INTERVIEW WITH ALEX LAMOND, MANAGING DIRECTOR, SOLCO LIMITED (SOO)

“Sound Cash at Bank Position of Approximately $3 M”

http://www.brr.com.au/event/47480

THURSDAY, JULY 24, 2008, 12:45 PM

            BRR    Hello an d welcome to Boardroom Radio.  Today, we speak with the chief executive 10officer of Solco, Mr. Alex Lamond. Alex, thanks for joining us.

            SOO    My pleasure.

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            BRR    Alex, there has been some good news at the Solco Company recently, significant turnaround.  First of all, could you talk to us about your core business and what products you provide to the market?

            SOO    Solco is Australia’s only listed supplier of photovoltaics products so we’re

15                    talking about solar powered products, solar panels, solar pumping, and the range of equipment that makes a solar power system, and core products for the grid connect market which is when you put it a power station on your roof … on your residential roof that’s called the grid connect system.  We also do off-grid power systems for mining and for regional rural areas.  We do solar

20                    pumping where we have a whole range of solar pumping products which are sold throughout Australia as well as internationally and we also have hot water manufacturing system which we would market internationally as a manufacturing system.

25        BRR    It’s a very typical subject now with climate change in front of most [people’s minds.  How did you get into the industry please and what’s your background?

            SOO    Well my background is in engineering but mainly in management.  I’ve had a long history in innovation industry so working with early stage companies and

30                    their growth and development.  More recently, I’ve been involved in a lot of turnarounds so I’ve worked in a whole range of industries and doing turnarounds on businesses.  So before this business, it was a pharmaceutical business, before that it was a telecommunications business. The reason I came into Solco was that it had been through the first stages of a fairly

35                    extensive turnaround and I joined at the end of last year….in November of last year as a CEO to continue on that process and then take it to the next stage which is the growth and development.

            BRR    Speaking of turnarounds, this business is actually ongoing significant

40                    turnaround.  Can you talk about the turnaround please and what are some of the initiatives that you’ve implemented since you’ve been here, and more importantly, what’s the future life of the business?

            SOO    Yes, sure.  Look Solco had a checkered history. This is the eight years of being a listed company and it’s the first year where we able to forecast profit.

45                    Two years ago,  the company was going through a very poor time, it was unprofitable and it was losing a lot of money and at that point, one of the new directors of the board, David Richardson, put his hand in his own pocket and shored the company up and made it financial, I guess, to keep it going. David then took on the role of instigating the turnaround.  The first part of the turnaround is the rationalization and the restructuring of the business, and David did that for the first 12 to 18 months.  I came on board for what is really the second part of the turnaround which is when we rebuild the capability within the business. That’s been my focus over the last 6 to 7 months,

5                      rebuilding the capability, the resources, the people, the focus on the products, the right products for the right markets, and the systems and processes that go around that.

                        The next stage for us  which is where we’re heading is refocusing the

10                    business on what we need to do the next to grow the business and I believe that the next twelve months will see a lot more results…at about plans, at about specific directions and out of the work that’s being done in the building of  capability.

15        BRR    You know the internal developments about the company but the external environment has certainly favored the business. It is based on legislative changes since the new government’s come in, could you give us an update, please on what is the current left side of the environment?

            SOO    Sure, look, you’re right there.  In the last twelve months it has been

20                    particularly good for this sector which our business is involved in the next grid connect sector and that’s where moms and dads buy a solar power system, stick them on their homes and they are able to receive a rebate of up to $8,000.  Now the last twelve months that rebate was available to everyone and that drove the industry very strongly, prices of products were coming

25                    down, efficiencies of  our business and other businesses in this sector very much greater so the delivery was much better.

                        The recent budget from the federal government in May put a mains test on that $8,000 rebate so families with a family income of $100,000 or less were

30                    eligible for that $8,000 rebate, but people over that $100,000 weren’t.  Now the reality is that there’s still quite of large out-of-pocket cost to our solar power system,  you know, $3,000 to $4,000 for a basic 1 kilowatt system so that makes it like a $12,000 system and the $8,000 on rebates. So you had a profit of about $4,000 where the average family with a household income of

35                    less than $100,000 was not able to…..found it difficult to bridge that gap,  that out-of-pocket expense.

                        Now this has been an issue for the last two months and myself and a number of  other industry people have been encumbered and it has been quite hard

45                    for the government to reconsider this change as well as to start looking at a longer term industry road map which might involve the introduction of fill-in powers to support the renewable industry.  I’m happy to say that Solco, as a business, is probably less exposed to the verifications of this decision because our business does a lot work in… out of areas of the solar industry

45                    which are not affected by this rebate and we also doing, larger sort of scale distribution activities, but we do have over three hundred dealers in this area and those dealers are hurting, and which is the reason why we’re willing to try and support them.

            BRR    Alex, could you just talk about the revenue of the business, what proportion is considered to be one of sale prices and what portion would you say would  be more of a recurring nature?

