Global Value Creation Part 2, Driving Structural EBITDA Improvements

All right, everybody, welcome back to episode 2, Global Value Creation with Karl and myself, Sean. Today we're going to be going through a couple frameworks that we put together. We're going to start with Karl's and then move on to mine. Karl's is more focused on process excellence with sustainability solutions, and mine is AI as an EBITDA lever. So we've created a framework, and it's both in the same framework, and we call it our income statement framework, which essentially will work down the income statement from top to bottom and talk about these things in context of cost of goods sold, sales and marketing, R&D, general admin, and then EBITDA after tax savings. And so with that, I will Share Carl's here. And there you go. I think you can see it. And then if y'all are curious about our background, check out episode 1. And once again, we're gonna try to keep this to the highest value per second possible. So we'll see if we meet that lens. So Carl, go ahead and take it away, my friend.

Thank you very much, Sean, for, for the introduction. Hello, everybody again. Glad you're tuned in for listening. First, I would like to get rid of the urban myth in the regards of sustainability, especially in these times, because Sean and I, we've been working together for quite a while in the regards of EBITDA improvements and getting the job done, increasing the balance sheet and all that stuff. And the rumor often is in the regards of sustainability solutions that is just for tree huggers and pure idealists.

Yeah.

Without ever generating any kind of money. And this is a framework I would like to show you a little bit more in the background that rightly done and implemented sustainability solutions provide support for process excellence and therefore can provide you a lot of additional potentials for your organization, no matter which business, which industry, product, or service driven you are in. the value you can take out of it is of great service. So going briefly through the categories that Sean just introduced, it very well starts in the very beginning of the cost of goods sold here, as with the rightful aspect in tackling these problems and issues in these regards. talking about redundancy, we were talking about lower costs, and especially in the time since COVID came in, in supply chains, the effectiveness as well as the efficiency on that. And so seeing where you have waste in your supply chains, in your cost of goods sold, both upstream as well as downstream, you will always see energy waste. And that leads you to the, to the level of sustainable aspects in the regards of lower energy consumption. So rightly imposed, you can improve your unit costs from the transport that is required. The reliability of supply chains can increase, and of course, therefore, the cost-effectiveness becomes bigger, and you have a beautiful leverage in the regards of the EBITDA. As we're not talking about scratching 0.1%, 0.2% out of every unit cost, but rather with the leverage in the regards of transportation and manufacturing, big part. Second, when we were talking about sales and marketing with the idea and hopes, of course, in generating more leads and more wins, an innovative image of an organization also in the regards of offering new products and services that are attributed to new horizons. Think of, despite all the political issues going on, but think of the disruption that Tesla has created in the manufacturing of automotives and the disruption there. Where nobody ever thought with such a high-scale production would ever be possible in regards to electric vehicles. And everybody who can do the math in regards to the operating costs, and I will come to that point especially when it comes to R&D just in a bit, the operating costs for an electric vehicle are far lower than with a standard combustion engine vehicle. And then of course with the costs coming down in regards of the buying benefits customers eventually and of course the brand attraction can increase and besides depending again on which kind of market you are in B2B or B2C it creates new sales opportunities as the message delivering that you can provide to potential clients and customers changes over time is because the more future-oriented you can be, the more technology-driven it is, and therefore opening new potentials. Then going down the value stream a bit more, I just said it a bit in the regards of research and development, it's about lifecycle management and innovative products. But eventually what you want to achieve, and this is something that has been a little bit neglected over the times also when I'm thinking of my tech school times almost 25 years ago. Total cost of ownership here and a product and cost-efficient development of products and services was never a big part of our academic training. So people were thinking also when doing investment decisions in the B2B market, people were thinking of the CapEx. That they were required to put on the table, but rather the, the OPEX that comes with it. Usually when you think of the standard support things like, again, buildings, machines, tooling, stuff like that was never considered much energy, and the availability of these things were taken for granted, and nobody basically shared much thought for that. Therefore, material reuse in terms of recycling and the, again, referring to the supply chains that we just had was also not part of that. But I just had the opportunity 2 days ago with a big business brand conference in Germany to share a keynote where I quoted from a Morgan Stanley study that until 2030 in the demands of materials, metals like lithium, cobalt, copper, aluminum, and stuff like that due to the rising and increasing demands on the global scale, the prices will go through the roof over the time. So the better you can create your products in terms of both energy as well as material efficient design, over the project lifecycle management, the easier it will become for you on the one hand side in the offering for the CapEx for potential customers, as well as then for the OpEx once they're operating these things, balancing the demands and requirements through that. And one thing comes with it, I briefly mentioned it, somehow you don't operate your manufacturing or your service creation in a kind of vacuum environment. You need administrative and support From HR, legal, finance, facility management. Of course, when we were talking about more sustainable process excellence, and usually HR and legal basically doesn't come up to mind, but of course finance in the regards of interest rates when you need to tap your credit lines from any financial services, or also in the operations of buildings, it's again pure OPEX costs and when thinking of the European developments in the financing industries and the banking. Banks today reflect a quite good length of their efforts in how sustainable industries would want to run their businesses with a forecast of 5 to 10 years. Of course, nobody has a crystal ball in foreseeing what the future will bring indefinite. But often they need to have to pay an interest burden and a spread when they are not reflecting their energy efficiency in the regards of their own making. So therefore, both on finance as well as then especially when it comes to the management of buildings and the operation of buildings, sustainability solutions well made. And we have the ones of you that have listened to our first episode, they will remember that I talked at great length in the regards of building operations as well as production efficiency of net energy gains and therefore cost savings of up to 20% with short and medium-term measures to be implemented. Therefore, a lot of risk mitigation, cost efficiency, and process excellence here is possible. And then Eventually, that all adds up with the support of EBITDA and the profitable growth through cost cuttings without the need of thinking of return on investment periods over a period of 5+ years. No, we have a lot of leverage that creates return on invest within even 3 to 6 months. some medium-term measures that require 12 to 18 months in return. And of course, depending on how far somebody is willing to, to go down that road, also within an investment period of 3 to 5 years, there are the next 20% also possible. But this is about you to choose. Message here from our side, from my side, loud and clear is It makes sense also, especially on the financial side, if you want to bring down costs and get profits up. Sean, so much from my side.

