What We Do Where We Are Our Options Game Plan Real Option Steenland Chocolate Nat Chaturaphat Puneet Grover Markiyan Kychma Luis Portela Krista Yang
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What We Do
Where We Are
Our Options
Game Plan
Real Option
Steenland Chocolate
Nat Chaturaphat Puneet Grover
Markiyan Kychma Luis Portela
Krista Yang
What We Do
Where We Are
Our Options
Game Plan
Real Option
What We Do
Steenland and Gina
Synergy- Steenland’s market leader position- Gina’s customised products, large coinsEfficiency- Cost efficiency: remove unprofitable products- Channel networkRevenue of €10m in 2006, promising 30% growth in sales volumeCapacity: Steenland: 100% utilisation, Gina: 25% utilisation
Leveraging Core Competencies
Strong points:- Superior quality- Recognised B2B brand and reliable partners- Alliances and key accounts
How it can be used:- Acquire new customers- Focus on premium niche
Boost sales:-Through more aggressive marketing- Product innovation
What We Do
Where We Are
Our Options
Game Plan
Real Option
What We Do
Turnaround Results
Judging the turnaround result by benchmarking with industry peers
Financial ratiosRoA,RoIC, RoS, RoE are still relatively lowAsset utilisation is good and improvingLeverage and liquidity ratios within industry norm
Ratio Hershey Lindt & Sprüngli SteenlandReturn On Assets 15% 11% 2%Return On Invested Capital 23% 17% 10%Return On Sales 10% 8% 1%Return On Equity 45% 21% 4%Cost of Goods Sold To Sales 56% 52% 57%Net Margin 10% 8% 2%Inventories Days Held 77 91 46Accounts Receivable Days 36 108 88Accounts Payable Days 13 30 35Current Ratio 0.93 2.01 1.88Total Debt / Common Equity 172% 19% 59%
What We Do
Where We Are
Our Options
Game Plan
Real Option
What We Do
Product Portfolio
Steenland
Coins
82% of volume, market share 20%, core product, higher margins for customized and incensed products
Bars
2% of volume, thin margin for all companies, but they make a bit more profit as they are catering to a particular niche
Cigarettes: 8% of volume, one of 3 suppliers, but dying market
Gina
Personalized coins
leader in this segment, Steenland & Gina together have 80% share, almost a monopoly.
Medallions
makes large coins which Steenland cannot make
What We Do
Where We Are
Our Options
Game Plan
Real Option
Where We Are Industry Analysis: Markets
Chocolate promotional gift market lies between the promotional and chocolate markets
Promotional Gifts Market
Total market: $18 Billion
Demand according to consumer trend, Strong need to be aware of upcoming trends.
Food gifts constitute 3.8% of the promotional gifts
Highly fragmented market and most of the production takes place in Asia
Generic Chocolate Industry
Regional variation of market:
Saturated: UK, Belgium
Reaching maturity: US, France, Italy
Growth region: China, India, E. EU
Popular distribution channel:
Western Europe: Supermarkets and large retail chains
Eastern Europe: Traditional grocers
US: Convenience stores
Largest segment: Moulded bars and boxed chocolates
What We Do
Where We Are
Our Options
Game Plan
Real Option
Confectionary Market by Geography
Europe51%
US 26%
Rest of the world 6%Asia Pacific
17%
Where We Are Industry Analysis: Confectionary Market Trend
The global market for confectionery grew at a steady rate over the past five years, and this trend is expected to continue throughout the forecast period, with good performances from the Chinese, Polish and Indian markets driving global revenues upwards. The global market is expected to reach a value of $107.6 billion by the endof 2010
CAGR: 1.9% (2005 – 2010)
Source: Data monitor
Global confectionary market by Type
What We Do
Where We Are
Our Options
Game Plan
Real Option
Where We Are Industry Analysis: Successful Growth
Arcor Group Arcor Group Argentina-based confectionary corporation
- Vertical integration- International expansion by M&A of local production- Establish strong distribution foothold then marketing- Concentrate on large accounts- Product innovation
MadelaineMadelaine USA-based
Customer service Customization Wide product line HR management Following market trend
Chocolate HouseChocolate House USA-based
Strong brandProduct innovationSubsidiary synergiesMove from retail focus to wholesaleConstant incremental improvement
What We Do
Where We Are
Our Options
