that they can actually master this technology. They approached us. They didn't have the in-house capability. That was in 2003. 2009, the first production, series production started. We've manufactured over 4,000 of those cameras, and as we stand here today, we are still working with this client, talking about future upgrades. That's the portion I'm talking about, becoming deeply embedded into the value stream. Because we're the design authority, we remain in that path. We continue to manufacture, we continue with the observation management, anything else that goes with that product.
It's almost as if it's our product, but it's not our product, and that's important to understand. Otherwise, I will also get funny as hell to market. The one at the bottom is a combination of the two. It's a typical jammer that's used in a military environment to jam radios. That one leverages one of our signal processing cards. We developed our own product. It's our IP. It is high-end signal processing cards. That jammer runs on our signal processing card. This is now bottom left, sorry, I can't point. We also developed the algorithms on behalf of the client. Again, this is a very old relationship. In actual fact, I think Harald, in his previous life, was part of that. These relationships really do go on long. I think that was almost the year 2000.
It's a 23-year relationship, and we're still working with that client. Our product is still going in, and as they do new products, we work with them to supply new products. Three models, own products, and this is just example. I cannot take you through everything that we do. Top one is our own products, big business for us. Middle one is a long-lasting, high-end business, where it's a purely services business, but again, that deep entrenchment. The bottom one is where we do a combination. That's what we also like to do, is when we go to a client and we see there's an opportunity to embed some of our IP, but also provide that continued services, we do both. In the middle of the mining, at the top, the one that Alan referred to, is the electronic detonations.
You may be aware that there's a normal route of way that is done today, and that is, they do electronic detonations, they sequence the explosions so that they can actually fragment the rock better. That's typically done by wired detonations. Just to contradict Trevor again, sorry, Trevor, I'm going to get a hiding for this. We started with this development probably eight or nine years ago. This is how complex it is. Why is it complex? Because we're doing wireless detonations with our clients. Wireless detonations imply that you actually have to communicate through the Earth at a fair distance, because you want to be away from those explosions.
If you think about it, with a wire, you can actually communicate with the detonator, you know, you can communicate backwards and forwards and make sure that you've actually detonated each unit and programmed the timing. In this case, we have to do it wirelessly, we have to do it through rock, various types of rock. There's no way to communicate back because we're communicating at a very low frequency, the effect is that our antenna that transmits is quite big. Low frequency, big antenna. Communicating back is not possible. You actually have to be very sure there's high safety standards that apply to this. This is why it takes so long. First, you have to do research to understand how you're going to communicate through earth.
You have to develop it, and then you have to qualify it, and you actually have to get it to work very, very cons effectively. In the mining industry, again, just to reiterate, this is where it's not our product. Designed by us, we continue to design the new versions of the product, and we manufacture the electronics assembly, sub-assembly, on behalf of our client. Now, typically, if you look at the wired environment, millions of units per year. The wireless environment is not supposed to go to those volumes. When I get back to the growth opportunities, I'll touch a little bit on that again. The bottom two is mining safety equipment. Very similar story. Our client came to us. They didn't have the ability to design and manufacture this in-house. This one started about 2006.
We're still designing and manufacturing on behalf of our client, mining safety equipment. The middle one is a collision avoidance system, which, if you're aware, in the mines, they cannot see where they drive, and they actually drive over the miners. What this does is it warns the driver so that he can see the miner, and the miner also knows that the vehicle is on its way. The bottom one is a more commonly known problem in the mines, and that's gas detection to warn miners if they have either slow gas exposure or if there's a quick pocket, and they need to get out quickly. Middle is all of that is ODM services, and the reason being that if you want to be in the mining and you want to supply directly to the mines, you have to have a broad footprint.
This is why we can leverage defense and mining fairly efficiently. We don't have to have that broad footprint to support these items in every mine. Our clients do that. We bring the design and manufacturing capability to the table. On the top right, we also do cybersecurity, and there we focus on network security, high-end network security, and then we do rail equipment. Track side, this is effectively monitoring where the vehicles of the track, the trains are, and then also on board. The onboard equipment, ironically, look very similar to the Titan nav system that you're seeing right at the top left. The reason we could develop that a bit faster, and that's where Trevor is correct, our ability to take the navigation system to the market.
What we did is we used our rail equipment as a starting point 'cause it had a very similar looking device, but it was obviously not military qualified, and it wasn't a navigation system. We leveraged that into the product that you see at the top. Just to reiterate, own products and then services that we supply into clients, very, very long-term relationships. Talking about the growth drivers or sustainable growth, Alan was sort of joking about the fact of Trevor, that we weren't smiling, and you could have heard Alan say, "Our order book must go up." You know why we're not smiling. It's the pressure that's being applied by a top manager, but I'm only joking. I think it's because we weren't close to the wines when we were taking the photos.
If we look at our growth drivers, the first one is defense growth, and there I would focus on the Middle East. We have a very strong track record of collaboration. We started quite a while back with our ODM business model in the Middle East, and this is obviously a very strong or rapidly growing market. The fact that we were busy doing localization gave us a very good footprint to take our business further. We're very well known of, in terms of doing good localization. If you go into these regions, they talk about us quite openly, the fact that we do true localization. What we mean by that, there's a lot of, let's call it, other countries that go in and they promise localization, but they're actually trying to create a dependency.
The clients see through this fairly quickly. They wanna see true localization, they wanna feel that you're actually working with them in terms of the longer-term strategy, that's what we do. What we know today is there's various land system acquisition and upgrade programs planned over the next 5 - 10 years. The quantities is in 1000s. We're already on two of those programs, we have a proven product already embedded in those programs, there's a lot more coming in terms of the programs. Trevor talked about it earlier, the way that we work, our localization plays in our favor. We do true localization, we recently went to do some client demonstrations again to the end user. Our partner did the presentations.
We were sitting there, listening to the discussions and trying to look pretty, which, as you can see from our photos, we're not good at doing that. If you're in a position where you go internationally and your client effectively sells to the end user, they start seeing this as being a truly local product. That's why you can actually grow your business into that region. That's what we've really done successfully. 5-10 years, lots of programs, the nice thing about land systems is it's higher quantities. Typical programs can be easily in the region of 1,000 vehicles. Our tactical navigation system is really well-positioned. It's already selected by two programs, and typically what the nations are trying to do is they realize that there's a support cost associated with equipment.
Every time you use a different piece of equipment, you actually drive up your support cost. You now have multiple suppliers that want to support, while you can actually spread that support cost by having one supplier, and also you get economies of scale. They bring bigger volumes to us, and then they obviously have ability to drive price and localization harder. The other thing is the tactical navigation system as we go forward, because remember, we're doing localization, so if we don't do something new, somewhere we're going to run dry. We have to constantly work with the client on the future. What we're doing, the navigation system actually brings a nice way to do this. It's just a screen if you look at it. To give you an idea, on the first program, we just did tactical navigation.
Second program, if you look in these vehicles, and you go into the inside, you'll see they're very congested from a space point. All of these screens with various functions, there's cameras that they wanna see what's going on outside, various functions that they wanna handle. What we did is we said, "No, we can actually integrate the cameras that's on the vehicle and show the same image on the navigation system." Client immediately said they like the idea. We pay, charge a little bit extra, we add a new feature, add that to the product line. Somebody lost a fairly big deal because they couldn't sell an additional screen, but that's part of the game. Now we see additional features. We're looking at more features that we can add on. We see the navigation system as a platform on the vehicle.
Once you're there, we can add Blue Force Tracking, we can do battle management systems, all of that gives you a roadmap to work with your client beyond the current features that you have in the product. On the non-defence growth, the safety standards imposed by the South African Department of Mineral Resources is driving a fairly big drive, especially in the collision avoidance portion of it, where in the past, these systems were not mandatory. They recently became mandatory, I almost think around about in January this year, which means that all the mines have to react fairly quickly, they now have to roll out this technology. Obviously, our client is seeing huge demand, they're working closely with us to try and ensure that we can deliver that demand into their client base.
The other area that we see huge growth, and I've touched on this, is the wireless detonations. I mentioned that this was a quite a long development, a very complex development, but our client is very successful. What they're actually seeing is they expected wireless detonations to only absorb a portion of their wired business, but the use case for the wireless detonations actually increased. It's more than the portion of business that they thought they would take. What we're seeing is that they're actually growing at a faster rate than they anticipated, and we're seeing the flow-through of that as we manufacture the electronic subassemblies. We also look at what they're forecasting, and we can see that they're expecting this growth to continue. This gives us a nice continual business.
We call all of the mining business in our world is what we would call. We don't have annuity business like Adam, that says it's a tick-tock, we have to work, and that's why I don't have hair. We have to work every year for our business, sadly. The mining business does bring this repeat business. Repeat business, and especially in an environment where the guys are selling more and more at a quite a rapid rate, gives us a growth opportunity, quite a good growth opportunity. The last one, we touched on the synergies already. I mentioned that coming into the Reunert Group, I'm not saying this because Alan Dickson is sitting there probably as well, but no.
No, the synergies really sat well, Harald is going to talk a little bit later, and you'll see that Harald 's also in the mining industry. I think the rest of our colleagues will also have pictures to point at when they talk about what they do. Sorry, Harald , your videos was better than ours. When we came in, one thing that Trevor touched on is, we've got a strong footprint in the Middle East. We're already working, just to give you an example, when we do trials later in the year with our navigation system, I'll try and make sure that we take what becomes their radios along. There's other radios in the play, but maybe we demonstrate by taking our group's radios along, and how this client sees a different solutions.
One, they see a bigger solution, bigger integrated solution. Secondly, if they start looking for radios, the radio tech is already part of the demonstration and the trial that they're doing. That's one way that we're trying to drive that in. We're also leveraging the brand. We really do have a strong brand, and we've taken Trevor as well as the rest of the CEOs in, and we're trying to make sure that we. They can leverage off our brand. The counter is, too, the rest of the Applied Electronic Holdings is strong in other regions where we are not. That time it takes to get into a new market, the lessons that you have to learn, we can now short-circuit that by leveraging of the group and trying to get into those markets quicker and through our sister companies or subsidiaries.
We're working all, both from a sales point of view. In the last bullet there, talking about collaboration with the business units, that is, if you think about it, we're now in the group nine months. Generally, if any company gets bought, nine months, you're going to start thinking about synergies. It's a slow process. In this case, it was almost immediate. There's a couple of collaborations already running. I've talked about the radios. We're looking at one of the other groups, video tracking system, embedding that into each other. There's a lot of collaboration opportunities where we can take bigger solutions to the client. Bigger solutions drives you up in the systems hierarchy, and it drives up your revenue stream. That's my story. I hope it, you've got an understanding despite the lack of nice videos.
Thanks, Petrus. Let's shoot. You stay where you are. I don't think I can help you with too much here.
I think we all know the collaboration between government and private sector, you know, to get us on the right track. Thank you. I just wanna know the challenges that government has with Eskom and Transnet. There's obviously opportunities there to grow the order book, you know, especially on the rail side, and then also on the substations and power stations. I know the DAA has mentioned that they wanna focus on rebuilding the rail network. What is your focus there? I know finance is a challenge, so, you know.
I, obviously, I didn't list it, and the complexities would be the reason why I didn't list it, but we do see growth opportunities. The timing of that is a little bit more difficult to estimate, and that's why it's not part of my... We definitely continue to driving, and you're right, we're starting to see that requirement to re-establish infrastructure.
If I can just add into that, my expectation is that it looks to us like these business government conversations are more real than they have been in the past. My view, more about necessity than maybe ideological alignment, but I believe a number of these, the rail lines, will move to greater private participation, and I think that trigger is probably the timing trigger that we start to see the activity.
Yeah.
The increased activity in what we are seeing or the opportunity that sits within Etion for that. I think that's closer than further away, would be my sense. That's the trigger when we actually get private gets allowed onto those lines.
Mm.
I've got a very quick one. On the wireless designations, is the mining company the client, or is it Omnia and AECI that's the client?
I'm not going to mention any client names. We are under ITAR regulations, so we supply into the OEM that supplies to the mines. We don't supply to the mines directly.
Yeah, Peter, here we are. Come on.
If you look at your revenue splits between those different businesses, what is just plus minus the percent split between those different pillars that you have?
Are you talking about the revenue streams or the segments?
Well, well, well...
Mining and defense or?
Your mining, defense, and then cybersecurity. What is the-
The cybersecurity in our world is smallish. Our two big revenue streams is the mining and the defense, and they would, depending on the year and the growth of the various, they're sitting around about 50%. It's not exact, but, you know.
Mm.
It's also going to be a function of the growth that we see.
Okay, last question, I think, then we'll move on to Mike, I think, is next.
Thank you for the presentation, Petrus. I just wanna get an understanding of what's driving the strong performance of Etion this year. At the half year results, the presentation showed that the business made about ZAR 262 million in revenue, and last year, the business made ZAR 280 million for the whole year. What's driving this strong performance in 2023? Are there any exceptionals in the numbers, or is this the new base that we can expect this business to grow from?
The growth drivers that I've listed here are exactly what's actually driving it. We are really seeing the impact of that, we're seeing future growth of that. We're definitely seeing quite an uptick in the mining business. We've seen that. In the defense business, we've received large multi-year orders on the tactical navigation system. The same drivers that I've listed has already impacted the company as we stand. I think something else to mention there, and some of the graphs that you would have seen is, you know, where the company went into a downturn, and Etion Create also went through a downturn during the lockdown period. What we did do, and I think that's true for most of the group, is we retained our capability and our capacity, and that gave us the ability to bounce back quite quickly.
Perfect. Thanks, Petrus. Well done. Mike?
Yes, Alan.
Yeah, sorry.
Yeah. Maybe I should just take some time to qualify my statement, Petrus.
Don't be contradicted again.
Yeah. I very conveniently discounted the whole R&D phase when I made a statement regarding it takes us two to three years to take something to market. In defense, we have what is called technology readiness levels. R&D takes care of right up to technology readiness level six. Then at that point that we then say, "Right, we're gonna take that product to market." In that context, I'm talking two to three years when we have already established a high technology readiness level. Okay, thank you.
Thanks, Trevor. Morning, everybody. Thanks for your time. It's a privilege to be able to chat to you all. In contrast with the previous speakers, I have neither cool videos to show nor cool pictures. Excuse me. Steering away from, s teering away from details and really to explain three things. My presentation is very simple. It's, firstly, a little about the Fuchs story. The background of, excuse me. Got it. Our presentation is very simple. Firstly, a brief introduction to Fuchs Electronics, and Fuchs, as everybody knows it. A little about, you know, our value proposition, and then the interesting story about maybe those factors and the growth story about Fuchs going forward.
Fuchs, unlike some of the other speakers who are relative newbies to Reunert, Fuchs has been in the Reunert Group for as long as anyone can remember. The company was started, you know, about 60 years ago, it was actually started with the objective to bring defense electronics into scale. Starting actually with military radio production in the factory in [audio distortion] . Started as a family business originally, then being absorbed into Barlow Rand, which of course, much of it is now Reunert. A long story, the business that Fuchs finds itself in at the moment is a result of that legacy.
Fuchs is effectively, a manufacturer, a designer and manufacturer of product, and we have relatively little diversity as compared with my colleagues in ICT and to Petrus's presentation with a diverse range of products. However, we do find ourself in an interesting having had an interesting history. Also with some diversity in other areas in the future. Unlike many of our peers internationally, Fuchs is actually not linked to big government agencies and entities. Privately owned, of course, and many of the companies that one will find in the U.S. or Germany or elsewhere are very strongly linked into their defense industries. Fuchs has found its roots initially in the 1980s and 1990s on the back of the strong defense spend at the time.
We very quickly found that with the decline of the local market, that Fuchs had to internationalize and had to actually expand itself internationally to be able to firstly stay alive, we find ourselves actually growing in that space. A little about our value proposition. Fuchs's products, over time, have evolved into offerings which suit international customer bases, we've managed to integrate into a number of systems in many corners of the globe. The internationalizing drive actually started with export contracts in the early 1990s, and we found ourselves with a relatively small group of engineers investing time and effort and energy into making those products relevant in customer markets. Fuchs is actually a relatively small entity based in Eloff, in southeast of Joburg.
We have a company which is, at the moment, about 400 people strong, and those people that we employ are engineers and semi-skilled staff on the production side. The site itself, in recent years, has housed as many as 700 people, assisting with production on big orders. An example of one of our long-term partnerships that we're very proud of, and an example of how Fuchs has made a difference in the international market, is a partnership that existed in Southeast Asia, and the partnership existed or started about 20 years ago. It started very small, as a small challenge, where the local defense industry couldn't, couldn't supply equipment to a challenge which this company had.
They approached us, we designed a solution for them, and that led to a complete set of products, and that relationship has actually survived 20+ years, and some approaching 3 million units that we've actually sold into that country. If I talk to the growth drivers, further to what Trevor mentioned in terms of the international situation, specifically with the Ukraine crisis, we are experiencing on the back of the increased defense spend that Trevor alluded to, we are seeing significant changes in the past year, specifically coming out of COVID, in that markets that hitherto would actually not have placed any more contracts than approximately the execution timespan, which was six months to one year.
We are seeing multi-year orders from a few different domains and a few different customers, and in the history, in my history at Fuchs, we have never actually experienced those multi-year orders, and we believe that that's a trend which is set to continue. Also based on our customers, mostly being either OEMs in the munition space or end users and ministries of defense in a few jurisdictions in the globe. We deal with multiple countries, and the primary areas that the company actually sells into is Europe, Middle East, and also India and Southeast Asia.
