Benchmarks for Value. Presented by:

Transcription

1 Benchmarks for Value Presented by:

2 JEFF MENGEL Partner, Plante & Moran Plastics Team moran.com About Plante & Moran Plante & Moran is the 12th largest certified public accounting and management consulting firm in the United States Tax and Audit, Operations Improvement, Restructuring & Turnaround, Strategy & Global Services, Commercial Real Estate U.S. offices in Michigan, Ohio, and Illinois; international offices in Shanghai, Monterrey, and Mumbai Combined over 230 plastics clients place their trust in Plante & Moran and PMCF plastics.plantemoran.com

3 JOHN HART (Ryan Shuchman) Managing Director, Plastics & Packaging Group pmcf.com About P&M Corporate Finance (PMCF) Founded in 1995 with over 250 transactions completed Experienced professionals specializing in the M&A needs of plastics and packaging businesses Company Sales, Strategic Acquisitions, & Capital Sourcing Numerous completed plastics and packaging engagements covering a wide array of processing technologies and end products Active participant and attendee of industry events. Publisher of Plastics M&A Quarterly and Packaging Pulse periodic reports Over 20 professionals in Chicago and Detroit offices Extensive international coverage provided seamlessly through PMCF s partner firm Corporate Finance International (CFI) FINRA registered, independent investment bank with affiliation to Plante Moran plastics.pmcf.com

4 Today s Discussion Key Topics Film extrusion market size and metrics Size, productivity, operational performance, organizational design and financial performance Organizational drivers of value: Assessing your business, strategic position, and enterprise value today Planning and creating value: Creating a strategy to drive long term value and meet shareholder goals Agenda Presentation: ~30 minutes Q&A as time allows following the presentation

5 Film Extrusion Market Size and Metrics Range of Data by Quartile 2014/15 Data Lower 25% Median Upper 25% Size Total Sales $ 16,000,000 $ 40,505,061 $ 107,250,000 Total Assets $ 7,977,981 $ 11,591,000 $ 20,105,079 Total FTE Total Square Feet 120, , ,917 Range of Data by Quartile 2014/15 Data Lower 25% Median Upper 25% Productivity Performance Value Add per Employee $ 97,596 $ 106,559 $ 144,587 Value Add per Labor $ $ 1.97 $ 2.25 $ 2.93 Value Add per Loaded Labor $ $ 1.65 $ 1.96 $ 2.10 Value Add per Press Hour $ $ $

6 Film Extrusion Market Size and Metrics Range of Data by Quartile 2014/15 Data Lower 25% Median Upper 25% Organizational Design Complexity - Probable Case - Extrusion , ,080 Complexity Multiplier - Extrusion Sales $ per Level of Probable Complexity $ $ $ 33, Employee Turnover - % 13.1% 29.0% # of Recorded Work Injuries per Year (per 100) Range of Data by Quartile 2014/15 Data Lower 25% Median Upper 25% Operational Metrics Press Utilization (based on 24/7) -Extrusion 25.5% 33.3% 54.8% Customer PPM 528 5,218 7,886 Internal PPM 3,500 22,727 57,127 Delivery % 70.0% 85.0% 95.0% Inventory Turns

7 Film Extrusion Market Size and Metrics Financial Performance: Range of Data by Quartile 2014/15 Data Lower 25% Median Upper 25% Earnings Performance Earnings before Interest, Taxes, Depreciation, Amortization (0.5%) 8.1% 16.4% RON CE (11.0%) 5.5% 20.4% Return on Assets (9.1%) 4.1% 13.0% Percentage of sales with gross margin less than 10% 5.0% 9.0% 15.0% Growth Trends Two Year Sales Growth 4.1% 9.3% 11.2% Two Year EBIT Growth (59.7%) 14.4% 41.7% Expected 3 Year Growth 16-35% 16-35% 16-35% Balance Sheet Health Altman Z Current Ratio Debt to Equity (6.6)

