Transcript www.hha.dk

Managing for Value
The Aarhus School of Business
17 November 2001
Presented by Tinus Bang Christensen
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Agenda
• What are Investors Looking for?
• Economic Profit – What’s That?
• Implementing Economic Profit
(PwC Process)
• Case: Analysis of Juncker’s
Economic Performance
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What are the Investors Looking for?
•
Growth in earnings/cash flows - no profit warnings,
please
•
Strong global positioning in a growing market/industry
•
Focus on core business - conglomerates are out
•
Management compensation linked to value creation
•
Pay-out ratios
•
Diversified ownership and a single share class
•
Liquidity/marketability of shares
•
Strong investor relations
•
Efficient capital structure
•
Corporate governance/ethical concerns
Maximizing
Shareholder Value
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Shareholder Value Management (SVM)
•
SVM focuses all of an organization’s functions on
creating value
•
SVM is a way of managing with all measures,
decisions and rewards focused on creating value
and addresses the key elements of value
creation:
• Targeting appropriate performance measures
Incentive
Compensation
Performance
Measurement
• Alignment, integration and cooperation
across the organization
Operating Decisions
• Effective use of information
• Effective communication
•
Many firms talk about creating value, but very
few consistently generate it
Shareholder
Value
Strategic
Planning
Resource
Allocation
Goal Setting
Acquisition
Analysis
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SVM Addresses the Needs of
the Entire Organization
Portfolio Review:
• Where are we creating value?
• Where are we squandering scarce resources?
Strategic Vision:
• What are our strengths and weaknesses?
• Where are our future opportunities?
Planning
Marketing
• Which strategic
alternatives are the
most valuable?
• Are we getting the
most out of our brand
value?
• Are all of our planning
processes consistent
and integrated?
• Which product line,
product, customer, or
segment yields the
most value?
• Does the strategic
planning process
draw upon insights
across the firm?
• Should we form an
alliance or joint
venture?
• Which products/
services do our
customers really
want?
• Must we abandon all
products that appear
to destroy value?
Finance
Board/CEO
Human
Resources
• Does the Financial
• Does the incentive
Management System
compensation plan
consistently define
motivate and reward
successful:
value creating
behavior?
– Investments
– Acquisitions
• Do operating
– Annual Performance
managers understand
– Strategy
how their actions
impact their bonus?
• Does the Financial
Management System
• Are managers held
provide a common language
accountable for their
across the organization?
decisions?
• Is the Financial
• Are we able to attract
Management System
and retain top
streamlined to provide unity,
management talent?
accountability, and rigor
across the organization?
• Has the
compensation
• Do non-financial managers
strategy tapped the
understand and utilize the
power of the entire
Financial Management
organization?
System?
• What blend of funding
optimizes cost of capital?
Incentive Compensation:
• How can we get managers to act like owners?
• How can we attract and retain top managers?
• How can we extend equity like incentives without diluting
shareholder interests?
Shareholder Communications:
• What do shareholders expect from us?
• How can we communicate our commitment to value creation?
Tactical/
Operational
Research &
Development
• What key tasks lead
to efficient working
capital management?
• How can we exploit
the firm’s intellectual
property portfolio?
• What blend of
investment and
manpower maximizes
shareholder value?
• How can we evaluate
the strategic options
inherent in the R&D
process?
• At what level of
quality is value
maximized?
• How can we assure
that research efforts
lead to marketable
products?
• How do we balance
customer service and
inventory
management?
• Do operating
managers coordinate
sequential tasks
effectively?
• Do we fully exploit the
tax benefits of our
intellectual property
portfolio?
Investment
Analysis
• At what price does
this acquisition
enhance shareholder
value?
• Does the capital
budgeting process
identify value
enhancing projects?
• How much capital
should we invest in
each business unit?
• What is the
appropriate cost of
capital for global
investments?
• Should we produce
in-house or
outsource?
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How do We Measure Shareholder Value?
•
From a market perspective, shareholder value is defined as the Total
Shareholder Returns, ie dividend and share price appreciation
•
From an economic perspective, shareholder value is determined by total
market value of the company (market value of equity and debt) less the
invested capital ( TMV-IC = Market Value Added (MVA) )
•
Value creation in a single year is determined by net operating profit after
tax less the required return on capital (Economic Profit*)
* Economic Profit is also called EVA™ which is a trademark of Stern Steward Company.