In terms of the, the drivers, you know, the multiple year orders, is very much bucking the trend of the very lumpy order intake that we've seen, over the past, 10 or so years, and that trend we see continuing. In terms of our, our, the movements that we have, is one of the projects which has been, which is gonna assist us, with the growth in the market, is expansion of Fuchs's facilities. We have recently started on a project to reflow the production lines at Fuchs, rejig the facilities to make those fuses, those, the facilities where we build the fuses, more amenable to volume production, and also more friendly in terms of the staff accommodations.
An offshoot of that is the project that Trevor alluded to. We're proudly home to, previously known as the Roanoke College, now Roanoke Learning Institute, where a few years ago, there were 18 students and a few teachers. There is about to be a complement of 60 students and more support staff, and proudly housed, adjacent to our factory, and very much a part of, let's say, the Fuchs scene, where we hire a large number of blue-collar workers, and the youngsters who come to the college come from the same environment that many of our workers do. It's a great story, and I'm very proud to be able to be part of that.
The refurbishing of the plant is going to lead to our quicker turnaround of product, especially having come out of the COVID crisis, where we've really struggled to obtain semiconductors and some difficult-to-obtain equipment. We're now seeing the tail end of that, and we are able to convert product more quickly, serving the backlog which exists in some of our OEM partners and customers, and we'll be able to clear space for future work and for future projects. What we see in the Middle East and South Asian region, we have long-standing partnerships, as I mentioned earlier. There also is huge potential in the UAE and in some of the markets serviced by ATRP8.
Those potential partnerships, in the same model that we've used in places like India, where we've worked alongside customers, where they access the market, we assist them with building factories and facilities, and that customer effectively builds the full product from kits that we supply. We believe that that's an absolutely scalable model that could work as well in the Middle East as it does in places like India. In terms of the rest of the world, our drives in Europe include last mile partnerships with OEMs. What we mean by that is because the goods that we make or the products that we make are hazardous, require hazardous goods transport, which leads to costs and leads to logistic delays.
To circumvent that, we are working with partners, excuse me, partners in Europe, who are actually adding value on the back end, which enables us to export goods which are non-hazardous and are able to be values added by the partners on the ground. It, it achieves two objectives: firstly, compliance in those markets, and secondly, reduction of the logistic challenges and the costs involved with being on the southern tip of Africa, supplying into markets that are very far away. It's also in terms of other world access and part of the Fox growth story, a few years ago, we absorbed a company, Doptech, into Fox, it as an acquisition. That company, with its engineers and its products, operates in the 14 mm weapon space.
That is an area which is complementary to the usual Fox products, which are used on mortar, artillery, and rocket systems. The 14 mm space is one where there has been significant growth in over the years, and we expect to be able to get those products into not only Central Europe, but to be able to access other markets, such as Middle East and India, with that product line. Trevor also alluded to other markets, which to this, to date, have been inaccessible by ourselves, and these markets have typically been sold to by various governments, government-to-government engagements.
We've seen numerous approaches, multiple approaches, and we've actually achieved fails, sales into those markets, where both products and also assistance with facilities, into world regions, where, which were, where the doors were previously closed to us. In, in conclusion, we believe that the Fuchs story has got legs, that the trends that we're seeing at the moment, where we're inundated with interest from all corners of the globe, that trend seems to continue. We've got a model, and that we've got the people and the scalability to make that relevant for years to come. Thank you.
Thanks, Mike. Any questions for Mike?
Thank you so much. Okay, seeing as a lot of the outlook is based on the international clients, especially for just the segment as a whole, is there any like, policy risk, social political risk, that could sort of affect the outlook? Maybe policies change in these other countries where a lot of the outlook or a lot of the growth is being anticipated from, is there a risk factor we should maybe be considering in terms of just policy changes and stuff?
No doubt that there is risk in particular areas of the world. The Fuchs story is one of not so much diversity in product, where we are very, very niche in what we do, but the diversity into regions of the world, where there are multiple countries. The slide we showed earlier was necessarily obtuse in terms of the actual countries that we deal with and companies that we deal with because of MBAs. If there are threats in particular areas of the world, we believe that there's enough diversity to counter that by equivalent business in other areas of the world, especially now.
Just to add on, I think that would not only apply in Mike's world, but generally across the segment, and that's why that sort of order book that you saw, that's sort of split almost equally across four jurisdictions, is so important to us. I office.
I think it's a question for almost all these businesses, but how do you balance the need to protect your IP with the customer's demands that you localize, indigenize, and do technology share?
I guess the short answer is careful contracting. The model that we use, you know, as if I can use a case in India as an example, that we remain relevant as an OEM to a company that generally builds to print. In terms of protecting that IP, the key elements of those kits that we sell to the company that's actually building them, adding that value, which are not easily replicable in country, because there is development or technology required in those areas. So that's the and of course, agreements. They're caused by agreement as well. In generally, we do a lot of hand-holding deep into the life cycle of projects.
In many cases, we try to do as good a job as we can to, let's say, discourage, or the customer doesn't actually need the expertise and the engineering support and the test ranges and everything else that the business needs, and, so it keeps us relevant.
Maybe just a quick question to Trevor. I think earlier you spoke about relationships and price as being a key competitive advantage. Could you just maybe talk about the competitive landscape? Where do you see the threats?
Okay. I think when we talk about internationalization, and as I explained to you, our willingness to do localization, we believe that our competitors in those markets are falling behind. When you look at not co-development, but actually a free competition, I think we've done very well in the local market. We retain a strong position there. When we look at the overseas markets, if I look at Fuchs and how we're expanding into Europe, I think we are definitely punching above our weight category. We offering products that are meet the customer requirements at the right quality and at the right price.
Whether this will now put us into the, let's say, the sights of our competitors, and they come back, more strong, you know, it is possible, for sure. At the same time, as I said, the competitors that we are up against, they're so consumed with their local demand or their regional demands. We believe the gap is there, and it will stay there for the medium to long term.
If I can just add on to that, the other area that typically in those areas that we've picked up, Europe aside, the customers in those areas are actively looking for non-traditional sources of the products that we deliver. That, I think it just not minimizes, but it optimizes the competitive environment, where they're actually looking for alternate sources and not Western sources. Thanks, Mike. We're gonna move over. We're running about. No, no rush. We've been running about 15 odd minutes behind. Harald 's gonna take us through his presentation. We'll take questions, and then he will give us the logistics for the site visit and lunch thereafter.
Thanks, Alan. I see Theophilus, you've scared Adam off totally. He's not even present anymore. I will not be able to use him as a scapegoat. Reutech Radar, thank you very much. Just as an introduction, I will also be rather brief, as Alan has pointed out, that I only have a few minutes. Okay, guys. The company was founded 35 years ago, or 36 years, within the 34th year, becoming 36 quite soon, in Stellenbosch, with the intention of creating a radar capability in South Africa. There were some technologies in the CSIR and other sorts of university spaces, but it was never in a position to commercially actually build something.
At the time, industry in South Africa, being some of the bigger corporate players that you see around you still today, and the Defence Force and Armscor together, made a decision to create something like this in South Africa, due to the political complexities at the time. They went about it by going to the University of Stellenbosch, taking the master's class in electronics and engineering, and the professor, and creating a company in Stellenbosch. We are actually quite fortunate that one of those founding members is still in our employee full-time, and the professor himself spends 2- 3 days a week in the company, still looking after our young engineers and skilling the people that are in the company. Quite a long, like good history.
At the moment, we're like 220 people. We will probably be around 240 people by, I would say, middle of next year. Also, due to actual requirements in the work that we have to do in the order book that we already have in hand, and that we foresee will be coming in the next month or two, few months for that matter. Reutech Radar, quite different from some of the other companies, but quite similar to Etion, has two portions. We have a defense portion, which is half the revenues of the company, and the other part we would call non-defense, maybe industrial or commercial, if you like, but they are quite distinct.
They feed off the same technology and the same engineering base in the company and the same support structures, but they are really two very distinct markets. It's worth having a look at the world map there. We seem to be covering from Reutech Radar, quite a wide portion of the market. You'll see the circled areas are actually the defense-specific ones, and there's an area in sort of Southeast Asia, which is also defense. The rest of the world is actually the mining radars that we sell. These mining radars we have been selling since 2005. I'll touch a little bit more on them when I get to pictures, as Petrus has just told you, we do pictures. Engineers do pictures. Just to...
Obviously, to sell that wide into the world, we cover all the continents, we do need significant channels into market, and we support different channels into market. In some places, in Australia, we own a company, which we use to sell our mining product through. In the rest of the world, it's by some other arrangement, be it a forward seller or an agent or some commercial arrangement, and the products get sold in that way into market. I think we can quite clearly state that we are the number two in the world market in mining radar product, which is a good position to be in.
We also took a bit of a COVID knock, as everybody else probably did, and it was difficult to service your product and service the clients, but we've recovered quite well. We're back to pre-COVID levels in terms of that market area. The internationalization drive that we've been on, I'll mention it in a bit more detail as we go on. Some of the previous speakers have alluded to the South African defense market being quite lumpy. Lumpy is a soft term for what the defense market in South Africa can do and does. You do need, really, other markets to be able to create a steady state or a proper growth picture for the products that we build. I think we've been able to actually achieve it quite successfully.
It's been driven for quite a while. In the past, we've even delivered, as you can see there, one or two small spots in Europe, which are not just mining products, they are also defense products. Our really, our ability to grow is in the Middle East, very similar to what Petrus has been telling you. Slightly different clients, also at scale, so we expect quite good, medium longer term, actually, business coming from the Middle East. In Southeast Asia, we've been for a few years, been doing some business, and we see it growing and continuing as it is.
Certainly, we'll try to push the defence products into a wider world cover, but in radar itself, radar is a strategic capability, especially in the first world, governments fund their strategic capabilities in their own countries. They protect their markets. They put the technology in and the funding and the people in there to make sure that they are self-sufficient. If you are France, and you have been building radars for French use for 50 years, like probably all the big OEMs in the world have done, we, as a South African company, cannot come in there and come and compete against you in your own home market, where you are government-funded and strategically protected.
The rest of the world, obviously, there we can play very hard because we have competitive technology, we have competitive products, and competitive pricing. That's the game we play. Radar specifically, not as easy to get into Europe, but all the other markets are quite open for us, and we're playing quite hard. I think the other... It's been mentioned a little bit today as well. The focus in Europe is such in terms of their own spend on the product at the moment, that they are defocusing from some of the other markets where historically they've been quite strong. I'm taking this Southeast Asia picture as a, as an example of that, where opportunity is created because of European focus by European large OEMs. Yep.
I mentioned there that we have well-established preferential partnerships, this is one of the key drivers that we are seeing at the moment that's enabling us to grow. The technology is very complex in radar, it's not just electronics, it's not just software, it's not just mechanical engineering. It's a whole combination of these engineering skills to create a product. That means that if you have a long-term relationship with someone that really wants an high-tech product on the other side, you can leverage off the relationship. Many of our contracts are in a non-competitive environment in terms of negotiated supply. Due to the localization willingness that we have, we are able to then negotiate deals instead of just pushing on price and trying to compete on price and time. Okay. We get to the pictures.
Just quickly before we go into the pictures place, I don't think it's been quite clearly explained at, up to this point, but in Defense, and specifically in Defense space, when we sell a product or pursue an opportunity, it takes anything from six months to 18 months to actually close the deal. After that, it takes anything from 1 - 3 years to fulfill that specific transaction. It's a long cycle, and you need many of these cycles actually running concurrently to make sure that you have an even loading and a proper growth picture. I think we are actually achieving that at this point in time. Again, without pointing, Defense and Mining split into two. Defense, the products, are radars.
Radars, just to sort of make it a simple comparison, you transmit energy, and you look for a reflection of something that you want to identify, and the energy that's reflected back into the radar itself is processed, and then you can show it in some other form on a map. People, you can track planes like you would expect of an airport. You can track vessels on the sea, and you can track vehicles and people driving and walking around. This is the information that you typically would expect from a radar. They are divided into categories in the defense space. There are tracking radars.
These are radars that can lock onto a target that you have flying or running, walking, or whatever, and then keep track on that quite accurately for you to know where it is. The other one is called a search radar. A search radar will either be turning mechanically and turning a beam of energy around it to get reflections and to find things which comes back to the search concept. It could electronically be steering the energy so that you don't have to mechanically turn the antenna, but you can electronically steer the energy, and then you can still find detections and show that information on a map or whatever display you need to use. That's the defense space. We started at the top one. The middle one is a search one. Top one, tracking.
The bottom one, it's a sort of a combination of these types of ideas that you have a tracking and a search capability, that will be a tactical radar, and they become quite big and complex as systems. You can see a picture there of a radar which actually consists of two vehicles, two shelters, one for personnel, one for the radar equipment, and these are deployed as part of a larger defense deployment with area protection and things like that. That's the defense products. These are just a few examples. The portfolio is substantially wider than what we are showing, I don't think we need to go into all the details.
You will be able to see some of the product and technology when we walk around in the building right after this. In the mining space, the area in mining that we sort of sell into that world picture that you saw, is slope stability monitoring. I need to explain that just quickly. Open cast mines are big holes in the ground, if you like. They dig the stuff out of the bottom as efficiently and as quickly as they can because that makes the productivity high and the yield high. The trick is, if you want to increase the volume that you take out, you make the slopes of the hole in the ground steeper.
The risk that you then create is, these things can collapse and kill the people and fall on the equipment that's in the bottom of the hole, and then you have a big problem. You have to optimize the mine itself for productivity. To do that, you have to protect the people and the equipment that's in the bottom, and you have to measure whether the slopes are stable, and this is where these products come into play in the world market. Petrus spoke about the South African context about safety in mining, but this is a whole world trend, and most countries have very stringent rules that say, you have to monitor, otherwise you can't mine, because otherwise you put people at risk. That creates the market. We sell these mining radars.
There is currently 260 of them sold around the world since 2005. We sell roughly 30+ per year, and that market will sort of keep on growing. We see it growing actually a little bit in terms of what the market can take. They are relatively high-value items. It's not high volume, it's high value, and you have to look after them once you've sold them. The middle right-hand picture is the newest technology of that type of mine slope stability monitoring radar. You will see in the picture at the top there is an antenna that is steered like this. The new middle one. It sort of is an electronically steered antenna. You don't have to move the physical antenna.
You can move the energy, and you can solve the picture that you see. If you look at the background of those pictures, you will also see the environments that these things operate in. The first one looks relatively cold, and the second one looks relatively warm and dusty, and weather and all sorts of other complexities come into play. It's harsh environments and quite complicated product that you sell, relatively high tech. Then in the... Who could that be?
Adam.
No, it's not Adam.
An expensive phone call.
Finds later.
... tonight.
There we go. There we go. The bottom on the right-hand side is incidentally other products in the mining space. They are not specific to open cast. They are used for other, all sorts of other productivity things in mines. In our expansion and growth strategy, we are also moving into some of the normal underground operations as well. We have ground-penetrating radars, that thing that looks like a paintbrush. The other one is a nip and dip measurement device. It replaces a compass in the underground vice, underground space.
The other product on the trailer is a laser-based scanner for any sort of surfaces in the mine that you have to measure and say it is of a safe dimension, and it is used quite extensively. That's the picture of the product space. In terms of services that goes with the product, we obviously need to be able to integrate and display information. We have system integration, and we have software that can take multiple sensors and combine the information from the multiple sensors into some other piece of information that the mining operators and engineers can work and plan accordingly. Products like these need quite complex installation and commissioning activities.
You'll see a console there, which is typically of a naval vessel, where you have a radar on sort of the top of the platform, and then you have to have cables and interfacing to the vessel systems, and you have to have displays and control and everything that you would expect. We are able to commission, install, and test sort of in that environment. The radars, being complex beasts, need to be supported over a period of time, and we have quite a few maintenance contracts that are running, which we, in the mining space specifically, it's a 24/7, 365 support activity, which we run.
You need call centers, and you need all sorts of planning around that, so that people, at any time of the day or night, anywhere in the world, can actually get support. There needs to be logistics planned and space sent and all sorts of things that you would expect in that space. Certainly we do have to do production and verification of these systems. It's not mass production like Mike does, but it's low volume, high, high-value items that we build. Okay. In terms of growth, I think most of these items I would have touched on lightly, but you will see the mining revenue, and that is a pie chart of the world market.
It's quite well mixed, that's in terms of revenue, it's all over the place, so that if there's some issue, politically, commercially, in some region where we would previously have been doing business, you need a few other ones to be able to step in to make sure that it's sustainable and growth-orientated. I think we cover quite well the market space that you see, and from all continents. The defense revenue picture that you see there, it obviously shows that there is quite a growth in the Middle East. If you were to normalize that over a few years, you wouldn't have just two pictures showing like that. It's just a bit of an artifact of the timing of that specific piece of information.
Certainly, South African market, we will keep and maintain and aggressively competing, and we've been doing that for a long time. We are planning and we are actually achieving growth in the other markets. The Middle East and Southeast Asia being the driving spaces. Yeah. I think, well, that's sort of my story. I can obviously bore you a lot more for much longer, but that should be sufficient for now. Yeah. Can you flip over? Yeah. Just to give you really a feeling of what a radar would look like if it's operating somewhere, and you must have seen this in movies and all sorts of places, but that's actually the picture that you get.
You see targets that are being tracked and reported on and managed and maintained in a database. Obviously, in the middle, where that line is rotating around, that is the location of the radar itself. This is just a recording. It's not live, but there we have live feeds like this, which we can show as well. Yeah, just to get a feeling. All right. Now you can ask questions.