8 Understanding Drivers of Value Value is what a third party is willing to pay for your company, which can be summarized by these components: Value = Cash Flow X Stability X Growth Key Internal Value Drivers (Strategy Influence) EBITDA Sustained Profitability Recent Growth Trends Capital Expenditures Management Team Pipeline & Opportunities < --- Competitive Difference / Uniqueness --- > Additional factors also play an important role in determining value: Size Influence Market Influence End Market Influence Size is also a component of value: Larger companies may feature lower risk and can obtain higher financial leverage The economy and M&A market greatly influence value: Cost and availability of financing Higher earnings levels increase buyer pool and competition for deals Primary end market served impacts value: End market dynamics directly impact perceived risk and growth outlook

9 Cash Flow Benchmarks Earnings before interest, taxes, depreciation, and amortization (EBITDA) Interest reflects the amount of capital NOT invested by the owner Taxes reflect the locale Depreciation and amortization are non-cash expenses Capital expenditures reflect the cash flow that is NOT expensed Range of Data by Quartile Mean Low Median Upper As a % of sales EBITDA 11.2% -0.5% 8.1% 16.4% Capital Expenditures 3.2% 1.9% 3.2% 4.6% Cash Flow 8.0% -2.4% 4.9% 11.8% Cash Flow Factor Source: Plante Moran NAPIS

10 Stability and Growth Benchmarks Stability is best defined by the ability to maintain your profitability year over year Gross margin trends and earnings growth Customer base and product portfolio Balance sheet stability Management team strength, runway, plus the bench External parties will place significant emphasis on the depth and capabilities of the management team Range of Data by Quartile Mean Lower Median Upper Altman Z: Composite financial measure to predict ability to meet obligations Number of key executives in your company that have a broad knowledge of the company and are in a leadership position Average number of years in the industry Average number of years at the company Two year EBIT Growth 9.9% -59.7% 14.4% 41.7% Source: Plante Moran NAPIS

11 Difference / Uniqueness Benchmarks Differentiation and uniqueness supports stability, and also drives growth, making this a critical variable in understanding your current and future value Step 1 is determining where you are today Step 2 is creating a strategy to improve, driving shareholder value creation Value Proposition self-rating (1-10) Unique Manufacturing Process 1 No differentiated manufacturing processes 10 Proprietary processes that is unlikely to be duplicated Product Development/Design Skills 1 Build to print supplier who have little influence on customer product 10 Best-in-class product development/design capability that is superior to competitors Competitive Landscape 1 More than 25 viable competitors for the Top 80% of business 10 Less than 3 viable competitors for the Top 80% of business Mean Source: Plante Moran NAPIS

12 Your Value Position Today Calculate your organization s value today, benchmark vs. peers, and set the starting point for value creation results from your strategy and execution Value Components: Mean Range of Data by Quartile Low Median Upper Cash Flow x Uniqueness Size (EBITDA) Stability (S) Factor Growth (G) (S*G)+ Value Rating = Cash flow (EBITDA-CapEx) at 5% and 15% thresholds at 2.5x Uniqueness manufacturing process x design capability x competitiveness / 250 at.50 and 1.5 thresholds Size (EBITDA) at $5M and $10M thresholds Stability (Altman Z) at 2.9 and 5.8 thresholds Growth (two-year sales growth) multiplied against stability factor Source: Plante Moran NAPIS

13 Value Calculation - Examples Company Examples and Scenarios Value Rating Company 1 Rating Company 2 Rating Company 3 Rating Sales 30m 50m 100m EBITDA 3m (10%) 11m (22%) 14m (14%) Cap Ex 1m (3.3%) 3m (6%) 5.5m (5.5%) Primary End Markets Diversified Medical CSD/Water Manufacturing Process Skills Design Capability Competitiveness Altman Z Score (Mgt. Team) Two Year Growth 3.0% 10.0% -5.0% Cashflow 6.7% % % 1.00 Uniqueness Size Stability Growth Value Rating Estimated EBITDA Multiple Enterprise Value / Multiple 21m 7.0x 99m 9.0x 91m 6.5x

