the aarhus school of business 17 november 2001 presented by tinus bang christensen managing for...

The Aarhus School of Business

17 November 2001

Presented by Tinus Bang Christensen

Managing for Value

2

Agenda

• What are Investors Looking for?

• Economic Profit – What’s That?

• Implementing Economic Profit (PwC Process)

• Case: Analysis of Juncker’s Economic Performance

3

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

4

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

• Alignment, integration and cooperation across

the organization

• Effective use of information

• Effective communication

• Many firms talk about creating value, but very few

consistently generate it

Shareholder Value

Incentive Compensation

Strategic

Planning

Resource Allocation

AcquisitionAnalysis

Goal Setting

Operating Decisions

Performance Measurement

5

PlanningPlanning MarketingMarketing FinanceFinance HumanResources

HumanResources

Tactical/Operational

Tactical/Operational

Research &DevelopmentResearch &

DevelopmentInvestment

AnalysisInvestment

Analysis

Board/CEOBoard/CEO

• Which strategic alternatives are the most valuable?

• Are all of our planning processes consistent and integrated?

• Does the strategic planning process draw upon insights across the firm?

• Should we form an alliance or joint venture?

• Does the Financial Management System consistently define successful:

– Investments– Acquisitions– Annual Performance– Strategy

• Does the Financial Management System provide a common language across the organization?

• Is the Financial Management System streamlined to provide unity, accountability, and rigor across the organization?

• Do non-financial managers understand and utilize the Financial Management System?

• What blend of funding optimizes cost of capital?

• 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?

• Does the incentive compensation plan motivate and reward value creating behavior?

• Do operating managers understand how their actions impact their bonus?

• Are managers held accountable for their decisions?

• Are we able to attract and retain top management talent?

• Has the compensation strategy tapped the power of the entire organization?

• Are we getting the most out of our brand value?

• Which product line, product, customer, or segment yields the most value?

• Which products/ services do our customers really want?

• Must we abandon all products that appear to destroy value?

• How can we exploit the firm’s intellectual property portfolio?

• How can we evaluate the strategic options inherent in the R&D process?

• How can we assure that research efforts lead to marketable products?

• Do we fully exploit the tax benefits of our intellectual property portfolio?

• What key tasks lead to efficient working capital management?

• What blend of investment and manpower maximizes shareholder value?

• At what level of quality is value maximized?

• How do we balance customer service and inventory management?

• Do operating managers coordinate sequential tasks effectively?

• Should we produce in-house or outsource?

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?

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?

SVM Addresses the Needs of the Entire Organization

6

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.

7

Shareholder Value (TMV - IC = MVA)

Coloplast

• Market Value is DKK 9 billion• Invested Capital DKK 3 billion • Value creation of DKK 6 billion• TVM/IC ratio is 3

Investedcapital

MVADKK

6 billionTotal Market Value

DKK9 billion

DKK3 billion

Investedcapital

DKK12 billion

MVADKK

-3 billion

Total Market Value

DKK9 billion

J. Lauritzen

• Market Value is DKK 9 billion• Invested Capital DKK 12 billion • Value destroying of DKK 3 billion• TVM/IC ratio is 0.75

8

Agenda





9

RevenuesOperating ExpensesTaxes

Net Operating Profit after Tax (NOPAT)

Capitalx 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

Investors Reward Economic Earnings

10

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)

11

Economic Profit - an Example

Net Operating Profit After Tax

Operating profit 145

Cash taxes 45

NOPAT 100

Invested Capital

Total fixed assets 500

Net working capital 250

Invested capital 750

EP = NOPAT - IC * WACC

= 100 - 750 * 10%

= DKK 25m

EP% = [NOPAT/ IC] - WACC

= 100 / 750 - 10%

= 3.33%

12

50

50

-50

150

100

Good or Bad Performance …?

A company earns a NOPAT of..

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

…and Economic Profit would then be

If capital is 500 at a cost of 10% the charge would be

…Economic Profit would then be

13

• 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.

Adjustments of traditional Accounting

14

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

• 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

Important:

• Simplicity

• Economic Impact

• Motivational Impact

• Ability to Manage

15

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

16

Why are Traditional Economic Goals not Sufficient ?

• Turnover has increased

• Operating profit has increased

• … but why isn’t the stock price appreciating?

Stock Price

1997-2001

“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% […]”

17

Why Should We Use EP as a Measure of Value Creation ?