Game Plan
Real Option
Where We Are Cost Structure and Margin
Competitors are more efficient with raw materials and/or direct labour
Reducing raw material cost by vertical integration
Reduce direct labour by offshoring, nearshoring
Steenland purchases liquid chocolate from third parties, such as Barry Callebaut, hence it pays extra 5% for raw materials compared to others, who own chocolate production
Steenland’s products are relatively customised, hence more labour intensive
What We Do
Where We Are
Our Options
Game Plan
Real Option
Our options
Two approaches
Given these macro, meso, and micro factors, the investors of Steenland can approach their investment with two views:
Harvesting and Planting
What We Do
Where We Are
Our Options
Game Plan
Real Option
Our options
What is Harvesting
Objective explore the best opportunities with the available capacity, optimising its utilization
Time frame 3 years
Product focus on promotional gifts and licensed products
New product developmentuse core capabilities and techniques
Market gifts market, focused on chocolate promotional gifts segment
Growth and expansion through new clients, by exploring growing markets and new key accounts
Productionno extra investments in capacity or relocation
Investmentgifts market specialized sales force, focused on big accounts
What We Do
Where We Are
Our Options
Game Plan
Real Option
Our options
What is Planting
Objective leverage on our core capabilities to explore the whole of the chocolate promotional gifts market
Time frame 5 years
Product broader product range of promotional gifts and licensed products, responding to market needs
New product developmentinvestment in extra technology
Market gifts market, focused on chocolate promotional gifts segment
Growth and expansion through new clients, new growing markets and new products development
Productioninvestments in relocation and extra capacity in new Asian markets (low labour cost countries)
Investment extended gifts market focused sales effort, extended production capacity
What We Do
Where We Are
Our Options
Game Plan
Real Option
Our options
Stakeholders, Time, and Real Option
“Harvesting” and “Planting” views can potentially create a conflict of interest between stakeholders.Investors only harvest and owners only plant ?- Not if you put Time in between them -
Harvesting gives investors fast return and provide company with cash to grow. Planting provides the company with a growth plan but also provide exiting investors with a future plan they can sell. Both gain from lower risk.
“Timing and
sequencing is the key
to a unified effort to
success”
HarvestingStage
Year 1 Year 2 Year 3 Year 4
Real OptionIntermediate evaluation:divest or invest?
PlantingStage
Exit
Year 5
What We Do
Where We Are
Our Options
Game Plan
Real Option
Game Plan
Harvesting Stage: Marketing
Game Plan Segmentation chocolate promotional gifts market segment
Positioning high quality producer of flat shape chocolate gifts
Targeting large companies and promotional gifts distributors; retailers for licensed products
Measures
Expand sales force by hiring promotional gifts specialists
Sales effort focused on large corporate and promotional gifts accounts and growing markets (Asia-Pacific and China)
Product development based on current technologies
Objectives
Increase sales by an average of 20%, with a focus on the most profitable products and geographic markets
Create long lasting partnerships and costumer relations with gift products
Faze out lower margin products and diminish dependency on seasonal products
Segmentation according to
decision maker benefits: high
quality stamped
chocolate gifts
Coin and bar shaped
Promotional gifts for airlines, hotel chains, casinos, coffee and food retail chains, financial institutions
Special editions of collectables for events like Soccer World Cup or Olympic games
New flat shaped products
Flat moulded products shaped on costumer demand indented for promotional purposes and events
Utilization of Gina’s more flexible production method as a tool for development of these products
What We Do
Where We Are
Our Options
Game Plan
Real Option
Game Plan
Harvesting Stage: Channels and Sales Force
Small vs. LargeLarge and accounts are handled by direct sales force. Small accounts are passed on to distributors.
