S e r i o u s a b o u t S u c c e s s ®
Enabling Cleantech Capabilities From a “provocative” financial viewpoint
• Why the current focus
• What methodology to adopt – Enterprise DNA
• Traps for the unwary
Mr Robin Pennell, Moore Stephens Melbourne
17 May 2012
www.moorestephens.com.au
Commercial in Confidence
Disclaimer
Our comments and information contained in this presentation are generic in nature and are not purported to represent advice that can be relied upon. You should seek your own advice for your own circumstances.
The author or any other persons involved in the preparation or distribution of this presentation expressly disclaim all and any contractual, tortious or other form of liability to any person in respect of this presentation and any consequences arising from its use by any person in reliance in whole or any part of the contents of this presentation.
The comments contains in the presentation shall not in any way constitute a recommendation as to whether you should invest in any product discussed in the presentation.
Enabling Cleantech Capabilities
Carbon Price a “catalyst” to action
It will cause a focus on both:
• Cleantech capabilities
• More importantly trigger a review of business sustainability as a whole
Enabling Cleantech Capabilities
For Private Sector Businesses “sustainability” means clearing the financial hurdle of the necessary Return on Investment
No matter how described- ROI, ROFE,RONA, etc –
It broadly measures;
• “Profit” as a return on
• the “Investment or funds”
• tied up in the enterprise
The required hurdle rate is obviously a function of other risk weighted investment opportunities
Cleantech capability ought to deal with both these concepts - “Profit” & “Investment”
Enabling Cleantech Capabilities
Don’t be “Blind Sided” by the Carbon Price
Unfortunately many businesses are being blind sided by the short term imperative of determining what to do about the carbon price from1/7/2012.
In other words:
• How much to pass onto customers or
• How much will the enterprise bear against current profits
Enabling Cleantech Capabilities
Don’t focus on calculating
The cost of the carbon price
based on your aggregate
enterprise
Using an aggregate
(average) approach really
produces a very average
result as it hides both
the “good” and the “bad”
Enabling Cleantech Capabilities
Profit & Cost Drivers
Instead it’s better to get a clear picture of:
• What drives “Profit” – remember profit is a key element of sustainability
• What is currently driving “costs”
• What should drive “costs”
• this should be the pursuit of the most profitable activities.
• cost should not be driven by general activity or worse
• by other costs
Note :
• There is nothing mystical about the cost of energy, water & waste.
• They are simply costs that are possibly going to increase at rates greater than the norm and need to be dealt with accordingly
Enabling Cleantech Capabilities
Mapping the DNA of the Enterprise
A better approach is to;
• invest in the understanding of the business/enterprise and
• devising strategies to improve it.
Cleaner tech options will emerge as part of this process.
A Granular Approach
• To do this one has to take a granular approach
• Start with by Identifying within the enterprise the different:
• Activities ( there may be sub businesses within the business itself)
• The different Products or services within each activity
• The different customers for each activity
• Then analyse the profit or contribution being made by each.
Don’t be overwhelmed – help is at hand
• You will be amazed by the results of applying some simple mapping or data extraction tools.
Pareto
principle rings
true in most
cases
“80% benefit
from 20% of
effort”
Enabling Cleantech Capabilities
Assume the Enterprise consists of:
• Single Business Activity
• Multiple Products (3 broad groups)
• Multiple Customers (3 broad groups) The basic measurement tool for mapping is “Profit or Contribution Margin” in $ and % terms. The results clearly show where:
• the profits are being made,
• the cost & sustainability risks and
• where to focus one’s efforts to improve
the same.
Simple Case Study
Risk of aggregate Approach
It is clear in relation Carbon
pricing and Energy costs that:
•Using the aggregate approach
may give rise to wrong pricing
decisions
•Simply recovering the price of
carbon via a price increase
does not maintain
contribution margins.
Note: Individual ROFE results
as compared to aggregate
Enabling Cleantech Capabilities
Case Study Findings Product 1
• Highest turnover (60% of sales),
• Highest consumer of inputs including energy,(67% of total business energy consumption) whilst
• Producing 54% of the Contribution Margin.
Product 2
• Although a lower revenue base 30% of sales it has a higher contribution margin producing 41% of total contribution margin
• It has a comparatively low energy cost (only 20% of group energy consumption)
• It has quite a distinct customer base
• ROFE of 30%
Product 3
• Low sales revenue, low margins, high embedded energy cost and
• Higher cost of customer service as multiple small customers
• Each of the above attributes will give rise to appropriate improvement strategies cause management to focus on.
• Poor ROFE 10% .
Action Plans
Product 3: Possibly cease production •It is a heavy user of energy, provides little if any contribution
margin and its ROFE is less than the funding costs.
•Appear unlikely that margins can be sufficiently improved
particularly in the light of expected energy cost requirements
• Benefits from redeploying of capital into other strategies.
Product 2:Standout product •Examine why & how to further exploit comparative
advantage in market place
•Market & IP protection strategies
•Still pursue further cost down actions.
Product 1 Main product problems •Largest sales revenue however only modest margin
•Main generator of cost (including energy)
•Multiple strategies will be needed to:
•Remove energy & other inputs (engineering review)
•Review pricing to see if margins can be improved
•How to value add if market is price sensitive
Enabling Cleantech Capabilities
Clean Capability approach
Need to apply similar strategies that
one does for any cost input of
business:
– e.g. Lean Manufacturing, 5 why’s etc
This would create a list of priorities
including capex.
It is the capex items that may be
eligible for the Clean Tech Investment
Grants
Enabling Cleantech Capabilities
Clean Technology Investment Program •Non tax exempt entity
•Meet or exceed certain prescribed energy or emission
thresholds
•Capex to implement specific energy efficiency or
emission reductions
•Competitive over next 7 years
Project size Grant size Applicant T/O Grant Other requirements
$50K <$1M $25K <$500K <$100M $1 for each $2
spend
$75K < $1.5M $25K <$500K $100M plus $1 for each $3
spend
Grants $500K+ require
greater viability financial
details
$1.5M<$30M $500K <$10M NA $1 for each $3
spend
Grants >$1.5M have
additional competitive
requirements
$30M <$40M $10m+ NA ? transitional
rate
Consider reducing
application to <$30M
$40M + $10M+ NA $1 for each $4
spend
Likely to be subject to
Cabinet
recommendation
Contact details
Robin Pennell
Moore Stephens Melbourne
Level 10, 530 Collins Street
Melbourne VIC 3000
Phone: 03 8635 1800
Email: [email protected]
An independent member of Moore Stephens International Limited – members in principal cities throughout the world
Liability limited by a scheme approved under Professional Standards Legislation