• Declining Economic Profit from 1997-2000 has affected the stock price

• Strong correlation between the stock price ( i.e. MVA) and Economic Profit

1997 1998 1999 2000

1997 1998 1999 2000

Economic Profit 1997-2000

Market Value Added 1997-2000

• 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

18

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)]

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

Economic Value

Value

of

Business =

PremiumReturn

on InvestedCapital

Invested Capital

=

PV of all Future EP=

Invested Capital

Expectations of Future Premium

Performance

MVA=

19

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?

20

Agenda





21

Economic Profit: Tool to Manage Long-Term Value Creation

Incentive Compensa

tion

Strategic

Planning

Resource

Allocation

AcquisitionAnalysis

Goal Setting

Operating Decisions

Performance

Measure- ment

• Successful implementation of

EP results in the possibility to

focus on long-term creation of

shareholder value

• EP is useful as a decision tool

in connection with all relevant

management decisions

Economic Profit

22

Generic Project Plan: Assessing, Planning and Incentivizing with EP

Define and

develop EP

Models

Review of Current

Business Portfolio

Peer

Bench.-marking

Linking financial

and operating

drivers

Implied Valuation

and Target Setting

• Introduction to BU managers

• Standards for NOPAT and IC

• Cost of Capital study

• Analyze EP historically

• Assess Value of current financial plans

• Benchmark performance against peers

• Benchmark Reporting Units against each other

• How efficiently did we create value?

• What drives our value and where in the organization is it impacted?

• How did we perform compared to our peers ?

• Where can we improve?

• How do we integrate value management in our planning processes?

• What performance requirements does the market have for us?

• Analyze and prioritize financial and operational drivers

• Link drivers to value creation

• Coordinate management processes

• Begin management reporting

• Conduct employee training sessions

Assessment Planning Implementation

• How can we build value creation into the culture?

• How to communicate externally and train internally to reinforce the message?

• What tools are required?

Reporting & training

Compen-sation

Planning & Design

• Review value of current financial plans

• Assess and allocate improvement goals to Business Units

• Define plan participants

• Determine KPIs for each plan participant

• Define EP Interval plan characteristics (apy-outs etc.)

23

Drill Down EP to Manage the Business Portfolio

Define and

develop EP

Models

OperatingProfit

+/- Economic

Adjustments Less:Operating

Taxes

NetOperating

ProfitAfterTax

(NOPAT)

Less:CapitalCharge

EconomicProfit

Less:OperatingExpenses

Revenues

Amount of capital

+

Riskiness of business

(WACC)

• 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

24

Review of Business Portfolio: Identify Value Creators and Destroyers

Review of Current

Business Portfolio

Business Unit

Value

Capital Employed

Value creating unitsBU 1BU 1

BU 2BU 2

BU 3BU 3

BU 4BU 4

BU 5BU 5

Value destroying units

Enterprise Value

Analysis of the historical Economic Profit performance brings insights into the major drivers of value...

Analysis of the business portfolio brings insights into the value creators/destroyers...

Finansielle Value Drivers Analyse 1996 1997 1998 1999 2000

Sales Growth (2.1%) 12.7% (5.6%) (2.8%) 0.3%

Net sales 100.0% 100.0% 100.0% 100.0% 100.0%Cost of sales 81.7% 76.9% 77.5% 94.6% 76.4%Gross margin 18.3% 23.1% 22.5% 5.4% 23.6%

Sales & distribution costs 14.2% 14.0% 15.8% 17.3% 17.3%Administration costs 5.3% 5.1% 5.5% 6.4% 6.2%Operating margin (1.1%) 4.1% 1.2% (18.4%) 0.1%Betalt skat (0.3%) 1.2% 0.4% (5.5%) 0.0%NOPAT margin (0.8%) 2.8% 0.8% (12.9%) 0.1%

Average Working Capital / Sales 25.8% 22.2% 21.2% 21.7% 26.0%Average Net Fixed Assets / Sales 57.7% 53.8% 68.5% 71.5% 68.5%Capitalised items / sales 2.9% 5.2% 4.8% 4.2% 2.3%Operating Capital / Sales 86.4% 81.3% 94.5% 97.4% 96.7%WACC 8.9% 8.9% 8.9% 8.9% 8.9%Capital Charge 7.7% 7.2% 8.4% 8.7% 8.6%