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Shareholder Value (TMV - IC = MVA)
Coloplast
J. Lauritzen
•
•
•
•
•
•
•
•
Market Value is DKK 9 billion
Invested Capital DKK 3 billion
Value creation of DKK 6 billion
TVM/IC ratio is 3
Market Value is DKK 9 billion
Invested Capital DKK 12 billion
Value destroying of DKK 3 billion
TVM/IC ratio is 0.75
MVA
DKK
-3 billion
Total
Market
Value
DKK
3 billion
DKK
9 billion
Invested
capital
MVA
DKK
6 billion
Total
Market
Value
DKK
9 billion
Invested
capital
DKK
12 billion
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Agenda
• What are Investors Looking for?
• Economic Profit – What’s That?
• Implementing Economic Profit
(PwC Process)
• Case: Analysis of Juncker’s
Economic Performance
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Investors Reward Economic Earnings
-
Revenues
Operating Expenses
Taxes
Net Operating Profit after Tax (NOPAT)
-
Capital
x Cost of Capital
=
Economic Profit
Accounting Earnings
Economic Earnings
Economic Profit sets the performance bar higher by forcing managers to meet not only
operating expenses but also all expenses associated with invested capital
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Economic Profit Measurement
Focuses on Profitable Growth
Two equivalent definitions of Economic Profit (EP):
1. The Residual Income Method: focuses on quality earnings
EP
= Net Operating Profit After Tax - Capital Charge
= NOPAT - (Capital x WACC)
2. The Spread Method: focuses on quality return on capital and profitable growth
EP% = (Return on Capital - Weighted Average Cost of Capital)
(NOPAT/Capital - WACC)
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Economic Profit - an Example
Net Operating Profit After Tax
Invested Capital
Operating profit
Total fixed assets
500
Net working capital
250
Invested capital
750
145
Cash taxes
45
NOPAT
EP =
100
NOPAT - IC * WACC
EP% =
[NOPAT/ IC] - WACC
=
100 - 750 * 10%
=
100 / 750
=
DKK 25m
=
3.33%
- 10%
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Good or Bad Performance …?
A company earns a NOPAT of..
100
Is this good or bad performance?
It depends ! How much capital is employed?
If capital is 1,500 at cost of 10% the charge would be
150
…and Economic Profit would then be
-50
If capital is 500 at a cost of 10% the charge would be
50
…Economic Profit would then be
50
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Adjustments of traditional Accounting
•
The Economic Profit Model is in principle
very simple. There are only three variables
in the model:
•
•
•
•
Invested capital (economic
invested capital)
WACC (risk adjusted cost of
capital)
NOPAT (economic operating
profit)
Even though the model is simple,
adjustments of traditional accounting are
necessary. Only then the capital expresses
the true economic invested capital.
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What Types of Economic
Adjustments are Typical?
•
Non-operating
• Financing related charges
• Non-operating income
•
Non-recurring
• Restructuring charges
• Unusual gains or losses
• Accounting changes
Important:
• Simplicity
• Economic Impact
•
•
To change accrual accounting back to a cash
basis
• Provision for taxes to cash taxes
• Provision for accounts receivable write-offs
• Goodwill amortization
To reflect the economic life of certain expenses
rather than cash
• Research and development
• Advertising
• Motivational
Impact
• Ability to Manage
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EP Improvements Are Driven by:
•
Investing in new products or markets provided the incremental return on capital
exceeds the weighted average cost of capital
•
Becoming more efficient
•
Restructure value destroying activities
– Reconfigure
– Outsource
– Dispose, so long as proceeds from sale exceed existing returns
•
Minimizing weighted average cost of capital, while maintaining financial flexibility
for growth
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Why are Traditional Economic
Goals not Sufficient ?
“Our wish to create value for all our stakeholders is an inseparable
aspect of everything we do […] Our objective is to generate an
average annual increase in earnings per share of 10% […]”
Stock Price
1997-2001
•
Turnover has increased
•
Operating profit has increased
•
… but why isn’t the stock price appreciating?
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Why Should We Use EP as a
Measure of Value Creation ?
