Pacific Brand - Company Overview - Case Study Example

Pacific Brand Institution: Date: Pacific Brand Executive Summary Purpose This particular case study is aimed at providing an insight as well as outlining the present position on Pacific Brand Limited (PBG). This study is bent on analyzing the corporate governance structure of the company and assessing where the company’s power lies as well as the potential for conflicts of interest in the company. This overview and insight of the company will be established through a detailed analysis of the company’s corporate governance, risk and return, its earnings and recent cash flow as well as the company’s dividends. Company Overview Pacific Brands Company is a leading importer as well as a promoter of quite a number of Australian iconic brands. The company is among the listed companies in the country. It is relatively quite a large company given its number of employees which approximates to 5,000 employees globally with more than 200 sites in the country which operate through 5 major operating groups. Close to 85% of the company’s products are sourced from offshore whereas the remaining 15% is manufactured locally. The company’s total sales for the financial year of 2010 summed up to approximately $1.8 Billion. The company has divided its operations under three segments: Footwear and Outerwear, Underwear and lastly Workwear and Homewears. The first group of underwear mainly focuses on marketing, distribution, importation, manufacturing as well as wholesaling and retailing intimate apparels, socks and also hosiery wear. The Workwear group also does the same duties, but it focuses on image wear and other wears related to work environment. Lastly, the home wears and foot wear segment mainly also provide the same services in relation to linen products, pillows and carpets as well as both men and women footwear. Some of the brands of the company that are popular to the customers include Dunlop, KingGee, Everlast, Hush Puppies among other renowned brands. The company derives its roots way back in 1893 when it started dealing with manufacture of Dunlop bicycle tyres. Presently, the company is not only the leading manager of major brands in Australia, but also in New Zealand where the company markets most of the popular brands such as Berlei, Bonds, Mooks, Mossimo, Sheridan, Slazenger and Sleepmaker. The company is committed to participating in extensive range of product categories to add to its strong and diversified customer network. This highlights its strong position as the leading marketer of essential commodities to the Australian marketplace. Issues and Findings of the Company In 2012’s financial year, the company generated sales amounting to over $ 1.3 billion. The company sells over 200 million units annually and leverages the benefits of large scale production to further increase its effectiveness as well as develop innovation throughout the organization. The company received financial assistance from the government of Australia in the year 2007 in order to continue providing manufacturing job opportunities to its citizens. Later in that year, the company announced the sacking of close to 1850 workers; this was after granting unprecedented salary increments to executives of the company who had gone ahead to develop a major plan to transfer the manufacturing operations from the country to China. The salary package of the chief executive officer shot up from $ 685000 to $ 1.8 million. This generated a lot of concerns and controversies from the public. Most of the information relating to the company was obtained from the company’s website and as a result not all the information required was obtained and therefore the study assumed that information provided in the website such as the financial statement reports as well as matters relating to the cash flows were projections of the actual figures. For past years, it was assumed that the cumulative figures only varied slightly and therefore to obtain an overall overview of the figures, the study rounded off some of the data. FINDINGS Corporate Governance Pacific Brand is an Australian company that is listed in the stock exchange. The company is a leading marketer of popular brands and is not only relied upon in Australia but also New Zealand. The fact that it is a market leader with many small firms relying on it for marketing purposes makes it to strictly adhere to the corporate governance frameworks. The directors of Pacific Brands as well as the management are strongly committed to conducting as well as running the company in an ethical manner as per the required standards of corporate governance. The company encourages creation of value to the shareholders and other related stakeholders of the company; this is realized through reasonable risk taking and provision of accountability and control systems which are in line with the inherent risks (Hilb, 2005). The company’s corporate governance policies strongly comply with all the required details as well as comply with the Australian Securities Exchange procedures and recommendations. Duties of the Board The board of Pacific Brand focuses on investing in not only investing in different brands but also people and