New vs. ExistingDivision into new & existing clients is essential because existing clients require sales force which is good at maintaining relationships.New clients require sales force which is aggressive and convincing.
Other ChannelsOnline services to its clients for quicker service. Additionally, Steenland should register itself with the agencies for promotional gifts.
Large Accounts:Direct Sales force
Mature market: UK, US, EU
New market: China, India, East EU
Focus: Maintain old clients1 key account manager
Focus: Pursue new clients and maintain existing ones3 Sales Managers and 3 sales representatives to acquire new accounts and 1 to maintain existing
What We Do
Where We Are
Our Options
Game Plan
Real Option
Game Plan
Harvesting Stage: Operations
Production SynergySteenland operated at 100% utilization rate in 2005. Together with Gina, a combined capacity, of 3200 ton/year, will be again fully utilized by 2008.
Supply Chain benefits from centralized planning and purchasing. Therefore higher bargaining power and less personnel.
Given current production limitations, Steenland’s product will be limited to flat chocolate items.
Operations concept for the
harvesting stage is to exploit
current capacity and
capabilities.
CostsReduction in seasonality of demand decreases inventory, ICC and improves payment pattern.
The risk of high complexity cost managed through efficient production planning and delaying variation.
ReceiveOrder
SteenlandFactory
GinaFactory
Produce/Package
Transport
Produce/Package
Transport
Steenland’s facilities remains as is, focusing on the production of generic coins. Gina, with its flexible capabilities, will focus on customized and possibly new products.
Generic coins
Customized
What We Do
Where We Are
Our Options
Game Plan
Real Option
Game Plan
Harvesting Stage: Human Resource
The most important issue during the harvesting stage is how to motivate Steenland’s employees, especially sales people.
Motivating Process: Clear and reasonable targetsSound monitoring systemTraining and developing programFair rating standardAttractive reward and recognition program
Four Important Issues:1 Culture Change 2 Motivation 3 Performance Management4 Compensation and Benefits
Reward system:Base SalaryFor full time direct labours
Salary per hourFor part-time employees
Incentives:Stock optionfor sales managers Bonusbased on company-wide performance for staffs Commissionfor sales representatives; high commission fee
What We Do
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Game Plan
Real Option
Game Plan Balance Sheet 2008
Fixed AssetsTangibleFinancial
276000Current AssetsInventory 3649865Recievable 3410148Bank, Cash 600000
7660013Total Assets € 7,936,013
EquityShare Capital 90000Premium 188000Retained Earning 2559301Revaluation reserve 1233982
4071283Liability (3949) 0Provision 157770Long-term debt 1657180Short-term debt 2049780
3864730Total Liabilities € 7,936,013
Harvesting Stage: Results
Free Cash Flow 2008Net IncomeDepreciationInterestGross Cash Flow
InventoryRecievableShort-term debtInvestmentFCF
Return rateInflation Rate
Company Value
Benchmarking Steenland Hershey'sROA 13.39%ROE 26.10%ROIC 25.41% 22.99%
Time interest earned 5.30Debt Ratio 48.70% 41.02%D-E Ratio 91.05% 172.55%
1,062,524
283,182150,000
1,495,707
(852,865)(392,318)
(3,949)0
246,574
0.040.15
2,577,823
Compare to our competitors, Hershey’s, our debt ratio and D-E ratio are still in the reasonable range.
What We Do
Where We Are
Our Options
Game Plan
Real Option
Game Plan
2008: Decision, Decision, Decision
In 2008, the company is at full capacity, and valued at 2.58M.
ROE increases from 4% to 26.10% in three years as a result of increase in net income.
