Performance and Risks Management of Britvic Company - Essay Example

Britvic PLC Table of Contents I. Introduction amd Company Overview II. Detailed Firm Discussion - Turnover, Industry, Competition III. Financial Trends IV. Corporate, Financial Actions Analysis A. Competitive Extent/Degree B. Geography C. Financing, Implications V. Management of Risks A. Risks Tied to the Exchange Rate B. Country, Political Risks VI. Conclusion, Recommendations References I. Introduction amd Company Overview As the literature on the company reveals, Britvic is essentially in the business of the manufacture and distribution of soft drink products, with its key markets being France, the United Kingdom. and Ireland. It has a prominent stable of soft drink brands, and those include drench, Ballywogan, Fruite, Robinsons, J2O, MiWadi, Tango, and Teisseire. In Ireland and the UK it is under an arrangement with PepsiCo for the production and distribution of a number of the latter’s products, chief among them Mountain Dew Energy, 7Up and Pepsi (The Financial Times Ltd 2015; Google 2015). Its five business segments are France, International, Northern Ireland and Republic of Ireland as one segment, GB Carbs-UK sans Northern Ireland as one segment, and GB Stills-UK sans Northern Ireland. It also manages several other subsidiaries either in an indirect or a direct fashion, and those are Britvic Overseas Limited, Britannia Soft Drinks Limited, Britvic Finance Limited, and Britvic Finance 2 Limited. In France, the segment holdings by way of brands include Pressade, Fruit Shoot, Teisseire, and Moulin de Valdonne (Reuters 2015; MarketWatch 2015). The company makes its home base in Hernel Hampstead, in the United Kingdom, and became a corporation in 2005 (Yahoo! 2015) In the London Stock Exchange, Britvic is listed with the ticker name BVIC. and its latest market capitalization is pegged at $ 1.9 billion (Britvic PLC 2015; Google 2015; London Stock Exchange plc 2015). The past fiscal year had been difficult for Britvic financially, with concerns with regard to problems relating to meeting financial targets, but the actual results for the past year actually saw the company generating profits that exceeded forecasts owing to the improved cost structure of its operations and improvements in the top line revenues over the past year as well (Geller 2014; Geller 2014b). That said, for 2015, the company is seeing a difficult business climate for meeting targets, owing to the intense downward pressure on product prices from aggressive promotion schemes of big British retailers and supermarkets/superstores (Maidment 2015). Elsewhere, the International segment is seeing action in terms of Britvic expanding into select geographies in Asia and North America, in the former represented by the actions of the firm to try and become a dominant soft drinks play in India (Reuters 2014). II. Detailed Firm Discussion - Turnover, Industry, Competition The trade literature lists Britvic as belonging to the sector of Consumer Goods that are not cyclical, in the industry with standard designation of NEC, for Non-Alcoholic Beverages. In this industry it plays alongside a host of tough competitors, including Unilever, Diageo, AG Barr and SABMiller, as well as non-traditional competitors such as Tesco, and a comparison of the market capitalization of Brivic relative to competition in its industry reveals that it is dwarfed somewhat by some very large competitors. Key revenues and profitability data also shows that where Britvic revenues are about US 1.3 billion dollars and profitability is about US 89.7 million dollars, much larger players exceed turnover by several orders of magnitude, and the same goes for profits. The elephants in this space in terms of market capitalization, revenues and profits are Diageo, Unilever, Tesco, J Sainsbury, Coca Cola, and SABMiller. The table below lists Britvic turnover, share prices, and other key valuation and financial statement figures relative to its peers in the NEC industry (Google 2015): Table Source: Google 2015 In terms of geographic reach, the company has presence in three key markets of the UK, France and Ireland, but it also has a much wider footprint in the form of international subsidiaries and partnerships/franchises that it manages through its International Segment, as discussed earlier in this paper (Britvic PLC 2015b). In terms of overall vision, the grand strategy is to become recognized among the earth’s most admired soft drink firms, and this translates to specific target categories and market segments, namely excellence in the UK, the pursuit of worldwide opportunities targeting adults, kids, and families, and rationalizing global operations (Britvic PLC 2015c). In terms of competitive positioning, the firm has dominant positions in the supply of syrups, carbonates and top access to key distribution channels of take home, clubs, and pubs, in the three geographies of Great Britain, France and Ireland (Britvic PLC 2015d). III. Financial Trends The share price is an important financial metric because of its upward trend over the past five years, indicating good performance and favorable investor views of Britvic shares. The plot below shows a steep ascent in Britvic share prices from lows in 2012 to five-year highs by 2015 of about US 765 dollars a share (Google 2015): Plot source: Google 2015 Elsewhere we see very interesting five year trends in dividend growth, at 6.86 percent outpacing the industry rate of just 1.62 percent. Five year revenue growth rate is just 6.96 percent compared to the industry rate of close to 25 percent, but five-year growth rate in earnings per share is close to double the industry rate, at 11.34 percent, indicating very good financial performance for the firm. Five-year averages for EBITD, operating margins, and gross margins top industry five year averages