Building Business AcumenBuilding Business Acumen

Know and understand what measures are important to the Executive Team.

Understand the five business drivers all successful businesses must focus on.

Have a better understanding of the company’s financial statements.

Become a better communicator of company strategy and performance.

Create an action plan detailing how you will positively impact company results.

Objectives

~Wayne Gretzky~

When asked by a reporter,

“What makes you so great?”

“I skate to where the puck… is going to be.”

Wayne responded by saying;

“I don’t skate to where the puck is.”

“The Great One”

• Quickness of perception• Keen insight• Mental acuteness

Business Acumen?

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Pop Quiz

1. How much Cash was on hand? ______ ($)

2. What was the Cash Flow from Operations? ______ ($)

3. What was the Dividend Yield? ______ (%)

4. What was the Total Revenue? ______ ($)

5. What was the Net Income? ______ ($)

6. What was the Earnings per Share (EPS)? ______ ($)

7. What was the total O&M costs? ______ ($)

8. What was the Authorized Return on Equity (ROE)? ______ (%)

9. What was the % change in Revenue year over year? ______ (%)

10. What was the % change in Net Income year over year? ______ (%)

11. What was the % change in EPS year over year? ______ (%)

12. What was the number of Notices of Violations? ______ (#)

- Answers reflect Integrys data FY2010

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Business Acumen

“When it comes to running a business successfully, the street vendor and the

CEOs of some of the world’s largest and most successful companies talk and

think very much alike.” Ram Charan

5-Step Approach per Driver:

Case Study

1. Define the driver.

2. Know how we measure it.

3. Know why it is important.

4. Discover our numbers (& comp).

5. Create an Action Plan.

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The Cash Driver is defined as what is needed to grow and maintain the business.

Measures

CASH

Why do you think Peter

Drucker would say…

“Cash Flow is

more important

than profit.”

Cash is the bills and coins in the register, and cash in the bank. It also includes cash equivalents, like Certificates of Deposits (CDs) and other highly liquid investments (i.e. easily converted into cash within 90 days).Cash Flow is the cash generation from “core operating activities” that flows into the business and the cash that flows out of the business in a given time period, such as a quarter or a year.

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Dividend Yield is how much cash a company pays out each year compared to the stock price. The Dividend Yield represents the Return on Investment for the stock.

Cash vs. Cash Flow

Pay off loansBuy furniture

Put it in savings

Pay off loansBuy furniture

Put it in savings

Benchmark Cash

How do we compare?

0.4% 1.8% 0.6% 3.4% 29.9% 26.3% 7.7%

Major uses of Cash in 2010:• $189 million paid in dividends• $259 million in CapEx• $202 million in Pension Contributions

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Impacting the CASH Driver

CASH:

•Pay slower•Collect faster… with the same sales revenues and costs.CASH or CASH FLOW:

•Increase revenues/sales•Reduce/costs

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PROFIT

The PROFIT Driver is defined as the money made after expenses are subtracted from your revenues. It can be expressed in dollars ($) or as a percent (%). You can improve profit in three fundamental ways:

The types of expenses you deduct determine which income you are calculating. Common income calculations include:

Gross Income: deducts Cost of Goods Sold (COGS)

Operating Income: deducts COGS, SG&A (Sales General & Admin)

Net Income: deducts all expenses

1) Increase Sales Price2) Reduce Expenses3) Sell more units

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Revenue – Expense = Income

2010(in Millions)

Revenues $ 5,203- Costs of Revenue (COGS) $ (3,305)

= Gross Profit/Margin $ 1,898 36.5%- Operating & Maintenance expense $ (1,045)- Selling and Administrative expenses (SG&A) $ (425)

= Operating Income/Margin $ 428 8.2%- Interest & Other $ (151)- Income Taxes $ (56)

= Net Income/Margin $ 221 4.2%(Also called: “Net Profit” and “Net Earnings”)

High Margin vs. Low Margin

30.0%

33.6%

21.5%

WHY?

They sell commodities.

“If you’re not unique, you better be cheap!”

WHY?

They sell commodities.

“If you’re not unique, you better be cheap!”

To drive Profit($) you need either: High Margin (%) or High Velocity (Volume)

3.9%

7.9%

1.4%

High Margins Low Margins

WHY?

They offer something Unique!

Benchmark Profit

How do we compare?

Impact to Margin: Reduce costs and drive operational excellence- 2009 $290 million after-tax increase in noncash goodwill impairment- 2010 2% lower natural gas throughput volumes = lower revenues 9% decrease in average heating degree days = lower revenues

$25 million less amortization of regulatory assets = higher costs

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Growing Profits

• Sell more• Improve Quality Strengthen Pricing• Understand Product Mix

(sell more of the higher margin products)

• Improve execution and up-selling• Make prudent investments in growth

• Negotiate materials costs• Reduce inventories• Decrease employee turnover• Scrutinize spend on R&D• Reduce/conserve Operating costs• Improve Project Planning

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PROFIT:

•Product Margin: Increase Price and/or Decrease Costs (or both)•Company Margin: Increase Sales and/or Decrease Expenses (or both)•Expressed in Dollars or Percent (Margin)

Impacting the PROFIT Driver

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ASSETS

Assets are economic resources owned by a business. Anything tangible or intangible that one possesses, usually considered as applicable to the payment of one's debts, is considered an asset. Simplistically stated, assets are things of value that can be readily converted into cash.

