Company

Going for green without the red ink

Clean-tech companies need a solid business case
Wednesday, April 22, 2009

Ted Lattimore has some advice for green technology start-ups trying to make sales in tough times. Focus less on touting the greenness of your business and more on making an economic case for your product.

"You have to have something economically viable in order to get the chief financial officer of a company to say yes. It doesn't necessarily have to be at parity, but it has to be viable."

Mr. Lattimore is chief executive of Carmanah Technologies Corp., a Victoria, B.C., company that makes solar-powered lights to guide planes to the runway, boats to the marina and joggers across the park. Solar power is one of the hot buttons of the green technology world these days, but Mr. Lattimore doesn't beat the green drum when he tells the story of his company.

"There are the Googles of the world who are willing to spend a significant amount of money to make a statement, but that's far from a generality," Mr. Lattimore says, referring to the fact that, in his experience, most companies will not buy a product simply for its green qualities if it doesn't make economic sense. Most of his customers want to hear about payback periods if they invest in his products, and what his lights can do that others can't.

Carmanah's products are in the marine, aviation and "obstruction" fields, such as lit warning signs for construction sites. What they have in common is their portability and simplicity; they can be brought in wherever light is needed, often in places where tying into the power grid is impossible or would cost an exorbitant amount, such as a mine site. Once in place, the lights need little or no maintenance, and the batteries that store the sun's energy typically last five years.

Sales of these types of products are climbing at about 30 per cent a year for Carmanah, Mr. Lattimore said, a rate that he expects will continue. But the demand for this type of lighting is finite, meaning there are only so many marinas and airports, so he has turned some of his attention to what the company calls "area lighting" for parking lots, pedestrian pathways such as park trails or those in resorts, and street lighting.

Area lighting now makes up just a small portion of Carmanah's sales, which totalled $60.6-million in 2008. Mr. Lattimore, though, expects such sales will comprise half of the $200-million in sales projected five years from now.

As Carmanah prepares to launch itself to the next level, it finds its challenges are economic ones. While there's no question its solar-powered products are more environmentally friendly than those connected to a power grid, they are pricier.

A Carmanah parking lot light can cost from four to seven thousand dollars, easily twice the upfront cost of a traditional light. Mr. Lattimore can argue that, when you factor in the costs of connecting traditional lights to the grid and paying for power, his product is a better deal, but he recognizes that, ultimately, his costs have to fall.

"That will be the challenge to make us into a big company," Mr. Lattimore said.

That is one of the things that keeps fund manager Greg Payne from buying shares in the company. He has been following Carmanah for several years, and held shares in the past, but wishes the company would keep it simple and stick to its marine and aviation products, instead of branching out into the area lighting business.

"It's what everybody believes will be the future, and it's more environmental, and it could be more cost effective and efficient, but it's still very expensive right now," said Mr. Payne, who manages a fund for environmental investment company Investeco Financial Corp. in Toronto. "I don't think Carmanah has the technology to drive the price points down."

When Mr. Lattimore took the reins as CEO in October, 2007, Carmanah was focused on revenue growth, in debt, and had made acquisitions that stretched it too far. Mr. Lattimore dropped some non-core operations and outsourced the manufacturing of its core products, making the company more nimble.

Sales tend to be "lumpy," Mr. Lattimore said, so by outsourcing manufacturing, he won't have to lay off staff if sales slow. Likewise, he can react to an upsurge in orders more quickly.

Mr. Lattimore's restructuring came at the right time for the company. It entered the recession with no debt, and an unused $10-million line of credit. Once the company eliminated any need for cash, private equity investors started calling, chequebook in hand. "We had people come to us saying, 'If we gave you some money, what would you do with it?' Well there isn't anything I would do with the money right now," he said.

The company does not need more money to build sales of its area lighting products, Mr. Lattimore said. "Nor do we have our eye on anything specific in terms of an acquisition that enhances our position, particularly in this economic environment," he added.

Mr. Lattimore's restructuring and the company's ability to fund itself is a key strength, said Rupert Merer, an analyst at National Bank Financial.

"If this company had any weakness on its balance sheet today, it would be finished," Mr. Merer said. "But now we have a company that has a fairly strong cash position and a core business focus that's quite profitable."

Mr. Merer expects that with technological innovation in the solar market, Carmanah's input costs will drop over time, but says that even at current costs, the market is big. He estimates U.S. government spending on street lighting at $3-billion (U.S.) a year.

The challenge for Carmanah now is distribution, Mr. Merer said. In 2008, more than three quarters of the company's sales were within North America. Mr. Lattimore's target is to have half of sales made outside of North America within five years.

"Developing nations are a huge opportunity," Mr. Lattimore said. Many are in the sun belt and they often don't have a power distribution grid, or have inconsistent power supplies, making Carmanah's solar products, which require no infrastructure, attractive. To meet those needs, Carmanah has revamped its distribution network, setting up a network of 250-300 dealers around the world.

One of the challenges will be finding buyers that can afford Carmanah's products in poorer nations. That said, Mr. Lattimore said he is seeing increased interest, though not yet a lot of sales, from those regions.