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

Summarising the Enterprise DNA Approach

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

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: rpennell@moorestephens.com.au

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