maximizing both operational as well as financial returns and generating value for the shareholders. In line with this objective, the board of the company is solely charged with the duty of ensuring that the company is properly managed in order to safeguard the interests of the shareholders, the company itself, the directors, employees and also the customers. The board undertakes its responsibilities in accordance with the provisions of the board’s charter which provides guidelines to the tasks of the board. It is the duty of the board to develop policies and guidelines of the business which affect the company affairs for the best interest of the shareholders and other stakeholders. The major duties of the board include the following; Appointment as well as review of the overall performance of the chief executive officer Approval of the strategic plan of the company Approval of annual budgets Detailed evaluation of the company’s performance in relation to the strategies and budgets of the company Determination of the capital structure of the company Overseeing of a risk management framework as well as a compliance framework and monitoring its effectiveness Overseeing and maintaining cordial relations with the company shareholders Approval of the company’s accounting policies as well as annual financial statements The board of the company delegates management responsibilities to the company’s senior management which is under the leadership of the company’s chief executive officer. He is required by the board to deliver and oversee the strategic direction as well as the operational goals of the company are fulfilled. A major duty of the board is also to monitor the performance of the company’s senior management and also evaluate the performance of the senior management annually. This is supposed to be in line with the required standards (Kim, 2007). Chief Executive Officer The chief executive officer of the company, Mr. John Pollaers joined Pacific Brands in September 2012 as the company’s head. Before this, he had been the chief executive officer of Foster’s Group limited from May 2011. In this company, John successfully managed to lead a turnaround of Foster’s beer business such that he was able to deliver strong returns for the shareholders of the company during tough economic period. His strategy had been centered on empowering the company’s executive team, boosting the self-confidence of the employees of the company as well as ensuring that the policies of the company emphasized on cost leadership. Upon demerging and also restructuring the entire company’s processes, the company had been able to stop 8 years of decline and begun operating profitably. Prior to this position, John had also had quite a remarkable career in consumer products which included a senior management role at Diageo plc. In this company, he acted as the president of Asia Pacific and also the managing director of Australasia. John has also vast experience in many executive committees such as the Diageo Group Executive Committee. Presently, he not only serves as the chief executive officer of Pacific Brand but also he is a director of the National Breast Cancer Foundation where he chairs its Audit Committee. In terms of remuneration, the company uses a fixed remuneration policy which includes both salary and other benefits. These are usually determined in the company’s annual general meeting. The company as a matter of routine benchmarks the proposed salaries of the senior management in relation to the remuneration in the market. It takes into account guidance from independent remuneration consultation firm which ensures that the company appreciates the need for the company to not only attract but also retain appropriate talent in its employee workforce in order to remain as competitive as possible in the market. Fixed Salary Super Annuation Benefits Short term Incentives Other Total Chief Executive Officer 2012 2011 1,234,470 1,141,479 240,722 222,741 0 910,000 32,083 35,000 1,507,275 2,309,220 Chief Financial and Operating Officer 2012 2011 718,958 672,671 25,000 21,385 0 505,845 54,162 55,093 798,120 1,254,994 Group General Manager, Underwear 2012 2011 758,269 122,333 40,828 11,010 0 450,004 963 0 800,060 583,347 Group General Manager, Homewears 2012 2011 497,040 393,493 25000 25000 0 183,993 77,959 46,099 599,999 654,585 Group General Manager, Workwear 2012 2011 651,879 601,174 25,000 29,319 0 344,736 27,641 27,096 704,520 1,002,325 Total 2012 2011 3,860,616 2,937,150 356,550 309,455 0 2,394,578 192,808 163,288 4,409,974 5,804,471 In order to ensure that the company attracts and also retains competent personnel, the company has developed a strategy for remuneration specifically for the senior management as shown below; Appointment and composition of the Board The board comprises mainly of independent non-executive directors. This implies that majority of the directors of the company should not in any way have any form of connection to the company as this could greatly hinder their judgment when it came to managing the affairs of the company. Also to add on this particular requirement relating to director’s independence, the company’s policy requires that the office of the chair be occupied