Any questions for Harald ?
Yep. I have a question for you, specifically. It's just a question on the order book in general. I just want an understanding, is that, are those the orders that have been, or rather, where you've got the export permits already, or you still have to secure those export permits as it relates to, you know, your obviously international sales?
I'm happy to take that. That order book, of course, is a combination of your defense and commercial or industrial, et cetera. It would be a combination, the defense cycle from accepting order to delivery, as mentioned, can be anywhere from 6-18 months and beyond. There's various permits that you have to get during the course of that process, with the final one being the export permit before delivery. The main one, that's the big one to consider, is the contracting permit. It allows you to effectively execute the contract, once you fundamentally get a contracting permit, it's very unlikely you're not permitted to enable the export, that's more of an administration process that allows the export. That typically comes a bit closer to the time.
There's some aspects of that go onto that permit, like who you're going to use to ship, et cetera, that you may not know right at the start of the contract.
Can I just add one thing? Not all our products are covered by permit requirements. It varies quite a bit. Obviously, the mining products, for example, are totally exempt from permit control, but there are all sorts of categories defined, and the higher you move up certain lists, the more controlled it becomes. Some items, even in the defense space, are not controlled.
Okay.
A good example of that is CheetahNAV have a controlled item.
Yeah.
We won't put something on an order with backlog if we don't have the necessary contracting permit.
Sorry.
Hi. I've got another question for the gentleman here. You mentioned earlier that Applied Electronics, they received a high rating or good rating from the agency you mentioned on ESG. Found that interesting, and I'm curious to know on what metrics they considered to ... you that rating?
Maybe I can answer that if I may. Not we weren't referring to the rating per se, but category of controversial weapons is classified as we don't fall into that category. There's various aspects that give you an ESG rating. The controversial weapons is not something that we fall into, and we're clear on that. I hope that answers the question. There's various ESG ratings. You've got very large defense companies globally that have the highest ESG ratings. But certainly, they won't fall into the controversial weapons category within that rating.
I think what we're trying to highlight is in terms of the risk of what we manufacture, we don't fall in that high-risk category. We can unpack as we go through it.
Yeah.
You know, it's very important for us that we deal with this matter in our ESG positioning. It will become increasingly clear, as we go through our development and how we, and how we position it within that international domain, that what we manufacture and the relative risk of that, too, from a shareholder point of view. We're not in the big, scary stuff. I think that's the real take out of that, is it's. We're not, despite what it may sound like or defense and these type of elements to it, we're not in that, in that environment where we fall into the high-risk category. Any other questions? Yes, go for it, Arthur.
You mentioned the government spending on things like radars. I mean, given the amount of money that some of these countries spend on things like this, does this mean that you seek out specific niches where you can?
Yes.
'cause I think you, it seems improbable that you could compete dollar for dollar against-
Yeah.
...some of these institutions.
Quite correct. We don't compete at all levels of all product that's available, because in radar, you get stuff that tracks satellites from ground stations. These things cost hundreds of millions of dollars per item. We will not be in that space. In the, in the areas where we can compete, it's sort of in the, in the middle of the product range, we can compete quite aggressively. It is niche. It's not... It doesn't cover everything that can be done. Okay. I'll give you one example in that space at the moment. One of the large OEMs in Europe is called Thales. Their radar factory currently has a six-year order backlog. If you want to buy a radar and you're prepared to wait six years, go for it.
If you want to come to us, we can help you sort of in a year and a half. That's the type of examples that are out there.
My question is for Trevor. It looks like the business overall is doing quite well, a lot of growth. We see the order book. Is there a need for additional CapEx in the business to be spent to grow the business appropriately? Then, I suppose, a follow on, if the answer is yes to that, how does that play into the operating leverage again then?
Mm-hmm.
Don't ask the sales guy whether he needs more CapEx. Maybe, let me ask. I mean.
Yeah.
I think on a, on a serious note, Mike has already spoken, we've released CapEx already into the Fuchs factory upgrade, that's already in place. CapEx-wise, if you just talk generally about, certainly, let's go radars, first of all.
Yeah.
It's low volume, high value, so there's not a particular need to implement from a CapEx point of view. Etion, there is. That's the next area that we anticipate to release capital into, particularly in the wireless detonation space, as that expectation climbs up. We, from a shareholder point of view, we see this environment as a growing environment, and similar to what we would do in our other factories in the way we allocate capital, we would allocate capital towards this, given that there's a robust enough business case underneath it that stacks up. It isn't, however, it doesn't appear to us at this stage, you know, there's hundreds of millions of ZAR that need to go into the build-out of these factories. We kind of commercial scale manufacturing.
It's not like heavy manufacturing, like a cable plant, where you could, you know, it cost you ZAR 1 billion to build a new cable factory type of thing.
Yeah.
We can scale quite nicely. We can scale with buckets of CapEx. Typically, what comes out of it is quite positive too then. The other area of CapEx obviously would go into the self-funded, the privately funded R&D, which again, we would look at, and that comes along the typical sort of numbers for the 3%-4% of the segment revenue per annum, that we would continue to invest into to make sure our products are relevant, we're able to attack new opportunities and the like. This certainly isn't an area that is, call it, devoid of CapEx or we would not allocate capital to. We sort of fits into that bucket because it's a growth environment for us. I'm gonna take any last questions.
There's just one from David Fraser, who asked, Mike, I'll sort of let you have a go. He's asking a margin question, just about historically, your margins have been fairly robust. The question is, with your current order book, is there any reason why those margins are not holding their own?
I think the answer is quite easy, is the margins are 100% intact. you know, on balance, the margins are 100% where they were some years back.
Perfect. Okay. Ladies and gents, that brings us to conclusion on the defense side of it. We had a suspicion that a few of you might sneak off if we did renewable energy first, so we've kept that for the after-lunch period. We're making sure you all come in for the graveyard session. Harald will just give us the logistics. We've set one hour for lunch. If we can just curtail it to 50 minutes, please. We'll start off again at 1:30 P.M., and then Harald will tell us how we get around the facility and the lunch arrangements.
Yeah. Yeah. It's better. I think the easiest is if we just sort of split into two groups. One group can come with me, probably somewhere along here, we have a group like that and a group like that. I just want to fetch the chap that will take the second group through, then we're not gonna go everywhere in the company, but we'll walk through the development lab, some of the integration and production areas. We have some radars turning on the roof, so if you're not feeling too weak, we can run up the stairs and have a look at what you see from the roof and the radars turning there. It's quite interesting. That's sort of the extent of it.
It's not gonna take an hour, it'll take 10 minutes or so, and there should be some lunch outside here, coffee and tea and cold drinks and stuff like that.
Don't take any food or drink with you, please, folks, there's some ingredients for components in there.
Good point, Alan. I agree. Yeah.
For those of you, it's the first time we've seen the sun in the Cape for a month, so, I would use the opportunity and get onto the roof if you get a gap.
Yeah. Thanks, Anthony. There's our second tour guide, Mr. Anthony Green.
Maybe Anthony should go first and then take the first half-
Good
... and then the second half will follow. Terry is going to give, first of all, a segment overview, as similar to what Trevor did. I'm gonna propose that we don't stop for questions at the end of the segment, because we're then gonna go straight into the solar energy business, Terra Firma Solutions for Lumika. Once that's complete, I think that'll be a natural break for some questions. I anticipate there'll be some excitement at that point. We'll keep going till then, and then we'll stop and take questions then.
Good afternoon. I'm Terry Lawrenson, and I'm the Electrical Engineering CEO. In a minute, I'll introduce the rest of the speakers, I'll just quickly take you through what the kind of order of these presentations will be. We first going to talk about key market developments. What... You know, we did a version of this about a year ago. What has happened in this market since then? What has changed? What are the factors that have to be considered? I'm then gonna talk you through. Again, last year, we shared with you our vision of this renewable energy ecosystem, all of the components of the ecosystem, and how it fits into the Electrical Engineering or the electricity supply chain.
Just as a reminder, because it'll be a good tee off for some of the components of this ecosystem that we'll show you down the line. From there, we go into a deeper dive into generation. From there, energy storage solutions, energy trading and wheeling. Back to me, I'm gonna talk a little bit more about load control and managed metering, and then we hand over to Nico, who gives you some insights into financial disclosures. That's kind of the proceedings. I am going to quickly introduce now. I've introduced myself. After me, Grant Berndsen is our CEO for the Lumika Group. That's our generation company. James Verster is our CEO for the BlueNova Energy business. That's our solar, or sorry, our battery storage business.
Jenna Harris is our CEO for Apollo Africa. That's our business that is being positioned for energy wheeling and trading. Nico is the segment CFO and business improvement officer. Him and I work very closely together. Those are your speakers, and that's the way we're gonna do it this afternoon. There's your pictures. Key market developments. On a macro scale, there are two things. This is a very dynamic market, and things change, and things change quite quickly. At a macro level, things that have kind of arisen in our world in the last couple In the last, say, year, has been inflation, global inflation, interest rates that tracked and followed. That has an impact on our assumptions around projects, around the long-term modeling of energy prices, funding requirements.
It does have an impact, and we have to make, as we develop these projects and as we build and own and operate them, we have to take a view on what that's going to do for the overall returns of the project. The other factor that persists is global supply chain issues. Since COVID started, supply chain is an issue. It seems to. The shape of it changes over time. It's almost never disappears completely. At the moment, it's reasonably stable, and, you know, availability of materials and getting those materials and so on is reasonably manageable, but it is a factor that has to be considered in all of these projects.
Those are the two things that on a macro level, continue to have to be considered as we, as we build out this renewable energy cluster. At on a local level, the scrapping of the 100MW license, these, those thresholds, that has stimulated a tremendous amount of activity in the market. It's, there's a huge demand for this, for this solution, a very willing, receptive market for this solution, and a lot of competitive activity. The other thing that we've seen is that government appears to be doing fairly well in removing red tape, enabling the rollout of these larger projects, and the result is a tremendous competitive environment that we're in. There's a lot of competition.
This is not just competition for projects, it's competition within the supply chain, competition for materials, and competition for talent, you know? You know, one of the factors that we deal with, this is a very young industry. This is an industry which literally almost walked out of nothing in about the last 10 or 12 years. Yeah. What that means is, the capacity in the industry to achieve its full potential is quite limited. You know, skills, people, and then, like I say, even your supply chain, it's an immature supply chain compared to, say, factories that have been around for 50 , 60 , 70 years. There's a lot of risk in that competition. You know, that competitive activity, there is risk in that competitive activity. Not all competition is sensible, you know.
This is the world that we operate in. Towards the end of last year, load shedding came along, that had a significant impact on our market as well. Historically, renewable energy has been almost a price mitigator against Eskom inflation, renewable energy was bought in that spirit. You know, it gave you cheaper, it gave you more predictable energy costs and so on, gave you some control over those energy costs. With load shedding, that has shifted now from being renewable energy versus, okay, say, an Eskom case, versus renewable energy against diesel, you know. That's a factor of depending on how you look at it, anything up to maybe five - 10 times more. You can imagine what that did for the enthusiasm for renewable energy.
Suddenly, you're competing against diesel, you know, from a price point of view. Just adding to the vibrancy in this market, the enthusiasm in the market, everybody loves renewable energy, everybody wants a bit of this action, it's adding to a very active industry. What that's also introduced, what load shedding also introduced is some complexities around integrating technologies. It's now not just a matter of that you want your solar energy to generate you cheaper energy, you want these seamless changeovers. You want your energy to not disappear when load shedding happens, you know? One of the things that I don't think most people understand is a traditional solar plant, C&I scale solar plant, when load shedding happens, that plant switches off.
The reason it does that is it has no grid-forming element to track, you know? That obviously has to be managed now, and so there's a big drive towards integrating these technologies, integrating your solar with your generator and with your battery. These are not simple problems to solve, and so, of course, that will create opportunity as well. It's changed the nature of the game, and it's drawing a lot of skills and technical skills towards solving a historical problem that didn't exist until the load shedding hit us. Certainly, we've seen battery the demand for battery going through the roof. James will talk more about that in his presentation. He'll tell you that essentially they've closed production for the year now.
You know, very hard to take on more business simply because the demand is so high. This convergence of solar plus gen plus battery it's a technically complex problem to solve. These are all things that are happening in our market, driven by factors like load shedding, which adds color and, you know, complexity to our game. Yeah. The game has literally now become about energy certainty as well as energy costs. We have a situation now where I think in this market, there's a realization renewable energy is here to stay, and probably in the 5, 1 0, 1 5, 20 year horizon, this mix of energy in our industry, in our economy, is going to shift significantly towards renewable energy.
Most companies, there are demands from shareholders and so on to have a renewable energy plan or at least a load shedding plan, or at least a business continuity plan, that has to be considered now. There's a lot of push that people must adopt this technology. We have a very receptive market, so, you know, everybody loves our product, which is a good thing, you know. The alternative is a grudge purchase, and our product is. There's a lot of enthusiasm for our product, so that's a great place to be. From government is doing, you know, doing reasonably well in terms of facilitating that, you know, things like the improved tax benefits. More and more, we're seeing things like feed-in tariffs being adopted, and that's a very good thing.
It's a feed-in tariffs are a great enabler towards taking some of the financial risk out of renewable energy. More recently, wheeling as a concept in this country is starting to become a little bit more mainstream. Jenna will talk a little bit about that. Conventional wheeling, I think most people understand, hopefully, most people understand conventional wheeling these days, but there's some quite clever concepts, things like virtual wheeling, that also are great enablers for this industry. Checking my crib notes here. Our view, there's the context of this industry that we operate in. You know, it's actually a surprisingly complex industry in spite of the euphoria for the solutions that we are putting together.
Our view of that industry is, I think it's quite obvious there's going to be significant growth in the, in the medium to probably longer term. You know, renewable energy is probably going to become the solution to South Africa's energy crisis, more so than traditional forms of energy. That's a good long horizon that you've got to play against. Our view is that solar will remain the default choice. The reasons for that are, you know, solar is probably the quickest and cheapest to deploy. It's less grid-constrained, so less geographically constrained, less grid-constrained. Solar brings some challenges with that, you know, it doesn't bring system inertia in, which means it's got a very, very dynamic response. That becomes very difficult for the grid operator to manage.
As your adoption of something like solar in the mix increases, the management of the grid becomes very, very technically complex. Grid stability will be an issue. But the thing to also consider is that tariffs are going to follow, you know? If you, if you're a grid operator, you've only got two or three clunky mechanisms to manage that supply-demand equation. Supply and demand must match. From a technical point of view, if supply and demand do not match, you have all sorts of negative consequences, which, in a worst-case scenario, can lead to, for example, you know, national blackouts and that kind of a thing. The system operator generally has one or two, or two or three clunky mechanisms to manage that supply chain.
Obviously, load shedding is one, where they'll simply shed you. The other one is tariffs, you know? Tariffs are really just a pricing signal from the utility to say to you, "If you use energy when everybody else is trying to use it, you have to pay more. If your maximum demand is very high compared to, say, your average demand, you have to pay more." What tariffs are trying to do is to drive behaviors in a way that facilitates good stability and the full use of the grid. They're not a very effective mechanism because there's not much you can do about your load, and we'll talk about that in a minute. The point I'm trying to make right here is that tariffs are going to follow.
What we think may be a reasonably stable environment now, about how to cost your electricity, how to get your returns on the electricity over maybe 20 or 25 years, is subject to change because tariffs can't stay stable when the grid is changing so rapidly, or the mix on the grid is changing so rapidly. We fully anticipate that tariffs are going to change and maybe change quite a few times. Competition will continue to accelerate. It's a very nice place to be as a business. Everybody wants in. And again, you have a product and a solution that there's a tremendous enthusiasm and willingness for, so that competition will continue. There's risks in that.
Our view, if we take a step back from that, is we think overall, returns in this game are going to decline. You know, we've seen that elsewhere in the world, we've seen it in South Africa, the returns are going to decline. As a result, we believe you need a strategic response, you know. That's the heart of what we're talking to you about today, is we believe in order to manage a crazy, a very active competitive environment and probably declining returns over a protected amount of time, you do need to have a proper strategic response to that, and that's what we'll be sharing today. As we go through the presentations this afternoon, we're gonna talk about these converged solutions.
This is something that we have, that we are kinda sure that nobody else has in the industry. We have all of the components of the renewable energy ecosystem, and we're building the tech to integrating and converging those in a way that offers tremendous blended solutions for customers versus maybe just one or two of the components. The blue block at the bottom line is, massive market, keep growing, but we still believe there are risks in that, in the market, and we believe you need a clever strategy to mitigate those risks. Right. I'm now gonna talk to you about this ecosystem.
We shared this with you last year, and it's kind of at the heart of what we're doing here, and probably a little bit important to understand as you grapple with what our strategy is. Typically, electricity has been supplied from a centralized generation through a transmission grid, through a distribution grid, to an end user. In South Africa, that's been predominantly coal-fired and so on. With the advent of renewable energy and the introduction of things like embedded generation, typically closely coupled with your load, but generation can now happen almost anywhere in the grid. You'll have seen in the news, they're even talking about converting coal-fired power stations to being renewable energy.
That generation can happen almost anywhere along that supply chain, closely coupled with your customer in the municipal grid, in the transmission grid. Battery storage, similar. Historically, battery storage has generally been quite closely coupled with the with the load, but that battery storage can be adopted within the municipal grid, and it can be adopted in the transmission grid, just depending on what the use case is, what you're trying to do with it. Then, of course, wheeling.