too. Firm financial performance is solid and analyst perceptions are excellent, owing to the good data over the past five years (Reuters 2015c; Dobrow 2015). Looking further into the data, for the past five years, we see revenues and profits trending upwards: In the plot above, we see that revenues have been improving for the past five years, and net income has also trended downwards, going negative in the 2010, and recovering somewhat towards 2014. The same goes for sales. Looking at the assets and liabilities on the other hand, we see that both have been moving in tandem over the past five years, even as assets have increased at a faster rate than liabilities towards 2014: Looking at profitability: We see that gross margins have remained healthy, and both ROA and net profit margins have drastically improved over the last few years. Looking at the short term debt levels, as reflected in the ratios, we see that the company is relatively healthy on that score, with manageable levels of current debt: On the other hand, the efficiency in the use of assets and inventory has been relatively the same over the past five years: Finally, while dividends have been consistent, earnings per share have spiked from negative levels in 2010, indicating a return to health: IV. Corporate, Financial Actions Analysis A. Competitive Extent/Degree As the above discussion indicates, the level of competition is very high in the key markets where the company operates in Europe, and the biggest players in the industry are global players as well (Mattinson 2015; Northern and Shell Media Publications 2015). The trade press also reiterates that tough competition is a key concern for Britvic in terms of being able to achieve financial targets this year and in past years as well (Ficenec 2015). Diversification into new foreign markets via partnerships and franchises and even via direct establishment of subsidiaries can work to ease competitive pressures at home (RTE 2015; StockMarketWire.com 2015). B. Geography The company has global presence even if it is concentrated in its activities in the three core markets of Great Britain, Ireland and France. In these markets it is strong, but weaker presence in other international markets can be a cause for concern moving forward (Britvic PLC 2015; Britvic PLC 2015b). C. Financing, Implications The debt ratios suggest that while short-term loan levels are manageable, the company is overleveraged in the long term, with total debt to equity for instance close to 700 while the industry average is just 60. This suggests a major weakness in terms of having a more difficult time financing new activities with more debt (Reuters 2015c). V. Management of Risks A. Risks Tied to the Exchange Rate Looking at recent developments in the euro and the British currency the sterling, one can see that where Britvic can potentially shine is in being able to properly manage any exchange rate risks tied to its operations. Its base currency is strong and has in fact appreciated against the euro in the recent past, and if the persisting woes of the European Union are any indication, then one can foresee the problems of the euro persisting and Britvic doing well with sticking to its currency and exchange rate strengths. There seems to be nothing by way of extraordinary foreign exchange measures being undertaken by Britvic in the face of the evolving financial and currency crisis in Europe, and in the territories that it dominates, in Great Britain and in Ireland, the risks tied to exchange rates are also minimized by the fact that its home currency is a current safe haven against the euro (Reuters 2015d). A potential cause for concern though is the French currency, and whether or not the woes of the Euro has any impact on the ability of Britvic to manage exchange rate risks in its operations in its major Business Segment of France (EurActive.com 2015; Lynch 2015). Then too, Britvic may have potential risks associated with the exchange rate coming out of its International Operations. The ideal is one where all foreign exchange transactions are properly and centrally managed from the headquarters in the UK. All transactions moreover are to be centrally managed using the sterling as the base currency. In the ideal case too, the company has hedging strategies in place to make sure that any negative foreign exchange effects of the current financial crisis in Europe is counterbalanced by a safe haven currency, which in this case is the sterling. One can make assumptions about the relative health and excellent recent financial performance of Britvic occurring even in the midst of the turmoil in the euro and in the EU economy in general. The fact that Britvic has been able to do well in all of its major segments, including France and the International segments, suggests that Britvic has a good exchange risk management strategy in place and that it is aware of and reactive to the on-going changes in the direction of the exchange rates among the currencies that it uses in its different subsidiaries and business segments. The short of it is that there are real external factors and developments tied to the crisis in the euro and the shift in preference towards more stable currencies like the sterling, but that given that Britvic is headquartered in Britain, and that it has enjoyed a large measure of financial success over the past few years even in the midst of the crisis, that is is also excellently managing its foreign exchange risks. The two things going for Britvic at the moment are that its homebase is Great Britain and that the sterling is appreciating against the euro at that, giving Britvic a natural boost in terms of reducing its exchange rate risks. Two, the fact that its financial health is excellent and that it has been able to turn itself around even when the external financial environment