by not only an independent but also a non-executive director. The board considers a director to be an independent personality and specifically he or she should not be part of the company’s management team and should have no form of material relationship with the company which could possibly interfere with his ability to be able to act for the best interest of the company. It is the role of the board to be able to determine and assess the materiality of any form of relationship as per the company’s guidelines. It is important to note that as per the director’s materiality guide, the following interests are considered to be material: 5% holding or more of the shares of the company An association with the company which accounts for 5% or more of the company’s revenues or expenses The board is made of 6 directors, 5 of which are non-executive and the other one being the chief executive officer who is the only executive member in the board. The board of the company upholds quite different variety of skills as well as experience and knowledge background of its directors which are very essential requirements in order to be able to effectively manage the affairs of the company. With the help of a nomination committee, the board strives to ensure that it has an optimal membership so as to be able to maximize the benefits but also on the other hand minimize on the management costs. The Nomination Committee assesses both the appropriateness of skills as well as job experience in order to ensure that only competent personnel are appointed in the board of the company. Nominations for appointment are usually approved by the board as a whole. In order to identify a potential candidate, the board seeks external assistance such as search organizations which recommend to the company on appropriate personnel. The new directors of the company are provided with appointment letters which outline their terms of employment which consists of their specific powers, their rights as well as their obligations. Before commencing their duties, the directors are taken through a rigorous induction program after which they meet with the executives of the company as well as independent meetings with external auditors who provide them with the relevant corporate governance materials as well as policies and discussions with the chairman of the company. List of Directors Directors Position Start Date Mr. Peter Hallam Bush Non-Executive Chairman 24th August 2010 Dr. Nora Lia Scheinkestel Non-Executive Director 10th June 2009 Mr. Stephen Goddard Non-Executive Director 01st May 2013 Mr. James King Non-Executive Director 04th September 2009 Mr. Jonathan Peter Ling Non-Executive Director 01st May 2013 Ms. Arlene Tansey Non-Executive Director 25th March 2010 Mr. John Pollaers Director 3rd September 2012 Management Name Position John Pollaers Chief Executive Officer David Bortolussi Chief Financial and Operating Officer John Grover Company Secretary Anthony Heraghty Group General Manager, Homewears, Footwear and Outwear Colette Garnsey Group General Manager, Underwear Holly Kramer Group General Manager, Workwear Substantial Shareholders Holding Name -- (6.06%) AXA Group -- (8.19%) Integrity Investment Management -- (7.05%) Allan Gray Australia Pty Ltd -- (8.86%) Franklin Resources, Inc. and its affiliates --8.38%) Lazard Asset Management Pacific Co -- (7.16%) Dimensional Fund Advisors LP Bondholders Pacific Brand Company does not have any particular publicly traded debt and the greater portion of the company’s debts which includes both current as well as non-current debt takes the form of unsecured bank loans over the past decade. The company has been able to acquire long term bank loans from major financial institution in order to support its investment as well as expansion program. The company’s debts have also been in the form of lease as well as hire purchase liabilities. Most notably is the fact that the particular liabilities which carry considerable rates of interest are mostly related to specified projects such as financing of freight carriers as well as heavy machinery and motor vehicle equipment which are secured through importation form overseas markets. Financial Market Considerations Pacific Brand Company has been able to operate profitably over the years and the company shares are traded in the stock market. The following table outlines the company’s financial summary; Year to Jun NPAT EPS EPS chg (%) PER DPS YIELD (%) FRANKING (%) 2014 F 78.1 8.5 2.4 8.5 5.5 7.6 100.0 2013 F 76.3 8.3 5.2 8.7 5.0 6.9 100.0 2012 A 72.5 7.9 -29.1 7.9 4.5 7.2 100.0 Market Comparison Earnings P/E Ratio P/B Ratio P/E Growth P/S Ratio PBG 1.11 8.73 0.96 2.43 0.50 Market 0.84 14.8 1.26 1.90 1.75 Sector 1.03 14.2 2.23 2.17 0.78 Societal Constraints Pacific Brand Company is committed to attaining remarkable standards in ethical, responsible as well as sustainable conduct of the business of the company. The company’s corporate social responsibility action plan seeks to cover all aspects of individual businesses and the community at large as well as encouraging the related parties to be able to take part in helping to attain the vision of the company’s corporate social responsibility which is mainly achieving a