Economic Profit margin (8.5%) (4.4%) (7.6%) (21.5%) (8.5%)

Net Sales 1,169 1,318 1,245 1,210 1,214

Economic Profit (DKKm) (99) (58) (94) (260) (103)

25

Allocation of Resources and Strategic Planning

-15%

-10%

-5%

5%

10%

-10% -5% 5% 15% 20% 25% 30%

Spread

(ROIC-WACC)

Growth in invested capital

1998

1999

2000

Value Destruction

Value Creation

Value Destruction

Value Destruction inhibited

1998

2000

1999

1999

1998

2000

Review of Current

Business Portfolio

26

• Financial performance will be

compared to others in the industry

• The key financial drivers of value will

be scrutinized

– Growth

– Profitability

– Capital management

• Industry specific operating drivers and

key performance indicators will be

analyzed as well

Insights are Gained from Benchmarking Performance against Competitors

COGS

0%

20%

40%

60%

80%

100%

AAA BBB CCC DDD EEE

1997 1998 1999 2000

Sales Growth

0%

15%

30%

45%

AAA BBB CCC DDD EEE

1997 1998 1999 2000

Inventory Days

010203040506070

AAA BBB CCC DDD EEE

1997 1998 1999 2000

Key EP Value Drivers

= Best in Class

Peer

Bench.-marking

Economic Profit

0

5

10

15

20

25

30

AAA BBB CCC DDD EEE

1997 1998 1999 2000

27

Operating Value Drivers Link Daily Activities with Financial Performance

Financial Value Drivers

Operating Value Drivers

Non-Cash Relief

Exposure Avoided

Payables &Accruals

Accounts Receivable

Inventory & Other

Net Dayson Hand

Uncollectible ExpenseCurrent Oper.

Assets

Cash Relief

Non-Cash Relief

Net WorkingCapital

Daily Cash Collected

Call Efficiency

Billed on Time

Billing Accuracy

(Disputes)

$ Written OffAllowance DisputesDisputes (Current/S Resolved)

Orders ScreenedDeposits ReceivedOrders Held

Linking financial

and operating

drivers

• Deriving operating value drivers is imperative

to establishing KPI’s for employees that link

daily activities to EP improvement…

28

1 2 3 4 5Net Sales % Growth

NOPAT

Operating Capital

Return on CapitalWACCSpreadEP

Target EP

PV EP Total Value

Value DriversGross MarginOperating MarginNWC DOHFixed Capital/SalesEP Margin

Other Value Drivers

• Market Environment• Competitive

Strengths/Weaknesses• Strategic Highlights

• Operating• Marketing• New Products/Ventures• Competitors

• Short/Long Term Goals• Key Forecast Assumptions

Financial Forecast

Qualitative DescriptionDetail

The SVM Planning Framework - The Strategic and Annual Plan

Implied Valuation

and Target Setting

29

EP Targets will Incorporate the Valuation Goals

Invested Capital

MarketValue Added

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Future Economic Profit Stream

Implied Valuation

and Target Setting

0

25

50

75

100

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

0

25

50

75

100

125

150

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

+

Business Unit 1

Business Unit 2

0

25

50

75

100

125

150

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Business Unit 3+

+ ...

• Financial planning and allocation of Economic Profit should be Business Unit specific and support overall valuation goals...

30

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

(52)

(33)

(14)

5

(60)

(50)

(40)

(30)

(20)

(10)

0

10

2000 2001 2002 2003

InvestedCapital1,488

1,488

Present value of current EP

(570m)

Present Value of future growth

opportunities 2,058

DKKm

Demanded future EP’s

31

Expected Improvement -Selected Companies

Source: PricewaterhouseCoopers

0

200

400

600

800

1000

1200

1400

D/S 1

912

Svend

borg

Novo-

Nordis

k

Lund

beck

TDC

Vesta

s

Willi

am D

eman

t

Group

4Falc

k

Current EP (2000) Expected Yearly Improvement

DKKm

Yearly increase in EP during the next 10 years to support the current stock price

32

Key Actions in Designing the Incentive Compensation Plan

• Identify the KPI’s that will drive variable compensation

• 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

Compen-sation

Planning & Design

The compensation should support the strategic goals of the company - a balanced approach

