WHERE KNOWLEDGE IS POWER

Phil Ruthven, Chairman

A New Era, New Rules

2012 & Beyond

19th Annual Dinner

Sandown Racecourse 09 August 2012

Topics

1. Global Perspective 2. Australia’s Market Economy 3. Our Changing Mix of Industries 4. Manufacturing? 5. Keys To Success

1. Global Perspective

World’s 30 Largest Economies 2011 (F)

World’s 228 nations US$ 62.0 trillion

India 2.6% Spain 2.2% Australia 2.1% S. Korea 1.7% Mexico 1.7% Turkey 1.3% Netherlands 1.3% Indonesia 1.3% Switzerland 0.8% S. Arabia 0.8%

Japan

24.5% USA

Rest of World (198 Nations)

8.0%

Market price ($US) terms

China

CIA & IBISWorld 08/01/11

3.9%

3.5%

Belgium 0.8% Sweden 0.8% Poland 0.8% Taiwan 0.7% Norway 0.7% Austria 0.6% S. Africa 0.6% Argentina 0.6% Iran 0.5% Thailand 0.5%

Denmark 0.5% Colombia 0.5% Venezuala 0.5% Greece 0.5% UAE 0.4%

The Troubled Economies USA, the EU and Japan (48% of World GDP)

Japan has by far the worst debt problem (government debt of 220% of GDP, and total debt of nearly 5 times GDP!) and no clear leadership or future plans

The EU has very serious problems: deep debt welfare/socialist economies A handful of ill-fitting members abysmal leadership lack of federal cohesion on finance

The USA’s problems are: public debt (but manageable) politics (preventing higher taxing of the rich, plus a GST) too slow to jettison yesterday’s industries (eg motor vehicles)

The World’s Economic Regions In 2011 Share of World GDP (ppp basis)

2011 World GDP, $US 78.1 trillion

C&S America

6.3%

North America

23.3%

W&C Europe 21.7%

Eastern Europe

3.7%

Asia Pacific

28.9% Africa 3.9%

ME 5.4%

Indian S-C 6.8%

IBISWorld 08/02/11

2.1 2.8 2.9 3.0

3.6 3.6

3.8 4.3

4.8 4.9

5.1 5.8 5.9 5.9

6.1 6.3

6.5 6.5

7.1 8.0

8.2

0 1 2 3 4 5 6 7 8 9 10 11 12

Japan Taiwan

Australia S Korea

Pakistan NZ

Nepal Singapore

Thailand Philippin… Malaysia Myanmar

Asia Indonesia

Banglad… Vietnam

Sri Lanka Cambodia

India Laos

China

Asia Growth 2012 (E) 20 Largest Economies (ppp ranking)

IMF/IBISWorld: 19/06/12

Regions Growth Asia 5.9% E. Europe 3.3% World (8 regions) 3.2% N. America 2.1% EU -0.7%

Asia Economy Asia Pacific + Indian S-C

ppp terms 2015 (F)

$US 38.9 trillion (39.8% of world GDP)

Source: Wikipedia/ IBISWorld 18/02/11

India 16.4%

Other A-P 0.3%

NZ 0.4%

H/K 1.1%

Singapore 1.0% Vietnam 1.1% Philipp 1.2% Malaysia 1.5%. Thailand 2.0%

Greater China 47.9%

44.0% China

13.0% Japan

Other Indian S-C 3.1%

2.8%

2. Australia’s Market Economy

The Market Economy Year to March 2012

Source: ABS/IBISWorld 06/06/12

Gross National Expenditure (GNE) $1440 billion (current prices)

Consumption Expenditure

72.1%

Company CapEx 2 Household

Consumption

Capital Expenditure

27.9%

1 Mainly on behalf of household 2 Incl. inventory change

Govt. CapEx GBEs GG

$ 1236 billion ($138,100 per household)

H’Hold durables 2.9% Motor vehicles 1.7% Other 0.8%

16.3% Non-durables

Taxes (& social contributions)

4.5%

13.4%

Depreciation 6.2% Dwell/Propty Interest 5.9% Consumer Debt Int 0.9% Unincorp. Interest 0.7% Transfers 0.4%

Australian Household Expenditure Year to March 2012

14.0%

Food 6.5% Alc.& Tobacco 2.3% Clothing 2.0% Utilities 1.5% Veh. Operation 3.0% Other 1.0%

Communicns. 1.5% Fares 2.0%

Fin. & Ins. Serv. 7.7%

6.6%

Note: 1 includes imputed rent (home ownership)

Source: ABS5206/IBISWorld

Savings 6.7%

Entertainment (Gambling 3.4%)

New Expenditure In The New Age1 Household outsourcing of services F2011 (E)

$263 billion $29,900 per Household

($575 per week) Source:IBISWorld 06/06/11

26.7%

12.9%

Entertainment & Recreation

Other 2.4%

11.2%

Note: 1 Spending on services, new since 1965

Entertainment Recreation Gambling

Clubs

Transport Accommodation Miscellaneous

Business Expenditure Capital Expenditure Year to March 2012

Source: ABS/IBISWorld 19/06/12

Investment (GFCF & increased inventory)

$401 billion

IP & Other Intangibles

Machinery & Equipment

8.0%

Buildings

Dwellings 22.2%

9.5% Gen. Govt.