reduction in the company’s impact on the surrounding environment as well as supporting the local communities within which it operates its business. The company’s program mainly focuses on the people, the environment, the community and the marketplace of the company (Hunnicutt, 2009). Pacific Brand Company not only focuses on making profit and safeguarding the interests of the shareholders but also the company seeks to build and maintain a positive and admirable image around its environment and customers. To achieve this, the company has undertaken numerous responsibilities and tasks that have proven to be quite beneficial to the surrounding community; this has helped to ensure that the company continues to uphold a good image which makes it quite an admirable company. The company ensures that it looks after the local community as well as both the consumers and employees lives in order to develop much deeper connections which help to build them and to also help them achieve their personal goals. The company through its investment programs aims at improving both the social as well as the economic welfare of the community where it operates. Through this approach, the company has been able to adequately develop innovative programs by partnering with the community in order to enhance development. An example to this is discussed below. Flood Relief: With constant flood attacks on Queensland which have resulted to quite devastating effects, the company has moved forward to provide support through relief aid to the affected communities. The company has been able to provide quite substantial supplies of materials as well as manpower. In line with this particular aid, the company also donates close to 200,000 items consisting of mainly basic necessities such as clothes for children, underwear, Workwear, boxers, socks, towels, bedding and also shoes. Pacific Brand Company presently works closely with relief organizations such as Red Cross and also Salvation Army. Partners of the company such as Deluxe have also helped in the company’s social responsibility activities which helped the affected communities by providing transport facilities to the affected areas. This ensured that there was easy and fast movement of relief products to the affected areas at the time of need. Black Saturday Bushfires: In the year 2009, the company’s outstanding response to the devastating bushfires was a great way for the company to underline its commitment to protecting as well as safeguarding the interests of not only its members but also the interests of the community at large. The company responded to the incident by immediately formulating an emergency response team which helped the affected victims after the tragedy. The company collected jointly $500,000 worth of commodities and donated to the affected victims. The company joined efforts with Salvation Army which worked hand in hand with the company’s freight suppliers. The company also worked hand in hand with other companies to see to it that food as well as other basic commodities was supplied to the victims. These acts helped to improve the company’s image such that over time it has been able to build a proper and admirable image throughout, market and much of this is attributed to the company’s social responsibility. Risk and Return Regression Statistics Pacific Brand Company in an attempt to ensure that it analyzes as well as operates within the limits of its finances, the company uses a regression analysis to outline each component of the company’s operations. The following statistics were established; Multiple R 0.524426524 R Square 0.275023179 Adjusted R Square 0.262735436 Standard Error 0.202784194 Observations 61 ANOVA df ss MS F Significance F Regression 1 0.920376225 0.920376 22.38191222 1.4369E-05 Residual 59 2.42616434 0.041121 Total 60 3.346540566 Beta (Systematic) Risk Comparison: The company’s Cost of Capital: The company’s cost of capital refers to the minimum rate of return which the company must offer its shareholders for their investment to compensate for time as well as risk that is associated with their investment (Connor, 2010). The cost of capital is determined by the company through the following procedure. i. Realized cost of equity – CAPM The company’s cost of capital (rf) time for the company is 10 year government bond rate at 5.75%3 ii. Is a specified measure which determines the sensitivity of stock’s returns to market returns; it is also referred to as a systematic risk as well as market risk. This particular figure shows the volatility of the company’s stock as well as liquidity of the throughout the company’s financial year. This figure is usually derived from a regression 5 consecutive years share prices of the company against all ordinaries regression. Market risk may include interest rate, commodity as well as currency exchange rates which greatly exposed PBG to more risk with a beta figure of 2.5. iii. refers to market risk premium that is usually measures the least amount of money by which expected to return on a specified risky asset which actually does exceed the known return on a risk-free asset; this is usually so in order to encourage as well as induce an potential investor to the company to