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In any industry cyclical or otherwise, the winners are the Atomizers focusing on segments where they can achieve dominant position even though they may hold only a small fraction of the assets or revenue. The companies that create value become Leaders irrespective of their size, and the Under Achievers of the industry have to follow the model of the Leaders even though they may be the largest; this is the only way the companies can deliver the promised value proposition to their stakeholders.
There is not a single perfect measure to describe different aspects of performance of a Company. It is recommended that a framework of economic and accounting measures is used to describe performance. In using these metrics, it is important to understand the impact of factors outside managements control and exclude them in accessing how a company is doing.
Copeland, Koller and Murrin in Valuation Measuring and Managing the Value of Companies.
FINANCIAL METRICS
OPM NOPLAT= ROI ROE = Operating Profit Margin, % Net Operating Profit Less Adjusted Taxes, % = Return on Investment, % = Return on Equity, %
VALUE METRICS
= = = = =
Economic Value Added Market Value Added Total Shareholder Return Shareholder Value Creation (Risk Adjusted Basis) Free Cash Flow (Current and Future (Forecasted))
TOTAL = 2000
Convertible Securities
200 250
400 1750
Debt
Operation D
350
Operation C
200 Preferred
Stock Common Equity Stock
1150
Operation B
750*
Operation A
Enterprise Value
Value Distribution
Source: Copeland, Koller and Murrin in Valuation Measuring and Managing the Value of Companies. John Wiley Press, NY 2003.
EXHIBIT 2.
US$ Millions
10,000
5,000
PROCESSING
BEVERAGE*
STEEL
CHEMICALS**
HOUSEHOLD
PRODUCTS
CHEMICALS
SPECIALTY
FOOD
&MINING
METALS
HOMEBUILDING
PUBLISHING
NEWSPAPER
PUBLISHING
OTHER
-20,000
-25,000 -30,000
* Non-Alcoholic Beverage ** Basic and Diversified *** Specialty Textiles and Non-Wovens
TEXTILES***
P&FP
Value is Being Destroyed The Industrys Returns are 37% Below the Weighted Average Cost of Capital (WACC)
EXHIBIT 3.
ROTC is Lower Than the Cost of Capital: Value is Being Destroyed
15.0 12.0
% Return
1994
1996
1998
2000
2002
2004
Source: BDCI Date Base. Value Performance Based on 47 NA/ Canadian/ European Companies
EXHIBIT 4.
ROTC is Lower Than the Cost of Capital: Value is Being Destroyed
EXHIBIT 5.
P&FP Industry Has Returned Poorly Relative to the Risk of Investment
(Source: VLI Data Base and BDCI Data Base)
Return/Risk (ER/WACC), %
150 130
110 90
70 50
30
HOUSEHOLD PRODUCTS
BEVERAGE* PROCESSING CHEMICALS SPECIALTY NEWSPAPER HOMEBUILDING CHEMICALS** OTHER PUBLISHING TEXTILES
STEEL
P&FP
METALS AND
PUBLISHING
MINING
FOOD
EXHIBIT 6.
Capital Turnover (Indexed) for the Other Manufacturing Industries as Compared to P&FP Industry
(Sales/EC)(Ratio)
2 1.5
1
0.5
0
EXHIBIT 7.
Capital Spending as % of Sales = 4.45% (Average)
% of Net Sales
1996
1998
2000
2002
2004
EXHIBIT 8.
Percent
9 8 7
6 5 4 3 2 1
Average = 4.7%
EXHIBIT 9.
List of 27 Companies with their FY 2005 Revenue
FINANCIAL METRICS
OPM NOPLAT= ROI ROE = Operating Profit Margin, % Net Operating Profit Less Adjusted Taxes, % = Return on Investment, % = Return on Equity, %
VALUE METRICS
= = = = =
Economic Value Added Market Value Added Total Shareholder Return Shareholder Value Creation (Risk Adjusted Basis) Free Cash Flow (Current and Future (Forecasted))
EXHIBIT 10.