Non-Financial

KPI’s

EP KPI Financial KPI’s

X% Y% Z%

Total Bonus

KPI = Key Performance Indicators

33

Key Actions in Designing the Incentive Compensation Plan

• Set performance targets

• Derive performance intervals

• Establish bonus pay-out and deferral

(or “Bonus Bank”) plan

• Confirm fit of plan design with

performance objectives

Compen-sation

Planning & Design

EP

Bonus

Target Payout

TargetPerformance

+ Bonus Bank

- Bonus Bank

34

Detailed Reporting Templates Should Support On-Going Reporting

Reporting & Training

Actual Plan Prior Year Change

Net Sales

NOPAT

Operating Capital

Return on CapitalWACCSpreadEPYear to Date EP

Target EP Value DriversGross MarginOperating MarginNWC DOHFixed Capital/Sales

EP Margin

Other Value Drivers

Financial Results for BU X

Detail

35

Internal Communications - Training and Toolsets

• Shareholder Value Management (SVM) is a change management process

• 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

Reporting & Training

36

Agenda





37

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.

38

Junckers Under-Performed Significantly the Past Five Years

CAGRJunckers -23%KFX 21%

Indexed Stock Price: Junckers vs. KFX

0

50

100

150

200

250

300

350

Aug 3

0, 1

996

Oct 3

1, 1

996

Dec 3

1, 1

996

Feb 2

8, 1

997

Apr 3

0, 1

997

June

30,

199

7

Aug 2

9, 1

997

Oct 3

1, 1

997

Dec 3

1, 1

997

Feb 2

7, 1

998

Apr 3

0, 1

998

June

30,

199

8

Aug 3

1, 1

998

Oct 3

0, 1

998

Dec 3

1, 1

998

Feb 2

6, 1

999

Apr 2

9, 1

999

June

30,

199

9

Aug 3

1, 1

999

Oct 2

9, 1

999

Dec 3

1, 1

999

Feb 2

9, 2

000

Apr 2

8, 2

000

June

30,

200

0

Aug 3

1, 2

000

Oct 3

1, 2

000

Dec 2

9, 2

000

Feb 2

8, 2

001

Apr 3

0, 2

001

June

29,

200

1

Aug 6

, 200

1

Date

Ind

exed

Sto

ck P

rice

Junckers

KFX

39

Indicative Calculation of NOPAT, Operating Capital and the Cost of Capital

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%.

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.

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 CapitalRisk Free Rate 5,0%Market Risk Premium 4,0%Unlevered beta 1,25Debt/Capital 50,0%Debt/Equity 100,0%Marginal tax rate 30,0%Levered beta 2,13Cost of Equity 13,5%Cost of Debt pre tax 7,0%Marginal tax rate 30,0%Cost of Debt after Taxes 4,9%Weigthed Averege Cost of Equity 6,8%Weigthed Average Cost of Debt 2,5%WACC 9,2%

Calculation of NOPAT (DKKm) 1995 1996 1997 1998 1999 2000

Result of production and sales 58 (6) 59 33 (215) 62Adjust for Other Operating Income 3 7 5 18 8 61Adjust for Write Downs 0 0 0 0 177 0Adjusted Operating Income 54 (13) 54 15 (46) 1Cash taxes on Adjusted Operating Income (30%) 16 (4) 16 4 (14) 0

NOPAT 38 (9) 37 10 (32) 1

Invested Capital (DKKm) 1995 1996 1997 1998 1999 2000Tangible Fixed Assets 735 615 805 900 779 783Financial Fixed Assets 0 0 0 0 50 50Net Fixed Assets 735 615 805 900 829 833Raw Materials 105 105 94 74 63 66Work in progress 48 50 51 43 54 63Finished Goods 124 124 154 195 205 209Inventories 277 278 299 311 322 338Trade Receivables 165 185 181 141 174 182Other Receivables 20 17 8 66 23 60Total Receivables 185 202 189 206 197 243Current Assets 462 480 488 517 519 581Trade Creditors 67 74 110 98 90 83Corporation tax payable 3 3 2 2 2 0Other Creditors 91 101 92 174 142 147Prepayments and accrued income 0 0 0 0 2 2Non-Interest Bearing Current Liablities 161 178 205 274 236 233Working Capital 301 302 284 243 283 348Other Operating Income (3) (7) (5) (18) (8) (61)Extraordinary Items 0 111 0 0 0 0Write Downs 0 0 0 0 177 0Capitalised items pre tax (See note 1) (3) 104 (5) (18) 169 (61)Capitalised items after tax (30% assumed) (1) 31 (2) (6) 51 (18)Cumulative capitalised items after taxes (2) 70 67 54 172 130Operating Capital 1.033 987 1.155 1.198 1.284 1.311Average Operating Capital - 1.010 1.071 1.176 1.241 1.297

40

Development in Junckers Economic Profit 1996 – 2000

Note: For practical purposes the Cost of Capital has been assumed constant from 96-00.