            SOO    Well, the basic part of that business is a whole set of distribution business

5                      and so most of that is product and therefore it’s, you know, it’s one of sales. We do have quite a large dealer base and, therefore, you know, we have a good reputation with those dealers and we support them as well as we can, and so we do have very strong income from that dealer base.  We do a number of projects which are,…all of seem one of top activities and we’re

10                    moving towards some recurring income models where we provide ongoing services for installations in the (inaudible) (00:06:45) and monitoring of those installations, but the best part of that business is a wholesale which is a product business.

15        BRR    And in terms of the environment at the moment with interest rates going up, the consumers are certainly….screws have been] tightened, how much…..how effective will your business be as the economy tightens.

            SOO    It gave us the grid connect market, the residential market, which is most affected by this and that represents, you know, a reasonable percentage of

20                    our business.  However, the areas that were…… a lot of that growth is focused, is in the commercial and industrial sectors of the market which are much less affected by this, but will affect them….. is more of the rising cost of energy and the renewable products such as solar and wind which we are also

25                    into.  They’ve actually offered security in the long term, between 20 to 30 years,  before organizations in terms of…. Yeah, which is subjected  to the rising energy cost.  So that is currently the average price of energy not being 15 cents per kilowatt hour, it’s pretty well understood that that is a non-sustainable cost and aging process will be moving up quite significantly, 30 cents to 40 cents per kilowatt hour, and that’s where the level renewable

30                    energy such as wind and solar become very viable. Those are the markets in the industrial and commercial areas that we wanted to be more involved in.

            BRR    And, Alex, you haven’t talked about the competitive landscape, what’s the competition like in the commercial arena and how does Solco differentiate its

35                    products from its competitors?

            SOO    I guess the main differentiator for Solco…let’s talk about this first is that we’ve been in this industry for 25 years through our major (inaudible) (00:08:28) business which is the choice electric business, and we have very, very good supply chain arrangements so we actually have access to the product at

40                    competitive based cost base of anyone in Australia.  We’re one of the top three or four wholesalers in the country in terms of size and turnover.  We differentiate also on the range of products that we have and the fact that we supply solutions not just individual components and so we have solar and power systems branded under the grid path brand which supply a whole

45                    range of product solutions for grid connect environment.  We also have the Sun Mill range of solar pumping products which supply solar powered pumping products into Australia and internationally.  So we have some intellectual properties specifically in our pumping division and we also have a range of exclusive distribution contracts so we differentiate ourselves on the tops of  products and the way that we can distribute them.

            BRR    And, finally, Alex, when you look at the chart provided to you at ASX with your

5                      operating profit  that’s a grade shot, twenty shareholders, I guess, how confident are you that the business can continue to grow or to continue the turnaround…

            SOO    Inside direction…

10        BRR    …in the next 12 months.

            SOO    Look, I think we’re very well positioned.  I mean the biggest part of the turnaround is getting the business structure on, you know, it’s very much about profit before growth, and if you don’t have your cost base in alignment with your revenue base then you can never achieve that.  We’ve achieved

15                    small profit this year, I believe, because of the effort we’ve made on that in terms of managing our costs and restructuring the business in the ….. to be very much aligned with our revenues.  The future of the business is to build on that capability of build on that structure and we all see need to be mindful of the external environment and how that might impact us.  So we have to be

20                    flexible and that’s something that we’ve been waiting on this world.

                        So we see the top of operation we’ve drove in now as one that is  focused on bottom line performance not just on growth.  However,  growth is a key part of our strategy and we see this industry go through a period of consolidation

25                    over the next twelve to eighteen months brought about somewhat by the government announcements and changes, but also because there has been a rapid growth in this industry and it’s a perfect time for consolidation.  I believe we’re very well placed for the consolidation phase and we would hope to be out to, I guess, become a major player in that activity.

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                        We also on the lookout for upstream investments to show our power supply chain in this area and those investments would be in other countries where we are investigating those opportunities as we speak.  We also see downstream activities in other countries where there are favorable conditions

35                    and favorable markets, and we’ve investigated a number of those already as well.  So you know, we do have some sort of, long-term horizons that we are focusing on, but the key part of our business is making sure that our activity now is profitable and it remains profitable and that capability development that we’ve backed on is seen to its conclusion so that we’re well positioned

40                    for any other growth market coming along.

            BRR    It’s an interesting story and now some of our listeners would probably like to investigate further.  What’s their first protocol?

            SOO    Well, we do have a website.  It’s solco.com.au and that does give you a good

45                    basis of information about the company and what we’re doing and how we’re doing it.  Of course, you know, we are very open to direct contact through e-mail and through telephone calls. So we’re active in three states in Australia, we’re in Brisbane, in Perth, and in Melbourne, and we expect to be in other states later this year as well.

            BRR    Let’s just remind our listeners if you’re too timid to ] ask a question directly, feel free to ask a question through the facility on the webcast and we will certainly pass the question on to the company for an answer. It’s been great

5                      chatting with you, Alex.  We appreciate your time. The Chief Executive Officer of Solco, Mr. Alex Lamond.

            SOO    Yeah. I appreciate it, John.

            BRR    No, thank you, I’ve enjoyed this.

INTERVIEW CONCLUDED

Contact brr@brr.com.au for more information

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