Weighted Ranking (Indexed) For NA P&FP Companies Based on Four Key Financial Performance Metrics
Financial Metrics = % OPM, % NOPLAT, % ROI and %ROE
HIGH
%ROI
25
III
20 15
10
I, Q J C
F Z L
KMB
EXHIBIT 11.
ROE versus ROI Matrix for the P&P Companies (PG and KMB is included for comparison)
PG
5
S
Y
M W B
%ROE
5
O 10 U H
-10
-5
-5
T
15
20
25
30
35
LOW LOW
IV
-10
II
HIGH
VALUE METRICS
VALUE METRICS
= = = = =
Economic Value Added Market Value Added Total Shareholder Return Shareholder Value Creation (Risk Adjusted Basis) Free Cash Flow (Current and Future (Forecasted))
EXHIBIT 12.
EVA versus MVA Matrix for the P&FP Companies (PG and KMB is included for comparison)
VALUE METRICS
TSR SVC
= =
SVC is an indexed metric and in a sense is the true TSR delivered by the companies. To eliminate the influence of the size of the company (the socalled CAP Effect), each companys equity volatility (beta) is weighted and indexed relative to the industry and sector volatility.
(2)
(3)
SVC = Events3
1. The Required ROIMEC is calculated by compounding companys initial equity market value by the beta () adjusted market index return; the same value adjustment is made for share issuances, dividends and spin-offs starting on the issue date. 2. Includes both common and preferred issues 3. Other equity events include dividends, share (stock) buy-backs, spin-offs, etc.,
The total SVC lost by the 27 P&FP companies over a 8-year period is about US$ 41.23 billion. Out of the 27 Companies, only five had a positive SVC The two of the largest P&FP companies (Companies K and M) had a negative SVC of about US$ 14.4 Billion. It is not easy to compare the disposition of P&FP companies share prices to their FCF because traditional value proposition models cannot be applied to valuation of cyclical industry. One such process is comparison of market-to-capital to TSR ratio and as an extension, MC to SVC
in U S $ , B illio n s
4 .4 5 %
R evenue
U S $ 5 .7 B illio n U S $ 5 5 .8 B illio n NEXT 7 M ID D L E 1 7
EXHIBIT 13.
The Big Three Companies Destroyed More than US$ 27 Billion in SVC.
(Source: ZACKS Investment Research 2003, Forrester Research 2003, BDCI Data Base, Annual Reports 1998 -2005)
100 90 80 70 60 50 40 30 20 10 0 -1 0 -2 0 -3 0
5 1 .9 4 % 4 3 .5 9 %
U S $ 6 6 .5 0 B illio n
TO P 3
It is not easy to compare the disposition of P&FP companies share prices to their FCF because traditional value proposition models cannot be applied to valuation of cyclical industry. One such process is comparison of market-to-capital to TSR ratio and as an extension, MC to SVC
EXHIBIT 14.
3.0
2.0
Z H E D W
2
1.0 0.0 -1.0 -2.0 0.0 T B 0.2 S M
N AC K
4
Source: 1990 to 2005 Annual Reports
EXHIBIT 15.
