Bayern Brauerei

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Bayern Brauerei
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Bayern Brauerei

• (Group D) What accounts for Bayern Brauereis
  rapid growth in recent years? Specifically, what
  choices account for this success? What does the
  financial forecast tell us? The
  sources-and-uses-of-funds statement? The
  financial ratios?

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What does the breakeven chart tell us?
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• Operating Leverage
• The breakeven point is 543,607HL
• 1992 volume is 667,000HL
• Above the breakeven point small increases in unit
  volume lead to large increases in operating
  profits
• But. Small decreases in unit sales decreases
  operating profits significantly.
• Current unit volume provides some safety margin.
  But not much.
• May explain the thirst for growth.
• Only measures the cost/revenue breakeven for the
  current cost structure.

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• Sensitivity Analysis

• Breakeven is more influenced by price than other
  variables

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Financial Forecasts
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• The Forecast
• Bayern will need large amounts of short term debt
  to fund expansion if the proposal above is
  accurate.

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Financial Forecasts

• Sources and Uses of Funds

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• Sources
• Income
• Rapid Depreciation
• In 1993-1994 short term debt is the major source
  of cash used to finance the expansion
• Uses
• Increases in working capital (inv. And accts
  rec.)
• Dividend payments
• Debt Payments
• 1993 and 1994 major increase in capital
  expenditures

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• Financial Ratios
• Profitability
• What caused the decrease in profitability from
  1989 to 1992?
• What causes the more optimistic forecasts for
  1993 and 1997? Are they warranted?
• If profitability does not improve how will that
  affect borrowing needs?
• Leverage
• Debt ratios raise dramatically over the two
  forecasted years what provision is made for
  repayments?
• How does the raise in profitability above impact
  coverage? Is it reasonable?

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• Asset Utilization
• Overall asset turnover has improved as sales
  increased more rapidly than assets form 1989-1992
• This masks the large build-up in current assets
• Virtually all due to eastern expansion
• While the build-up was due in part to increased
  sales it was also the result of a dramatic
  change in terms
• Liquidity
• Liquidity improves from 1989-1992
• Declines during the forecasted period
• Overall
• ROE has fallen from 1988 to 1992
• Expected to rise during 1993 and 1994
• Performance is due entirely to expansion and
  aggressive predictions

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• (Group C) What is Bayerns credit policy toward
  its distributors in the eastern Länder? Why is
  it different from the policy toward its other
  distributors? Is the companys credit policy
  appropriate? Is it profitable? If not, how
  would you change it? If so, what arguments would
  you offer to the board of directors in its
  defense?

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Bayerns Distributors Compared to the Industry

• Bayern is using its own borrowing power to
  finance the distributors and through them its
  retailers.
• Bayern borrows at 11 relending the funds through
  receivables to distributors.
• Distributors relends to retailers again through
  receivables.
• Leiter expresses optimism that the banking
  business is profitable.

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• Exhibit 6
• Profit Margins for four of the distributors is
  materially lower than the industry.
• Competition? Poor cost control?
• Distributors are aided by trade payables and
  relatively low inventory levels.
• Their receivables are higher than normal
  suggesting slow payment on receivables.
• Asset turnover is relatively close to norm
  suggesting that distributors are not building up
  assets.
• Berlin is the strongest while Magdeburg or Gera
  is the weakest
• May warrant more careful credit controls

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• Leiters incentives
• Strong incentives for growth with little
  incentive to manage risk.
• Why do you think the bank is interested in
  talking to Bayern?
• Concerns about eroding credit position?

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How Not To Handle Your Receivables

• Start with a unknown individual who has a minimum
  of capital and a great story about prospects in a
  far corner of the state.
• Offer extended terms so he can finance the
  inventory needed to generate the fantastic
  business he has described.
• When he is past due on payments rationalize tha
  this is tempory perhaps the result of seasonality.

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• Let the accounts sales person verify that the
  inventory is in fact in place.
• As you look at the financial statements, be
  sympathetic that his is a new operation having
  trouble getting a handle on operating results.
• When you start to realize your customer is in
  trouble do not take your losses early. Stick
  with him, you ought to be able to double the
  amount you have to write off
• Source Inc. Magazine May 1989

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Profitability of Eastern Expansion
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• Are Leiters estimates accurate? If so the
  returns appear large.
• What about the cost of building up inventories
• What about the fixed asset investment necessary
  to support growth?
• Exhibit TN3 shows that returns net of capital
  expenditures is reduced to the 20 range.
• Two other concerns
• Potential bad debts no bad debts estimated in
  1993 and 1994.
• Cost of funds
• Is this the same company that borrowed at 11 in
  the past?
• Is 11 the real cost of funds????
• What about equity

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• What should Bayern do?
• Stop capital expansion?
• Would reduce financing needs and clean up the
  balance sheet.
• Tighten credit policy toward the eastern
  distributors?
• Small reductions in DSO provide material
  reductions in borrowing needs.
• Improve profitability?
• Cut dividends?

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Sensitivity Analysis

• Credit Losses

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• Another Example Three Scenarios
• A Credit extension is cut back in the east and
  the annual rate of sales growth in the east is 2
  annually.
• B The plant is not expanded and the companys
  sales growth in the east and west is only 2.
  Days sales outstanding in both the east and west
  is 41 days.
• C Dividend payments as a percent of net income
  are reduced to 25.

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• (Group B) Why does this profitable firm need
  increasing amounts of bank debt? Is the
  expansion as profitable as Max Leiter reports?
  What is missing in his calculations? Can you
  improve on his measures? Finally, how would you
  conclude was the companys financial health?

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• (Each Group) As a member of the board of
  directors, how would you vote on
• The proposed raise for Max Leiter?
• The quarterly dividend declaration of DM 650,000?
  
• Adoption of the financial plan for 1993?
• For each vote be sure to detail the defense of
  your position along with any concerns or
  assumptions utilized.

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The proposed raise for Max Leiter?

• Paid DM122,860 in 1992
• Proposed pay of about DM183,000 in 1993
• Is the pay warranted?
• Leiter has responded to economic incentives
• Created a potentially profitable growth option
• But are the incentives appropriate
• What about the risk generated buy Leiters
  activities
• Could pay be structured differently?

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The quarterly dividend declaration of DM 650,000?

• Currently Bayern pays out 75 of earnings
• Sustainable growth for 1993 at current retention
  rate is approximately 2.0.
• If retention rate is increased to 75 sustainable
  growth increases to 5.5
• Still below the estimated 10 growth in sales
• Is this feasible given the current clientele for
  Bayerns Stock?

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Adoption of the financial plan for 1993?

• Plan calls for major capital expenditures in 1993
  and 1994.
• Should they?

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• (Group A) What is Bayerns sustainable growth in
  1990-1994? Use the sustainable growth formula to
  detail the components of sustainable growth and
  compare to actual growth (include a table
  exhibiting these numbers). What growth problems
  is the company having (ie. Growing too fast or
  too slow?). What has the company done to cope
  with growth problems? What has been the impact
  of the companys financial policies on
  sustainable growth?

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• Growing too fast
• Handled with increased debt and an improvement in
  Asset Turnover
• Asset Turnover improvements mask potential risks
  of the expansion.