Republished with permission from: InvestSmart

Host:  Alan Kohler
Guest:  Alfred J. Chown

Alan Kohler here and it’s Alfred Chown who is the Chairman and Managing Director of Energy Technologies, EGY, which is a fancy name for a manufacturer of cables and it has had what you would have to call a chequered history, this company.  It built up far too much debt, probably nearly went broke, has had to recapitalise earlier this year and convert the debt into equity and now it’s got no debt, it owns a cable manufacturing business called Bambach which currently is in Sydney but they’re about to move it to Rosedale in Gippsland in Victoria in an old factory there using a government grant of $2.9 million which they’ve got and they are an Australian manufacturer of cables competing against imports and Olex cables and so on.  They’ve got about 2% or 3% of the market and they have just increased their capacity. 

It’s an interesting business now, it was a mess and now it’s not.  The question is are you interested in backing an Australian manufacturer?  Alfred Chown says that Australian manufacturing has turned the corner.  He said, in fact, in the interview that we’re entering a golden age for Australian manufacturing which is great if that’s true and maybe it is.  I think the best thing is to listen to him and see what he says.  I grilled him pretty hard about how they got into the mess they were in and how they have got out of it and where they’re going from here.  I think it’s worth listening to, it’s a pretty long interview but it’s really interesting.  Here is Alfred Chown, the Chairman and Managing Director of Energy Technologies.Alfred, I think it would be best if we started by just going carefully through the history of this business because I confess that I am finding it difficult to get my head around what’s been going on.  I just wonder if you could help us out.  You launched a company called Dulhunty Cables I think.

Yes.  What we did was we had a business – it’s a very long and convoluted story, but I got involved with this business, it was a listed vehicle called Australian Innovation Ltd, when I was in Hong Kong.  Peter Lucas, who was ex Bond, not the Peter Lucas but the Peter Lucas from the Sydney side who had been running Bond in Asia, Bond Corp, he came to me.  He subsequently has gone back to Australia after all the fiascos with Bond Corp.  He came up to me in Hong Kong and said there’s a lot of opportunities in Australia but there’s no capital there.  At the time I was the Chairman of the Australian Chamber of Commerce and knew a lot of business guys.

We should perhaps say, Alfred, you were born in Sale in 1960 but you then went to Hong Kong and lived there for quite a while.

That’s right.  Yes, I lived there for about 25 years.  I originally went up there with a company called Dulmison which was owned by Phil Dulhunty out of Sydney and that was then bought out by AWA.  Then subsequently after the [0:03:29.0 Hook] family lost a lot of money, as you might recall, in the currency trade, it lost $80 million and it caused a lot of trouble for AWA so they hived some things off and I then started up again with old Phil, we started another business basically trading electrical components which was for overhead powerlines back into the Australian market and elsewhere.  That morphed into a small manufacturing business in China back in the early Nineties.  In the meantime I got involved with this AIL thing because they needed to access some capital so a group of us in Hong Kong put some capital behind it, we took over AIL.  It had a business in supplying News Corp with pagination systems and everything.  Later on we then sold that and that gave us some funding in the AIL company and it was right at the dotcom boom, some of the things worked and some didn’t.

What was AIL doing, what was the business?

It was basically an investment vehicle, it had been a small business listed entity that I think it came out of the BT fold originally and that had investments in this company called Cryptographic, I think it was called, that was supplying News Corp with all its pagination systems as well as an abalone farm in Tasmania and various things.  When Lucas came up he said this is a good little listed company to get hold of and do something with.  We did that and then we sold the News Corp pagination business off and had funds entered into various investments, one was Authenticate, another one was a business in the distributed energy sector and basically with the fund sold money was returned to shareholders.  It continued on to invest in various things, some of them worked, some of them didn’t.  At the end of the day we were dealing with Hastings on putting together a big investment into this distributed power company that was part of the AIL network or part of the investment group and Mitsui, I think, was in it and other pretty well known big companies investing in it.

