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
• What are Investors Looking for?
• Economic Profit – What’s That?
• Implementing Economic Profit (PwC Process)
• Case: Analysis of Juncker’s Economic Performance
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
• What are Investors Looking for?
• Economic Profit – What’s That?
• Implementing Economic Profit (PwC Process)
• Case: Analysis of Juncker’s Economic Performance
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
• What are Investors Looking for?
• Economic Profit – What’s That?
• Implementing Economic Profit (PwC Process)
• Case: Analysis of Juncker’s Economic Performance
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
Economic Profit (DKKm) (102) (61) (98) (146) (118)
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
Economic Profit (DKKm) (102) (61) (98) (146) (118)
(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
Economic Profit (DKKm) (102) (61) (98) (146) (118)
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