Economic Profit
1997-2000
1997
1998
1999
1998
1999
Declining Economic Profit from 1997-2000
has affected the stock price
•
Strong correlation between the stock price
( i.e. MVA) and Economic Profit
•
Market Value Added (MVA) indicates the
spread between the market value of the
company and the invested capital
•
MVA equals the present value of expected
EP’s in the future
2000
Market Value Added
1997-2000
1997
•
2000
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Economic Profit (EP) Drives Value
•
Economic Profit (EP) equals the returns on invested capital in excess of its cost
•
The greater the EP performance, the greater the value created for stakeholders
•
Generating EP helps ensure that management will be able to continue investing for
the benefit of all stakeholders
Value
Economic
Value
of
Business
=
Premium
Return
on
Invested
Capital
Invested
Capital
=
Expectations
of Future
Premium
Performance
=
PV of all
Future EP
=
MVA
Invested
Capital
1 Miller
& Modigliani’s October 1961 watershed paper, “Dividend Policy, Growth and the Valuation of Shares,”
Journal of Business, 34: 411-433 established that firm value = PV (all future cash flow) = [Invested capital +
PV (all future EP)]
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Key Questions to Management
•
How is the Economic Profit and market value of the company affected by the
current strategy?
•
What business units are creating value and what units are destroying value?
•
What value drivers has the biggest impact on shareholder value?
•
What is the risk profile and the required return on capital for the different
business units?
•
Are we communicating effectively to the stock market?
•
Is compensation linked to value creation?
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Agenda
• What are Investors Looking for?
• Economic Profit – What’s That?
• Implementing Economic Profit
(PwC Process)
• Case: Analysis of Juncker’s
Economic Performance
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Economic Profit: Tool to Manage
Long-Term Value Creation
• Successful implementation of
EP results in the possibility to
Incentive
Compensation
Performance Measurement
focus on long-term creation of
shareholder value
• EP is useful as a decision tool
Operating Decisions
in connection with all relevant
Economic
Profit
Strategic
Planning
management decisions
Resource
Allocation
Goal Setting
Acquisition
Analysis
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Generic Project Plan: Assessing, Planning
and Incentivizing with EP
Assessment
Define
and
develop
EP
Models
Review of
Current
Business
Portfolio
• Introduction to BU
managers
• Analyze EP
historically
• Standards for
NOPAT and IC
• Assess Value of
current financial
plans
• Cost of Capital
study
Planning
Peer
Bench.marking
• Benchmark
performance
against peers
• Benchmark
Reporting Units
against each other
Linking
financial
and
operating
drivers
• Analyze and
prioritize
financial and
operational
drivers
• Link drivers to
value creation
Implied
Valuation
and
Target
Setting
• Review value of
current financial
plans
• Assess and
allocate
improvement goals
to Business Units
Implementation
Compensation
Planning
& Design
• Define plan
participants
Reporting
& training
• Coordinate
management
processes
• Determine KPIs for
• Begin management
each plan
reporting
participant
• Define EP Interval • Conduct employee
plan characteristics training sessions
(apy-outs etc.)
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Drill Down EP to Manage the Business
Portfolio
Amount of
capital
Define
and
develop
EP
Models
+
Riskiness of
business
Less:
Operating
Expenses
+/Economic
Adjustments
Revenues
(WACC)
Less:
Operating
Taxes
Operating
Profit
Net
Operating
Profit
After
Tax
(NOPAT)
Less:
Capital
Charge
Economic
Profit
• NOPAT: Determine economic adjustments
• Invested Capital: Allocate capital to Business Unit
and determine economic adjustments.
• WACC: Determine Business Unit and country
specific cost of capital
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Review of Business Portfolio: Identify
Value Creators and Destroyers
Review of
Current
Business
Portfolio
Analysis of the business
portfolio brings insights into the
value creators/destroyers...
Analysis of the historical Economic
Profit performance brings insights into
the major drivers of value...