Hastings pulled back at the last minute and then that sent AIL into disarray so what we did then is because the Hong Kong group was still pretty active and we then basically backdoored the manufacturing business which started up in China into the listed vehicle and that created a company called Dulhunty Power which then went on.  We built that manufacturing business up to turning over around about $23-$25 million with manufacturing sites in China, Malaysia, Thailand as well as warehousing in Australia and the USA.  That then was bought out in 2012 by MacLean Power Systems.  The reason why we sold that business is that one of the investors out of Hong Kong, a substantial investor, he had gone into the operating business only, because he wasn’t an Australian citizen he hadn’t invested in the listed entity and so basically we were offered a very good price, we were offered $15 million which was about 14 to 15 times earnings at that point.

Because of the structure we thought the best idea would be to sell that business and then we were left with a listed vehicle with cash.  We distributed money back to shareholders and that’s when we bought Bambach Cables in Sydney.  We bought Bambach because we had previously been trying to create a business that had multiple entities under it in the electricity supply space, with manufacturing in the electricity supply space.  We looked at Bambach and a number of other businesses in Australia.  Then the GFC hit and of course that put all of those plans very much on hold and then MacLean came along, we sold to them in 2012 and that’s when we came back and we had a listed vehicle with cash in it and we had to do something with it.  We looked around and we revisited the Bambach business and we felt there was a lot of legs in Bambach because it was a business owned by very aging operators, the Gale family, which was the son in law of the original founder of the company, he was about 78 or something at that stage.

They hadn’t put any money back into the business and it was struggling but we thought we would be able to turn it around.

What were they making?

Making cables mainly for the mining industry and mainly to OEM manufacturers to the mining industry.  Companies like Austdac Conveyor Systems, big conveyor systems, as well as direct sales for pumps and everything that go into mines.

These are being manufactured in Sydney?

Manufactured in Sydney, yeah.  I had a bee in my bonnet coming back from Hong Kong that I couldn’t see why you can’t make things in Australia because I’d spent all my time up in China when it was basically they couldn’t make anything properly, and saw them go through that phase and be able to become very good manufacturers.  Of course they had a big market and all the rest of it and they had cheap labour but that was all changing and I thought why can’t you make things in Australia, I think it’s very important for a country to be able to manufacture things for a host of reasons, especially Australia being an island.  That sort of was one of the big drivers as well as the fact that you want to make money out of it as well.  It became sort of a bit of a personal quest that when we took on Bambach to really show that you can actually make things in Australia.

Unfortunately for us we bought it just as the mining boom busted so companies like that particular business I mentioned before making conveyor systems, they were $200,000 to $300,000 a month of sales every month in month out, and it went down to $20,000 a month because nobody bought any conveyor systems anymore.  Mining just dried up so we were hit with a situation in 2013 where the business we bought its customer base just about disappeared.

How much had you paid for the business?

In the end we basically only paid for the stock.  We had a larger price on it but through the negotiations that subsequently followed we really only ended up buying stock.  We actually got out of it quite well in that sense.  As we got into the business of course the plan was that we would develop new products as well as bring in new equipment and upgrade it, etcetera.  When the guts fall out of your market like that whatever plans you have basically change very quickly.  We then focus very much on expanding the product range and it’s the same thing we did with Dulhunty Power manufacturing all the fittings in China, etcetera, for overhead transmission lines, is that we started out making the products on an OEM basis for other well known brands and then we made our own brand and we went out and we went from having 15 products to 500-800 different products, every different size and everything else.

That’s when I looked at – after the crisis in 2013 I got back involved in the business on a day to day basis and said we’ve got to develop products that there’s going to be demand in Australia for, we just can’t be reliant on the mining sector because maybe it will come back, maybe it won’t.  We’ve got to go into other areas.  We did a bit of research and we looked at what’s happening in Australia and I just felt it was very similar to what I had seen in China and that was in China you’ve got a huge population and you’ve got a definite need, they’ve got to build their infrastructure.  Australia was a modern developed country but its infrastructure was very inadequate compared to other places in the world.  I felt that there had to be money spent sooner or later on infrastructure and especially things like rail because that’s what has driven the China miracle, has pretty much been driven by the fact that they have put in rail infrastructure and road infrastructure to connect all the dots in China and speed up the economy, accelerate the trade activities right across their whole geography. 