18.8%

11.5%

R&D 3.8% Software 2.7% Mining 1.7% Biological 0.9% Art 0.4% Increased

Inventories 1.7%

Defence

2%

3. Our Changing Mix

of Industries

Ages Of Economic Progress GDP @ Constant F2011 Prices Australia 1788-2011 and onwards

GD

P $

billi

on

Industrial Age

0

200

400

600

800

1000

1200

1400

1600

1800

2000

220017

8017

9018

0018

1018

2018

3018

4018

5018

6018

7018

8018

9019

0019

1019

2019

3019

4019

5019

6019

7019

8019

9020

0020

1020

2020

3020

4020

5020

6020

7020

8020

9021

00

Hunting Age

Agrarian Age

Infotronics Age

Industrial Age

Year, ended June IBISWorld 26/05/11

Transport the major

utility

No pervasive

utility

Enlightenment Age ?

Imbedded intelligence,

Neural network programs

More electronic “guardian

angels” New

technologies

Electricity the main Industrial Age utility

ICT the Infotronics Age utility

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Note: At market prices to 1940, at factor cost thereafter Source: N.G Butlin, ABS & IBISWorld

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020 2050

Importance of Industries Shares of GDP by Industry Division, 1800-2050

1800

18

20

1840

1860

1880

1900

1920

1940

1960

1980

2000

2020

20

50

Agriculture Mining Manufacturing Utilities Construction W’Sale Trade Retail Trade Transport, Postal Media & Telecom

Finance & Insurance

Rental, Hiring. R Estate

Dwelling O’Ship

Prof & Tech Services

Admin Services Public Admin/Safety Ind taxes less subsidies

Education Hospitality

Health & Social Assist Arts & Recreation Personal & Other Serv

Primary Sector

Secondary Sector

Tertiary Sector

Quaternary Sector

Quinary Sector

Australia’s Industry Mix Shares of GDP in constant F2010 price terms Year to March 2012

ABS 5206-26 IBISWorld 08/06/12

Agriculture 2.2% Utilities

2.1%

GDP $1349 billion (constant F2010 prices)

Finance & Insurance

Mining

7.3%

Govt. Adm. 5.0% 7.8% Construction

3.2%

Info Media & Communications

Cult & Rec. Serv. 0.9%

Pers. & Other Serv.

Hospitality

Sectors Primary Secondary Tertiary Quaternary Quinary

Admin. & Support Services

Note 1: includes stat. discrepancy (-0.3%)

Rental, Hiring &

Real Estate

2.3%

Where The Money Is By Industry Full-Time Total Adult Earnings 12 months to March 2012 ($’000)

50.2 (E) 50.4 51.2

56.6 63.0 63.0

65.6 66.5 67.9

71.3 72.1 72.9 73.8 74.8

78.2 82.3 82.4 84.5

87.0 117.7

0 10 20 30 40 50 60 70 80 90 100 110 120 130

Agriculture Hospitality

Retail Personal & Other

Arts & Recn. Admin & Support Rental & Real Est

Manufacturing Health

W'Sale Trade ALL INDUSTRIES

Transport Education

Public Adm/Safety Construction Finance & Ins

Media & Telecom Prof & Tech Serv

Utilities Mining

All Industries

Wages ($’000)

2.1% of workforce F2011 7.6% 3.7% 1.8% 1.4% 7.5% 6.5% 9.1% 3.9% 5.1% 11.8% 1.7% 3.5% 8.3% 1.8% 3.9% 10.6% 6.8% 2.9%

Total employed 11.5 million

6. Manufacturing?

Manufacturing Industry Lifecycle Value added as % of GDP

02468

1012141618202224262830

1800

1810

1820

1830

1840

1850

1860

1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

Valu

e ad

ded

% o

f GD

P

Year, ended June IBISWorld

IBISWorld 20/01/12

11% 8%

8% 9%

3%

Manufacturing Shares of industry revenue F2012(E)