Finansielle Value Drivers Analyse
1996
1997
1998
1999
2000
Sales Growth
(2.1%)
12.7%
(5.6%)
(2.8%)
0.3%
Net sales
Cost of sales
Gross margin
100.0%
81.7%
18.3%
100.0%
76.9%
23.1%
100.0%
77.5%
22.5%
100.0%
94.6%
5.4%
100.0%
76.4%
23.6%
Sales & distribution costs
Administration costs
Operating margin
Betalt skat
NOPAT margin
14.2%
5.3%
(1.1%)
(0.3%)
(0.8%)
14.0%
5.1%
4.1%
1.2%
2.8%
15.8%
5.5%
1.2%
0.4%
0.8%
17.3%
6.4%
(18.4%)
(5.5%)
(12.9%)
17.3%
6.2%
0.1%
0.0%
0.1%
Average Working Capital / Sales
Average Net Fixed Assets / Sales
Capitalised items / sales
Operating Capital / Sales
WACC
Capital Charge
25.8%
57.7%
2.9%
86.4%
8.9%
7.7%
22.2%
53.8%
5.2%
81.3%
8.9%
7.2%
21.2%
68.5%
4.8%
94.5%
8.9%
8.4%
21.7%
71.5%
4.2%
97.4%
8.9%
8.7%
26.0%
68.5%
2.3%
96.7%
8.9%
8.6%
Economic Profit margin
(8.5%)
(4.4%)
(7.6%)
(21.5%)
(8.5%)
1,169
1,318
1,245
1,210
1,214
(99)
(58)
(94)
(260)
(103)
Business
Unit
Value
BU 4
BU 3
Net Sales
Economic Profit (DKKm)
BU 5
BU 2
Value destroying units
Enterprise
Value
BU 1
Value creating units
Capital
Employed
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Allocation of Resources and
Strategic Planning
Value Destruction inhibited
Value Creation
Spread
(ROIC-WACC)
10%
1998
Review of
Current
Business
Portfolio
1999
2000
5%
1998
1998
-10%
-5%
5%
1999
15%
20%
Growth in
invested
30% capital
25%
1999
-5%
2000
2000
-10%
Value Destruction
Value Destruction
-15%
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Insights are Gained from Benchmarking
Performance against Competitors
•
Peer
Bench.marking
Key EP Value Drivers
Financial performance will be
compared to others in the industry
Sales Growth
1997
45%
•
1998
1999
2000
The key financial drivers of value will
30%
be scrutinized
–
15%
Growth
0%
AAA
•
–
Profitability
–
Capital management
BBB
key performance indicators will be
EEE
1997
1998
1999
2000
80%
60%
40%
20%
0%
analyzed as well
AAA
BBB
Economic Profit
1997
30
25
20
15
10
5
0
BBB
DDD
COGS
100%
Industry specific operating drivers and
AAA
CCC
CCC
CCC
DDD
EEE
Inventory Days
1998
DDD
1999
2000
EEE
1997
70
60
50
40
30
20
10
0
AAA
BBB
CCC
1998
1999
DDD
2000
EEE
= Best in Class
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Operating Value Drivers Link Daily
Activities with Financial Performance
Linking
financial
and
operating
drivers
• Deriving operating value drivers is imperative
to establishing KPI’s for employees that link
daily activities to EP improvement…
Operating Value Drivers
Cash Relief
Financial Value Drivers
Net Days
on Hand
Non-Cash
Relief
Non-Cash
Relief
Accounts
Receivable
Uncollectible
Expense
Current Oper.
Assets
Exposure
Avoided
Inventory &
Other
Net Working
Capital
Payables &
Accruals
Daily Cash Collected
Call Efficiency
Billed on Time
Billing Accuracy
(Disputes)
$ Written Off
Allowance
Disputes
Disputes
(Current/S
Resolved)
Orders
Screened
Deposits
Received
Orders Held
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The SVM Planning Framework The Strategic and Annual Plan
Implied
Valuation
and
Target
Setting
Financial Forecast
1
2
3
4
5
Net Sales
% Growth
NOPAT
Operating Capital
Qualitative Description
• Market Environment
• Competitive
Strengths/Weaknesses
• Strategic Highlights
• Operating
• Marketing
• New Products/Ventures
• Competitors
• Short/Long Term Goals
• Key Forecast Assumptions
Detail
Return on Capital
WACC
Spread
EP
Target EP
PV EP
Total Value
Value Drivers
Gross Margin
Operating Margin
NWC DOH
Fixed Capital/Sales
EP Margin
Other Value Drivers
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EP Targets will Incorporate the
Valuation Goals
• Financial planning and allocation of
Economic Profit should be Business
Unit specific and support overall
valuation goals...