is shaky means that Britvic’s current measures and strategies for mitigating exchange rate risks are effective. On the other hand, there are aspects of the operations of the company that are potentially risk factors for greater exposure to instabilities in the exchange rate. One, as discussed above, is the exposure to exchange rate risks of the France segment. This segment is especially vulnerable to potential risks in the exchange rate especially in light of current problems in France with regard to meeting EU mandates for budget deficits, necessitating the EU to issue a warning to France to get its budget deficit figures in order by 2017 or face some sanctions (Lynch 2015). This definitely translates to some foreign exchange rate risk that may further worsen moving forward. Two, the international operation is vulnerable as well to risks tied to the exchange rate, and the proper mitigation of the exchange rate risks to which the International segment is exposed depends on how well Britvic is able to centrally manage its foreign exchange exposures from its headquarters in the UK. Again the discussion goes back to the premise that since Britvic has done well the past few years in spite of the brewing financial problems in Europe, then it must be equipped to properly manage its foreign exchange rate risks in Britain and in its other segments and subsidiaries around the world (Graham and Bruce 2015; Epstein 2013). B. Country, Political Risks At the same time that the sterling is being considered as a safe haven currency, leading to its appreciation versus the euro as discussed above, there are fresh concerns about brewing political problems in Great Britain that can undermine the sterling in the long term. One can say that in this case, the political risks in Europe and in Great Britain itself can lead to the creation of new foreign exchange risks later on as well. Focusing just on the political risks, reports on potential negative repercussions to the British economy of Labour that leans towards the center-left ascending into office. Then too, policies relating to fiscal spending and taxation are causes of concern in the domestic market of Britvic. These translate to risks that need to be managed of course, but again, beyond the details, one can make some assumptions about the ability of Britvic to manage political risks in Britain. Some of those assumptions relate to the proven ability of Britvic to mitigate political risks and turn itself around from its poor performance in 2010 and earlier. This, even as the turmoil on the political front in Europe and in its key markets in Ireland and France, suggesting an already-existing capacity for Britvics management to address political risks as they arise. On the other hand, one can see too that there are looming political developments that are original and may have unprecedented consequences not just for the British economy but for the whole economy of Europe. Those relate for instance to the political scenario where Great Britain leaves the European Union. In one way or another Britvic is vulnerable in this scenario, because its home base is Great Britain, and its three major markets and business segments are all located in Europe, and are among the biggest country economies in the Union at that. Therefore, one can also make a judgment for the need for Britvic to equip itself with some extraordinary strategies and capabilities to prepare for the consequences of looming political crises in the horizon (Reuters 2015d). Turning to Europe itself and not just on the British political landscape, we see too that the literature is unanimous in saying that new political developments will pose challenges and threats to the political and economic well-being and stability of Europe, among them the gradual decline in the living standards of immigrants and the working class leading to new social and political problems. Among them too are concerns relating to the natural churn of populations in Europe leading to the rise of new political groups and agendas, which in turn lead to new risks of political upheaval and change. All these changes and upheavals translate to political risks that Britvic will have to properly manage in order to continue to succeed (Wagner 2013). VI. Conclusion, Recommendations The analysis of the overall financial health of Britvic and of its competitive positioning and prospects in the soft drinks industry reveal a company that has managed to get its act together and carve a path to financial health and organizational health over the past five years. There are looming political and economic developments on the other hand that threaten to increase political and foreign exchange risks to the point where Britvic will have to plan and strategize around them, in order to maintain its good prospects and to survive the coming storm. As an international company with large operations in key markets in Europe, Britvic is vulnerable to political and economic upheavals from all sides, and so the recommendation is a continuous righting of the ship so to speak by continuously watching and acting on foreign exchange and political upheavals as they arise (Wagner 2013; Reuters 2015d). References Britvic PLC (2015). Company Overview. Britvic.com. [online]. Available at: http://www.britvic.com/about-us/company-overview.aspx [accessed 3/1/2015]. Britvic PLC (2015b). Where we operate. Britvic.com. [online]. Available at: http://www.britvic.com/about-us/where-we-operate.aspx [accessed 3/1/2015]. Britvic PLC (2015c). Strategy. Britvic.com. [online]. Available at: http://www.britvic.com/about-us/where-we-operate.aspx [accessed 3/1/2015]. Britvic PLC (2015d). Key Figures. Britvic.com. [online]. Available at: http://www.britvic.com/about-us/key-figures.aspx [accessed 3/1/2015]. Dobrow, T. (2015). 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