That was sort of the situation in Australia but when you look at Australia a bit more deeply you see that the population is climbing very rapidly and we identified back in 2013 we thought that they’re going to have to spend money on rail and road in Australia because you can’t get across a city very quickly anymore, it’s very difficult, it’s congested, they’ve got to put in these types of things.  The first indication of that was the New South Wales government when they started to spend a bit on infrastructure, they sort of got a resounding tick from the electorate because they had actually tried to spend money on infrastructure.  Then I think every other government basically has seen the same thing and that’s become the norm in Australia now, to spend quite heavily on infrastructure, not because it’s just a political winner but also because it’s badly needed in Australia.

That’s what guided us on our products so we developed a lot of products in the road, so all the various traffic cables for all the states, and of course in Australia you don’t just make one traffic cable for all states, you’ve got to make many traffic cables for each state and the same with the rail, rail signalling and rail power cables.  We started out without a very big client base or customer base in these areas and now we’re supplying all the big guys with these types of cables.  Like always when you start off with a big company and you’re a small company you start off your first year and you get a $50,000 order and then you do alright, the next year it goes to $200,000 and so on.  You build up, you sort of grow with the company that you’re supplying and that’s what’s starting to happen to Bambach.

You seem to have built up a huge amount of debt.  December 31 2018, $11 million in debt which had to be recapitalised.  Just take us through firstly all that growth you talk about was done with debt, was it?  Or how did that happen?

That’s right, some was debt, we grew the stock, we had losses of course as well because we were developing a lot of things and winning customers over.  You’re putting a lot of cost goes into developing the product and you get it slowly back until you’re starting to sell $5-$10 million worth of that product category.  It’s like anything in manufacturing, it takes you as much to make one thing as to make 10,000.  You’ve got to make the investment first basically to get the product out the door.  That’s pretty much with Bambach has been the case, we have also put money into expanding our network so we’ve got warehouses and sales offices in each state and the model we are using is where we can do direct to customers as well as not just relying on the wholesale market because the wholesale market is very price sensitive.  Most of the people in the wholesaling groups are not fully au fait with the product so they’ll just sell on price. 

We really need to have people out in the marketplace talking to the customers and the customers also want this because half of them don’t really know what application the cable has got to be used for and all that sort of stuff as well.  You need that servicing on the ground to be able to support the product and that allows you to get a better margin for it and allows you to basically build a brand and that’s what we’re trying.  We branded all of our products and we’re building brands out in the marketplace so that going forward if people come in and ask for our brand as opposed to just a generic cable type thing.  That’s working and we have got good growth in our margins, we’ve got some growth because we’ve put in new machinery in our Sydney facility but a lot of it is simply because we have been able to get customer acceptance of the brand, Australian made product using Australian copper made to standards, you’re not going to have any problems.  The premium on it is not so great that they sort of won’t buy it.  That side of it is working.

Just before we get onto it sorry to dwell on the debt but you had a debenture of $6.8 million and convertible notes of nearly $4 million and loans from directors of $2 million and that’s all now had to be converted into equity, right?

That’s right.

I guess you’d have to say that it didn’t work, it was a bit of a debacle, the whole thing.

I agree, it’s a debacle in the sense of it’s a timing debacle and this industry is very capital intensive.  We started out without enough capital behind us is basically what it’s been.  Then it’s come in at subsequent times and that’s always a more costly way to do it but the result will be that as long as you get to the end result and you deliver the gains that I believe are there then your shareholder base will be pretty happy with it.

As well as recapitalising and converting the debt into equity have you got some new investors in to supply some cash as well?

We’ve got some.  When we did the recent raising we got some but most of it came from the existing investor group.  Again it was a timing issue, we went out to market in November last year just before the Melbourne Cup and at the same time in the market we had a lot of interest and then the interest waned as the markets continually worsened.  We then decided we’ll still need to go ahead with this because we picked up a government grant and everything.  For the business to survive it has to has – we are stuck in a business in Sydney where we’ve done all the right things, and this perhaps might explain a bit about the debt issue as well, is that we had done all the right things on the product front.  We developed a whole raft of new products, we started to get very good traction with the customer base with the new products but we were stuck in a factory where we were paying nearly $1 million a year rent and with equipment that could perhaps turn out around about 25 to 30 tonnes of product a month if we’re lucky.