What wheeling is a great enabler, where you can plant your generation almost anywhere, and you can match it with your offtaker almost anywhere, and becomes a tremendous enabler for, you know, full adoption of your grid and for, you know, getting the cheapest energy, and getting to almost any user, whether they have the facility to create their own renewable energy solutions or not. All of these things come together. One of the things that I'm gonna talk to you about a little bit later is this notion of grid-interactive buildings. A grid-interactive building is a building that understands its energy mix, understands what its load looks like, understands the tariff it's in, and can do something about it.
A building that can maybe shed load, can shift load, move it out of peak tariff times and so on. You'll have seen a lot in the media recently about government talking about geyser controls and so on and so on. What they're trying to do is manage the demand. If you can manage the demand, it saves a tremendous amount of energy that has to be generated, especially peaking energy and so on, if you can move that demand around. There's a big drive you'll have seen in the media recently, this drive towards demand-side management. I think, there's a big realization, even within government, that if you can do something about the load, it has a tremendous beneficial impact on generation, transmission, and so on.
That's a grid-interactive building, and I'll talk to you a little bit later about our plans for that as well. Holding all of this together is IoT. We're in the era of IoT platforms. We talk about a single point of truth. If we're able to integrate all of those technologies and all of those solutions and give end users full knowledge of where their energy is coming from, what it's being used for, what comes from battery, what comes from coal, what comes from renewable energy, if you have it, you're able to then start to do things like validate these RE attributes, your RECs and your carbon credits and those kinds of things. You have tremendous benefit from having full sight of that energy equation across the whole ecosystem.
These are all things that we are busy working towards. In that ecosystem, what do we have? We have the four businesses that we're going to talk about in a little more detail now. We have BlueNova Energy, that's our battery storage business. James will talk about that. We have our Lumika Group, that's our generation business. Grant will give a deeper dive on that. We have Apollo Africa, which is all about wheeling and trading. Jenna will speak about that. We have CPI Energy, which is around load control and building automation. I'll be back to talk a little bit about that, thereafter, we hand over to Nico to talk about the financial disclosures.
Benefits to the customer of doing it this way, we pretty sure, quite certain we're the only company that has that full end-to-end ecosystem and is developing the tech towards it. We're able to offer tailored solutions to customers, you know, because we're not a single component player, we can sell blended solutions, we can offer customers, you know, rooftop solar as well as wheeling. We can offer rooftop solar and battery, and, you know, we can do all of these components more tailored towards the customer, what the customer needs than what we have to sell.
We're developing the technology towards the integration and validation of these renewable energy attributes, and we're developing the technology towards having this, call it single point of truth, where, as a user, you can see your full energy equation through the use of platforms and tech and IoT and so on. Benefits to investors. Investors get multiple access points into the renewable energy value chain. Again, you know, there are risks in this game. This amount of competition, this young of an industry, this young of a supply chain, industry and so on, there are risks in this game. What we're offering to investors is these multiple access points. Margin protection, you know, again, the issue with these single component businesses-...
...disruptive technology, things change. This there's a lot of R&D going on globally in these technologies. Policy is changing. Things like tariffs will change. All of these things make for an extremely dynamic business case. We believe that by having this ecosystem approach and driving towards these conversions, we believe that we're taking a prudent strategic view on how to manage this industry as best as we can. Karen, are you keeping time there? Am I doing all right? Okay, well, I'll take it as fine. I'm going to give you one little example around policy changes. Just to, you know, just to show you know, why it's important to have a pretty good understanding of what's going on in this industry.
Eskom announced last week in a presentation, talking about grid curtailment. Now, they have no policy for grid curtailment at the moment, but they said two things: There will be curtailment, and it will be retroactive. Now, for those who, you know, curtailment literally means they switch you off because there's too much supply on any part of the grid at any point of time. They said there will be curtailment, and it will be retroactive.
What that means is, if you've developed a plant, if you've built a plant, you've got your returns calculated over 20 and 25 years and so on, they decide, wherever that plant may be, that that part of the grid is going to be curtailed, say, 5% or 10%, there's a very profound impact on your returns over those 20, 25 years, and it's going to be implemented retroactively, it has to be so. You know, it has to be so, because if you don't manage the grid, you know, the grid stability is important. There's one little example of.
I don't understand that. When you say grid curtailment, switching off. What exactly?
Imagine you've got a part of the grid, I don't know, anywhere, in Northern Cape or something like that, and the grid can handle, say, 2 GW, you know? The projects that are developed in that area end up being, say, 3 GW. From time to time, it won't happen all the time, but from time to time, when all of those 3 GW become available, somebody's got to switch off. Otherwise, you overload the grid. That's curtailment. Now, Eskom's view is you have to curtail because nobody would ever build a grid that is of such capacity that you, that you are always underutilized. Far better you have oversupply and you curtail, than that you have undersupply, and your grid is overwhelmingly expensive compared to, you know, to the most optimized case.
That's curtailment. These are things, again, it's a fair question because Eskom has no policy today, you know, but the policy is being developed. What they have said is there will be curtailment, because that's the most optimized way of designing a grid, but it will be retroactive. These are all things that you have to be very careful about as you plan out these projects, as you build out these projects, as you cost them, you get the returns on these projects. All right, I'm getting quite close to the end. Investors get this benefit of having this blended end-to-end access points into these ecosystems.
Also, I think it's important for investors to realize that we have a plan, we have a strategy. We're not just, you know, we're not getting lost in the hype around this industry. It is important to know what you're doing. Final slide from me. This is kind of a graphic that shows the overall landscape of how we operate in this industry. Embedded generation, EPC, that's our project business, and of course, BOO, that's our asset ownership business. Storage, that's BlueNova. We have all of the components of storage, as you can see in the graphic there. Wheeling plays across the full grid, as, you know, by definition, that's what wheeling does.
Above that, electrical load control and automation plays across the whole world of users, so we have access to that world as well. At the very top level, through our CBi-electric businesses, we expose to this industry through our cables business, through some very specialized products and balance of plant and that kind of a thing. That gives you kind of an overall footprint of how we operate in this game. I think that's me. I'm going to hand over to Grant now. Grant's going to talk you through a little bit more deeper dive into the generation part of our business. Make sure I've clicked the right button.
Good afternoon, ladies and gentlemen. Thanks, Terry, for the great foundation that's been laid for me. I think he's painted a very good picture of the market as it stands. My name is Grant Berndsen. I'm the CEO of the Lumika Group under which Terra Firma Solutions sits. Terra Firma Solutions essentially is the operating business which has been established over 10 years ago. Lumika Group was set up as a joint venture entity through which projects can be owned and operated under. That structure has now been folded into one, essentially. When we talk of Lumika and Terra Firma Solutions, effectively one and the same. I will commence, essentially elaborate on what Terry introduced in terms of the market.
Give you a bit of color in terms of what is the size, give you a bit of a feel for the size of this market, and I suppose what you're interested in is what that translates into in terms of investment requirement and rands and cents. Where Terra Firma sit in the market to date, as Terry mentioned, it's a fairly new market that started from fairly low base or zero base. Where we believe we're sitting right now is the market leader in commercial and industrial embedded generation solutions.
Embedded generation, of course, being closely coupled to the load, so it sits on the customer side of the meter, where we mostly use roof space, or ground mount sites located adjacent to the operation and the facilities that we're actually supplying power to. The size of the market is difficult to quantify. We make use of various sources, industry associations, like the South African Photovoltaic Industry Association, GreenCape, which is a, was a Western Cape government, not-for-profit. Social media, news, we make use of data coming out of our equipment suppliers, module and inverter suppliers, and import data.
Try and get a bit of a sense of what's actually being supplied into the market, see what we've actually installed, and then try and work out more or less what where we rank in the market share. To date, we've installed over 200MW, about 280 MW of capacity. That's spread across around 500 odd sites over the last 10 years. That is this little blue slice of the pie on the right side. As you can see there, it's a majority chunk of what's been installed to date. We believe, and that equates to approximately 15%-28% of the market share of installed capacity to date. Total installed capacity is in the region of...
In the C&I segment of the market, is in the region of sort of 2.5GW-3GW , based on our calculations. Bear in mind that this excludes all your large REIPP projects, which are the utility scale, and also large commercial and industrial applications that the likes of projects, the likes of Sasol. Sibanye announced a project last week. These are removed from that calculation, and they kind of sit within a different segment to the market. Where are we going to in terms of this area of the market? Again, based on certain projections, but the latest figures from GreenCape, suggest 600MW, between 600MW and 900 MW per annum, over between now and 2035, up until the saturation point of around 10 GW.
Again, that's only in the sort of sub 5 MW range, which will be a portion of the segment that we're actually playing in. As to Terry's point, the market is sizable, and that's simply been accelerated by the recent bout of load shedding, coupled with the reduction in technology prices. This is, of course, coupled or against the backdrop of what's happening on a global basis. Wind and solar technologies are increasing at a rapid rate. This is a reference to a recent study by Shell, where we could see that these wind and solar technologies are growing faster than nuclear or LNG technologies at a rapid rate. Figures of 150% faster than nuclear, and 250% faster than LNG.
I think this point here is the one that really hits home and gives you a sense of the scale of where the global market is going. 316 GW of solar and 110 GW of wind in 2023 alone. That's obviously across all segments of the market, utility scale, et cetera. What it tells us is that there's a huge shift in global thinking, which should bode well for our market and our business prospects as we stand today, through reduction in costs of the technology, improvements in technology, which we see on a very regular basis.
A simple example is the size of your solar panel is remaining the same, but it's now able to churn out 10% more, and that changes every six months. You've now got an 800 W solar panel, versus a couple of years ago, it was a [audio distortion] . All those costs are gonna bode well for our technology and for our business case that we're actually trying to put forward to customers. Where is Roylen playing? I know Terry's spoken about the ecosystem as a whole, but when we talk about embedded generation specifically, we can split it up into kind of three rough parts.
On the lower end of the market, which would service primarily residential and small-scale businesses, we have a rough cut-off point of around 250 KW, and that's currently serviced within the Reunert Group by Nashua. These would typically be homeowners and small businesses who would either own those installations outright, or they would look at some kind of lease or rental model on a much shorter-term basis. Much more simplistic installations than what you get on larger scale business. On the other end of the spectrum, which would be more on the utility scale, but still on commercial and industrial, would be your REIPP-type applications, which would be in the 100 MW type ranges.
we're not currently playing in that space as Terra Firma Lumika. We don't intend to in the short, medium term, or even long term, and I think there's a lot of concentrated risk. You've got a lot of eggs in one project basket. I think one of the most topical reasons that we hear of in the press and in our market is grid constraints. A lot of these big projects are advanced on a very slow and long, and expensive path, only to be told there's no access into the grid, which places a lot of those risks, those projects at risks. Margins are significantly lower, and it's a very competitive space out there on these big projects....
...where our sweet spot is in that 500 KW to 50 MW range. We can probably stretch that a little bit further north, but that's our current strategy at the moment, to really focus on that segment of the market. Predominantly embedded generation solutions that might evolve into some wheeled bilateral wheeling scenarios, where you've got a fairly simplistic wheeling approach. Otherwise, we'll bring in Apollo on certain customer scenarios as well. We typically target long-term PPA tenors or contract terms of 15+ years . Returns that we're targeting are slightly higher as well, and we're bringing debt into the financing mix as well, which Nico will go into in a lot more detail.
Either on a project-by-project basis or as we're currently doing on a portfolio basis, we'll take a portfolio of projects and get those financed to improve our equity returns on each of those projects. A bit more detail around our exact business model. We've spoken about EPC, which is really the implementation and execution of these projects, the physical installation works. The business model there is fairly straightforward. We allocate engineering time and installation time, and we derive a margin. On the alternative side is the BOO assets, which we would then own that asset and generate revenue via the cash flows of the business over its life, so based on a targeted equity return.
I think where Terry's given a lot of background into in terms of the space and the how dynamic our market is right now, and there's constant flux of players coming in. It can be very challenging. I think ensuring the sustainability of our business is key in making sure we're gonna be around for years to come. The fact that we were an early mover in this market is significant to us. It places us head and shoulders above the competition, even if we've got foreign competition that's done this elsewhere. The fact that we're able to demonstrate what we've done in the country is extremely valuable. That brings a lot of technical, financial, and legal know-how within our business.
Being able to deal with corporate customers in South Africa is valuable as well, and understanding their needs, understanding the technical requirements, and being able to integrate the system into something that they don't necessarily want a third party touching or even owning and operating over the life. Giving them that sense of comfort and trust is very, very important. Funding relationships, I think, again, it's our funding market for renewables has evolved very rapidly over the last 10 years. A lot of the commercial banks in South Africa have been focused on large utility-scale projects and more recently now on the commercial industrial space.
Having a counterparty that's done a lot of this and built up the track record, gives them a lot of comfort, which in turn means we can access more capital, more efficient capital, and cheaper capital, which ultimately makes us more competitive and maximizes the returns that we're able to command on all the projects that we're owning and operating. The cluster approach, Terry's spoken a lot about that. I think this gives us a unique sales advantage over our competition. A lot of our peers are only offering kind of one segment of what we're doing, either an IPP-type solution, where they're funding and owning it, but they're outsourcing the execution phase of it.
As well as the offering of our sister companies in other parts of our business, such as software development, monitoring, metering. There's various aspects that we can add to the complete offering, which means we're generally giving a more holistic approach. Ultimately, as the market evolves and becomes a lot more liberated and deregulated, we can simply offer more, almost in the form of a mini private utility to customers in the market. The philosophy around playing within our embedded generation value chain, that starts from project origination and development through to the engineering, preliminary engineering, designing of the equipment, obviously execution, the funding, owning, operations, maintenance, and ultimately sale of the kWh s to the customer.
The fact that we're wearing all these hats, it has numerous advantages. Number one, we can take margin across all these different silos and streams. Number two, that allows us to be more competitive and obviously command a higher overall equity return on the projects that we're engaged in. It's a risk mitigant against the shortage of skills, as well as the supply constraints that we've seen in the market, and that problem is not going away. If we look at what new generation capacity needs to be brought online, whether it's large scale or small scale, there are only so many contractors that can actually go out and build these plants.
If we want to realize our targets, we need to be able to deploy and install and be able to control that piece of the puzzle. Otherwise, we're beholden, and unto the rest of the market, and we're gonna need to wait in line for these contractors to become available and ultimately pay a premium for their services as well. Firm focus of our business model is to build out a large BOO portfolio. This build, own, operate portfolio is key for us. We, as I mentioned, we're well positioned to be able to execute on that through the execution strength and track record we have. Access to funding, not only our own equity sources of funding, but debt pools as well. Equally importantly, governance factors and processes.
ESG is a very strong part of the business. I'll touch on that in a minute. Just having strict governance processes within our organization, which will allow us to scale the business and meet the demand of the market. I've touched on these aspects around our core focus already, I think just to highlight a diversification approach is very key in terms of what we do. Ultimately, every contract that we're signing with customers, we need to be 100% sure that they're gonna pay the bills, number one, but they're not gonna bring any damage to our reputation through any ESG risk that they bring.
Diversification across different sectors that we operate in is key, not only in terms of the sectors themselves, but jurisdictions as well. We have executed projects outside of South Africa, and we'll be looking that way in the future as well. I think the South African market is really forming our focus right now. Having that diversification is key to us as well. Clearly, with the offtakers, I've highlighted on already, very important for us that we have strict processes in place to be able to do some preliminary vetting, which is closely coupled with a process that our funders will bring on board and utilize as well.
How we're gonna access this market is the key, and I think weeding out the rats and mice is an important focus for us. Really trying to understand how you can service this quantum of electricity that's required and are driven by our customers. Scaling is obviously key, and it's something that we've already had to learn some hard lessons on. How do we take a business that's used to rolling out a couple of rooftop installations a month to many 10s of installations in a month or if not more? The process of appointing new leadership is ongoing. I personally fall into that category.
I'm fairly fresh in my position, and then one or two other key leadership positions we're currently in the process of filling as well. I think as some of you know, the business was started up from scratch, really, so it was founder-owned and managed up until recently. Taking the business to a more professional and larger institution that can service the market that we're in currently now is a key focus. Key skills are equally important across the board. I think whether it's engineering skills, finance skills, legal skills, sales skills, there's a dearth of skills at the moment, and everyone's scrambling for that, given the race in the market.
Building up a company that everyone wants to work for is kind of primary focus for me right now. Demonstrating to the industry the kind of offering we bring, the shareholding base, the various tools that we have within our armory are very important for me to try and retain talent and attract talent and retain that talent. Various other initiatives, such as deploying technology, cleaning robots, is one such example that we're highlighting here, where it'll simply enable us to service more and more facilities. This is specifically on running sites. Currently, we're operating over 300 sites.
We've got a clearly distributed team that are running around all over the country, cleaning panels, and so we're constantly trying to find ways to do this process more efficiently. Bear in mind, the sites that we actually own, every kWh less that we're producing hurts the return on that project and hurts our business and cash flows, of course. Processes are key, so trying to scale the business, but we really need to put in place the right processes that will enable us to do that. We've got strict governance that will control that and will enable us to scale up to the next level.
I think a key point in scaling is not really just finding a way that we can churn out more, but being more strategic about it as well. I think we are starting to move into the next bracket in terms of size of project. We're certainly not going to the 100 MW range, but to date, we've been on the lower end of that 50MW limit that we're currently targeting. Being able to source those projects is one thing, but then obviously delivering on them is the next step.