Real OptionHere, investors have an option; to divest profitably, or to continue – “planting”
Decision criteria •Target ROE, derived from the industry benchmarking •Environmental factors such as industry trend and market growth •Plain Vanilla’s portfolio situation - ROIC must at least match the investor’s rate of required return Value for Potential Investors
Company Strength• increased margins and sales• new streams of revenues• opened new markets and increased client base• market focus and expertise
Future Growth Opportunities• investment plan for new products• cash to finance in part from new revenue stream• new Asian market opportunities for capacity expansion
What We Do
Where We Are
Our Options
Game Plan
Real Option
Game Plan
Planting Stage: Marketing
Segmentation chocolate promotional gifts market segment
Positioning high quality and flexible solutions provider of chocolate promotional gifts
Targeting large companies and promotional gifts distributors; retailers for licensed products
Measures
Broader product range to respond to market needs
New product development based on extra technology
Continued sales effort to boost orders, building on market expertise gained and leveraging the increased capacity
Increased market feedback required from sales people
Objectives
Become a reference solution provider in the chocolate promotional gifts market segment
Increase sales of high margin products
Increase the market by broadening possible product range
Extend market knowledge to build on created competitive advantage
Use market information in order to be on the forefront of market developments
What We Do
Where We Are
Our Options
Game Plan
Real Option
Game Plan
Planting Stage: Operations
Investing in ProductionRelocation of the Dutch and German production facilities to either Poland or Turkey, as low cost countries. Selection criteria are suitability of M&A target, raw material accessibility, transportation reliability, and favorable macro factors.
As new markets strengthen, offshored production caters to regional demand. Steenland moves from a centralized system in the harvesting stage to a networked structure in the planting stage. Offshoring comes with exchange rate risks, which must be hedged.
Operations concept for the
planting stage is to increase
capacity and capabilities and reduce
cost.
Supply ChainIndustry benchmarking suggests room for improvement in the cost structure. Vertical integration provides an expensive but sustainable improvement of margin.
InventoryOffshoring production to countries with less reliable infrastructure an workforce exposes us to high risk of unreliability. Higher level of inventory will be required.
What We Do
Where We Are
Our Options
Game Plan
Real Option
Game Plan Non-Financial RewardTop managers:
•More recognition; more respected. •Celebration Lunches•Awards•Special Recognition Clubs•Promotions
Planting Stage: Human Resource
Four Important Issues:1 Culture Change 2 Motivation 3 Performance Management4 Compensation and Benefits
Sales and staffs: Sales: •Access to top executives when they close the large contracts
Staffs:•Reasonable and organized promotion •Clear career path
Shift and sales managers:
•Increased decision authority •Increased recognition
Financial compensation should not be the only motivator for employees, but company care about the needs of their employees
What We Do
Where We Are
Our Options
Game Plan
Real OptionReal Option
In a nutshell …
1: Harvest 2006 to 2008 Growth through aggressive marketing effortExpand market to chocolate promotional gift marketMaintain current production capacityInvestment in sales force and organization2: Decision Divest or Plant? 2008 3: Plant 2008-2010Growth through optimized supply chain and marketingImprove cost structureProduct Innovation
natYear 1 Year 2 Year 3 Year 4
Real Option
PlantingCapacity-led growth with product innovation
Exit
Year 5
HarvestingMaintain capacity
for sales-led growth
What We Do
Where We Are
Our Options
Game Plan
Real Option