Economic Profit (DKKm) 1996 1997 1998 1999 2000

Operating Income (13) 54 15 (46) 1Cash Taxes (4) 16 4 (14) 0NOPAT (9) 37 10 (32) 1

Average Capital 1.010 1.071 1.176 1.241 1.297Cost of Capital 9,2% 9,2% 9,2% 9,2% 9,2%Capital Charge 93 99 108 114 119


Return on Capital (ROIC) (0,9%) 3,5% 0,9% (2,6%) 0,1%Cost of Capital 9,2% 9,2% 9,2% 9,2% 9,2%Spread (10,1%) (5,7%) (8,3%) (11,8%) (9,1%)

Average Capital 1.010 1.071 1.176 1.241 1.297


(102)

(61)

(98)

(146)

(118)

(160)

(140)

(120)

(100)

(80)

(60)

(40)

(20)

0

1996 1997 1998 1999 2000

Economic Profit is negative but improving by DKK 28m from 1999-2000

Economic Profit is negative but improving by DKK 28m from 1999-2000

41

Economic Profit and Value Drivers

EP

NOPAT

CapitalCharge

Revenues

COGS

SG&A

CashTaxes

InvestedCapital

WACC

X

Value Drivers

Revenue Growth

Operating Margin

Cash Tax Rate

Working Capital

Capital Efficiency

Cost of Capital

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.

Economic Profit

42

Decreasing GOGS Almost Offset by Increase in SG&A…

SG&A

Cost of Goods Sold

81,7% 76,9% 77,5% 80,1% 76,4%

0%

25%

50%

75%

100%

1996 1997 1998 1999 2000

19,5% 19,0%21,3%

23,7% 23,5%

0%

10%

20%

30%

1996 1997 1998 1999 2000

-1,1%

4,1%1,2%

-3,8%

0,1%

-25%-20%-15%-10%

-5%0%5%

10%

1996 1997 1998 1999 2000

Operating Margin

+5.3%

-4.1%

+1.2%

-2,1%

12,7%

-5,6%-2,8%

0,3%

-10%

-5%

0%

5%

10%

15%

1996 1997 1998 1999 2000

Sales Growth

Change 96-00

Change 96-00

Change 96-00

+2.4%

Change 96-00

43

Inventory DOH Increased by Almost 2 Weeks...

86,6 79,989,5 95,4 99,2

0

20

40

60

80

100

120

1996 1997 1998 1999 2000

Inventories DOH

32,727,5

24,520,6 19,5

0

10

20

30

40

1996 1997 1998 1999 2000

15,314 13,8 14,5

17,5

0

5

10

15

20

1996 1997 1998 1999 2000

38,6 38,5

51,260,3 62,3

010203040506070

1996 1997 1998 1999 2000

Raw Materials DOH

Work-In-Progress DOH

Finished Goods DOH

Inventory DOH

+13.2 days

-2.2 days

-23.6 days

-12.6 days

Note: Inventory DOH and its components have been calculated as an average.

Change 96-00

Change 96-00

Change 96-00

Change 96-00

44

Receivables DOH Increased by 6 Days...

60.554.2 58 60.8 66.1

0

20

40

60

80

1996 1997 1998 1999 2000

Total Receivables

54,650,7 47,2 47,5

53,6

0

10

20

30

40

50

60

1996 1997 1998 1999 2000

5.9

3.5

10.8

13.3 12.5

0

5

10

15

1996 1997 1998 1999 2000

Trade Accounts Receivable DOH

Other Receivables DOH

Accounts Receivable DOH

+1.0 days

-6.6 days

-5.6 days

Note: Receivables DOH and its components have been calculated as an average.

Change 96-00

Change 96-00

Change 96-00

45

Non-Interest-Bearing Current-Liabilities DOH Increased by 2.5 Weeks...