You just can’t get the sales to a point where you can cover the actual costs of running the business and as well as pay off all the debt.  The only solution really was to come to a facility where you can increase the actual capacity substantially as well as reduce the cost of production so that you’ve got machines that go faster than the existing ones we’ve got in Sydney.  That’s where we got to that crossroads back at the start of last year where to continue with the business wasn’t really viable in the Sydney facility and that’s when we applied for a government grant and the fact that we were  looking fairly good for that grant is what made the directors of the company say well this is a solution to the problem that we’ve had being able to put in place a new factory that is able to deliver the amount of product out the door at a very strong margin and that will basically return all of the funds, etcetera, to the shareholders that have previously been invested.

How much did you get from the government?

$2.92 million.

Did that cover what you needed?

That was one for one so we had to match that which we have done, and we have now got the facility in this little place in Victoria called Rosedale.  It’s an old leather tanning factory that we took over which was not in great condition but in pretty reasonable condition and we have been able to totally refurbish that building and now we have got machines and we’re about two thirds of the way of having all of the machines put in place.  In the meantime we hooked up with another company called Advanced Cables out of Melbourne and we actually acquired that business in the whole restructuring operation so that we looked to bring all their equipment down here and get it installed and then we’ll move the Sydney factory in another couple of months’ time once we have got production operating here fully, so we’re never without a fully operating factory. 

By doing that the capacity of the factory now is about 300 tonnes of finished product a month so we’re going from 25 to 30 to 300 tonnes.  The equipment we have got is much bigger equipment far more suited to the market we’re supplying, the rail cables and big traffic cables and so on.  For that amount of tonnage we really only need about the same amount of people as we have got in our factory in Sydney.  Therefore, your labour cost per unit of production has come down dramatically, it’s come down from something like 38% to 42% of our cost of production in Sydney is coming down to between 18% to 20% with our production here.  We’ve got very strong margin improvement coming to us as a result of what we’re doing now.

Is your product price competitive and who are you competing with?

Yeah, it’s very price competitive.  We’re competing with companies like Olex and Prysmian, the two big guys in the market place here, but also a lot of Chinese imports.  We previously were importing cable from China because we couldn’t make the larger sizes and we have slowly been able to improve our capability in that regard and now we’ll be able to make all the range right up to 600mm cable and our cost of production here is less than we can buy it from China now because the dollar has come down as well.

Is your product cheaper than Olex or not?

Our product, it depends on whether we sell it cheaper or whether we make it cheaper.  I’d say that our cost of production is very similar to Olex’s, yes.  I know that even on the smaller diameter cables we’re in sort of a centimetre of production cost with a company like Olex making the cable in Australia or even overseas as well.

I’m just wondering what sort of sales revenue you’re likely to make because as you say you have increased your potential production from 25 to 30 tonnes to 300, so that’s quite a big increase in capacity, what sort of increase in production are you likely to see?  What’s the demand for your product like?

The demand is very strong now.  In those first years the whole cable industry in Australia was very difficult, companies like Olex and everybody were making very large losses.  It’s improved dramatically since then because of the infrastructure build that’s going on.  In each of the sectors we want to be strong in we have really only got say 2% or 3% of the market at the moment so the potential for growing it is just very great.  The lower dollar has helped immensely, the change in sentiment, the sentiment to buy Australian made has grown dramatically pushed by the state governments that are all insisting on local content in most of the contracts that they put out a moment. 

There’s even been a change in the federal government level where before they were very aware of the WTO sort of obligations, etcetera, they watered that down substantially now because basically we were about the only country properly adhering to them and everybody else was flouting them.  I think there’s been sort of recognition that you really need a strong manufacturing base.  Every other country is doing the same thing so why should we be the standout and basically not have such local content type requirements, etcetera, as what other countries have got.  That’s helped Australian manufacturing greatly.  Then of course you’ve got the big spend coming on defence and it’s already started and so we believe that the industry is poised for quite massive growth actually.  You’ve got billions and billions of infrastructure planned and approved and it’s all for products that we’re making, so it’s all for streetlighting cables and traffic signalling cables and rail signalling and rail power cables, all the various cables that go into putting a road in place or a railway and railway stations. 