Scaling not only in terms of the number of people, but how we actually deliver on larger scale projects is a key focus, and one that we believe we are well placed in our stepping to that bracket and deliver on that. Our lean construction model. We've played around with this a bit over the last year in terms of having a certain number of teams, and I think this flows into the point that I was just making around larger projects. There really is a drive to try and do slightly larger projects so that we get more efficient outputs from those, from those projects.
The ability to flex, we make use of a hybrid model when it comes to our own installation teams, coupled with subcontractors that we bring on as and when required. We're not sitting with underutilized installation teams and all the baggage that goes with it. Various other initiatives to attract talent, as I've mentioned, including, most importantly, development of partnerships. This is, again, partnerships throughout the chain of what we do, not only at a shareholder level, which we'll talk to you about in more detail shortly, but throughout the execution phase, partnering up with other contractors, particularly when it comes to larger scale projects that we can leverage off know-how and track record of those entities. The same goes for ownership.
We currently are partnering with other equity providers who might be our customers as well, that end up owning a portion of the asset as well. There's various creative ways that we look at partnership approach to help us unlock the MWs that we're targeting ultimately. I think this is quite important for us to highlight a few of the wins and progress that we've made over the last year, particularly on the battery storage front. Paarl Mall is a great case study for what's to come. This is one of the largest commercial scale, if not the largest, commercial scale solar coupled with battery installations. A 2MW PV system, coupled with 4.5 MWh of storage in Paarl Mall.
The interesting fact about this is that it's not a load-shedding solution that we've provided to this customer, but one where the business case is successful on the basis of load, a load tactic direction application. Essentially, we've got a system in place that allows them to control the amount of load that they're drawing from the grid, and as soon as they breach that, they pay heavy penalties. The business case really is strong just on this basis alone. It's a good case study for what can be replicated elsewhere in the market.
Another great success from this week, in fact, well, we were awarded a while ago, but we've signed the contract this week. Orders are being placed right now for what will be the largest PV and battery storage for a commercial customer in South Africa. That's on the other big telecoms provider in the country. That's for their head office in Johannesburg, 5 MW of PV and 6 MWh storage solution. That's really sizable and again, will help us put forward a case study for other customers of a similar size and scale. Third point to note, I think the financing of storage solutions is something that's fairly new to the market. Everyone's running around trying to put backup power in place.
How to actually own that and sell the capacity or sell the power that's being delivered to customers is not that straightforward there. There are accounting triggers, you've got to be careful in terms of putting forward a straightforward lease or rental structure, and getting that banked as well, and getting debt finance in place, given the life cycle uncertainty that you've got. It's really dependent on how heavy you run that battery, which is gonna determine its lifespan, essentially. We've made a lot of significant inroads in terms of putting together creative financing solutions, plus the contracting that goes with it, which will hopefully allow us to roll out many more of these types of installations. This should give you a sense of how we've been running hard this year.
Testament to the team and how we've had to build our team quite quickly. We've increased the number of proposals that we're churning out to the market by over 100%. The number of awards has increased by more than 200%. We've quoted in excess of 40 MWh of storage solutions to the market. A lot of these are now converting. We're delivering on those as we speak. I think I mentioned already that we have in excess of 300 projects throughout the country and a couple of outside the country as well, which we operate and maintain, and about a third of those, we own some equity stake in as well.
It's a, it's a very complex business that we're running, but we're bringing in line various processes and applications to help streamline that process going forward. This is my final slide, just to give a bit more color to the partnership with A.P. Møller Capital. A.P. Møller Capital and Reunert are 50/50 partners in Lumika. A.P. Møller Capital, for those that don't know, you're probably familiar with that little logo there, which is Maersk Shipping. A.P. Møller Capital is a private equity fund manager, essentially. Sister company to A.P. Møller Maersk. They've raised the Africa Infrastructure Fund in 2017, which is a $1 billion fund focused on energy and infrastructure assets in Africa.
The projects, the capital that's rolled out on our projects is coming out of that fund, for their portion of the equity, of course, and they're in the process of raising a second fund, which we can tap into as and when required as well. The value that this partnership brings together, I think it's important to highlight a few points, though. I think the value system of both businesses is very much aligned. There's a strong meeting of the minds in terms of how we approach the business, what we do, what we don't do, is a very strong, strongly aligned process there, which follows into the ethical business side of things.
We really need to make sure, particularly in some of the markets outside of South Africa, that we are operating in the most ethical manner possible, and having the systems and processes in place from both the organizations is really helpful for us to be able to put forward a strong product and argument to the customers that we're servicing. The same can be said for ESG. Reunert is on a very strong ESG drive at the moment, across all businesses within the group, and the same goes for Lumika for A.P. Møller Capital. We have stringent processes for the organization in terms of how we run our business. I think most importantly, in terms of the projects that we're rolling out.
The strict ESG guidelines that we need to adhere to before any project is given the go-ahead, and that flows, of course, through to the funders. It gives them a lot of comfort that the ESG risk on these projects that they're deploying capital into is low, and that we're gonna monitor this on an ongoing basis. A.P. Møller Capital, another strong positive that they bring into the partnership is access to funding. Not only through the fund itself, but with various other debt providers that they have long-standing relationships with. European DFIs, for one, that can come in on a project level if needs be, and various other relationships, including the South African banks as well.
They've been around the block for a number of years now, and that allows us to do more from a funding perspective on the projects and within our organization. Reunert, of course, bringing the industrial and operational know-how, most importantly, local know-how. I think the local knowledge gives the A.P. Møller Capital team a lot of comfort that we know what we're doing on the ground. We have been around here for over 10 years in this business, but Reunert's been around for far longer. Leveraging off their experience and their operational know-how on the ground is valuable to the partnership. Finally, A.P. Møller, on their own, bring with them a significant pipeline of potential project opportunities.
I think through A.P. Moller - Maersk and Maersk Logistics and cold storage alone, I think they've got a demand in South Africa of around 50MW-6 0MW split between a number of sites. There's an immediate pipeline of projects that we're currently tapping into and trying to take advantage of as well. That creates a lovely synergy for us, as well as opportunities on the continent as well. On that note, I will finish off and hand over to Alan for questions.
Don't go too fast. I think we're gonna have a few. Any questions for Grant or Terry on his portion? Sure. Yeah, go for it. I'll repeat the question.
Yeah, my understanding is that over the long while, your preference is that you model. With the new model, the way you recognize income is obviously de-delayed and you pay off the funding element first, and then you recognize, you know, profit later on, and whatnot. Is there gonna be an air pocket initially as you shift from EPC to ... can you just talk us through that from a business standpoint?
Sure. Well, what I'm gonna suggest is Nico, in the financial portion, is gonna cover exactly that. He'll actually talk through the project nature of the revenues and also give you some of the disclosures. I think it's probably best to hang on to that, we'll actually cover it very nicely in a couple of slides. Yeah, go for it.
Thank you. I know there's complications between NERSA and Eskom, and, you know, trying to roll out sustainability and solar panels across the country. They haven't actually commented on tariffs, and I think you mentioned about the tariff roll out eventually. Will that eventually be resolved, or is that more a NERSA issue than a question maybe for this audience? Sorry.
I think we have a go.
Jenna might want to chip in at a later stage as well. I think the tariff question within NERSA, I mean, NERSA's made a lot of great inroads in terms of the licensing and regulatory aspect of the market. From a tariff perspective, it's currently open for comment. Eskom have. NERSA have put out a tariff structure that's open for comment, which essentially shifts more away from an energy basis to a fixed tariff base, where the more and more renewable energy that you have online, that's essentially gonna eat into that revenue stream, is gonna be covered by a fixed cost base, which allows Eskom then to service its fixed costs across fixed infrastructure. Yes, there will be a change.
We just don't know exactly what the quantum is going to be. We've got a sense of what it's going to look like. My personal view, I think market conditions are going to prevail, and the economics are going to prevail. I think if they make a fixed tariff that's sky high, no one's gonna take up any They're still going to be faced with a, with a generation issue. You can do that, but it's going to dissuade the entire market from moving towards renewables, and we're still going to be stuck with load shedding in 10 years' time. I don't know if you want to add to that, Jenna.
Yeah, it's.
It's working.
Thanks. Thanks, mine's working.
Thank you.
Eskom has released the proposed tariff structure or restructure. As Grant said, there's gonna be a fixed cost component, and then the variable costs or your energy charge on the bill will essentially be decreased. Our estimates for a base load type customer is about 10% decrease in the energy charge, and then that is shifted over into a fixed cost. For a typical base load customer, their price or effective price will pretty much be the same. Those customers who are taking on a more variable load, they'll be penalized more. We see the increases in Eskom's tariff year-on-year would sort of compensate for the decreases in that energy charge component.
Thank you.
My question is. I mean, Nick might correct me on these numbers. If I look at the CapEx spend for the group, right? You spent about ZAR 260 million on renewable energies cluster. That is about 33% of your total spend on CapEx over that period, cumulatively. If I look at the contribution of renewable energy, it just doesn't seem to be scaling much. It's currently 8% of your revenues, versus it was 7% last year. Where's the lag there? I mean, like I said, it doesn't seem like to be scaling. Also, where do you see the renewable energies cluster scaling to business, like, its contribution going forward? Where do you imagine it growing? Thanks.
I think the... I'm not sure about the numbers. I mean, you've obviously added them up, so I trust them to be correct. What Grant and the team have found through the last 12 months is that whilst we've been trying to drive towards an increased BOO model, there's been an increasing number of customers who've actually been asking for EPC. What the team have actually done is they've now throttled the EPC model. We have now said to customers, we're not taking on any more EPC for the rest of this year and actively driving the BOO model. That take-up, it's not that the overall build has sort of not scaling, it's that because the capital that you'll see there is what's being put into BOOs, the assets that we own.
That hasn't scaled at quite the rate we would like yet. We've, I mean, we've given the numbers, I think sort of 41 MW is what we are, and that's moving up. We're now actively and much harder driving that BOO model in it, and you should see an acceleration in the capital getting allocated to the BOOs. Just, it's the blend between BOOs and EPC that haven't quite got to the momentum that we'd like them to be over the last 12 months. Yeah, you're looking at CapEx. If it's CapEx you're talking to, the CapEx will be recognized at the completion of the project. The revenues, you'll actually see in the financial metrics a little bit later. You just need to look at. If you're looking at CapEx, that's the number.
You'll see that in the number of MWs that have been built. If you're looking at revenues, you'll see that in the EBITDA, which we'll talk to you about as well. Any last questions? Perfect. Grant, thank you. James?
Okay. Thought it was gonna hide for a while. Thank you, guys. Let's talk about batteries. I don't know if you guys know this, last year, South Africa spent about ZAR 12 billion importing batteries. It's roughly 4% , 5% of the SS balance of payments. It's a significant number. The thing that's fueling it is load shedding. The inability for people. Let me sort of clarify this a little bit. This segment that has spent this ZAR 12 billion importing batteries was mainly the residential and small business, even larger businesses in the C&I space, for a small part of their load.
They're really saying, "Listen, we've got a lot of stage two, and we've got to deal with this." Stage two is quite disruptive, not closely like stage four, which really affects the C&I space. It's in the lower-end business. I'll elaborate a little bit more about what this product looks like, but that's where the money was spent. This growth was about 300% up from the prior year. If you look at the numbers for 2023, it's just flying. It's just because now the C&I space is saying, "Hey, guys, the writing's on the wall. This thing is with us." If you look at some of the numbers, this deficit in production is gonna stay with us for some time.
The latest forecast I saw was 18 GW short by the end of next year. Yeah, you'll see a huge amount of embedded going, flying up. Still, you know, there's gonna be a long period where there's gonna be this massive deficit in production. If we have a deficit in production, we have load shedding, because that's the only way that we can actually recharge our resources at night and so forth. If you look at this market segment, it was driven by the residential space, the market, and small commercial space. If you see who serviced it, you know, in South Africa, there's only three really significant battery manufacturers. It's us, Freedom One, Solar ND. We only made up about, I'd say, 10% of this number, maybe a little bit more.
Freedom One is a bit bigger. Maybe made up 15% of this ZAR 12 billion. The rest were direct imports from China, mostly from China. It's a market segment that one has to be... First of all, you ask the question: How big is our demand compared to the world production capability? It's insignificant. You know, ZAR 12 billion, even ZAR 20 billion or ZAR 50 billion worth of batteries is a fraction to the production capacity of these countries.
You know, I did a quick calculation, and I said to myself, "We should be producing about 40 GW of power in South Africa." I think we're short by about 12GW or 15 GW. Even if you take South Africa at 40 GW, and you say, "Listen here, let's run the country for four hours off batteries," just arbitrary number, that's 160 GWh . CATL produces 90 GWh per year of battery power. This means within sort of two years' production, if we dedicated a CATL to South Africa, we could run stage, well, a four hour load shedding with their production capacity. The point I wanna make is, this market segment, which is the lower-end market segment, is, can quite easily be serviced by the production capabilities of the big battery producers.
I know that Huawei's just placed an order for 2.7 million batteries for the cell phone towers for backup, and this is in the 5.2 kWh range. What happens if Huawei is satisfied with CATL? If that demand diminishes, there'll be a massive influx of these lower, low-end markets batteries. I'm telling you this because when we built the BlueNova strategy, we are very cautious to build a big business in that segment, because there's gonna be a price war. You know, it's the era of moving away from when we still built televisions at RCNC for Panasonic to now being mass produced by Samsung and the like.
That market segment is going that route. We're certainly not planning to go and play in that low-margin business, high-volume stuff. That was the point I wanted to make, is that we, as BlueNova, must definitely focus on areas where we can differentiate ourselves significantly. It's in the higher, more complex, fancier systems, where we, if you look at the renewable energy cluster, and we work together with TFS and Apollo and CBI, that more complex, higher power market, the C&I space, is where we will flourish. It's. I'll get, I'll show you some more detail behind that. Just quickly, what is the applications that we service? The obvious one is the backup and the standby power. Everybody knows it. You have the system, it stands there, it does nothing. There's no solar connected to it.
When there's a power interruption, it seamlessly take over the loads that's connected to it. It's also known as the UPS type market, uninterruptible power supplies, and we have a big product offering in that, in that range. It's all about securing the supply of power. Well, all the other business opportunities that we're pursuing are the ones that's looking at saving money. You know, the cost of electricity has been flying up compared to CPI. If you look at it, if you look at the numbers, you know, we're averaging around 13% year-on-year from NERSA and Eskom. You can see that Eskom will ask for a huge number this year. They must probably settle at about 15%.
What that means is that it creates a huge opportunity to find ways of not using energy when it's really expensive. That's the so-called arbitrage market. Arbitrage market or load-shifting market is essentially look at when energy is cheap, which is like at night, like at the moment, typically about ZAR 1.10 around the country, and then in the morning, between 6AM and 9AM, that energy costs six times more, even sometimes seven times more. If your cost of ownership of a energy storage device is, let's say, ZAR 2 per kWh cycle, and you purchase for ZAR 1, you have energy here at ZAR 2 per kWh . When the bill comes, or when the demand comes at ZAR 6 or ZAR 7 per kWh , you use your stored energy, and there's a huge saving.
That saving is so much that you can basically find yourself having a break even on the CapEx of that device in about a 4-6 year period, depending on the tariff increases. Arbitrage is a great mechanism to sort of convince the asset managers and companies that, "Okay, I have to take out a couple of million ZAR for a backup system, but what happens if load-shedding disappears?" That's one of the big questions that people ask. The answer is, well, arbitrage is not gonna disappear. In actual fact, I see that if we look at the longer-term strategy of BlueNova, the energy savings market will be the one that drives us going into the future, not necessarily so much the energy reliability, which is our big crisis at the moment.
The other thing, I think you guys understand peak shaving. The whole idea is that there is a huge fee, additional fee on your electricity bill for demand charges, and that's the sort of 30-minute window. Take the average of the maximum draw in any 30-minute window, and you will receive a bill as much as ZAR 250-ZAR 300 per kVA for that peak demand. What we do is we fill up the batteries with energy, and we monitor this peak demand, and as soon as we see that it exceeds the threshold, we then discharge these batteries, which means that energy is not coming from the grid, and hence we manage the peak demand charges. The places that really likes this a lot are shopping centers.
You know, we've got The Grove, we've got Paarl Mall together with TFS and all the rates. I mean, I've spent a lot of time with Flanagan and Resilient and Growthpoint and a few others, and they have plans to spend billions of ZAR on battery energy storage systems in order to manage this demand charge. Backup for them is like, yeah, okay, they've got their generators, they've got a plan. They're really not building business models on backup. They're building business models on arbitrage and peak shaving and demand management. Another market segment that we address is just self-consumption. Essentially, where institutions, people, homes, residential spaces have got PV production that exceeds their actual own consumption during that period of the day, which is normally in the middle of the day.
Those guys are taking that excess energy and charge their batteries, and then they discharge those batteries over a longer period, let's say from 4:00PM in the afternoon until the sun comes back up. The self-consumption market, together with its benefit of providing essentially off-grid application, is a big market in South Africa, and that will grow even bigger. I think Terry mentioned about grid stabilization. One of the things and features of our batteries, and I'll get to that earlier or later, is the ability to quickly discharge our batteries, so the so-called 1C battery. A 1C battery means that you can discharge the whole battery in one hour. That is quite unique because it's a high-performance battery.