When evaluating a company’s assets, both strength and utilization should be considered.

Return on Assets (ROA)The percent value of sales (revenues) to Total Assets.

Authorized Return on Equity (ROE)The Regulatory Net Income (GAAP Adjusted Net Income) compared to Regulatory Equity (GAAP Adjusted Equity). Equity adjustments include items such as Goodwill.

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Strength vs. Utilization

Organizations must balance Asset Strength & UtilizationOrganizations must balance Asset Strength & Utilization

Asset Strength:Refers to a company’s ability to stay viable during the ups and downs in the market place.

Asset Strength:Refers to a company’s ability to stay viable during the ups and downs in the market place.

Asset Utilization:Refers to a company’s ability to efficiently and effectively use its assets to generate profits.

Asset Utilization:Refers to a company’s ability to efficiently and effectively use its assets to generate profits.

Asset Strength Metrics:•Current Ratio•Debt to Equity Ratio

Asset Utilization Metrics:•Return on Assets (ROA)•Return on Inventory (ROI)•Inventory Turnover•Return on Equity (ROE)

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Assets in Action

The modern charcoal briquette was invented by automaker Henry Ford. Ford operated a sawmill in the forests around Iron Mountain, Michigan, in the years prior to 1920 to make wooden parts for his Model T. As the piles of wood scraps began to grow, so did Ford's eagerness to find an efficient way of using them. He learned of a process developed and patented by Orin F. Stafford. The process involved chipping wood into small pieces, converting it into charcoal, grinding the charcoal into powder, adding a binder and compressing the mix into the now-familiar, pillow-shaped briquette. By 1921, a charcoal-making plant was in full operation.

Benchmark Assets

How do we compare?

Impact to Assets:

- Rate Cases- Regulated vs. Nonregulated- Purchase or Sell Assets

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ASSETS:

•Asset Execution = efficiencies, productivity, speed•Remember…Return on _______

Impacting the ASSET Driver

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Growth is defined as an increase over a period of time such as year/year, quarter/quarter, or month /month. Growth is most commonly measured by:

There are two types of Growth:1.Organic Growth:Comes from a company’s existing business

2.Inorganic Growth:Comes from a merger or an acquisition

SalesSales IncomeIncome EPSEPSTop-Line Bottom-Line Investor

In today’s business world, no growth means lagging behind in a world that grows every day…

Growth

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Decline vs. Growth

Business in Growth Mode

Business in Growth Mode

• Best & brightest leave first• Productivity goes down•Morale goes down• Costs are cut, which limits ability to grow,

and the company becomes less profitable.

Business in Rapid Decline

Business in Rapid Decline

• Attracts/Retains the best & brightest!• Productivity goes up = more profit =

more cash = more ability to grow!•Morale is typically higher.• You have the ability to grow in your

career!

Benchmark Growth

How do we compare?

Inorganic Growth - 2007 purchase of North Shore Gas Company and The Peoples Gas Light

and Coke CompanyOrganic Growth - Pipe Infrastructure replacement in Chicago (Part of 5-year plan) expected to take nearly 20 years to complete.

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GROWTH:

•Growth = quarter over quarter or year over year increases in…• Top-Line (Sales) and/or…• Bottom-Line (Profits) and/or…• Earnings Per Share (EPS) for public companies.

•Remember…Organic growth comes from a company’s existing businessInorganic growth comes from mergers and acquisitions

Impacting the GROWTH Driver

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People are the external customers, internal customers, as well as in-direct influences such as affiliates, vendors, and suppliers.

Without People…then what happens?

People

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Internal People

A’s hire A+’s and B’s hire C’s

What is the #1 reason a person will leave a company?

External People

“If I would have asked my customers what they wanted, they would have told me a faster horse!”

Henry Ford

Anticipating External People

What companies have failed to anticipate customer expectations? What were the results?

What limits companies from anticipating their customers’ wants and needs?

Benchmark PEOPLE

How do we compare?

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PEOPLE:

•People = Customers & EmployeesHopefully you serve your customers well. How well do you serve your co-workers?

•AnticipationThe best way to meet and exceed people’s needs

is to try and anticipate them.

Impacting the PEOPLE Driver

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5 Business Drivers

Can you ignore any of these over time and still be successful?Mid-Term Exam

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5 Business Driver Ranking

Rank the 5 Business Drivers in order based on the driver you have the greatest impact / influence or (based on your role) is the most important to the success of Integrys Energy.

Be prepared to share your list with the class.

1.) Most important

2.)

3.)

4.)

5.) Least important

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What is the Purpose of the Annual Report?