One question I had—

go ahead—

uh, is you mentioned like some of the fundamental materials like lithium, cobalt. I've done some analysis in the past. Obviously that's a huge piece of the computing infrastructure in our global society, so the prices may increase pretty substantially. On what time horizon do you think that will happen? Like 1 to 3 years, 3 to 5, 5 to 10, or just gradual?

Yeah, if I quote the, um, the Morgan Stanley research study that I mentioned before, they're talking about the price increase, and that depends of course on the, on the material and the metal. They were reflecting on that, the price range from 3 to 5 years. So, okay, especially with technology-driven demand, lithium, cobalt, copper, and some parts also aluminum, that demand will go through the roof. China is more and more industrializing. We need copper for the electric stuff, lithium for the electric vehicles. Therefore, and we're not talking about a price increase of 10 to 20% over a 5-year period, but sometimes double, triple, or quadruple pricing within the next 5 years, at least what they estimate from today's offer versus the demand that they are foreseeing for a 5-year period.

Yeah, supply is not going to increase as fast as the demand, so price must rise. Yeah, it makes sense. Okay, cool. All right, that was great. Let me do— let me pull up my side. We'll go through mine and then we'll do a wrap-up. We're a few minutes in now. Okay, let me share this and talk through it. Okay, so this one really is from the approach of artificial intelligence and how we can use that to drive structural EBITDA in your business. There's really 3 core value creation approaches you can have along the continuum of super complex, high risk, high cost to low complex, low risk, low cost, but also opposite on defensibility. So on the highly complex side, you can build your own model. You can be like OpenAI, you can be like Gemini, Cohere, you name it, right? Some of the big startup darlings or a big tech company. It's probably out of bounds for most SMBs for sure, mid-market companies probably, and even large-cap Fortune 1000s would struggle to build their own model, foundational model. The next step is to actually wrap a product and use the APIs from these foundational model providers. That's where I see a lot of folks operating today. And those products could be internal or external. And then the last piece is really you just buy someone else's AI product and you just pay them a monthly subscription fee, $20,000 to, you know, tens of thousands of dollars a month depending on usage or seats or whatever. So I think this conversation will be structured more around how do you use an existing AI model. So it's sort of that in-between place where you can create defensibility, you can customize the approach to your needs, and you don't have the risk or cost of building the underlying infrastructure. So what we did through here on the income statement is we looked at each one of the key problem areas from a global perspective. This came from decades of doing requirements gathering and user interviews and market research and competitive analyses across a number of different sectors. And so really, I think a lot of P&L owners would kind of understand this, or leaders, chief executives. Obviously, your suppliers are very, very necessary depending on what business you're in, whether that's a physical good or a digital good. Sales and marketing, pretty clear. Marketing, you need to drive more leads. Sales, we need more closed ones. So this stuff should be pretty obvious. R&D, the constant requirement is more innovation, faster velocity, accelerate roadmap. And then finance and legal is, you know, we need less risk, higher returns, ROIC. And then, you know, the investors really are looking for profitable growth either before tax or after tax. optimize that tax basis as well. So this is like the dream, right? And so the middle is here is like, what's our bridge to get there? And then this new world. So I'll talk about new world really quickly. And this is really more like the solutioning of how we get to this problem statement area. So really, I think the requirement at the end of this is how do I improve the quality of my, of what I use to deliver my product or service at a cheaper cost. That's the dream, right? Like better materials, lower cost. That would be great. Sales and marketing. One of the things the internet does really well is it's a giant marketplace. It's a giant matching engine, but no one yet has found a way to at scale