Business Unit 1
100
75
50
25
2010
2009
2008
2007
2006
+
Future Economic Profit Stream
350
2005
2004
2003
2002
2001
0
2000
Implied
Valuation
and
Target
Setting
Business Unit 2
150
125
300
100
250
75
50
200
25
150
2010
2009
2008
2007
2006
2005
2004
2003
2002
100
2001
0
2000
Market
Value Added
+
50
Business Unit 3
150
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
125
100
75
50
25
+ ...
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2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
Invested
Capital
29
Establishment of EP Objectives
• Market value consists of two components (1) value of current activity and (2) value
of future growth opportunities
• Value of current activity is negative by DKK 570m (EP of -52 capitalised by 9%)
• If the company is valued at book value (MVA = 0), then EP must be improved by
DKK 19m per year in the next three years
DKKm
Demanded future EP’s
DKKm
10
1,488
5
0
Invested
Capital
1,488
Present Value
of future
growth
opportunities
2,058
(10)
(14)
(20)
(30)
(33)
(40)
(50)
Present value
of current EP
(60)
(52)
2000
(570m)
2001
2002
2003
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Expected Improvement Selected Companies
Yearly increase in EP during the next 10
years to support the current stock price
DKKm
1400
1200
1000
800
600
400
200
0
Current EP (2000)
Source: PricewaterhouseCoopers
Expected Yearly Improvement
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Key Actions in Designing the Incentive
Compensation Plan
•
Identify the KPI’s that will drive variable compensation
Compensation
Planning
& Design
•
EP is the main financial KPI
•
Other performance indicators can emphasize:
– Other financial KPI’s
– Company strategic priorities
– Individual development goals
•
Establish each KPI’s weighting
The compensation should support the strategic goals of the
company - a balanced approach
NonFinancial
KPI’s
EP KPI
X%
Y%
Total Bonus
KPI = Key Performance Indicators
Financial
KPI’s
Z%
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Key Actions in Designing the Incentive
Compensation Plan
Compensation
Planning
& Design
Bonus
+ Bonus Bank
Target Payout
•
Set performance targets
•
Derive performance intervals
•
Establish bonus pay-out and deferral
(or “Bonus Bank”) plan
•
Target
EP
Performance
Confirm fit of plan design with
performance objectives
- Bonus Bank
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Detailed Reporting Templates Should
Support On-Going Reporting
Financial Results for BU X
Reporting
& Training
Actual
Plan
Prior Year
Change
Net Sales
NOPAT
Operating Capital
Return on Capital
WACC
Spread
EP
Year to Date EP
Detail
Target EP
Value Drivers
Gross Margin
Operating Margin
NWC DOH
Fixed Capital/Sales
EP Margin
Other Value Drivers
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Internal Communications Training and Toolsets
• Shareholder Value Management (SVM) is a change
management process
Reporting
& Training
• To embrace the process, management must understand how
their decisions create value and how they will share in value
creation
• SVM must evolve from a theoretical concept to a way of
running a business
– This can only be accomplished through extensive training
and toolsets
• Internal communication is thus crucial to the success of SVM
– Train-the-trainer
– Extensive user manuals
– Software toolsets
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Agenda
• What are Investors Looking for?
• Economic Profit – What’s That?
• Implementing Economic Profit
(PwC Process)
• Case: Analysis of Juncker’s
Economic Performance
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Story of Junckers Industrier A/S
• Junckers Industrier A/S is Europe's largest manufacturer of
solid hardwood floors and Denmark's largest timber industry
and employs more than 1,200 people world wide. The
company's primary goal is to produce top quality products
on the basis of an ongoing dialogue with architects,
builders, contractors and owners. It is the close
collaboration with industry professionals which enables
Junckers to maintain its position as Europe's leading
supplier.
• Junckers Industrier A/S operates within 3sectors, Solid
Hardwood Flooring, Solid Hardwood Worktops and Surface
Treatment. Junckers have 7 subsidiaries and
representations in more than 25 countries.