Balance Sheet 31-12-2004 2005
Fixed Assests
Tangible 665,358 637,000
Financial 83,615 89,000
748,973 -22,973 726,000
Current Assets
Inventory 1,346,868 -49,868 1,297,000
Recievable 2,569,939 29.04% -216,939 2,353,000 23%
Bank, Cash 183,509 585,000
4,100,316 4,235,000
Total Assets
4,849,289 4,961,000
Equity
Share Capital 90,000 90,000
Premium 187,778 188,000
Retained Earning 79,885 393,115 473,000
Revaluation reserve 1,634,018 (200,018) 1,434,000
1,991,681 2,185,000
Liability
Provision 751,410 (148,410) 603,000
Long-term debt 673,924 (16,924) 657,000
Short-term debt 1,432,274 83,726 1,516,000
2,857,608 2,776,000
Total Liabilities4,849,289 4,961,000
What We Do
Where We Are
Our Options
Game Plan
Real Option
2006 2007
Fixed Assests Fixed Assests
Tangible Tangible
Financial Financial
576,000 426,000
Current Assets Current Assets
Inventory 2,047,000 Inventory 2,797,000
Recievable 2,672,830 Recievable 3,017,830
Bank, Cash 675,000 Bank, Cash 585,000
5,394,830 6,399,830
Total Assets Total Assets
5,970,830 6,825,830
Equity Equity
Share Capital 90000 Share Capital 90000
Premium 188000 Premium 188000
Retained Earning 831,078 Retained Earning 1,496,777
Revaluation reserve 1,233,982 Revaluation reserve 1,033,964
2,343,060 2,808,741
Liability 1000179.6 - Liability 537729.2712 -
Provision 454,590 Provision 306,180
Long-term debt 1,657,180 Long-term debt 1,657,180
Short-term debt 1,516,000 Short-term debt 2,053,729
3,627,770 4,017,089
Total Liabilities Total Liabilities5,970,830 6,825,830
What We Do
Where We Are
Our Options
Game Plan
Real Option
Budget 2005 (euro*1000) 2004 GrowthF2005 Growth R 2005 Growth %F2006 Growth %F2007 F2008
Revenues 8,850 13% 9,975 14% 10,121 15% 11,621 13% 13,121 13% 14,827
Increase / Decrease stock 194 -128% (55)
Production (Gross Margin) 9,044 10% 9,975 11% 10,066 11,621 13,121 14,827
Production Costs(Variable)
Chocolate & Packaging 5,190 10% 5,690 8% 5,613 6,480 7,317 8,268
as % of revenues 57.4% 57.0% 55.8% 55.8% 55.8%
Direct Labour 1,918 9% 2,100 10% 2,113 2,439 2,754 3,112
as % of revenues 21.1% 24.5% 27.6% 31.2%
Total 7,108 10% 7,790 9% 7,726 8,920 10,071 11,380
as % of revenues 78.1% 76.8% 76.8% 76.8%
Contribution Margin 1,936 13% 2,185 21% 2,340 2,701 3,050 3,447
Fixed CostsPersonel 521 10% 575 596 575 575 575 Online website 5 5 5 Sales 309 -29% 220 220 420 420 420 Housing 451 -4% 435 435 435 435 435 Other 401 -10% 360 459 360 360 360 Depreciation 89 46% 130 141 150 150 150 Total 1,771 -3% 1,720 4% 1,850 1,945 1,945 1,945
EBIT 165 182% 465 197% 490 756 1,105 1,502 Interest ### 134 12% 150 24% 166 242 283 283 EBT 31 916% 315 945% 324 514 822 1,219 Tax 9 956% 95 97 156 156 156
Net Profit 22 900% 220 931% 227 358 666 1,063
What We Do
Where We Are
Our Options
Game Plan
Real Option
Assumptions:1. We assume that the 8 sales reps can get total 1.5M contract each year due to good motivation program.
2. We assume that the proportation of variable cost to total sales is the same 3 We assume that we do not increase managers; the personal wages are similar4. We plan to increase the on line website service for business customers; therefore, the initial cost will be 5,000 each year
5. We assume that the extract 8 reps total salaries will be 170,000; and the maintance cost will be 30,000. They increase the total sales cost6. We do not plan to move to the new factory. Housing cost is the same7. Other cost and depreciation cost will maintain the same as those in 20058. Interest rate will be 8% in each year
9. Tax expence is refering to the data showed in the slides10. When increasing 1M sales, inventory increases 0.5M11. We assume that receivable to sales has the same proportion in each year.12. We assume that cash to sales has the same proportion in each year.13 We do not raise any capital through shareholders
14. We do not issue any dividends15. Tax provision decreases equally each year
16. Leverage finance by borrowing short-term and long-term debts; and payback debts when we have extract cash
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