collect every single person and business's needs with the offers of another business or person. So we have little subset marketplaces, but there's nothing at scale. Even Google doesn't do this. This is a huge opportunity for artificial intelligence startups, even big corporations to collect that information and do that matching. R&D. This is where you see a lot of the AI agent stuff happening, which is how do I in real time identify inefficiencies in the organization, write the spec and requirements for that, and then go do the work. And then down here is sort of the control layer. How do I establish legal guardrails, set controls, and keep the business and operations within those lanes? And then how do I, how do I best allocate resources? That's human capital, physical capital, monetary capital. And then the last piece, which is really the dream once you have that cash generation engine, is how do I allocate that capital to keep my compounding going up and up? So you see companies like MicroStrategy taking their retained earnings and putting it into Bitcoin as a way to like do that compounding over time. So that has actually taken the place. They're now a currency conversion company from from data and software and taking that money and putting it into Bitcoin. So as you think about how do we get from here to there, this middle section is really the thing that the software needs to do. So a lot of this is handled by a combination of pen and paper, Excel files, documents, email, human face-to-face, some software. But over time, as we see this digital transformation capability take hold, what we see is the movement off of these historical physical object systems into digital systems that humans are managing, both in that transition as well as this. And then finally taking those requirements and getting that more into automation. So that's classic software with if-then statements, and then now moving into large language models, which does some of the fuzzy matching and intent recognition in between the areas that humans have traditionally had to manage. So as you look at each one of these, what you see is like, here's a use case, right? So the first thing I need to do on getting this outcome, improve my quality per unit of cost on suppliers, is I need to identify the right vendors in the world. I need to do a selection process. I need to analyze those vendors against our needs. We need to negotiate with them. We need to engage with them. We need to Sign the contract. We need to track that work, those goods, those services over digital or physical boundaries. And then based on performance, if one supplier starts underachieving, we need to switch rapidly to another supplier that is overachieving, which is this headline: optimize in real time globally. So maybe I'll pause here for a second. Carl, because I think that's where maybe both of our sort of expertises land in this whole global economy is based on mostly moving physical goods between A and B. And so this idea of like supply chain management and assessment and real-time changeover, right? Like if you find a lithium or cobalt supplier, and all of a sudden another vendor can save you, I don't know, 10 cents per unit and you're buying a billion dollars worth, that starts to add up pretty quickly every month. So is there a capability set such that you could automatically switch all of this because it's been automated and you've got all the suppliers in there? And then you can also add different criteria, right? Maybe it just isn't, maybe quality or definition is like hard functional quality, but also sustainability in that quality. I don't know what you think about that.

Yeah, I agree with that 100%, and I can also emphasize that point because we have just started negotiations with the business partners of ours in the regards of using and even creating by our own, making AI-based algorithms in the regards of optimization towards supply chains in the regards of process excellence. And of course, this is just a question on how you feed the algorithm. So what you were just mentioning is something that can come into that, as well as what I've seen on a real estate and project developer conference in November in Düsseldorf in Germany, where also others are doing stuff like that in the regards of facility and building management. So therefore, It is the combination of the tools that you were just outlining with the ideas behind the process excellence that is driven by, by the proper attack angle in the regards of sustainability and bringing costs down.

