2016 Review Prepared for the Chronos Board of Directors April 23, 2014.
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Transcript of 2016 Review Prepared for the Chronos Board of Directors April 23, 2014.
2016 ReviewPrepared for the Chronos Board of Directors
April 23, 2014
Agenda
• 2016 Summary
• Finance
• Marketing
• Operations
• 2017 Overview and Future Outlook
• Compensation Plan
• Game Wrap-Up
2016 Summary
Products
• Sprout: High End
• Evergreen: Low End
Business
• Sales: 1st in world 4, 2nd in all worlds
• Profits: 3rd in world 4, 4th in all worlds
Competition Landscape
• C3 & C5 specializing in P2
• C1 in the middle ground for P1 & P2
• C4 is closely positioned but inferior to Chronos
Items that require Board Approval
• Dividend policy: $3MM/quarter
• Debt policy: $1MM/quarter
Jason Chen
Finance
2016 Financial Performance2014 2015 2016
Annual Sales $161MM $178MM $200MM
Economic Profit $10MM $12.7MM $15.9MM
Ann. Net Income $9.8MM $15MM $17.7MM
Ann. Net Income % of Total Rev
6.1% 8.4% 8.9%
Ann. ROIC 30% 36% 44%
Avg Contr. Margin 29.87% 38% 42%
Annualized ROE 38% 60% 55%
Avg Market Share 20% 20% 21%
Balance Sheet
Income Statement
Cash Flow Statement
Value created
• 3 yr annuity of NI: $35.5MM
• 3 yr annuity of Econ Profit: $32.5MM
• 3 year annuity of NOPAT: $44MM
• Perpetuity of business: $147.5MM
• Perpetuity of net income: $4.3B
2017 Financial Goals
2014 2015 2016 2017 2018 2019
Annual Sales $161MM $178MM $200MM $236MM $244MM $253MM
Economic Profit $10MM $12.7MM $15.9MM $20MM $20.6MM $21.5MM
Ann. Net Income $9.8MM $15MM $17.7MM $20.5MM $21.5MM $22.5MM
Ann. Net Income % of Total Rev
6.1% 8.4% 8.9% 9% 9% 9%
Ann. ROIC 30% 36% 44% 51% 56% 62%
Annualized ROE 38% 60% 55% 62% 62% 63%
Madison Rabson & Eric Bae
Marketing
Goals for 2016
• Push Sprout as a winning product
• Increase marketing consulting by 15% by Q4
• Continue to occupy the lower quality market for product 2 with Evergreen
• Increase marketing expenses in Europe and the U.S. in order to increase market share
• Adjust marketing expenses every quarter so as to stay above 20% in Japan
• Focus on winning government contracts
Notable Achievements of 2016
• Won ¾ Government contracts for Sprout
• Evergreen green value 98.73%
• Highest quality for P1 across all companies
• Gained 26% of P1 market share in Japan
• 2nd highest overall total sales across all companies
Sprout Sales and Marketing
Japan Mexico China U.K. Germany U.S.
Sprout Sales
26% 14% 21% 18% 21% 19%
Contribution Margin
46% 29% 41% 35% 43% 27%
Marketing 22% 19% 20% 19% 19% 18%
Evergreen Sales and Marketing
Japan Mexico China U.K. Germany U.S.
Evergreen Sales
18% 14% 21% 17% 20% 19%
Contribution Margin
54% 44% 50% 43% 49% 49%
Marketing 16% 16% 22% 15% 16% 19%
Sprout Quality and Green v World Averages
Product Positioning for SproutHigh Quality
Low Quality
Least Green Most Green
S
S
S
S
2013201420152016
2016 Sprout is High-End Product
Evergreen Quality and Green v World Averages
Product Positioning for EvergreenHigh Quality
Low Quality
Most GreenLeast Green E
E
2013201420152016
E
E
2016 Evergreen is Low-End Product
Characteristics of Competition
• Company 3o Highest overall sales (Chronos #2)o Lowest prices in most countries for product 1 (C5)o Lowest quality in product 1 (76.7% below Chronos)o Highest prices in every country for product 2o Highest quality in product 2 (21.4% above Chronos)o Spending well over $6 million for quality of product 2o Have essentially abandoned quality of product 1o Green values are unknown
Characteristics of Competition
• Company 4o Unstable sales record, although currently in 3rd
placeo Highest quality of product 1 (0.4% above Chronos)o Prices very competitive with Chronos in P1o Low quality of product 1 (7.8% above Chronos)o Prices competitive with Chronos in P2o Never wins government contractso Green values are unknown
Chronos v. Competition
Long Term Plans for Future Management
• Build up Evergreen and develop the product through more R&D
• Maintain competitive advantage of Sprout through marketing and green
• Continue to invest in marketing consultants
• Promote Chronos as an environmentally friendly and green brand
Lisa Cherkassky & Sophy Chu
Operations
Goals for 2016
• Inventory control: 15% goal
• Production consulting: gradual increaseSprout: 80%
Evergreen: 20%
• Purchase more shipping containers to stay at 110% of sales
• Capacity utilization: 100% capacity goal
2016 Strategy Results
• Inventory control:o No stockouts o Sprout jumps at Q4
• Production consulting increased to 600,000:o Variable costs minimally affectedo For Sprout: variable cost correlated with Quality
• Shipping capacity with respect to demand:o No emergency purchases
• Capacity utilization: Closer to 100% utilization
2016 Inventory
Higher Quality Higher Variable Costs⇒
Higher Quality for Evergreen
Shipping Containers
Capacity Utilization Recap (2014-2016)
Sprout Evergreen
Production Budget Projections
Year Sprout Evergreen
2017 $18 $20.9
2018 $17 $20.5
2019 $16 $20.0
Variable Cost Assumptions:
(Holding fixed costs constant)
Total Production Costs: $266,523,000
Total Construction Costs: $2,812,385
Operations Recommendations
• Prevent Stockouts: Spend on production and construction costs to prevent stockouts
• Capacity Control: Do not decrease units of capacity unless capacity utilization is significantly low
• Shipping Containers: 110% of demand; prioritize shipping destinations based on higher opportunity
• Consultants: Countries with variable costs that depend on the quality have variable costs correlated positively with quality
Germany for Thought
Consider expanding Evergreen to Germany:
• R&D efficiency
• High quality
• Advantage in German and UK markets (no tariffs)
• Great profit margin
Jason Chen
Future Outlook
Defendable Position?
• Sprout has no competitors with a similar position
• Evergreen occupies a profitable market segment
Possible Merger
• Merge with Company 3o Company 3
Premium P2 product Possibly consider dropping economy P1 product
o Chronos: Premium P1 product
Items that require Board Approval
• Dividend policy: $3MM/quarter
• Debt policy: $1MM/quarter
Jason Chen
2016 Compensation
Salary Increase
Bonus
Modifications and Improvements
• Financial measures: LT vs. STo Fwd looking/predictive vs. backward looking
• Alternative strategyo Golden strategy: High quality/price/profit margin
premium product strategyo Strategically wage price war in economy market
• Trade payables: Operating Costs
• Super cheap P1: max profit in contracts
Modifications and Improvements
Appendices
3 year forward income statement
3 year forward balance sheet
3 year forward cash flow statement
Stock Price