It's really a segment that we focus on, and that is what the characteristics of your batteries should look like if you want to be able to stabilize the grid. We definitely position ourselves to provide solutions for grid stabilization as well. That's just in summary, the areas that we focus on. How does that map onto our product range? I hope you can see that. We've got essentially five products that we bring to the market. On the far left, you see the mobile power series, and these are little 12V batteries that you can be using for gate motors, for alarm systems, for small UPS systems, where you don't necessarily have the power going through the DB boards, but directly at the loads. It's a highly competitive environment.
It's distributed through, you know, our big distribution channels like Voltex, ACDC, Takealot, all these type of channels. It's the market area, which I said to you previously, one must be very careful that you build a business on this area. We do have a strategy where we're going to make these batteries, smart. We want to connect our batteries to the Internet. We want to make them think for themselves so that they can communicate their state of health and warn consumers of abuse. You know, lithium batteries, they might sound wonderful, but one thing is, they're very finicky, and they're very fragile, and if something goes wrong, or you don't charge them properly, we discharge them too quickly, they age quite rapidly. It's almost like a tire of a car that's not, you know, pressurized properly, and the temperature's not right.
You could quite easily half the life of your battery, and we want our batteries to be smart and smarter than the competitors, so that people would feel attracted to buying and maybe paying a little premium for something that is not gonna, you know, just die after 3,4 years. The second segment is the residential segment. We've got a product there called Rack Power. Also, a highly competitive market. I think we're gonna check it. That there's about 18 companies that play in that market. Our two big competitors are there, but there's a myriad of other, you know, Asian companies that compete with us there.
We've managed to secure a very good footing, also again, through our main distribution channels, based on the fact that our batteries have got high-performance characteristics, and that we only use A-grade cells. We've got a fairly advanced BMS that communicates to a back end with remote monitoring, so it's a higher-end product. Yeah, it's an interesting segment that we're busy with. Then going to our high-capacity batteries. One of the problems with these low-end batteries is that their ability to deal with big surges, like double the power requirements, is limited. They can only do about 20% or 30% overload.
Some of the applications, if you start looking at things like lodges, and large commercial installations, where there's a lot of inductive loads, like pumps and air conditioners and all these. Even maybe some transformers. These loads tend to want to have a 300% overload capability. We developed a range of products called HC, high current, high capacity, and we're very successful to dealers. Also a 48 V market segment, but successfully integrated with all the inverter suppliers, and yeah, we just differentiate very specifically there in terms of our performance as well as our remote monitoring and diagnostics. The next step, we go to high voltage.
All these other ones were either 12 V or 48 V, and then we do a 10 times jump to about 500V , and this is where we start dealing in the C&I space. As I mentioned before, this is the segment of the market which is now really coming to the party. Everybody's waking up. You'll see all the big corporations, big South African institutions. I'm talking about 200,000-300,000 companies are now at the point where they say, "Listen, we've got to put something in that keeps the lights on." Terry alluded to the thing about the argument about how do you do the ROI calculation or the break-even calculation? Well, previously, the people were comparing with ZAR 1.60 per kWh because we competed with Eskom.
Diesel is sitting at close to ZAR 9, ZAR 10, ZAR 11 per kWh. If you had to compare Stage 4 scenario between a diesel generator and a battery storage system, the battery storage system pays for itself after two years, and then you're in the money. If you have a view... Remember, that's just on Stage 4 load shedding. I'm not talking about the arbitrage opportunity. This reality has really, you know, sunken in, and we see that this market is just going in this direction. We will be focusing a lot on the high voltage, let's call it component battery business, and then the one behind it is the battery energy storage solution, where we have a fully containerized, fully integrated battery with inverter, with energy management system. That is sort of a drop-down plug-and-play.
We've just recently. I don't want to say that your 5 MWh by 6 MWh is the biggest one. We have signed a contract for a 6MWh by 70MWh system, which is the mid-range state or midstream estate, and I think that thing will go up to double that, to 12 by 30. They need 12MWh and 30 MWh . It comprises of those containers, which we manufacture. You'll see them at the factory later this afternoon. We're gonna manufacture them there, and we test them there. Time that we spend on the site is absolutely minimal, and we don't really depend on any of the infrastructure. We tie in on the medium voltage time points, and commissioning is actually a very short exercise.
I'm going to say this again: Where do we focus? What is the Reunert's focus? The Reunert's focus is basically to add value in the C&I space with high power, high current, and smart battery systems. We've invested quite a bit in our R&D capabilities. We've appointed a whole lot of young and smart engineers, and we see that our strategy is to provide battery energy solutions in that market segment with our own IP. 'Cause the applications are fairly complex. One thinks, "Yeah, you know, it's they all just plug and play." They're not. You know, Midrand, Midstream Estate has got 35.5 MW transformers. If that load had to shut down, we have to do a fancy startup sequence.
You know, I've just come back from Germany, 'cause we're partnering with some really clever German companies, and they also said, "Well, you know, that will also be a first for us, to wake up a so-called black start load." That's where we're gonna focus. We think that the real estate, the gated community industry is a big target for us. Just to give you an idea, Midstream has got 6,200 homes. Per house, they pay more than 40% less for backup than had they done it by themselves individually. A 40% rebate, and you've got the so-called diversity gain factor, which means you're not limited to your 8kWh and your 12 kWh .
You can get 20 KW because this, you know, everybody's not switching on the load. You've got this diversity gain benefit as well. I predict in the next two years, gated communities will. There's 1000s of them, they will all go this route. It's, it's the most sensible route. They'll still have distributed PV on the roofs, but centralized storage. Are we gonna move away from this low-end business? The answer is no. It's still lucrative. It's great to manage our recoveries in the factory and all our overheads. It is still a very healthy revenue and profit stream for us, but we will differentiate by making those products of ours unique through adding this smart IoT self, this self-deciding and reporting systems.
I'll repeat, we will limit our exposure to those segments in the market which are just pure dumb batteries, where we're going to just fight for price. We won't be doing that. What we've done, yeah, this was one of my dreams. We've managed to get our six buildings down to two. We built a 4,000 sq mt facility down here in Sunset West, for those of you who will come with us just a little later on. The benefit of it is significant. You know, just the flow from goods receiving, to the stores, to kits, to work in progress, back to testing, and it's all under one roof. You'll see it this afternoon. Just massive improvements in the operational efficiencies and controls.
The other thing is we've, you know, we're only eight years old, and we're continuously improving the business with improved business processes. We should wrap ISO 9001 this year, and we corporatize as we go along. You know, BlueNova is now a significant business. We've seen year-on-year growth of 50%-60%. This year will be at least 55% bigger than last year. We have to make sure that we have the right governance in place, the right controls. You know, there's a lot of people who work at BlueNova that I don't know. That is scary. I like to buy each person a box of chocolates on their birthday. Cost me about ZAR 11,000 now.
In any case, I have to go and check the names, and I've never met these people. It's, you know, 124 people, going on 140 by the end of the year. It's getting significant. As I said, again, the growth, we've manufactured more than 40% in the first half of the year compared to last year. The second half will be bigger than that. It'll be like 60%, 70%, 'cause we've got to finish Midstream. Yeah, the contract with Midstream, I think, is going to expand. What I like about those contracts is that they're significant, you know? They're like sort of 10% of your annual turnover.
It's really nice to be able to get this type of contracts, compared to, you know, all this fast-moving consumer stuff where you have to carry a huge amount of stock. The customers are literally, you know, they're spoiled for choice. They just wanna walk in and buy something. It sort of puts huge strains on your on your working capital. Where the other ones, you know, we still, we're still in the world of luxury, where we can ask 70% - 80% deposits on, you know, a ZAR 100 million style contracts and run a cash neutral project. Again, that said, market segment is the one that we must focus on. I think that's me.
Thanks, James. I'm gonna ask us to hold our questions and push through to finish the presentations. Then we'll open up the questions for everybody.
Thank you, guys. I'm on the graveyard shift, it seems, so I'll have to do some singing and dancing to get some attention. Good afternoon, ladies and gentlemen. I think it's needless to say that you're all quite aware that the South African electricity market has liberated in the last few years, since 2021, from that Eskom monopoly of old to a more fair and equitable access to the national grid infrastructure. We believe that Eskom is not the generation or the retail business of the future, and there'll be multiple retailers and generators entering the market, and they'll become as ubiquitous as it is in, for example, the States and in Europe, where you can switch between providers of choice. We're seeing that there's a significant opportunity in the market, and that is what we're here to pursue.
Can I flip forward here? To the green one. The total grid-based electricity supply industry in South Africa, just to put it in perspective, compared to other industries, it's about 3.5 x the revenue generation of the South African gold market. In contrast with the transition to more renewable resources, there isn't a dilution in natural resources in sight for that industry. The Eskom and municipal electricity revenue generation was about ZAR 260 billion last year, and the market is largely occupied in terms of demand by the energy intensive users group, which use up about 50% of demand, and then everyone else sitting over here at about 60%. Just to flick back to introductions really, my name is Jenna Harris.
I'm the co-founder and chief executive of Apollo, which is the group's grid-based, renewable retail business. I have an engineering and business background, and I've been working in the power and energy sector in both South Africa and Australia for the last 20 years. Just prior to starting Apollo, I was on one side, advising these blue chip companies and the energy-intensive users group on their energy procurement strategy in the wake of the 2021 market liberalizations, with the generation cap being lifted, and how they could go about their procurement strategy to buy renewable power themselves and wheel it to themselves over the grid. On the other side, I was assisting IPPs on their new projects to bid into the government procurement rounds, the REIP, and the Risk Mitigation Program.
I think it's all quite common knowledge that those projects are really on a race to the bottom in terms of returns on equity. There did emerge the opportunity for that segment of the market, the everyone else section, to also get access to this lower cost wheeled supply solutions, where that everyone else is sort of the under 10MW size fractions, where they don't necessarily have the buying power or the knowledge to transact in private sector trade of electricity. These type of customers are typically buying in the 50MW-100 MW size fractions of that utility scale supply. Apollo's really been born to service that segment of the market, retailing to customers in the 0.5MW- 10MW size fraction and giving them access to that more affordable, cleaner power solutions.
The market size at this point is simply huge. I mean, there's a number there of 180,000 GWh per year that's currently being consumed over the grid. As I mentioned, the energy intensive users group occupies 40% of that. Everyone else over here, they're gonna be resorting to a mix of rooftop solar, the embedded solar supply, balance of Eskom, and then wheeled supply going into that market in the future. What is wheeling? I think some of the basics of wheeling are quite well known, but I will go through that with you today. Wheeling is essentially the mechanism under which private trade can be facilitated over the grid.
To put it very simply, if you imagine the national grid infrastructure being like a swimming pool, put water in on one side, take water out on the other side, you've essentially got a balance. Because of the complete fungibility of electrons over the grid, the same can occur here, where the geographic location of our source of supply and where our customers are actually irrelevant to trade of electricity. The only thing that makes it more complex is the grid network that a customer is connected into. Whether it's a municipal grid or directly connected into the Eskom grid, it's really a credit flow process that flows over either one network or two networks. To give an easy demonstration, the simplest form is an Eskom-connected generator to an Eskom-connected customer.
Our supply is generated at high yield areas, where perhaps you might be aware that yield varies across the country, where in the more centralized or the more interior regions, we have higher solar yields, and then as you move out, you could get drops of about 30% decrease in yields more towards the coast. We generate in the high yield areas, feed it into the grid, and then we notify the grid operator of to whom that electron credit is to be transferred to, investing a credit flow process. Eskom then supplies the balance or supply to those customers.
The difference between our price, which I can point out here, so if this is our supply contract to our customer, the difference between our price and the credit that the customer receives, or which is actually the Eskom wholesale price, 'cause we're swapping out Eskom wholesale electrons for our electrons, that's essentially the savings that the customer will experience. Those savings are compounded year on year, as the price between the Eskom wholesale price and our prices start diverging more. Our prices increased by CPI, whereas we've seen with Eskom, over the past decade, they've increased on average about 14% per year. This year, we've seen a market shocking 18.4% approved by NERSA, and next year we've got 12.4% increase.
I think it's needless to say that every customer in the market is scrambling to reduce their exposure to Eskom price increases. The way Eskom actually gets their prices determined is by the national regulator. Their prices are determined by a cost plus method or a pass-through cost method, instead of a competitive pricing method. You have inefficient pricing basically coming through the Eskom system, and that is why most customers would like to have a hedge against them. Our retail products are designed with the customer in mind to provide flexibility, and maximize on their green energy coverage, so that the amount of green energy they have on their electricity consumptions.
Offering them supply, which covers about 50% of their needs from day one, which far exceeds what you could typically get out of a rooftop solar. We're able to upsell in future when we bring in more blends and could typically achieve about 100% supply to those customers. Product maturity and market maturity. We're obviously in a very nascent electricity market, and there's varying levels of maturity across products and in markets, and mechanisms to facilitate transfers of credits. We've had a number of iterations of commercial models and market testing to find a re-recipe that works in today's nascent market. The market financial mechanisms and our products range from under development to early stage deployment.
We're driving readily deployable products now with an eye on ongoing policy and regulatory changes in the market, on both a national level and a municipal level, which we're preparing to capitalize on as they actualize. Within the electricity markets, the most mature or ready is the Eskom-connected generator to Eskom-connected customer. That wheeling framework has actually been underway for probably the last decade for approved generators. For example, Eskom frequently wheels between their Secunda and their Sasolburg facilities, so that mechanism has been tried and tested and well deployed. Just out of interest, in the past, Eskom's always used an email system for nominations of credits to customers.
Obviously, with the huge influx of new nominations coming in for credit transfers, they're moving over to an IPP portal to start to digitize those, because I'm sure one million emails to Eskom every month would probably kill them. The next in market maturity is an Eskom-connected generator to municipal customer. We have a few examples of that under play with PowerX and some of their generators supplying into Nelson Mandela Bay. The least mature is the municipal-connected generator to municipal-connected customers. There's no sort of one size fits all on the municipal side, and each municipality is at varying levels of readiness to facilitate wheeling. There are some municipalities who are dead against it, some municipalities who are actively working towards it.
And on our customer tap, large power users with consistent base loads are the ones that are easiest to serve in the retail market. We've developed new instruments to start dealing with customers who have seasonable variable loads. For example, typically, customers who have shutdown periods, we've developed instruments to make custom products for them. Then in our sights are the smaller power users in the domestic market, which we have our eye on for deployment next year. On our products, we currently offer that conventional retail product for that customer size in the 0.5M-10 MW size fraction. Then we're expanding that to a wholesale product to customers who use an aggregate over 1 across multiple sites.
This could be, for example, a business who, like a Nando's, for example, has many sites across the country, and they would contract directly with the head office. Finally, the virtual wheeled product, which is available on both a wholesale and retail basis. This is in the pipeline for next year, which is suitable for very much any size customer, in any district, whether it's municipal or Eskom, as long as they're in a municipality of a good financial standing or they're a customer in good financial standing. The environments we're operating in have a balance of incredible opportunity and very difficult challenges. Some of the inhibitors that we have are firstly around municipal debt.
Since wheeling is a credit transfer process, Eskom is not willing to transfer credit to municipalities that owe them huge amounts of money. That eliminates a huge chunk of the municipal market, where there are really good customers stuck in those municipalities. I think that that will change in future, because we're seeing incredible pressure from those customers to be able to access wheeled power, and I do understand Eskom's working on a mechanism to facilitate that, but it is currently an inhibitor. Terry mentioned earlier the NRS load shedding framework or load curtailment, this is on the flip side to load curtailment of customers, and that's really instead of a customer being load shed, they are just asked to turn their consumption down consistently. This has very recently changed.
Previously, there was no allowance made for customers who are buying wheeled supply to mitigate their load curtailment requirements. Very recently, we've heard that the NRS groupings are going to update their load-shedding framework, so that there will be some relief for customers on load curtailment who do buy wheeled power. That's a big game changer for us. On municipal deposits. Literally in the time that between the slide being developed and now, municipal deposits was an issue, and it was a blocker for us accessing any municipality, except for City of Cape Town. Basically, what this is that any Eskom customer needs to have a deposit with Eskom associated with their account, and Eskom had called for everyone's deposits to be updated if they wanted wheeling.
For municipalities, this was a huge amount of money that none of them could raise the funds for, except for City of Cape Town. Since the making of this slide, Eskom has actually said that they're gonna waive that deposit update requirement for municipalities in good financial standing. That has opened up huge opportunities in those other markets like Ekurhuleni, eThekwini, Nelson Mandela Bay, Most DA municipalities. Game-changing opportunities. Eskom's virtual wheeling framework, which is currently being piloted, is a huge opportunity for us. And this essentially enables us to bypass the municipality in the credit flow process.
Municipal credit and municipal risk is something that we have to carefully manage, and through virtual wheeling, that credit flow through the munic can be bypassed, and we can essentially retail to any customer in any municipality, without having to go through them, as it's basically a credit swap process. The Eskom open market system is well-publicized in the public domain, and that provides us spillage risk mitigation for our business, and that's not been there in the past. This, quite critically, provides us with some level of load-shedding resilience. A supply that we can't get to customers due to load shedding, can be sold into Eskom's open market system. The more load shedding there is, the higher the price that Eskom offers to the market.
As an example, just over the last three months, Eskom's offer prices almost doubled due to load shortages. That price is closely linked to Eskom's marginal cost of production, whereas they're burning more diesel on their diesel peakers for emergency dispatch, which is in the ZAR 4,000-ZAR 5,000 per MWh range. That offer price that they offer in the market to avoid them from dispatching on the diesel peakers goes up. Load shedding in our industry actually offers some benefits because you're earning a commodity in a supply shortage. The risks in the industry, I think tariff restructure was mentioned, tariff restructure beyond the currently proposed amendments. We're quite familiar with what amendments Eskom's put on the table at the moment.