14 Planning & Creating Value Once you understand the drivers of shareholder value, and current benchmarking results, your organization can hone its approach to value creation Carefully evaluate your company s market position, strategy, and path to higher levels in the value chain Fully understand shareholder investment timelines and expectations Plan and prepare well in advance for any event: 100% or minority sale or shareholder transition Identify Desired Market Position Evaluate and Refine Your Value Proposition Earnings Level & Growth Rate Evaluate Fit to Current & Target Customers Outline Organizational Gaps to be Filled Strategy & Execution End Market & Customer Risk Profile Chart Paths to Preferred Positions With Customers Assess Shareholder Risk Tolerance Valuation Level at Shareholder Exit

15 Strategy Timing and Impact The path to maximizing your organization s value is to prepare as early as possible in areas you can influence, so you are ready when external factors are most positive Assess & Benchmark Performance Develop & Execute Strategy Drive Growth & Share-holder Value Plan For & Complete Exit, Grow via Acquisition, Or Pass Improved EV Onward Strategy Influence to EV (Highest Impact) Timing Influence to EV (Secondary Impact) Define and create your unique company characteristics Expand EBITDA with reasonable capex Illustrate sustained profitability and margins Build outstanding leadership team and bench Grow with new customers, products, or end markets Create commercial function that generates new opportunities If exiting, consider waiting on a transaction if major growth milestones are 1-2 years out Be prepared when the best M&A window arrives no influence over this factor

16 Sale Planning PMCF Successful Case Study Before Strategic Initiatives After Owner in President Role Seeking Retirement Lower Growth Story & Defensible Niche Company Successfully Hired New President Company Completed International Expansion: Lower Costs & Growth Company Marketed With Established, Young Leadership in Place Outlook for Lower Costs and New Growth Via Expansion Key Customer Concentration Poor Market Timing Secured Top Customer Via Multi-Year Contract Completed Strategic Initiatives Concurrent to Market Recovery Lower Risk to Buyer With Regard to Top Customer M&A Market Significantly Improved Driving Value 3 to 4 Year Sale Planning and Execution

17 Strategic Planning Overcoming a Value Gap Current Equity Valuation $26 million Current Financial Summary ($mm) Revenue $50.0 EBITDA $6.0 EBITDA Margin 12.0% EV/EBITDA Multiple 5.0x Enterprise Value $30.0 Less: Net Debt ($4.0) Equity Value $26.0 Valuation Gap of $25 million Valuation Levers Revenue growth of 20% Margin improvement of 300 basis points Multiple expansion of 1.0x Decrease leverage by $1.0mm Desired Equity Valuation $51 million Desired Financial Summary ($mm) Revenue $60.0 EBITDA $9.0 EBITDA Margin 15.0% EV/EBITDA Multiple 6.0x Enterprise Value $54.0 Less: Net Debt ($3.0) Equity Value $51.0 Value is created by improved financial results and decreased risk

18 Where Do I Start? Ask & Assess How does my organization match up today against these benchmarks? (Participate in North American Plastics Industry Study (Free) ) Does my organization have a strategy today? Is it properly aligned with the following tenets? Sustained growth in cash flow Growing and retaining an outstanding team Demonstrating and expanding uniqueness as an organization and industry supplier What is the goal for my shareholders? When do my shareholders (or I) require their investment capital to be returned? How much of my wealth is in the business (diversification)? Does my strategy align with building enterprise value? Call, , or meet with us at FlexPackCon. We frequently assist plastic processors in this complex exercise and would be pleased to serve your organization: Jeff Mengel jeff.mengel@plantemoran. com John Hart john.hart@pmcf.com