be able to hold the much riskier asset rather than the risk-free asset. With a specified condition in the stock market of a current asset, the Australian market risk premium is estimated at approximately 6.3%4 and this figure is usually projected to rise to 7%5, this is mainly because the market becomes much more riskier and therefore the designated government bond rate of 5.75%, the expected market rate is therefore 11.75%-12.75%. The company’s cost of equity also referred to as re=18.35% this therefore refers to the return which the company expects to get from the stocks. Cost of Debt: Period Type 2010 2011 Interim Long Term $ 455,471,000 $ 383.133,000 Ending 31 Dec Short Term $ 351,000 $ 107,000 Interest Exp. $ 18,478,000 $ 13,644,000 Final Long Term $ 461,900,000 $ 382,503,000 Ending 30 Jan Short Term $ 760,000 $ 177,000 Interest Expense $ 48,289,000 $ 35,632,000 Short Term 468,500.00 Long Term 422,201,500.00 Total 422,670,000.00 Interest Exp. 35,632,000.00 Cost of Debt 8.44% Kd (1-t) 5.91% Weighted Average Cost of Capital: E + D = Total equity + (Short-term debt + Long-term debt) = 1,184,899,000+ (468,500 + 422,201,500) = 1,184,899,000 + 422,670,000 = 1,607,579,000 Ke = 21.50% Kd (1-t) = 5.91% = 17.40% Earnings and Cash flow: Competitive Strengths Pacific Brand Company is the leading marketer of basic commodities as well as household accessories such as pillows, clothes and many other types of cloth wears. The company has been in the industry for quite a long period of time and hence has been able to earn customer loyalty. This has seen to it that the company maintains its leading role in the market such that it not only concentrates in serving the local market, but also the company has been able to extend its services to other countries such as New Zealand where it also competes quite favorably. The company is divided into three large and distinct departments each dealing with specific wears; this has helped to ensure that the company remains large in size such that it out-competes other smaller firms in the market through taking advantage of the benefits as well as the economies of scale which not only include increased quantity discounts, but also the fact that the company is able to offer its products at relatively reduced prices while still maintaining the same amount of profit margin as a result of low cost of production due to economies of scale associated with large scale production. Interest Payments The company’s ability to cover its interest expenses is usually measured through comparison of its cash flow to the interest expense. It is important to note that a higher ratio indicates that the company has sufficient as well as enough cash from its operating activities to pay its interest payments. The table below outlines the case scenario; 2007 2008 2009 2010 2011 PBG 3.58 3.57 2.60 3.63 3.05 ORL 33.23 44.05 46.84 37.82 21.61 Average 7.46 6.78 13.17 14.21 10.61 From the table, it is noted that the company’s interest coverage ratio remains quite steady with a low ratio despite the fact that the company has been able to maintain a positive trend. In comparison to the industry as a whole, the company has a relatively lower interest payment than the average industry whereas ORL has significantly been able to outperform the average industry with high interest payment ratio, On a general note, the table clearly shows that Pacific Brand Company has quite a low operating cash flow and this feature might be a major concern to the management of the company such that they will be required to construct a better system designed for the future. Financing Sources: Cost of Equity The report which was calculated to determine the company’s cost of equity established the figure at 21.50%. This was majorly attributed to the fact that the company had been considered as a very risky company mainly because of the beta figure of 2 that clearly indicated that it had quite significant implication to the fluctuations present in the market. Also part of the high figure was attributed to the fact that the information environment was not quite rich enough. This assumption may not specifically and comprehensively be the reason to the inflated figure; this is so because the company only holds quite a small percentage of debt when compared to its amount of equity. Notably, the market risk is greatly influenced and determined by the company mostly the currency risks. Investors who might be seeking to invest in a higher risky company might be motivated to be able to invest in the company (Barrow, 2005). Working Capital Pacific Brand has increased its working capital by $164,125,490 which translates to a ratio of 0.64%. This has seen to it that the ratio of the company’s working capital to sales is 16.02%. It is worth noting that the bearish of the Australian dollar will in the near future move up the sales and this implies that the effect will be felt on the inventory which will tend to increase. In the long run, the ratio of working capital to sales of the company shall decline to approximately 15% in a years’ time. Long-term Assets Pacific Brand Company uses operational lease to be able to finance its leases which has seen to it that that the long-term assets of the company have