Anything beyond that or policy change, which serves to stagnate the current wave of investment in this space, poses a risk to this industry. Far to date, the government and Eskom have actually created a very good enabling environment for public participation in this space, and that's quite evidenced by the over 4,000 MW worth of new generation capacity that's been registered with NERSA to date. Sorry, that's just over the past 1.5 years since the generation cap threshold was lifted. There's definitely a very strong call from business and the investment community at large for those frameworks to be maintained, and other government obstacles and new generation capacity deployment to be lifted and alleviated. I think just to sum up, I don't think I have any more slides, but yeah.
I think just to sum up, we've been very fortunate to have Reunert as our majority shareholder, who shares my vision in the transformative changes afoot in the energy sector and how best to capitalize on these changes. Additionally, it's a very highly complementary business within the renewables cluster, covering generation, storage, and load control. All of these businesses can leverage off each other for mutually spring-bolting the group forward. Our business model is not capital-intensive. It revolves around our legal, commercial, and financial IP. It's a contracts business. And then the digital technology is under deployment to facilitate trade. The business is therefore highly scalable, offering opportunities as far as the market is big, and provides annuity revenues based on medium to long-term supply contracts.
If I were to reflect back just to the size of the market, on the first slide, if we were to occupy just 0.07% of that market, we would have a good business. That's definitely not our aim. Our aim is much higher. Anything higher than that is a fantastic business. Okay.
Yeah. To try and explain this concept, I just want to give a few examples here. One of the first things you do when you install solar in your own home, for example, you try and take load off of the system. The most obvious example is, you'll change your incandescent lamps, your lighting, you will change to LED lighting. Depending on the size of your home, if you can cut out 1KW or 1.5 KW of load, and you're burning those lights for maybe four hours in an evening, just in the battery capacity that you would need to support that load overnight, you're probably saving ZAR 30,000-ZAR 40,000, you know.
When you add the panels that you need and the big inverter and so on, you may be moving closer to ZAR 40,000-ZAR 50,000 in the capital that you're saving by managing your demand. Similar, you know, if you've ever had solar installed in your home, you'll see the first thing they do there, they split your DB, and they have essential loads and non-essential loads. During load shedding, only the essential loads run. That, again, is because you don't want to spend the money to size this overall system that big that it can handle your whole load. You want to take a load off. Those are very simple examples of demand-side management.
Grid-interactive buildings, you know, are buildings, let's say, for example, this kind of building where you may have 100s of nodes that all operate independently of each other. A grid in-interactive building is a building that understands its load, understands its time-of-use tariff, understands where the energy is coming from. For example, if you're in load shedding and your generator is running, that building would prefer not to run certain loads. You wouldn't want your hydro boilers to run, you wouldn't necessarily want your aircons to run, you wouldn't want your geysers to run. Otherwise, you have to size your generator so big that the capital cost is much higher. That's at the heart of what a grid-interactive building is.
It's a building that is smart, that understands its load, understands where its energy is coming from, and understands what the cost of that energy is. By doing that, if you look at that curve on the bottom right, you can, you can do what we call flattening the load. If you can see on that curve, you'll see a kind of a purple raw curve, and then you will see the kind of light blue flattened curve. What you've done there is you've cut load out of, out of peak tariff times, and you've moved them into standard, or you moved them into off-peak, and you're paying less for your electricity. In the process, you've flattened your load.
What that means, just like in your home example, is you can use less solar, you can use less battery to achieve the same result. Very significant. M anaging the load, managing the demand is very significant in the overall deployment of renewable energy. By doing this, you avoid these undesirable peaks and penalties. You pay penalties for maximum demand. You flatten that load profile, you restrict your electricity wastage. For example, you know, almost every building, I would think, overnight, the hydro boilers keep running, the urns keep running, the geysers keep running. All of these loads can be switched off with no impact on the human experience of operating that building.
Of course, there's this issue of optimizing the sizing and cost, this high capital cost of deploying renewable energy. That's at the heart of what we have, you know, far down the process of developing at the moment. The product and solution that we are in the process of rolling out right now, puts this kind of control, this demand-side management control, in the hands of the user. Users can now shape that load in their building, and any user with a time-of-use tariff would benefit from moving those loads around, from flattening their curve, from eliminating things like maximum demand. Our estimation is that Eskom has 100,000 commercial industrial customers, and there's probably another 100,000 within the various munics.
There's no equivalent solution for what we are in the process of rolling out at the moment. Building management systems have been around for many decades, but they are very clunky, very expensive, very disruptive technology to deploy. If you look at the right-hand side of the curve, you can see the hardware that we've developed, and you'll see there's the four-by-four plug point. It literally fits where the passive plug point would have been. You can remove that passive device, you can install this intelligent device, and it's an edge controller, so whatever load you've got against it, you have full knowledge of that load. You know what the load size is, you know that it's on or off, you know, and you can switch it on or off, you know?
You can imagine if we take the one at the kind of top leftish is an isolator. Very typical. Everybody's seen isolators. There's an isolator on every geyser. There's normally an isolator on pool pumps and those kinds of things. The deployment of this hardware is quite, the installation is not disruptive at all. You literally remove passive devices, you install active devices, and you've created a smart building, a building that can interact with the grid. I hope I've explained the concept here. Demand-side management is important. It's been tried for decades and decades. Probably the most typical one is the little curve on the SABC.
Back in the day, people remember SABC, that little curve, and they would say, "Please go and switch off your loads." That's demand-side management. They're trying to encourage behavior to limit the demand so that it can match your load. What we've developed here is this demand-side management solution, which is in the hands of the users. Okay? We've designed, we've developed, we've certified the technology, the hardware, and we're in the very early stages of rollout of this technology. The mechanical form and fit, which I've explained, is it's equivalent to the existing passive devices, which means it's inexpensive. Low disruption, low disruption to implement, and it's backwards compatible, in the sense of even a building of, say, 20 or 30 years old, can be converted to a smart building.
You don't have to, you don't have to follow the installation of new buildings or new construction and so on, to move into this era of grid-interactive buildings. We're in the process now of rolling out partnerships with a body of installation and implementing communities. We've designed this to have an annuity income, so we, you know, we of course, we manufacture and sell the hardware, but we want an annuity income that comes from the deployment and use of this solution. And we're literally in the throes of the first orders right now and the first run outs. That's a little concept I wanted to explain.
We're kind of missing link, if you want to put it, between this whole renewable energy ecosystem, and something we're quite proud of. I'm gonna hand over to Nico now, because we move, we need to move quite quickly, yeah? Okay.
Thanks, Terry. Afternoon, ladies and gentlemen. Yeah, I see a few of our guests left after Jenna spoke, so they waited for the wheeling stuff to be over at the interesting part, and now I have the real graveyard shift here. Yeah, I'm gonna try and give you some more information about a very complex, in my view, thing we had to deal with in terms of disclosure and how we communicate to the market in terms of the guidelines and regulations which we are bound to. In my presentation, I'll refresh a little bit about the main business archetypes that we have in our cluster, which, each of the speakers talked about now. I will delve a little bit deeper, specifically into the Lumika/Terra Firma business, where we will speak about the main objectives, the creation behind it.
Looking at the structuring of how we're structuring Lumika, as well as diving a little bit into a PPA and how we structure a PPA contract. Looking at the typical profile of a 1MW PPA. Getting to Charles' question a little bit about the EPC versus PPA profiles, to some of the items that most of you have been waiting for since last year's capital markets day. This is what we'll be communicating to you guys in the very near future in terms of the renewable energy. If I jump into this. We shared last year, pretty much the same with you guys in this.
Just to refresh, we have two main business archetypes in the renewable cluster, being our product sales business, which is typically BlueNova, as well as the EPC portion of Terra Firma, which is characterized by a low upfront investment, other than some working capital, and then sustained, not sustained, but immediate profit and cash profile that comes out of it. On the flip side to that, we have the more investment-based annuity business, which is the blue business in Terra Firma and Lumika, which is the PPA contracts, as well as our battery financing models that we are also undertaking. To some extent, the load control, which will be implemented, that will also generate some sustained revenues and profits for us.
These businesses are characterized by higher upfront investments, but it does deliver the sustained cash and profit profiles that we need. In the past 12 months, very recently actually, Jenna joined us from Apollo Africa, and that introduced a third archetype, typically for us, which is sort of in the middle of these two archetypes. Jenna mentioned that the business is not heavily capital-intensive upfront, but the business will deliver sustained long-term solutions, because we're also entering into long-term contracts with our customers there. This a nice third archetype to add to the offering that we have. What we need to remember, however, is that the main objective for this cluster is for us to build an asset base that will deliver us with sustained profits and cash over a long-term period.
In this period, and Charles, coming to your question a little bit, we will keep on augmenting that business with our more immediate product sales and our EPC contracts as we go along. We're not dropping that base and just building asset base. We're continuing to do that, but our strategy is to build the asset base on the long term. If there's a fight for resources in Terra Firma's business, and we need to choose by, between building an EPC or building a PPA, we would build the PPA, and we will build that asset base. Diving into Lumika, again, Grant touched on it in his discussion.
The main reason why we created Lumika, was for us to build this asset base, to get into a partnership with a partner that can add capital, that has ties to debt providers, has also various operational arms which we can access, and shares the same values as us. With who we can build the asset base to deliver the sustainable geared returns, which is in excess of our weighted average cost of capital. The structuring of the Lumika Group is, we are structured basically in two main components. The one being we have the operational arm, which is Terra Firma Solutions, that houses the people, houses the functions, and actually rolls out most of the projects.
Under Terra Firma Solutions, there is some asset companies, which is companies that was created before Lumika, was created with some partners, which will continue existing into the future. Under Lumika itself, sitting next to Terra Firma Solutions, there will also be some asset companies or SPVs. The partnership has those goals, which is 50/50 JV, target of building roughly at 485 MW worth of BOOs within a 5-7 year time span. Which we estimate at this stage will cost around $100 million between the two partners. Looking a little bit more at the structuring and touching on why we are structuring it through asset management companies or asset holding companies or SPVs, there's two key reasons for that. First is risk management.
We want to ring-fence our debt portfolio into this specific asset company, and we also want to ensure that we have limited liability in those asset companies. We have the portfolio of assets in there. We believe our portfolio of assets speaks for itself, and is good assets, and thus the debt goes into at that level, and the liability is managed at that level without exposure to the ultimate shareholders. The second reason why we have specific asset holding companies or SPVs is, it depends on the partner or the opportunity that we deal with.
We deal with various partners on the ground, and those partners, either than offering an EPC to the partner, we might say, "But let's enter into a joint venture together and build a portfolio of BOOs together." They typically have roof space or ground, and we have the capability to build that, and both of us make a good return on it. Typically, the asset companies can either be one of two, being either a subsidiary or a joint venture, again, depending on the partners or the opportunities we go into. The asset holding companies are highly geared companies, so it's companies that operate at the project level. It's typically project-level gearing, looking at anything between 60% and 75%.
The debt is non-recourse, so we don't want to intend to recourse debt to the ultimate shareholders. The debt profiles are also sculpted in the beginning years to ensure that the project remains viable, especially in the beginning period of that project rollout. If we look now at our structuring of our PPAs and what the typical elements is within our PPAs, the main objective of our PPA is ultimately to provide us with an ability to own a well-designed and constructed plant, from which we can sell energy to a bankable off-taker over a 15-25 year period. That is the key objective for the PPA. We believe that we can achieve this by mainly two key objectives, having the in-house capability, as talked about by Grant, of engineering, construction, and O&M.
It's all under our own roof. This allows us to ensure the quality of the plants that we build ultimately, and ensures that we can easily stand behind the plants that we build, and offer our generation guarantees to our off-takers. This we affectionately refer to as a generation or a sell side guarantee. On the flip side of this, however, is the fact that we need to protect ourselves in terms of what Terry spoke about. I think Terry or Grant mentioned it, whereby if the grid goes away, if there's a grid failure or load shedding or whatever, the plant shuts down, ultimately, and that causes us to not be able to generate electricity and sell that electricity ultimately to an off-taker.
We need to protect ourselves against that, sign that Eskom and municipalities, let's call it, charge a capacity charge for putting a line there, you need to pay for that. We are building a big piece of plant for an off-taker, and for that reason, we would charge. We've not charged, but we have, let's call it, buy side guarantees in that, where the consumer ultimately pays for deemed energy, for energy that we could have sold, but due to grid unavailability, we didn't get to do that. There's also irradiance inconsistencies, so to the best efforts, we can plan to sell power during a period.
Like we've had for the past month in Cape Town, no sun, and ultimately, we can't guarantee to our off-takers the fact that we're gonna deliver energy in a period where we can't control the sun. I think a key aspect linking to, I think, and this is something that I've heard all through the presentations today, is governance. This is key to what we do in Reunert, and this flows through two important things that we heard today is values and governance. In our PPAs, we run a comprehensive governance process, which includes, which is most important on our side, we would say, is the credit vetting of our off-takers. We're entering into extensively long contracts, 15, 25 years.
We would know that we would want to know and ensure that the party on the other side of that contract can pay us with for the next 15 - 25 years. Diving a little bit deeper into that, our approach to this governance and our risk management strategy is typically that we undertake what I refer to as an onion approach. This is looking at risk through various levels, from your industry, your portfolio, your project, up to your off-taker. The thing here is, the more you peel back the layers, and as we develop a PPA, or we develop a project, and we peel back each of these layers and we mitigate these risks, the project becomes more valuable, ultimately.
The reason for that is that the safer a project is, the lower the required cost is to invest in that project, and ultimately, the higher the return is that you will get out of the project. The key risk factors that we typically deal with is credit risk, that sits on your off-taker or even your industry side. Exchange rate risk, which sits largely on our importation side, and we manage through. There was a question, I think, to the defense side with hedging policies, so we ensure that we follow hedging policies. Liquidity risk, which is in two buckets, being debt side as well as working capital side. Interest rate risk, which is a very topical thing, and forever everybody wants to know whether you are targeting fixed versus variable rates, and there's arguments for both.
As well as the grid availability, which I referred to a little bit earlier, which can be managed through one of two aspects, a commercial approach or a technical approach. If we dive into how a typical one-megawatt site looks over a 20-year period, one would notice, I can draw a line almost in the middle at, let's call it T12, and say, up to T12, you can typically see a scenario where you have higher debt payments with low tax payments and lower or subdued shareholder returns in your first 12 years. If you go on from the 12 years, generally, your debt falls away, so you've paid off your debt. You have increased tax payments, and you have accelerated shareholder returns on top of that.
The reason why the tax is low in the beginning period versus the second period, is ultimately due to the influence that interest has on the debt portion, as well as the wear and tear effect of the plants. That's the reason why the tax is strange. Over the portion of the period, however, we remain and we keep to our required rates of return. The project, over the project term, meets our required rate of returns. Shaul, again, coming to your question, there is a lag in cash flow, there is a lag in shareholder returns as we build this portfolio, which is a natural thing if you insert the CapEx. This is augmented through the EPC that we continue doing. Now, getting to the exciting part.
I'm not sharing any numbers or figures with you today, if you expected me to do that. You will see that in our FY 2023 report, at the end of this year. What I will share with you today is what you can look forward to in our year-end report. Again, putting the context into this is, we can only disclose certain items which is allowed for, because this is at the company level, and as Alan rightly said, we disclose at the segment level, typically. We can't dive deeply into it, but we want to take you through the journey.
We want to take you guys and show you that the stuff that we are talking here up front the whole time, about how we're executing our strategy, that you are seeing that, and that you can buy into that with us with some more accurate data. In three key buckets, first of all, we will look at our portfolio based on effective ownership. Now, effective ownership, there's two ownership. There's total ownership or total build, and then there's effective ownership. In models where we have partners in it, we will look at the effective ownership that we have in that plant. If we have 50/50 partnership, we've built a 10MW plant, our effective ownership on that plant is 5 MW. We will look at the plants that we've completed building, that has been built.
We will look at the plant, the amount of MWs that is work in progress at that point, as well as look at the amount of PPAs that we have signed but haven't executed yet. That gives you a little bit of a glance into what can come into the years up front. It must, however, be noted that in the pipeline, it's typically a shorter duration than what you will typically see in your utility-scale projects, which takes years. You won't see us sitting with 1000s of MWs in our pipeline to be executed, because that stuff has a quicker turnaround period.
The diversification portion and exposure, we will share with you the number of plants that we've built, which will give you a fairly good idea when you look at the MWs and the number of plants, that there's no exposure to one major customer or to two major customers, but it's across various industries and across many customers. Then on the returns and financial effective ownership, we look at the normalized EBITDA. If we refer to normalized EBITDA, there's a lot of plants that we built during the year.
Those plants will have only generated a small smidgen of EBITDA during that year, what we will aim to do is to normalize that EBITDA, to say to you, if that plant was switched on from day one in the year, what that EBITDA would have looked like for the entire year. That's what we effectively refer to as normalized EBITDA. We will look at the portfolio debt, so how much debt have we inserted into the various portfolios up to year-end? The average interest rates on those debt, and then the portfolio value, which is effectively the cost of the portfolio. Speaking to your question as well, I think you will see all of these disclosures ultimately come out at year-end.