Even the rolling stock I think there’s about a $15 billion spend required to get rolling stock over the next ten years onto the new railway lines that are being built.  The whole manufacturing side in Australia has completely changed, the landscape is very different than it was even three years ago.  I think we’re in a bit of a golden age for manufacturing in Australia coming up and hopefully we are poised at the right point with extra capacity and everything to take advantage of that.  We’re missing a lot of orders because we don’t have capacity at the moment, we can get a lot more stock on our shelves, there’s a lot more demand out there.  Three or four years ago you’d look at the sales figures every day and you’d just feel sick now you’re constantly surprised at how buoyant they are.

That’s good.  Just finally tell us what your balance sheet looks like now and just specifically what’s your debt and your cash situation.

We’ve got no debt to speak of, we do have a facility, an invoice financing facility, which is drawn down to around about between $1.5 to $1.9 million at the moment.  We’ve got capacity on that of another $1.2 million, I think it’s about up to $3 million with a handshake that that can be increased at any point from our lender based on need.  That’s a facility where we can draw down 70% of the invoice value on invoicing.  We have net assets of around about $13 million to $14 million at the moment and net current assets are about $1.1 million.  We always need cash, Alan, unfortunately.  Especially at the moment when we’re putting a factory together, etcetera.  The biggest thing for us, our biggest challenge, will be being able to fund the copper that we need to put through the factory.  Cash wise we’re fine except for that particular aspect.

Are you saying you will need to raise more cash or not?

I believe because we’ve got a very strong balance sheet we should be able to obtain financing for that, so it’s really a trade finance facility that will allow us to increase the copper we need because under an invoice financing facility you’ve got to make the product and get it out the door first.  What we’re talking about we’ll need to prime the pump, if you like, with a facility that can allow us to get the copper going through.  We’re talking to people at the moment about that and I believe that we’ll be able to get that in place.  We don’t need it right now but I’m talking about in three or four months’ time once we’ve got this facility down here in Rosedale going we’ll need more copper to go through and meet the demand of the orders.  There’s many ways to do it, I’m not opposed to asking customers to put down deposits and things like that as well, on big projects often they will because they want to buy Australian made and they get some discount for doing it and so on.  There’s a lot of different ways to skin the cat in that regard.

Rosedale is just outside your birthplace, Sale, so you’ll be able to go back and live there.

That’s right.  I’ve got a property down here, a farm, so I’m spending my time there although I leave in the dark and I get back in the dark, it’s not much use, but I come from this area.  The biggest thing I suppose is now we’re well and truly into it and we’ve got most of the machines are installed and wired up, etcetera, but the thing that’s really worked and why we’ve been able to do it frankly is the labour down here is very skilled.  I didn’t realise it, I’ve been away for so long.  It’s not so much out of the valley, they’ve got skilled labour as well but they’re more the power station sort of type, whereas the labour we’ve been picking up is all the fitters and welders and all that sort of stuff that have been servicing mainly the gas and oilfields off the coast here in Bass Strait.  That has allowed us to put in machines and everything at a far less amount of money than it would have cost us if we had to rely on contracted staff and other contractors.

We have done all the concreting work ourselves pretty much except for one machine, massive amounts of floor cutting and concreting and forming up and all the rest of it.  We’ve got local mechanics and that who are putting all the machines together.  It’s not over the top in price and it’s very highly qualified or skilled, and we’re doing things I thought we’d be getting specialists in to do but we don’t need it, and that’s saved us hundreds of thousands of dollars literally.  That’s been a godsend, I think when I look back at it it’s a bit of luck, if that hadn’t occurred we’d be struggling now, you’d have great big bills everywhere that you’d be struggling to get out the door.  I’ve been really pleased with that and I think it’s a great thing going forward because those same people, they’ll be able to run the machines very well. 

There’s something about a person who’s been a tradesmen and then they get involved in another area where you’ve got to have everything square and they’ve got to know exact metreage and all that sort of stuff, so I believe that they’ll make a great workforce down here to make these products, better than we’ve probably got in Sydney or even you get in places like Dandenong and that.  That’s a bonus that’s just been gifted.

Right.  Good on you, Alfred, thanks very much.

Thanks for that, Alan, cheers.

That was Alfred Chown, the Chairman and Managing Director of Energy Technologies.