Transcript Slide 1
Breakout Forum
A C-Level View of the Capital Project Portfolio
Emerson T. Johns
Global Financial Manager
DuPont
2008 CII Chairman
Capital Expenditures
Corporate Executive and Investment
Community perspectives
Critical issues and expectations
What this means to the E&C industry
2007 U.S. Construction Spending
Private Construction ($875 billion)
Public Construction ($286 billion)
Private
Public
(Source: U.S. Census Bureau News)
2006 Global construction expenditures: $4.6 trillion
Capital Expenditures
CEO and CFO Perspectives-Examples
Maintain a strong balance sheet
Drive sustained profitable growth globally
Satisfy shareholder expectations (e.g., Cash Flow Return on
Investment, i.e., CFROI)
Capital allocation process
Manage risk
Sustainability
Dependence/reliance on technology
Attracting the right talent (and keeping them) to improve
business outcomes
Adapt to change and respond strategically (speed, flexibility,
adaptability)
Having an effective capital execution process
Ensuring new assets operate efficiently and effectively
Containing costs (minimize delays, overruns, etc.)
Capital Expenditures
Investment Community Perspective-Examples
Key Metric – Cash Flow Return on Investment
(CFROI)
Grow high return businesses
Enhance your ability to increase (or hold on to) high
returns - may be new products or new features that
allow you to price higher
Give you a competitive advantage that you can
translate into pricing and/or higher market share
Improve fixed asset utilization
Allow you to reduce inventory
Make an asset more functional – i.e., improve
operating performance and improve returns on that
asset
Financial Planning-Capital Investments
Cash Flow Measures
Net Present Value (NPV) – the value of forecast cash flows if
discounted to the present at a given discount rate.
Internal Rate of Return (IRR) – financial return realized over the
life of an investment.
Profitability Index (PI) – present value of future cash inflows
generated by project divided by present value of cash outflows.
Discounted Payback (DP) – measures the time required for
projected cash flows from a proposed investment, discounted at
the cost of capital, to equal the initial cash outflow.
Cash Flow Return on Investment (CFROI) – measures return on
capital on a cash basis; metric useful to assess the quality of a
particular investment compared to other “investment” choices
(e.g., R&D)
Financial Planning-Capital Investments
Capital Investment Financial/Business Case Learnings
Business case analysis (market, pricing, and other key
assumptions)
Cash flow metrics (original project premise versus
actual)
Application of learnings to future projects, capital
allocation decisions, and risk management process
Financial Management—Capital
Key Metrics
Business Team
Net Present Value (NPV) and Internal Rate of Return (IRR)
Discounted Payback Period
Profitability Index
Project Team
Expenditures (capital and non-capital)
Schedule
Safety
Operability/Quality
Impact of project on operations Cost of Manufacturing (e.g.,
maintenance, reliability, energy, environmental, yields, uptime, etc.)
Corporate
Capital Allocation
Shareholder Value Add (SVA) and Return on Net Assets (RONA)
Return on Equity (ROE)
Reports on Accomplishment
Capital Expenditures
Risk - A Leader’s Concern
Capital Risk
Laws
and
Regulations
Financial
Controls
Ethics
and
Business Conduct
Operational
Controls
Facilities Engineering Process
Global
Customer
Needs
Business
Objectives,
Capital
Forecasts
Business
Planning
FEL-1
Project
Basis,
Capital
Budget
Facility
Planning
FEL-2
Production
Des Basis,
CAC,
Project
Auth
Project
Planning
FEL-3
Products That
Continuously
Meet Global
Customer Needs
& Requirements
Better Than All
Competitive
Products
Competitive
Facility
That Meets
Business
Needs
Project
Implementation
Front-End Loading
Facility
Operation
Execution/Operation
Owner
Audits
Owner Leads
Contractor
Involved
Contractor
Leads
Risk
Owner
Leads
Contractor
Supports
Few Projects Meet All Objectives
Schedule Effective
Cost Effective
Cost & Schedule Effective
On Budget
On Schedule
On Budget and Schedule
Early Operability Meets Expectations
Achieving All Objectives Simultaneously
0%
(Source: IPA benchmarking data)
20%
40%
60%
80%
100%
% Projects Meeting Performance Objectives
Capital Expenditures
Examples of Modern Day Risks
Loss of reputation—business scandals
Currency
Energy
Globalization
Business drivers
Natural and man-made disasters (e.g., industrial
accidents, transport calamities)
Creation of new potential hazards
Blow-ups of markets and firms
Terrorism
Epidemics (SARS)
Escalation
Risks of omission, implementation, operational, legal,
technology, intellectual property, project management,
credit, political, human assets, compliance
Reactions to Risks
Litigation and law suits
Government regulation (e.g., Sarbanes-Oxley)
Homeland Security
Some say too much time spent on small decisions
and not enough on big ones
Some businesses become more risk-averse; others
benefit by managing risk effectively
Higher insurance costs
Some governments take a more cost-benefit
approach; others put more emphasis on precautions
(“better safe than sorry”)
Contingencies
Withdraw from business or market
Examples of Risk Management Tools
and Services
Project Front-end Loading and Gatekeeping
Processes
Decision and Risk Analysis
Real Options Analysis
Risk Based Asset Management
@RISK
International Project Risk Assessment (CII)
CSFB HOLT’s CFROI® (First Boston)
Scenario-Based Project Planning (FIATECH)
IPA (BFEL)
Maturity Model
Consultants, Accounting Firms
Expert Judgment
Conclusion
“The revolutionary idea that defines
the boundary between modern times
and the past is the mastery of risk”
Peter Bernstein
Against the Gods
Capital
What Does Capital Management Entail?
Strategic Planning
Setting Objectives
Raising Capital
Product Pricing
Financial Risk Management
Liability Valuation
Asset Allocation
Risk Management
Financial Management—Capital
Financial
Management
Corporate
Capital Expenditures Trends
Work Force and Human Capability
Project Delivery
Corporate Strategy
Technology/Innovation
Markets/Demand Drivers
Social/Political Drivers
Capital Expenditures
Challenges for Owners and the E&C
Industry
Competitiveness
Work force development (Engineering professionals and
leaders, crafts)
Safety
Research
Sustainability
Productivity (what are the right metrics)
Cycle Time
Effectiveness & efficiency (competiveness) of assets created
Technology (Bio processes, nano technology, carbon
emissions, potential water crisis, energy)
Project Team Credibility
Globalization (including global markets, international
competition, materials availability, pricing impact, resource
availability, etc.)
A C-Level View of the Capital Project Portfolio
Thank You
Emerson T. Johns
DuPont
September 5, 2008