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Junckers Under-Performed Significantly
the Past Five Years
Indexed Stock Price: Junckers vs. KFX
350
Junckers
KFX
CAGR
-23%
21%
KFX
Indexed Stock Price
300
250
200
150
100
Junckers
50
0
Date
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Indicative Calculation of NOPAT, Operating
Capital and the Cost of Capital
Calculation of NOPAT (DKKm)
Result of production and sales
Adjust for Other Operating Income
Adjust for Write Downs
Adjusted Operating Income
Cash taxes on Adjusted Operating Income (30%)
NOPAT
1995
58
3
0
54
16
38
1996
(6)
7
0
(13)
(4)
(9)
1997
59
5
0
54
16
37
1998
33
18
0
15
4
10
1999
(215)
8
177
(46)
(14)
(32)
2000
62
61
0
1
0
1
Note (1): Other Operating Income and write downs are non-recurring items and are not included in NOPAT. The items are capitalised on
an after tax basis.
Note (2): The effective tax rate has fluctuated in the period. We have assumed a 30% cash tax rate on operating income for practical
purposes.
Invested Capital (DKKm)
Tangible Fixed Assets
Financial Fixed Assets
Net Fixed Assets
Raw Materials
Work in progress
Finished Goods
Inventories
Trade Receivables
Other Receivables
Total Receivables
Current Assets
Trade Creditors
Corporation tax payable
Other Creditors
Prepayments and accrued income
Non-Interest Bearing Current Liablities
Working Capital
Other Operating Income
Extraordinary Items
Write Downs
Capitalised items pre tax (See note 1)
Capitalised items after tax (30% assumed)
Cumulative capitalised items after taxes
Operating Capital
Average Operating Capital
1995
735
0
735
105
48
124
277
165
20
185
462
67
3
91
0
161
301
(3)
0
0
(3)
(1)
(2)
1.033
-
1996
615
0
615
105
50
124
278
185
17
202
480
74
3
101
0
178
302
(7)
111
0
104
31
70
987
1.010
1997
805
0
805
94
51
154
299
181
8
189
488
110
2
92
0
205
284
(5)
0
0
(5)
(2)
67
1.155
1.071
1998
900
0
900
74
43
195
311
141
66
206
517
98
2
174
0
274
243
(18)
0
0
(18)
(6)
54
1.198
1.176
1999
779
50
829
63
54
205
322
174
23
197
519
90
2
142
2
236
283
(8)
0
177
169
51
172
1.284
1.241
2000
783
50
833
66
63
209
338
182
60
243
581
83
0
147
2
233
348
(61)
0
0
(61)
(18)
130
1.311
1.297
Note (1): Other Operating Income, Extraordinary Items and Write Downs have been capitalized on an after tax basis assuming a 30% tax
rate.
Weigthed Average Cost of Capital
Risk Free Rate
Market Risk Premium
Unlevered beta
Debt/Capital
Debt/Equity
Marginal tax rate
Levered beta
Cost of Equity
Cost of Debt pre tax
Marginal tax rate
Cost of Debt after Taxes
Weigthed Averege Cost of Equity
Weigthed Average Cost of Debt
WACC
5,0%
4,0%
1,25
50,0%
100,0%
30,0%
2,13
13,5%
7,0%
30,0%
4,9%
6,8%
2,5%
9,2%
Note (1): The calculation of WACC is indicative. We have assumed
an asset beta of 1.25 and a capital structure of 50% debt to capital.
The cost of debt pre tax is assumed at 7% and the tax rate at 30%.
pwc
39
Development in Junckers Economic
Profit 1996 – 2000
Economic Profit (DKKm)
Operating Income
Cash Taxes
NOPAT
Average Capital
Cost of Capital
Capital Charge
Economic Profit (DKKm)
1996
(13)
(4)
(9)
1.010
9,2%
93
(102)
1997
1998
54
16
37
15
4
10
1.071
9,2%
99
1.176
9,2%
108
(61)
(98)
1999
(46)
(14)
(32)
1.241
9,2%
114
(146)
2000
1
0
1
1.297
9,2%
119
1996
1997
1998
1999
2000
0
(20)
(40)
(60)
(61)
(118)
(80)
Return on Capital (ROIC)
Cost of Capital
Spread
Average Capital
(0,9%)
9,2%
(10,1%)
3,5%
9,2%
(5,7%)
0,9%
9,2%
(8,3%)
(2,6%)
9,2%
(11,8%)
0,1%
9,2%
(9,1%)
1.010
1.071
1.176
1.241
1.297
(100)
(102)
(98)
(120)
(118)
(140)
Economic Profit (DKKm)
(102)
(61)
(98)
(146)
(118)
(146)
(160)
Note: For practical purposes the Cost of Capital has been assumed constant from 96-00.