Yeah, I think as, as we put this together, the thing that became clear to me is that You know, there's this debate like, is AI a bubble? And it's kind of like, it seems silly. It's like saying, is the internet a bubble? Is software a bubble? It's like, I mean, I, I don't know if I agree with that because really what we're trying to do is we're trying to get to this brave new world over here. And you tell me how we're gonna get there without these new tools. And the tools will continue to change. They'll continue to evolve. They'll continue to get better. But like, You just don't have 100,000 humans with an abacus on a piece of paper doing calculations and sending like snail mail over the continent. Like, we're on Zoom right now between Germany and the United States. And so it's like, is Zoom a bubble? You know, it just— it's silly to me when you actually structure this in the language of business and you see that Really what you need is you need smart folks to write these instructions such that a large language model can compress those instructions, identify what you're trying to say, and then output something with high probability that moves you in this direction across each one of these components of the income statement. So my belief system which I have high confidence in based on experience, research, and doing this thing in my career, is that this stuff will happen over the next 10, 25, 1 year. It's happening now, and we will get here. This is the dream that everyone's trying to get to, but I've never seen anyone put it in this structured way. So as you look at the Russell 3000, I can almost guarantee you that there's going to be a single product for this, for this, for this, for this. These are all billion-dollar companies doing this, each one of these. And then you'll have, you'll have a $100 billion company that's doing this and a $100 billion company doing this. And then you're probably going to have a trillion-dollar company doing all of this. That's the platform. That's the private equity roll-up of the future that I'm not so sure that Folks like KKR and Blackstone are even tracking. So you heard it here first, folks. We'll see if this is accurate, or, you know, maybe I'm, I'm crazy. But with that, I'll, I'll kick it back to you, Carl, and any final wrap-up words, a couple minutes, and I'll do a couple minutes wrap-up me, and then we'll close off on episode 2.

Yes, well, thank you, Sean, for that. Yeah, from my side, and this is basically highlighting and emphasizing the importance on the kind of work we are providing here altogether, is we are living in disruptive times, and we're basically on the very start, in the very beginning of technology improvements and technological gains that we might not be able to foresee to our linear thinking. So therefore, if it can be dreamt of, it can be thought of, and if it can be thought of, it can be implemented. Therefore, again, like I said with episode 1, I would like to encourage you folks out there being courageous and tackle the points than rather reacting. Go forward. move forward, and, uh, the juice is going to be worth the squeeze on that end. Combining these 2 kind of approaches together, blending it into one, and see what everybody for himself and then in the larger community can derive out of it.

Mm-hmm. Yeah, I, I think it's just like anything. You have the folks that go first because they understand the nuance and the organizations are already structured to start benefiting from this. Like, on my side, I see 3 tiers. It's like, we don't even have anything digitized, so you're way behind. The second tier is like, okay, we've got a bunch of stuff digitized, but we don't have it all centralized and structured into a standard database. such that we can do things with our information in our organization properly. So it's kind of a mess. So you've got some catch-up to do in order to get it in a way where you can start to benefit. And then the next piece I think is those that already have it structured. And I can tell you that they are already working on this path to make things simpler. And I'll give you an example. Every business has financial information. You've got sales data, you've got Customer data, you know, you've got a bunch of information, P&L data, the finance department. Most businesses have dashboards and analytics tools, whether it's in Google Analytics, it's some BI tool like Microsoft or Snowflake, some visualization tool, right? And then a lot of times they're putting that into just PowerPoint decks, show it off to Wall Street, show it off to the board, show it off to the execs, show it off to another department. So it's pretty standard. And so, you know, the real idea is like, well, instead of me asking finance for all this information and, you know, having to deal with, oh, should you see this? And like, is the data structured correctly? And download data into an Excel file and then analyze it and then yada yada. It's like, just say, hey, can you give me the sales data from last month? And like, what's driving that? And then like, boom, there's your There's your chart and then you just drag it into PowerPoint or Google Slides and you're done. And so instead of what used to take a week, it took 5 seconds, like the speed at which you can understand what's happening in your business, communicate that, change course, and then accelerate your positioning in the marketplace to take advantage of it. You're gonna win. You're gonna beat your competitors because you have faster iteration speed. So I think this whole thing is like, are you behind? Are you in the middle ballgame? Or are you ahead? And if you're not ahead, you're gonna have to play catch up pretty quickly because iteration speed is starting to compound. And if you get too far behind, you'll never catch up. That's it. That's it for episode 2. Karl, any thoughts as we wrap up this week here in February in 2025?

No, I couldn't have stated it clearer from my side. The only thing I would like to use right now is the opportunity to invite our listeners to our episode 3 coming up in about a month. And then where we want to share some outlooks and how to really tackle the topics and the pains that you are feeling in everyday business in regards to the 2 dimensions. Again, process excellence is the goal and increasing profitability and EBITDA is the aim. So stay tuned. Looking forward to that. Sean, thanks for the conversation. I enjoyed it very much again. And then, uh, we'll, we'll speak.

Yeah, sounds good. Next one will be a plan of attack for you guys, and then you just go execute and then win, and everything's good in the world. So, all right, thanks everybody. Have a great day. Talk to you later. Bye.