General Communication Shareholders, existing/potential investors

(others?) Important, numbers, decision and strategy Where we have been and where we are going

Marketing The what, who and how Name, Image & Branding Colors

Compliance GAAP SEC

Demystifying the Annual Report

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Integrys Strategic Message

• Financial Hi-lights

• Letter to Shareholders

• Management’s Discussion & Analysis

• Financial Statements

• Notes to the Financial Section

Income Statement

Balance Sheet

Statement of Cash Flows

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A Letter to Shareholders

5

Demystifying the Annual Report

Financial Statements:1. Identify the equation.2. Recognize the purpose of the statement.3. Locate the key numbers/measures.4. How do I impact each statement?

CAN YOU READ THIS?

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Income Statement

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Statement Formula:Revenues – Expenses = Income

Top-line

Bottom-line

Gross Profit

Revenues $ 5,203.2- Utility Costs $ 1,685.5- Nonregulated Costs $ 1,619.8= Gross Profit $ 1,897.9

Gross Profit Margin

= Gross Profit / Sales (Revenues)

=$1,897.9/$5,203.2

= 36.5%

Revenue Growth

This Yr / Last Yr – 1 * 100

$5,203.2/$7,499.8= .69378 - 1 = -0.30622 *100 = -30.6%

Net Income Growth

This Yr / Last Yr – 1 * 100

$220.9 / -$69.6= -3.1739 - 1 = -4.1739 *100 = 417.4%

Statement Purpose:Identify Profitability

-3.6%

-54.2%

-12.2%-56.2%-4.8%

+ $100

$100

$83.6

$16.4

$5.68

$10.72

- $100

$100

$100

$34.62

$65.38

Authorized ROE

Net Income/(Total Equity – Goodwill)= Authorized ROE

$223.5/ $2,263.3= 9.87%6,859.8 8,944.4

Balance SheetStatement Formula:

Assets = Liabilities + Equity

Return on Assets

Net Income/Total Assets= Return on Assets

$220.9/ $9,816.8= 2.25%

Current Ratio

Current Assets / Current Liabilities= Current Ratio

$2,050.4 / $1,657.8= 1.24

Statement Purpose:Identify Financial Strength

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Equity Ratio

Total Equity / Total Assets= Equity Ratio

$2,957/ $9,816.8= .3012 x 100= 30% Equity Ratio

Statement of Cash FlowStatement Formula:

Cash In – Cash Out = Net Cash

Earn It

Sell/Invest It

Borrow It

Statement Purpose:Identify Cash Management

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Navigating the Financials

179

725

5.57

5,203

221

2.83

1,045

9.9

-30.6 %

417 %

411 %

2.72 48.83

223.5

5,203 7,499

221 -67

2.83 -0.91

($2,905.8 - $642.5)

• Regulations– State– Federal

• Political Environment– Inflation– Unemployment– Interest Rates

• Competition– Suppliers Business– Investors

• Stock Market– Stock Price– Dividend– Investor

dependency

External Factors

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Stock Market Influence

Dividend Yield2006 – 4.22%2007 – 4.96%2008 – 6.24%2009 – 6.48%2010 – 5.57%5 yr. avg. – 5.83%

Market AveragesS&P 500 – 2.67%/2.08%

Overall #308 of 4640Sector #11 of 123Industry #7 of 31

“after talking with our investors, I realized how much they depend on the company for their retirement” Charlie Schrock

Individual Action Plan

Review:What new insights did you gain, as a result of attending?

(Page 52)

Action Plan: List the things you can commit to do:

Cash: (refer to page 9) Profit: (refer to page 11) Assets: (refer to page 13) Growth: (refer to page 15) People: (refer to page 17)

(Page 53)

52/53

Retention of Content

Time

ReviewApplyTeach

15%

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• How to Read a Financial Report

• Keys to Reading an Annual Report

• BusinessWeek

• Harvard Business Review

• www.finance.google.com

• www.hoovers.com

• www.smartmoney.com

Business Acumen Resources

Books:

• What the CEO Wants You to Know

• Good to Great

• Built to Last

Magazines and Newspapers:

• Wall Street Journal

• Fortune

Web Sites:

• www.reuters.com

• www.nasdaq.com

• www.yahoo.com

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Know and understand what measures are important to the Executive Team.

Understand the five business drivers all successful businesses must focus on.

Have a better understanding of the company’s financial statements.

Become a better communicator of company strategy and performance.

Create an action plan detailing how you will positively impact company results.

Objectives – How did we do?

Post Course Business Acumen

1. 7 days: Teach one of the principals learned in class today, to someone in your department.

2. 7 days: Discuss your action items with your manager in the next 7 days.

3. 30 days: Read the first 90 pages of: “What The CEO Wants You to Know“

4. 30 days: Get with your class partner and give an account of your progress on your action item(s).

Start now:

Build and practice your new business acumen skills. When making decisions, determine how the outcome

will impact Cash, Profit, Assets, Growth, People…

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One Final Thought…

“People will work

hard for a paycheck,

harder for a person, and

hardest for a reason.”