Economic Profit is negative but
improving by DKK 28m from 1999-2000
pwc
40
Economic Profit and Value Drivers
Value Drivers
Economic Profit
Revenues
Revenue Growth
COGS
Operating Margin
NOPAT
SG&A
Cash
Taxes
Cash Tax Rate
Working Capital
EP
Capital Efficiency
Invested
Capital
Capital
Charge
Cost of Capital
X
WACC
Financial Flexibility
Economic profit can be segmented into value drivers. Value drivers provide a mechanism to forecast
corporate value and to analyze how business decisions impact value.
pwc
41
Decreasing GOGS Almost Offset by
Increase in SG&A…
Sales Growth
Change
96-00
12,7%
15%
10%
+2.4%
5%
0,3%
-2,1%
-2,8%
1996
1997
1998
1999
81,7%
76,9%
77,5%
80,1%
76,4%
Change
96-00
+5.3%
50%
-5,6%
-10%
100%
75%
0%
-5%
Cost of Goods Sold
25%
2000
0%
1996
1997
1998
1999
2000
23,7%
23,5%
Operating Margin
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
4,1%
1,2%
-1,1%
0,1%
-3,8%
Change
96-00
+1.2%
SG&A
30%
1996
1997
1998
1999
2000
20%
19,5%
19,0%
1996
1997
21,3%
Change
96-00
-4.1%
10%
0%
1998
1999
2000
pwc
42
Inventory DOH Increased by
Almost 2 Weeks...
Change
96-00
Raw Materials DOH
40
+13.2 days
32,7
27,5
30
24,5
20,6
19,5
1999
2000
20
10
0
1996
Inventory DOH
120
100
86,6
79,9
89,5
Change
96-00
95,4
99,2
-12.6 days
1997
1998
Work-In-Progress DOH
20
17,5
15,3
15
14
13,8
14,5
1997
1998
1999
Change
96-00
-2.2 days
80
10
60
40
5
20
0
0
1996
1997
1998
1999
1996
2000
2000
Inventories DOH
Finished Goods DOH
Note: Inventory DOH and its components have been calculated as an average.
70
60
50
40
30
20
10
0
60,3
62,3
1999
2000
51,2
38,6
38,5
1996
1997
1998
Change
96-00
-23.6 days
pwc
43
Receivables DOH Increased by 6 Days...
Trade Accounts
Receivable DOH
60
54,6
53,6
50,7
47,2
47,5
1997
1998
1999
50
Change
96-00
+1.0 days
40
30
Accounts Receivable DOH
80
60.5
60
54.2
58
60.8
1997
1998
1999
Change
96-00
20
-5.6 days
0
10
1996
66.1
2000
40
20
0
1996
Other Receivables DOH
2000
Total Receivables
15
13.3
12.5
10.8
10
Change
96-00
-6.6 days
5.9
5
3.5
0
1996
Note: Receivables DOH and its components have been calculated as an average.
1997
1998
1999
2000
pwc
44
Non-Interest-Bearing Current-Liabilities
DOH Increased by 2.5 Weeks...
Change
96-00
Trade Creditors DOH
Non-Interest-Bearing
Current Liabilties DOH
70.1
80
60
53
76.9
Change
96-00
70.5
+17.5 days
35
30
25
20
15
10
5
0
30.5
25.5
+4.0 days
28.3
26.1
22.1
1996
1997
1998
1999
2000
53
40
20
Other Creditors DOH
0
1996
1997
1998
Total Receivables
1999
2000
48.6
50
40
39.7
30.9
30
44.4
Change
96-00
+13.5 days
27.5
20
10
0
1996
Note: NIBCLS DOH and its components have been calculated as an average.
Other Creditors includes Prepayments and accrued income and Corporation tax payable.
1997
1998
1999
2000
pwc
45
Net Working Capital DOH
Increased by One Day...