been able to increase significantly by a margin of 0.9% which is equivalent to $253,647,110. In line with the strategic plans of the company, the firm seeks to transform most of its operations by selling of unprofitable business assets. As per the previous financial year, the company had been able to dispose of part of its business and it was noted that this action greatly contribution to a reduction in the long-term assets of the company. Since the management of the company is strongly focused on moving from acquiring of new businesses to maximizing on the existing businesses, it has been noted that the benefits to the company may be earned from past acquisitions. Dividend Policy Pacific Brand Company determines the amount of dividends to be paid to the shareholders through measuring of the company’s cash flow. This figure is measured against the total amount of cash dividends that is to be paid. The following table provides the amount of dividends that was paid by the company over the last five years. 2007 2008 2009 2010 2011 PBG 3.09 1.94 0.09 167.88 2.39 ORL 6.33 1,20 0.63 0.75 1.19 Average 0.58 1.31 2.71 1.23 0.88 The company has also been able to pay dividends to its shareholders considerable amounts of dividends over the past ten years. The company’s latest price per share stands at $0.725 Ex-Date Amount Franked Franking Credit Books Close Date Payable 6/9/2004 0.035 100% 0.015 10/9/2004 30/9/2004 28/2/2005 0.075 100% 0.032 4/3/2005 1/4/2005 26/8/2005 0.075 100% 0.032 1/9/2005 3/10/2005 27/2/2006 0.075 100% 0.032 3/3/2006 3/4/2006 28/8/2006 0.075 100% 0.032 1/9/2006 2/10/2006 26/2/2007 0.08 100% 0.034 2/3/2007 2/4/2007 20/3/2007 0.235 100% 0.101 26/3/2007 10/4/2007 24/8/2007 0.085 100% 0.036 30/8/2007 1/10/2007 25/2/2008 0.085 100% 0.036 29/2/2008 1/4/2008 25/8/2008 0.085 100% 0.036 29/8/2008 1/10/2008 1/3/2011 0.031 100% 0.013 8/3/2011 1/4/2011 29/8/2011 0.031 100% 0.013 5/9/2011 3/10/2011 23/2/2012 0.02 100% 0.009 1/3/2012 2/4/2012 28/8/2012 0.025 100% 0.011 4/9/2012 1/10/2012 22/2/2013 0.025 100% 0.011 1/3/2013 2/4/2013 Discussion Corporate Governance Upon a thorough and detailed scrutiny of the company’s corporate governance structure, it is evident that the systems in place strictly favor proper and utmost leadership practices which are key for the success of any organization. It was worth noting that the fact that nearly all of the board members except for the chief executive officer were non-executive directors. This is very important in ensuring that the directors’ judgment is at all times free and non-partisan such that it does not in any way relate to any kind of material attachment to the company. The corporate governance structure of the company has addressed the aspect of remuneration quite effectively. This is because, the remuneration policy serves the role to ensure that it provides both long term as well as short term incentives to the management and the employees of the company. The remuneration plan has provided for both fixed salary as well as other benefits that are related to the individual effort displayed by a specific employee. It is also worth noting that the company highly upholds social values through it corporate social responsibility such that it has consistently come to the rescue of many victims in need of help. This has ensured that the company maintains proper and healthy relations with the surrounding community. Risk and Return From the data obtained, it can be concluded that the company had the highest figure of beta throughout the industry. A single increase in the market results to doubled increment by the company meaning that the company has a higher level of inherent risk; and since this systematic risk cannot be evaded through omission, the investors in the company demand more returns from the company. This is as a result of the high expected returns from the company. Financing Sources The company greatly relies on both secured as well as unsecured loans to be able to finance its operations. Other than these, the company finances itself through leasing of assets as well as disposal of major past acquisition and thereby focusing on improving as well as maximizing the output of the existing businesses. Dividend Policy The company’s dividend policy is in line with the capital management strategy which the company has applied for the past ten years. This policy has greatly helped to not only strengthen the company’s balance sheet but also it has helped to serve as a motivation and incentive to the shareholders to be able to increase their shares in the company (Baker, 2009). References Baker, H, K, (2009), Dividends and dividend policy, Hoboken, N,J,: John Wiley. Barrow, S, (2005), The Employer Brand Bringing the Best of Brand Management to People at Work, Chichester: John Wiley & Sons. Connor, G, Goldberg, L, R., & Korajczyk, R, A, (2010). Portfolio risk analysis, Princeton: Princeton University Press. Hilb, M, (2005), New corporate governance successful board management tools, Berlin: Springer-Verlag. Hunnicutt, S, (2009), Corporate social responsibility, Detroit, MI: Greenhaven Press. Kim, K, A., & Nofsinger, J, R, (2007), corporate governance (2nd ed.), Upper Saddle River, N,J: Pearson/Prentice Hall. Read More