The average yields, which you will see, which will typically be our EBITDAs across our cost. We believe if you have most of this information, you guys can put it into your models and do some calcs. I know last year we put some multiples and stuff on here, I can't remember the gentleman in the back, but he asked us, it's not our job to do that. It's your job. We will not do that. You guys will slot it into your models and you should be able to do the calcs. I believe we have a good story to tell, an exciting cluster and, yeah, challenging. It's a challenging environment and remains challenging. We have a good strategy going forward. Thank you. That's me.
Thanks, Nico. Okay. Questions?
Can I ask my question, and maybe it's completely left field. Where does the aggregator fit into with the opportunity you made?
When you say aggregator?
With the, my understanding, an aggregator buys from somebody themselves to somebody else. Is that correct or no?
Yeah. That's Apollo.
Is that you?
Yes.
Okay, you're the aggregator.
I think different names get used. I mean, say, a trader, but we're not doing day-ahead market trading. Aggregation, we aggregate our customers and our portfolio of generators, but something more simply understood as a retailer, you know, wholesale supply down to retail customers. Aggregation is part of the function.
Wonderful, thank you.
Okay.
Thank you.
Hi. maybe just a question to Terry and James. Terry, I think earlier you sort of touched on the smart meters by government. Do you see any opportunity there? I mean, I've got a CBi-electric switch in my house. I mean, is that an opportunity for you guys?
Am I live? It's technically possible. It's going to take quite a big social effort. To switch a geyser, when we're walking around, I'll switch my geyser for you if you'd like. I'll show it's on my app. To switch a geyser is technically very easy to do. There's a lot of social resistance to, you know, to government now starting to interfere in your home and your geyser and so on. Of course, there's the effort to roll out. You know, if you take something like one million geysers, if we could switch one million geysers, that's roughly a power station, you know?
The costs, our estimates to switch those one million geysers may be, and, I'm speaking at the top of my head now, ZAR 2 billion-ZAR 3 billion. To build a power station, maybe, I don't know, 100 times that or something.
Who's building it?
Yeah, yeah. Again, demand-side management is a very, very attractive proposition. To switch one million geysers, you need to get into one million homes. You need one million receptive individuals, et cetera. It's technically, I'd go as far as to say it's technically easily done. It's the social acceptance, it's the rollout, it's the, you know, getting buy-in that... You'll have seen articles in the news recently about the notion. The answer is, it's probably the cheapest power station government will ever build if they did that, and it's technically feasible for sure. Yeah. it's a big social effort to make it happen rather than a technical effort or even a financial effort. Yeah.
All right. Thanks. James, earlier this year, I went around just speaking to various people, especially the wholesalers. You know, I went to ARB and ACDC, et cetera. They sort of indicated that they wouldn't want to stock some of, you know, the unknown brands in terms of batteries. I mean, they spoke about Freedom One is probably the key one, BlueNova, I think Solar ND as well. I'm sort of trying to get a sense... I think earlier you said there's about 18 players in there, mostly Chinese.... My understanding is that they don't have the route to market. Why is that a risk?
I, you are right there. It's a question of time. It's, you know, two years ago, I was one of the disciples explaining to people what lithium batteries are. Now, people understand the benefits, the quick charge, and all these things. The moment you get to a point where you understand what's inside these batteries and you start establishing repair facilities, then you become more familiar with it, and so the likes of ARB, ACDC, Voltex, all these other guys, will become much more comfortable as they build relationships with these foreign suppliers over time. We can see that. One of the reasons why they like us, is because we do the complete customer installation systems.
We have the ability to upgrade all the hardware, all the software inside the systems, and we can do a full turnaround maintenance repair facility in South Africa under five working days. That's our agreement that we have. If ACDC has to go and establish that with another company, they're gonna have to invest in the capability of doing that internally. I think over time, they will. That's why we're very careful to say to put too much focus and attention on that market segment for ourselves. We will still sell there, but it'll be elite products with more features and higher margins.
All right, thanks. Maybe just the last question, sorry, if I have another chance. I think, Ian, maybe a question to you. You know, when you sort of talk about the size of renewable energy, I actually forgot to check the numbers for the first half. I think for the full year, 2022, you mentioned some of 39% of Applied Electronics. Do you also factor in some of the other, I suppose, businesses from Nashua selling, all those kind of things, or not really?
Sure. The important slide is Grant's slide that he put up when he spoke about that target market. When we talk about renewable energy and the disclosure that I'm giving, or that number, the 39% of last year, and I can't remember what it was in the half year, we're only talking about that portion that fits into that middle area, so it's only these businesses here. Nashua, as an example, is not included in that number. It's only the revenues flowing from. At the moment, basically, it's only BlueNova and Terra Firma Solutions that form that number on the disclosures we've given in the Applied Electronics. At this stage, Apollo isn't generating any income. Jen has made some enormous commitments, which have doubled now that his cell phone went off earlier.
That's still flowing, so it sends us just out of those two businesses. The cables that flows into the REIPP space, that is not included, that's accounted for in the Electrical Engineering Segment. The Nashua is that business is in the ICT, so it's only for those two businesses at this stage. Just while I'm on, there was a question from the webcast from Jovan, very similar to the question around the lower end. He's asking a question in the store, the containerized solutions for the retail or the property developers, what benefits does BlueNova have in that space, and why would a customer select BlueNova over an alternative in that space?
I think the first thing is that we're extremely well-positioned to respond quickly. Our time to market is, at the moment, about half of that of our competitors. We're available locally. It's not an easy system to design. You know, you see that there's a lot of knowledge being built on the customer side, and we're assisting them. The amount of time you spent and, or really, and still spend with the likes of Growthpoint and Resilient and all these other guys, and we're learning, and they're learning. Having a strong local engineering presence 24/7 is essential. That's what the foreign companies struggle with. They need to get themselves into that position. You know, Tesla has basically said, "Not interested." They're too busy with other things.
I've seen a lot of Chinese companies come to South Africa, worked with EPCs, some of your competitors, and they failed dismally, because it's not a plug-and-play solution. You need to customize this thing. Now, you've got 6-8 hours delay back to China. It's [audio distortion]. It's only once those companies, those foreign companies, establish partnerships domestically with local support and local engineering design capabilities, will we see the competition rising. By that stage, we should be strong.
Thank you. Charles, I don't know.
Maybe one for Nick, and just the funding of the BOO. The $100 million, so $50 million is your contribution to that. I mean, are you gonna take money from Quince Capital and reallocate it into BOO? Just maybe just talk about the capital allocation, and the interplay between Quince Capital and the JV.
Good afternoon, everybody. I was hoping to get away completely unscathed today, so thank you, Charles. Thank you for waking me up in my corner. The answer is probably a bit of everything. Yes, we can draw from Quince. We will redeploy the capital that we have on loan with Quince, put external funding into Quince, and redeploy that to Lumika. That would be one way of doing it. Alternatively, we will have facilities within Reunert itself, and then we have the positive cash generation within Reunert itself. It'll be the optimum combination of those three sort of financing areas that we'll use to effectively fund Lumika.
... just to add to that, just in terms of the BOO rollout. Did I understand correctly, you currently have about 40 MW of unbuilt?
Yeah.
Yeah, you intend to get to ZAR 485. What's your sort of annual run rate? What do you anticipate? How fast are you going?
Again, you're asking the guy who's setting the targets. Let's pitch it at Grant. Grant, you can have a go. Well, I mean...
Sure.
The simple I mean, we're trying to get 400, we need another 400 in 5 - 7 years, so there's your.
Yeah.
There's your number.
That's the answer.
Okay. And-
Is that effective or 30?
That's effective, yeah.
It's owned by the maker.
Yeah.
It's our share. That would be 50%.
Yeah.
If I can just add maybe to that as well, what needs to be taken into account is that doesn't currently include battery financing, which is a new thing that we are doing now as well. That might influence that as well. The battery financing over a longer term period, ultimately, it's to us building the capital base that will deliver sustainable returns.
Wow!
Over the period. I wouldn't look too much at the ZAR 485. It is getting that capital and earning money from that capital.
You happy? Perfect.
I have a question for BlueNova. We yesterday, actually, this past two days, we were at a conference with the REITs. You know, they're talking about the energy mix. Between, you know, for load shedding, using solar, and supplementing that with batteries or generators. Most of them were saying that, well, you know, while these batteries, generators rather, are expensive, diesel and maintenance and da, da, the batteries, rather, they're not optimal. They don't last long. How are you solving for that? For them, they're saying, yes, the generators are expensive, but batteries are not optimal.
It's a very complex thing when you look at load shedding at a rate scenario, because, you know, if it's a sunny day, and there's load shedding during the day, then a fairly small battery inverter system, which can be a grid-forming element, together with PV, you cannot beat that. I mean, we're talking here about ZAR 2.50 per kWh during load shedding. Once you start saying to yourself: "But wait a second, these durations are longer, they happen at night," and now you start oversizing and getting to very large scale and large format battery systems, which are not suited to at the level.
Then it might actually make sense to start going the other route. It depends on when the load shedding takes place, to come to an answer on that one. It's slightly complex, but in terms of life cycles, just to give you an idea, the battery systems, the capacity diminishes over time. We offer battery systems that you can do two discharges per day. That means two load shedding cycles per day. You can do that for 12 years and only lose 20% capacity. That's a very, very nice number, if you calculate that back about the effective rand per kWh cycle. The important thing is, you have to do that. The moment you stop doing it, the moment you stop cycling the battery, your ROI diminishes because you know, you're not getting value for money.
I think the important part is if it's only used for load shedding, the economics are not ideal. Once you bring those other elements in, that BlueNova has highlighted, the arbitrage and otherwise, where you can cycle it every day, the economics increasingly make sense. If you're using it only for load shedding, the battery still would probably still be a relatively pricey alternative.
Yeah.
Any other questions? Okay. Sure.
Is wheeling not affected by load shedding?
Okay, the question is Wheeling not affected by load shedding? Jenna.
Good question. There's load shedding on two different sides. One is on the generator side, where the generator could be cut off, the other one could be on the customer side, the customer gets load shed. Typically, generators in high yield areas, where you have multiple generators feeding in, say, in the Free State, at the major substation collection points, Eskom typically doesn't load shed those supply lines. I myself am on a generator line. I never get load shed because Eskom won't shut down their generators. There's much more of a lower risk on the generator side. On the customer side, the customer is not getting those electrons directly. What they're getting and what we're selling to them are credits on their bill, those credits are reconciled monthly.
At the end of the month, as long as we've put all that energy into the grid, and at the end of the month, if they've used that total amount of energy out the grid, then they will receive their full credits. That's quite different from, for example, a rooftop solar. If you're not using at that point, you lose it. Okay. Wheeling, you've got a month to make up that volume and to use that volume. The effects of load shedding are very much mitigated due to that reconciliation effect.
Not month-to-month?
Not month to month. We typically under supply our customers a little bit, so to make allowance for some load shedding. As long as we're fitting within that on a monthly basis, they're all good.
Load shedding itself wouldn't be a mechanism to avoid... Sorry, Wheeling isn't a mechanism to avoid load shedding?
... six of the new changes to the NRS comp.
Except for that. To get back Trevor, now I'm making bold statements that I'm getting corrected on. Any final questions?
Maybe one.
Yes, Charles.
Given that the blue funding models are ring-fenced and they stand alone, I mean, would they be saleable at a point in time to an external party, just thinking out loud? If the return in the past was adequate, would you think about offloading it to get your return earlier than waiting?
Yeah.
The full duration of the contract?
Yeah. The question is, the, with the SPVs or the blue assets being ring-fenced and in a standalone vehicle, would we consider selling them at before the term of the contract? Certainly, we would. You know, I think, when one looks at, and certainly one of our... The way in which we're building a diversified set of assets, the opportunity to sell those on and perhaps to accelerate the return, I think is real. We've already seen it in the first round of REIT projects. I think there is a demand, not only locally but globally, for assets of this nature, that would deliver the type of returns and the type of diversified returns that we're talking about here. That's certainly part of our thinking.
I think if the time was right and the returns were right, we would certainly consider it. Any other questions? There's one more question, just from Zintle. It's a, it's a defense question, which I think we may have missed earlier. She was just asking about: Why is the radar order receipt different, or the method of closing of sale and the manner in which order book flows into revenue, different to the rest of the defense business? It's really around the time. You heard Harald , in order to get a large radar, you'll engage sort of 6- 12 months in order to close a sale, and it could take you as long as 18 months to actually build the unit itself. They're highly complex units. They can be very large. They can be very complicated.
Whereas most of the other products that we have within the defense environment, they're from order to sale and receipt of cash, is very much shorter than that. It's just the bill cycle and the. Sorry, it'll kick in in a second. Don't worry. We're just showing you that we do have some backup here. We'll see how it kicks on in a second. I just want to see.
Okay, you're gonna put me on the spot here. Okay, three more last questions that I'll just take. First is from Itumeleng: What is the current headcount across the renewable cluster, and where do you see this headcount go in the next 18 - 24 months as you scale up? I think that goes to Terry. I don't know if you. Well, yep, okay.
Yeah.
Okay, that's fine. If you...
The headcount across on my side. Yeah, but the camera gone. Okay, sure. The headcount across the cluster currently sits at around about 450, about 450-500. Yeah, I... It's a difficult question to say whether it's gonna scale up. As James alluded, yes, his facility will go a little bit higher. On the EPC side, our strategy is not really to build a massive construction team and stuff like that. Our intention is definitely not to scale that business greatly, but to invest in key resources there, which in the engineering side and the technical, the technical side of the skill. I wouldn't say we are busy with the scaling this year. We've basically scaled these businesses, and we're busy with that, and I think from next year, they should largely stabilize.
Okay. Another question from Itumeleng was: What's our take on Eskom's transmission capability and the reliability thereof? Is there a risk that more CapEx will be needed to upgrade the line to absorb all the renewable estimated to come online in 2025? Our sense is that the transmission capability is nowhere near sufficient to take on all of the renewable generation that's going to come on board. If you just take the numbers that have been bandied around and... Not, no, bandied is the wrong choice of word, that are being planned over the next 20 years. First of all, where they're going to be generated, and second of all, the scale of them, the current transmission grid is nowhere near big enough in order to take account for that.
I would argue that there would be a significant investment still required in the transmission grid in order to take account for the change of our existing generation mix, which is primarily coal-based up in Mpumalanga, to the more renewable that we're going to see sort of 20 years from where we are now. Just while we're sitting here, though, just if I take that forward, I don't see that as a risk per se. I think it's an enormous opportunity. Certainly for Reunert, in terms of how we play out, and I'll give you our view on it. Firstly, pleasingly, whilst we were sitting here, Eskom has announced that they expect the completion of the spin out of the transmission grid to be done by November. They've been talking about this November date for a little while.
They've updated it today. They've indicated that they expect that to be completed by November. Now, that, in my view, is the trigger for investment into the transmission grid. I don't think there'll be any further investment going into that grid until that point. What's critical again for me, in that they're only gonna put ZAR 40 billion. They indicated they're only gonna be ZAR 40 billion of the ZAR 400 billion on, of debt onto that, into that company, and I think that's quite an important element to give. They're not going to overgear it. I think that's a fairly critical next step to it, and it makes it economically viable, and the follow-up of CapEx to go into that, or debt funding to go into that, I think is much more achievable.
Second point, I think availability of CapEx for that or funding for that, I think is enormous. The world knows that we can't bring on the renewables without the strengthening of that grid. I think DFI funding, low-interest funding going into that grid, I think that's where the funding will come. I think it will be cheap funding that will go into that, and I think it will go in quite quickly. We've also, which is interesting, which I'd given at last week at the ABO conference, was we've had our first sniff of an Eskom bid. Also indicating to come out around November time. That may well be the precursor, aligned to that around the new rollout of investment into the, into the grid.
In our world, it doesn't play out in the renewable energy cluster per se. Those cables end up in our electrical engineering business, so those flow into our cables business. It's a particularly interesting and a good demand driver for that cables business over the longer term. My expectation of when it would flow, it's probably even if the bid comes out in November, they've got to close the bid, they've got to get the land, they've got to appoint the contractors to build it. We're kind of halfway down the process of build before the cable starts to get drawn off. I wouldn't think it's a next year number. Maybe the sort of the year thereafter we'll start to see some effect from that. If you look over a five year period, it's a strong demand driver for the cables business.
Sorry, can I just make an add-on point to the transmission constraints concern? I think in the segment of the market that we're playing, within that MW range, we aren't as much at the mercy of those Eskom group constraints as the 100 MW+ wind and solar plants are. Those can be severely impacted by group constraints, and there's far more opportunities open up for us under the distribution network as well as the transmission network. We can feed into different pockets of the grid, where there might not be, necessarily be the same constraints. It certainly opens up more opportunities for us to service those customers that can't go and procure 100 M worth of power from suppliers.
Yeah. Thanks, Grant. That's a good point. Folks, that's it for today. Thank you very much. I'm glad we sort of went through a couple of cycles. It got warm, the air con worked very well. It got cold, and now it's warming up again. I think a walk around the factory and some fresh air will do us all good. That brings it to the end. Like I say, the intention really was to try and give you a deep dive into our growth areas, give you exposure to the management and, at a much lower level, into the actual businesses that underpin that, and I trust that you've been able to get that out of here.
For those of you who've got secret questions that we didn't get to, you're welcome to drop us a note, send us an email. We'll come back to those, and always, we're willing and able to engage with shareholders on any questions that you may have. Thank you for your interest. Thank you for your support. We are now off to BlueNova. Everybody should have had the address or will have the address on your invite. We're under our own power to get there, The intention is it should take us how long, James? 15 minutes. Roughly, we'll try and kick off the walk around at about 4:30 PM. Okay, good. Thank you, everybody.
Thank you.