Current Assets DOH
Net Working Capital DOH
100
94.8
94
81.1
77.3
79.4
1997
1998
1999
80
Change
96-00
175
150
125
100
75
50
25
0
147
1996
-0.8 days
134.1
1997
147.5
1998
156.3
1999
Change
96-00
165.3
-18.2 days
2000
60
40
20
1996
2000
Total Receivables
Change
96-00
(NIB) Current Liabilities
0
80
60
70.1
53
53
1996
1997
76.9
70.5
+17.5 days
40
20
0
Note: Net Working Capital DOH and its components have been calculated as an
average.
1998
1999
2000
pwc
46
Can Junckers Asset Base be
Utilized More Efficiently ?
Value Drivers
1996
1997
1998
1999
2000
Sales Growth
(2,1%)
12,7%
(5,6%)
(2,8%)
0,3%
Net sales
Cost of sales
Gross margin
100,0%
81,7%
18,3%
100,0%
76,9%
23,1%
100,0%
77,5%
22,5%
100,0%
80,1%
20,0%
100,0%
76,4%
23,6%
Sales & distribution costs
Administration costs
Operating margin
Betalt skat
NOPAT margin
14,2%
5,3%
(1,1%)
(0,3%)
(0,8%)
14,0%
5,1%
4,1%
1,2%
2,8%
15,8%
5,5%
1,2%
0,4%
0,8%
17,3%
6,4%
(3,8%)
(1,1%)
(2,7%)
17,3%
6,2%
0,1%
0,0%
0,1%
Average Working Capital / Sales
Average Net Fixed Assets / Sales
Capitalised items / sales
Operating Capital / Sales
WACC
Capital Charge
25,8%
57,7%
2,9%
86,4%
9,2%
7,9%
22,2%
53,8%
5,2%
81,3%
9,2%
7,5%
21,2%
68,5%
4,8%
94,5%
9,2%
8,7%
21,7%
71,5%
9,3%
102,5%
9,2%
9,4%
Economic Profit margin
(8,7%)
(4,6%)
(7,9%)
(12,1%)
(9,8%)
1.169
1.318
1.245
1.210
1.214
(61)
(98)
(146)
(118)
Net Sales
(102)
Economic Profit (DKKm)
Note: Write downs are excluded from Cost of sales in 1999.
26,0%
68,5%
12,4%
106,9%
9,2%
9,8%
EP was driven by:
• Weak (and negative) sales
growth
• Improved Gross margin
was almost offset by
increased S&D costs
• Fixed Capital increased
significantly
• Can the asset base be
utilized more efficiently?
pwc
47
Spread vs. Growth in Invested Capital
Spread
ROIC WACC
Value Creation inhibited
(reducing profitable capital)
Value Creation
(increasing profitable capital)
2%
0%
-10%
-5%
0%
5%
10%
15%
Growth in
Avg.Invested
Capital
-2%
-4%
1997
Improvement in 2000, but
still negative Spread...
-6%
-8%
1998
2000
-10%
Value Destruction
(reducing unprofitable capital)
-12%
-14%
1999
Value Destruction
(increasing unprofitable
capital)
pwc
48
Junckers are Expected to Improve by
18m per Year at Current Share Price
DKKm
•
Market value can be separated into two
1,311
components: (1) The value of current
Cap. Items DKK
130m
”Value Gap”
DKK 484m
operations + (2) The value of future growth
opportunities.
•
Equity DKk
499m
827
Equity DKK
145m
The value of current operations is negative
Net Debt
DKK 682m
Net Debt
DKK 682m
DKK 1,288m (i.e.. EP of -118 capitalized by
approximately 9.2%)
•
Invested Capital
Junckers current Market Value of Invested
Capital is DKK 827m. This implies an
annual improvement of DKK 17m over the
40
Market Value
Implicit EP Stream
20
22
0
(6)
(20)
next five years.
(34)
(40)
(31)
(62)
(60)
•
If Junckers was to be valued a its Invested
Capital (i.e. share price = 100), EP would
have to improve by DKK 28m per year
over the next 5 years.
(80)
(66)
(90)
(83)
(100)
(120)
(48)
(101)
(118)
(140)
2000
2001
2002
2003
2004
2005
pwc
Expected EP if
share price = 84
Expected EP if
share price = 100
49
pwc