Case Analysis Clayton Industries: Peter Arnell, country manager for Italy Submitted to: Prof.

Payal Mehra Submitted by: Introduction to the Case Peter Arnell, the new Country manager of Clayton SpA, Italy, was responsible for the Compression chiller manufacturing unit in Brescia and marketing of the same in Italy, Germany and Switzerland. He faced challenges due to global recession and reduction in revenue for the third consecutive year. The corporate leadership has huge hopes on him and expects him to bring back thing to order. Italian business of Clayton includes Production and distribution of compressor chillers to Italy and the rest of Europe. These units are used in large Commercial, Public and Institutional installations. Though Claytons European Market grew fairly with greater market share the compressor chiller units were lagging behind in terms of the overall market share and the revenue generated. The President of Clayton Europe Simonne Buis, has set up aggressive targets for the country managers to sustain and stabilize Claytons Operations and Market share in Europe. She had wanted all the country managers to cut their receivables and inventories by 10 days and reduce the head count by 10%. She also asked her managers for a plan to increase market share and be within the top four competitors in Europe within four years. Arnell, being new to the geography faced challenges due to highly unionized and over staffed labor in his plant in Brussels. Further the low penetration of the product in the rest of Europe and outdated features of Clayton SpAs compressor chiller were serious concerns looming ahead of the Italian Operations. These have made the targets set by the President very difficult to attain. Clayton Europe Scenario

* Brussels became the formal Headquarters for Clayton Europe. Four country mangers were appointed for by new president who were given responsibility for sales and exports. Following graph compares the market penetration for Europe countries and US in year 1998 : Asian producers have gain preferences over European companies, largely on the basis of price. Simonne Buis became the Clayton Europe President. She wanted to increase operational efficiency of different plants of Clayton and increase the penetration of entire product line. Company increased its global market share for Europe from 33 % in 2000 to 45 % in 2009. Following graph shows the break of sales in different countries of Europe: Dan Briggs, the new CEO of Clayton brought about two priorities: a) reducing capital use and b) bringing cost under control. He quoted Great opportunities always reside inside crises. He saw growth opportunities in Europe. He said that it in this business only the top three or four competitors could make money. The air conditioning market was growing due to changing consumer attitude and very hot summers. She brought a plan of 10/10/10 i.e., to cut receivables, to cut inventories by 10 days and head count by 10 %.She announced to work on Four on Four initiative. Case Analysis Major problem : Recession in Europe has hit the company badly its sales has gone down drastically. In Italy situation is far more challenging as compare to the other regions of the Europe. First half of the FY 2009 has witnessed a 19.4% drop in the sales, receivables and inventories are both above 120 day sales. Company is neither able to reduce its cost nor it has a product which is readily acceptable by the climate friendly people. So the company is finding to make profits in the time of recession when its sales are going southward very rapidly. Company is aiming to be in top four in each product category which is quite a difficult task ahead for Peter Arnell, the new country manager. Some of the reasons that the company is facing problem in European market are following;

* European people saw air conditioning as an luxury item which is harming environment so they resist to purchase it. This has been a real problem for company to expand its market share in Europe. Compression chiller produced by the company are not so climate friendly vis-a-vis absorption chillers so company is facing a huge challenge to make people accept their product who are climate sensitive. * European people also have a emotional attachment and preference towards their local national brand. Product which had a local presence before are able to sustain well in the market even in the bad economic conditions. * In past most of the company policies were centred towards getting large projects from government in Italy so it is not only losing potential commercial customer but also losing the chance to reach in other parts of Europe. * Because of its inefficient operations the compression chillers produced by the company are too expensive which are facing tough competition from the cheap Asian products. * Its air conditioners are not suitably designed according to the Italian buildings which lacked the duct work. As the company is neither offering low price products nor able to cope up with the perception of Discussion on Alternatives * climate friendly product. Company is struggling in the European market where it is not a familiar local brand. Evaluation of alternatives Target a. To increase the market share of Clayton SpA from 7% to 15% within 4 years (Four in Four objective). b. To reduce Days Receivables, Days Inventory by 10 days and Headcount by 10% (10/10/10 objective).

Alternative I - Revive the compression chiller line Key Steps involved Manufacturing plan1. 5 million investment in the next 12 months in the existing manufacturing facility 2. Addition of new features in compression chiller which would bring them at par with other Asian counterparts. 3. Technological improvement resulting in higher efficiency for the compressor. 4. Utilize Economies of scale to reduce Average Cost. 5. Increased substitution of labor by capital to utilize lower marginal cost of capital versus higher marginal cost of labor. Sales and Marketing plan1. Brand Diversification - Collaboration with local European brands to improve Brand perception. 2. Market Expansion Leverage sales and distribution channels of other European arms of Clayton industries to explore newer markets. 3. Market Penetration - Increased spending in Advertising to improve customer awareness about the new features and reduced carbon foot-print of the product. Financial Analysis and Forecasting Liquidity Ratio Debt-to-Equity (D/E) ratio As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that there has been a huge erosion in shareholders equity. This can be mainly attributed to poor financial performance of the company during recession which has resulted in huge losses. This erosion in the equity in the period of time has been compensated by increase in long-term debts and current liabilities of the company. The D/E ratio for the year 2004 was 1.16 which was comparable to the industry average of 1.17. The current D/E ratio is -4.89 since the equity has turned negative. This is an alarming situation for the company. By implementing Alternative 1, initially the D/E ratio will be adversely affected

but in the long run the profitability of the company will improve resulting in improved D/E ratio. This situation would result in high risk aversion of banks to finance the expansionary plans of the company. Raising money from shareholders Year | Clayton SpA 2004 | 1.16 | 1.16 | 2005 | 1.55 | 1.33 | 2006 | 2.42 | 1.58 | 2007 | 5.14 | 1.90 | 2008 | 1H09 | | 2.12 | | 1.89 | | Other Europe |