53 53

70.176.9

70.5

0

20

40

60

80

1996 1997 1998 1999 2000

Total Receivables

22.125.5

30.528.3

26.1

05

101520253035

1996 1997 1998 1999 2000

30.927.5

39.7

48.644.4

0

10

20

30

40

50

1996 1997 1998 1999 2000

Trade Creditors DOH

Other Creditors DOH

Non-Interest-Bearing Current Liabilties DOH

+4.0 days

+13.5 days

+17.5 days

Note: NIBCLS DOH and its components have been calculated as an average.Other Creditors includes Prepayments and accrued income and Corporation tax payable.

Change 96-00

Change 96-00

Change 96-00

46

Net Working Capital DOH Increased by One Day...

9481.1 77.3 79.4

94.8

0

20

40

60

80

100

1996 1997 1998 1999 2000

Total Receivables

147134.1

147.5 156.3 165.3

0255075

100125150175

1996 1997 1998 1999 2000

53 53

70.176.9

70.5

0

20

40

60

80

1996 1997 1998 1999 2000

Current Assets DOH

(NIB) Current Liabilities

Net Working Capital DOH

-18.2 days

+17.5 days

-0.8 days

Note: Net Working Capital DOH and its components have been calculated as an average.

Change 96-00

Change 96-00

Change 96-00

47

Can Junckers Asset Base be Utilized More Efficiently ?

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?

Value Drivers 1996 1997 1998 1999 2000

Sales Growth (2,1%) 12,7% (5,6%) (2,8%) 0,3%

Net sales 100,0% 100,0% 100,0% 100,0% 100,0%Cost of sales 81,7% 76,9% 77,5% 80,1% 76,4%Gross margin 18,3% 23,1% 22,5% 20,0% 23,6%

Sales & distribution costs 14,2% 14,0% 15,8% 17,3% 17,3%Administration costs 5,3% 5,1% 5,5% 6,4% 6,2%Operating margin (1,1%) 4,1% 1,2% (3,8%) 0,1%Betalt skat (0,3%) 1,2% 0,4% (1,1%) 0,0%NOPAT margin (0,8%) 2,8% 0,8% (2,7%) 0,1%

Average Working Capital / Sales 25,8% 22,2% 21,2% 21,7% 26,0%Average Net Fixed Assets / Sales 57,7% 53,8% 68,5% 71,5% 68,5%Capitalised items / sales 2,9% 5,2% 4,8% 9,3% 12,4%Operating Capital / Sales 86,4% 81,3% 94,5% 102,5% 106,9%WACC 9,2% 9,2% 9,2% 9,2% 9,2%Capital Charge 7,9% 7,5% 8,7% 9,4% 9,8%

Economic Profit margin (8,7%) (4,6%) (7,9%) (12,1%) (9,8%)

Net Sales 1.169 1.318 1.245 1.210 1.214


Note: Write downs are excluded from Cost of sales in 1999.

48

Spread vs. Growth in Invested Capital

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

-10% -5% 0% 5% 10% 15%

Spread ROIC - WACC

Growth in Avg.Invested

Capital

1998

1997

2000

Value Destruction (increasing unprofitable

capital)

Value Creation (increasing profitable capital)

Value Destruction (reducing unprofitable capital)

Value Creation inhibited (reducing profitable capital)

1999

Improvement in 2000, but still negative Spread...

Improvement in 2000, but still negative Spread...

49

Junckers are Expected to Improve by 18m per Year at Current Share Price

• Market value can be separated into two

components: (1) The value of current

operations + (2) The value of future growth

opportunities.

• The value of current operations is negative

DKK 1,288m (i.e.. EP of -118 capitalized

by approximately 9.2%)

• Junckers current Market Value of Invested

Capital is DKK 827m. This implies an

annual improvement of DKK 17m over the

next five years.

• 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.

DKKm

Market ValueInvested Capital

Net Debt DKK 682m

Net Debt DKK 682m

Equity DKK 145m

Equity DKk 499m

Cap. Items DKK 130m ”Value Gap”

DKK 484m

1,311

827

(118)

(101)

(83)

(66)

(48)

(31)

(140)

(120)

(100)

(80)

(60)

(40)

(20)

0

20

40

2000 2001 2002 2003 2004 2005

Expected EP if share price = 84

(90)

(62)

(34)

(6)

22

Implicit EP Stream

Expected EP if share price = 100

the aarhus school of business 17 november 2001 presented by tinus bang christensen managing for...

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