Weighted Ranking (Indexed) For NA P&FP Companies Based on Four Key Value Performance Metrics
Performance Metrics = EVA/TIC, MVA/MV of Equity, SVC/CR and TSR
O
B S T Y G K A M W
1.68
0.34 0.14 (3.37) (3.56) (4.24) (4.94) (6.73) (10.46) (24.89)
1.00
0.20 0.08 (2.00) (2.12) (2.52) (2.94) (4.00) (6.22) (14.81)
12
13 14 15 16 17 18 19 20 21
Financial Metrics Value Metrics FCF/EBITDA COMPANY Kimberly-Clark Procter & Gamble 1 Company A 2 Company B 3 Company C 4 Company D 5 Company E 6 Company F 7 Company G 8 Company H 9 Company I 10 Company K 11 Company L 12 Company M 13 Company N 14 Company O 15 Company Q 16 Company S 17 Company T 18 Company U 19 Company W 20 Company Y 21 Company Z Mean Std.Error of Population Mean Strength Index Ranking Strength Index Quartile Position >1.8 1 < 1.7 but > 1.2 2 < 1.2 but > 0.3 3 <0.3 4
Weighted Scale 21.82 22.15 (0.43) 1.21 2.66 19.62 6.47 3.67 (0.31) 5.91 5.89 (0.27) 7.06 (2.78) 2.66 2.71 5.78 (0.57) (2.08) 5.89 (6.23) 0.99 9.13 3.19 0.71
Strength Index1 4.50 4.60 (0.14) 0.25 0.55 4.07 1.34 0.76 (0.06) 1.23 1.22 (0.06) 1.46 (0.58) 0.55 0.56 1.20 (0.12) (0.43) 1.22 (1.29) 0.21 1.90 0.66
Quartile Rank COMPANY Quartile Rank Kimberly-Clark 1 Procter & Gamble 1 Company D 1 Company Z 1 Company E 2 Company H 2 Company I 2 Company L 2 Company Q 2 Company U 2 Company C 3 Company F 3 Company N 3 Company O 3 Company A 4 Company B 4 Company G 4 Company K 4 Company M 4 Company S 4 Company T 4 Company W 4 Company Y 4
EXHIBIT 16.
Quartile Ranking of North American P&FP Companies Based on the Weighted Strength Index of Eight Financial and Value Performance Metrics
24.60 22.12 3.55 2.46 2.62 13.98 7.84 3.94 1.98 6.70 6.70 2.79 7.97 1.00 4.17 4.73 6.45 (1.36) (2.35) 9.64 3.14 4.59 8.94 4.74 0.85
20.61 23.42 (4.00) 0.20 2.82 25.60 5.61 3.48 (2.52) 5.39 5.53 (2.94) 6.63 (6.22) 1.48 1.00 5.53 0.08 (2.00) 2.95 (14.81) (2.12) 9.83 1.98 1.71
0.94 0.59 1.65 0.00 0.50 0.59 0.83 2.85 3.64 3.06 0.00 0.00 1.02 0.00 0.57 2.12 0.00 0.11 0.58 0.76 1.81 0.90 0.00 1.00 0.25
4 4 3 1 2 3 4 2 2 4 2 4 3 3 2 4 4 2 4 4 1
CONCLUSIONS
o On a micro level the health of the industry is dictated by the performance of individual companies within its sector. The recent events in the equity market suggest that it is the winner-takes-all economy and the P&FP industry is no exception. Across NA P&FP sector, a select few companies are creating almost all of the new shareholder value; two of its largest players o are not presently among them. Two indicators were used. o One is the ranking using five key financial measures, %OPM, %NOPLAT, %ROE, %ROI and %FCF. o The other is a measure using value metrics, EVA and MVA, supplemented with TSR and SVC.
CONCLUSIONS
o The profit drivers distinguish the Leaders from the Followers and the Trailers. Profit drivers include, Capital Turnover (CT), %OPM, %NOPLAT, ROI and ROE. o Financial indicators like revenue growth and ROIC though useful should be supplemented with strategic value drivers like MVA to gauge where a company is heading and to decide the course of action to maximize performance and to enhance TSR. o Almost 50% of the companies in the P&FP sector are value destroyers including two of its largest. The P&FP industry over an 8 year period destroyed EVA of more than US$ 20 billion, which makes barrowing capital for project financing expensive; compounding with low ROI, the equity inflow to the industry is one of the lowest among all manufacturing industry as reflected in the poor MVA to MV of Equity.
CONCLUSIONS
To become a global leader again, the NA P&FP industry should focus on delivering decent numbers on the five key financial measures and the four value measures.
Thanks.