Profitability Ratio Return on Equity (Sales/Total Shareholder Equity) - As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that the return of equity has gradually withered to negative values. This is a grave matter of concern for the company as the company will face difficulties in raising debt and also in raising money through shareholder equity. By implementing Alternative 1, we expect to reap high profits by the second year of operations onwards which will gradually improve the retained earnings of the company. These will in-turn improves the Return on Equity. PROS and CONS Analysis PROs 1. Implementation of the strategy suggested by the Italian management who thoroughly understand the industry constraints. 2. The size of the compression chiller industry 20 billion dollars. The compression chillers comprise of 85% of the total market. 3. New methods of the new leadership can be put to test in this crisis. 4. Fits Briggs belief of opportunity in crisis 5. Peter Arnell has been handpicked by Buis, which would ensure greater cooperation by the top management. CONs

1. Investment of $5 million would be difficult considering the condition of the balance sheet (Clayton lost $24.2 million in the last six months) 2. The improvement initiatives might not result in substantial cost advantage for the company. 3. The initiatives taken might not result in immediate cash flow for the company. 4. Considering a condition of oligopoly in the chiller manufacturers, the company might find it very difficult to catapult in the top 4 players. 5. Briggs is unlikely to be supportive Alternative II Changing the product line by shifting from compressor chillers to absorption chillers. Key Steps involved Manufacturing Steps 1. Changing the plant setup to manufacture absorption chillers. 2. Transfer of technology from Spain to Italy which would boost the overall capability of Clayton Industries. 3. Lower involvement of labour would ensure substitution of labour by capital as per the isocost line. 4. Company would reduce it carbon foot prints by manufacturing these chillers, and gain on the carbon credits due to such chillers. 5. The company would reduce its overall cost due to lower manufacturing expenses, and also hedge against adverse commodity cycles. Sales and Marketing initiatives 1. Brand Diversification The Company can get into product distribution pacts with various other companies in the same niche market. 2. Market Expansion - The sales channel can improve by deriving synergies between the associated companies. 3. Market Penetration - No new marketing expenditure would be required as this product would be a part of the successful range of product line, manufactured in Spain.

Financial Analysis and Forecasting Liquidity Ratio EBIDTA: As per the balance sheet of Clayton SpA for the period 2004-2009 we observe that, there had been a huge decline in the Overall EBIDTA and the EBDITA margins.The overall EBIDTA margins of the company have shrunk from a healthy 20 % to a negative figure. Whereas the Spanish business of absorption chillers maintaining an EBIDTA of around 10 % even during the recessionary phase. Severe oligopoly ensures that the company would face continued pressures on both topline and bottomline. This makes the opportunity cost of diversifying into absorption chillers, adversely lucrative. Current Ratio (Current Asset/Current Liability): The ratio is a good indicator of the liquidity concerns of the company. Higher values of the current ratios are favorable for the organization. We find a continuous decline in the current ratio of the company. This can be mainly attributed to the shrinking EBIDTA which is reducing the assets. Whereas the company is forced to increase its debts on account of its poor financial performance in recent years. Whereas we find the current ratio is constant at 1.3 for the Spanish subsidiary of clayton industries. Alternative III Wait for at least six month for strategic options and focus measure to restore profitability PROs 1. Lower risk option, which suits clayton industries. 2. Affordable, appropriate for the time. 3. Offers more time to study options. 4. Arnell and team need the chance to prove themselves. 5. Keeps future options open. CONs 1. Delaying for six months is not cost-free 2. Arnell set his team in motion. 3. Briggs and Buis want turnaround proposal. 4. Lazzaro was fired for his batten down the hatches approach Recommendations:

Short term planning: On considering all these suggestions I would suggest the third option in the short term. Arnell needs to convince Briggs and Buis. As the economy is still struggling which is clear from the draft budget projection of 4.8% contraction in the economy so any strategic commitments to suppliers for expanding its production and thereby sales can have repercussions. Company is already struggling with its inventory which is keep on increasing. It would be good for the company to make necessary adjustments in the operations so that its inventory level can go down. Long term planning: In the long term company can invest in a new plant for absorption chillers. European peoples avoid purchasing compression chillers so it would be good for the company in near future to focus on absorption chillers which is more climate-friendly. As forecasted by the government that economy will take some time to come back on growth path so it would be a good decision for the company to focus on improvement in its operations and rethinking on its product line. Investing in a new absorption chillers plant will require significant cost in layoffs and restructuring with a gradual phased changeover process. But the absorption chillers is not only eco friendly but also it has growing market in Europe. Which will increase companys chances to increase its market share across the region.