Revenue $A 420 billion

2% Textile & Clothing

Machinery & Equipment

Petroleum & Coal

Polymer & Rubber

Furniture, Jewellery, Toys & Other

Transport Equipment

Chemicals

Responding to Challenges

Declining Economic Significance,

Global Competition, and

Overvalued dollar

1. Rationalise product range if too diversified

and/or 2. Vertically integrate upstream (where

practicable) but never downstream (wholesaling or retailing) unless that is a step-program in migrating out of manufacturing completely

or 3. Develop critical mass nationally and, if

necessary, globally (mergers, listing etc), or

4. Focus on safe niches or ultra-niches, with uniqueness, in Australia or globally or

5. Move manufacturing activity offshore (perhaps involving joint-venture or strategic alliance) or 6. Outsource the manufacturing process, onshore or offshore, but maintaining design/IP skills, and become a marketer (migration into wholesaling and even retailing)

Industry Share Strategy (positioning for a winnable war)

Source: IBISWorld

Major Player 25-75%

5% 1-5 %

No-man’s-land

No-man’s-land (un-winnable position) Caught between majors (“sledgehammers”) and niche players (“knee-cappers”)

1 Occasionally a symbiotic relationship between a supplier and customer(s) can

provide a mutually beneficial relationship, usually at an industry share level below

0.1% of the industry’s revenue

Power Points In The Input-Output Chain

Agriculture

Mining Consumer

Imports

Wholesaling

Retailing &

Other Final Resellers

Exports

Manufactg. Crude

Moderate Elaborate

Final Industrial Markets

Industrial Age (1865-1964)

Most Power

Least Power Most Power

Least Power New Infotronics Age (1965-2040s)

Vertical Integration/alliances Vertical Integration/alliances

In the Industrial Age, each link in the chain usually operated independently

Most Power

7. Keys To Success

Expectations of a New Age business

1. Profitability and growth ROSF (after tax) of 4 times the bond rate Growth better than the industry average International expansion where possible

2. Uniqueness in: Product, IP and operations Organisational culture

3. World best practice in: Operations Value for money for customers Respect for the society in which it operates Relations with other stakeholders Treatment of the natural environment

02468

101214161820222426283019

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

1920

20

Corporate Profitability to 2011 (Return on Shareholders Funds, after tax)

Australian Largest 30 Listeds

USA Largest 30 Listeds

4.9

4.9

7.1

8.1

8.6 9.6

9.7 11.2

12.2

14.1

14.7

17.2

17.3 21.0

22.2

29.2

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

Government Admin. Transport

Health Education

Manufacturing Cult & Recn Serv

Utilities Other Services

Agriculture Prop & Bus Serv

Average W'Sale Trade Construction Finance & Ins

Hospitality Communications

Retail Trade Mining

3.0

Percent

Australian Profitability By Major Industries

Return on Shareholder Funds (after tax), Top 1350 businesses 5 years to F2010

Source: IBISWorld 22/11/10

8.2

Includes private and government enterprises

4.1

Good And Bad Industries? Are there such things as bad industries; or just some industries with a lot of bad managers? The next chart answers that question. It would appear the second of these, because almost all of our industries except government dominated ones do produce outstanding results from good operators. And 23 of the Best 100 are in Manufacturing

40.9

42.4

43.2

44.1

46.8

47.7

48.0 52.8

53.0

53.3

69.8

72.3

79.8

95.2

0 10 20 30 40 50 60 70 80 90 100 110

Info. Media & Telecom Rental & Real Est

Mining Education

Retail Trade Other Services

Health Construction

Prof. & Tech. Serv All Top 100

Wholesaling Manufacturing

Arts & Recn Finance & Ins

Transport Admin. & Support

Percent

Australian Profitability By Major Industries

Return on Shareholder Funds (after tax), Best 100 5 years to F2011

Source: IBISWorld 06/04/12

40.7

Includes GBE & private enterprises 40.7

3 companies

4 companies

6 companies

9 company

23 companies

22 companies

9 companies

6 companies

1 company

1 company

8 companies

1 company

4 companies

2 companies

1 company

What the Best Enterprises Are Doing

1. They stick to one business at a time and do not diversify

2. They aim to dominate some segment (s) of their market

3. They are forever innovative, valuing the business’ IP.

4. They outsource non-core activities to enable growth.

5. They don’t own “hard” assets.

6. They have good and professional financial management. 7. They plan from the outside-in not the inside-out

8. They anticipate any new industry lifecycle changes.

9. They follow world best practice for their own type of business.

10. They develop strategic alliances. 11. They develop unique organisational cultures. 12. They value leadership first and management second.

ruthven sebn

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