Financial Trends and Risk Management of Britvic - Case Study Example

Financial Trend and Risk Management Table of Contents Introduction 3 Business and Key market Study 3Corporate and Financial Actions 5 Financial Trends 8 Profitability Ratio Analysis 9 Liquidity Ratio Analysis 10 Financial Gearing Ratio Analysis 11 Efficiency Ratio Analysis 11 Investment Ratio Analysis 12 Risk Management 13 Exchange Rate Risk Management 14 Political Risk Management 15 Firm Based 15 Country Based 15 Macro Economic Environment Risk Management 16 Conclusion and Recommendations 16 Reference List 17 Introduction Britvic Plc is the primary soft drinks corporation in Europe, which also operates in Ireland, France, and Great Britain. Across these marketplaces, the business has expanded a powerful portfolio of their own brands, including Tango, Ballygowan, Robinsons, J2O, MiWadi, Drench, Teisseire and Fruite (Britvic, 2015a). The company is the main provider of branded tranquil soft drinks as well as the number two provider of branded soft drinks which are carbonated in the Great Britain. Britvic Plc is leading the soft drink industry in France and Ireland. Through export, franchising, and licensing, the company is increasing its reach in other countries, especially in the United States. The management team of Britvic has effectively developed its business through an apparent strategy of international expansion and organic growth on creating as well as building the scalable brands (Britvic, 2015a). The vision of the company is to be the most accepted soft drinks company in the world. The strategies of the company involves: becoming the standard branded business of soft drinks, for their own brands and PepsiCo, in Ireland and Great Britain; fully exploiting international opportunities in the adult, kids, and family categories; and being a respected and trusted element of the societies in which they operate (Britvic, 2015b). This report will provide an understanding of the financial performance of Britvic Plc by analysing the financial trends of the company over the last five years. Further, it will focus on the different types of risks towards which the company is exposed and will also show how Britvic Plc manages these types of risks. Business and Key market Study In Ireland and Great Britain, Britvic Plc produces as well as sells various soft drinks brands of PepsiCo, including Mountain Dew, 7UP and Pepsi under exclusive contracts with PepsiCo. The company has shown a great augmentation in the quarterly turnover of 2013 in spite of a small turn down in the volumes of fizzy drinks in Great Britain (Montague-Jones, 2013). Pepsi reported an increase of 5.4% in sales revenue which has come up to £316.3 million for third quarter. The sale of carbonated drinks grew 2.1% but the volumes falls 2% and the sales of tranquil//still soft drinks augmented 8% although volumes falls 0.6%. The company believed profits were probably at the upper side of its expected range. Britvic Plc is expected to get advantage from the warm climate as the sale of soft drinks rises in the summer season (Montague-Jones, 2013). (Source: Financial Times, 2015) The share price of Britvic Plc is 722.50. It was extremely high in 2014 and was recorded at 765. It was observed that the company is reporting a continuous increase in its share price since 2010 except for the year 2012. The rising trend in its share price shows that it will rise in the near future (Financial Times, 2015). (Source: Britvic, 2014) Britvic Plc has reported a turnover of £1344 million in the year 2014 and has continuously increased since 2012. The earnings per share were 24.7p in the year 2012 which has also risen to 41p in 2014. The operating profits were £106 million in 2012 and have grown up to £146 million in 2014. The net profit has also increased from £57 million in 2012 to £90 million in 2014. All the figures have shown a continuous increase thereby reflecting the food financial performance of Britvic Plc (Britvic, 2014). Corporate and Financial Actions (Source: Financial Times, 2015) Year after year, the revenues of Britvic Plc remained even at 1.32 billion, despite the fact that the net income of the company grew from 61.90 million to 89.70 million. The net income of Britvic Plc was almost same since 2011 but has suddenly increased in 2014 which is a good sign for the company (Financial Times, 2015). (Source: Financial Times, 2015) Both the earnings per share and the dividends per share were increased by 43.27% and 13.59% respectively in 2014. The positive movement in the dividend payments is remarkable since few companies only in the non-alcoholic/beverages industry gives dividend (Financial Times, 2015). (Source: Financial Times, 2015) In the year 2014, the company increased the cash reserves by 51.80 million or 56.61%. The cash flow was very low in 2012 but has increased to a great extent i.e. approx 52 million in the year 2014. The cash reserves have risen from 105 million to 150 million in 2014. Britvic Plc earned 146.60 million from their operations in support of a cash flow margin (Financial Times, 2015). (Source: Britvic, 2014) In spite of the volume growth and strong value of its brand, Coca-Cola which is the competitor of Britvic was not able to beat the company off the peak spot, and the Britvic maintain to remain the top supplier, with sales of over £1.3 billion compared to the £1.1 billion for Coca-Cola Company (Britvic, 2014). The company will soon launch the multi packs of Fruit Shoot in the United States, most probably in the second third quarter of 2015. Britvic also creates and sells the brands of PepsiCo such as 7UP and Pepsi in the United Kingdom. The company operates mostly in Ireland, France, and Britain but has lately expanded its operations in India, Spain, and the United States with their Fruit Shoot brand for children (Reuters, 2015). Financial Trends The financial trends of Britvic Plc will be examined through profitability, financial gearing, liquidity, efficiency, and investment ratios analysis. 　 2014 2013 2012 2011 2010 Revenue 1344.4 1321.9 1256.4 1290.4 1138.6 Cost of sales 617.5 646.9 624.6 627.3 511.6 Gross profit 726.9 675 631.8 663.1 627 Operating cost 1198.1 1212.4 1150.6 1179.1 1141.9 Operating profit 146.3 109.5 105.8 111.3 -3.3 Net profit 89.7 61.9 57.4 58.4 -48.2 Current asset 513.7 463.7 380.8 384.4 366.6 Non-current asset 588.3 599.1 645 681 680.1 Total assets 1102 1062.8 1025.8 1065.4 1046.7 Current liabilities 434.3 504.5 371.9 390 366.8 Non-current liabilities 584.6 517.4 616.8 652.9 710.6 Total liabilities 1018.9 1021.9 988.7 1042.9 1077.4 Total equity 83.1 40.9 37.1 22.5 -30.7 Profitability Ratio Analysis Net profit margin The net profit margin was -4.23% in the year 2010, which shows a sudden rise in 2011 and reached to 4.53%. The net profit margin was almost same in all the three years ranging from 2011 to 2013 but it has increased to a great extent to 6.67% in 2014. It indicates lower risk for Britvic Plc and also the good profitability position of the company (Andrews, 1968). Gross profit margin Britvic Plc presents a mounting gross profit margin since 2012. Year 2012 shows a very narrow profit margin in comparison to the rest of the years. 2009 reflects the highest gross profit margin which is 55.07% due to less fluctuation in earnings. Year 2014 also shows a high margin of 54.07% and it has continuously increased since 2012. An increase in the gross profit margin indicates that the company will be able to utilize the total amount of cash to pay off its creditors (Pandey, 2009). Liquidity Ratio Analysis Current ratio The current ratio of Britvic Plc was 1.00 in the year 2010, which has increased to 1.02 in 2012 and has further grown up to 1.18 in the year 2014. However, the performance of the company was poor in the year 2013 in which it has reported a current ratio of 0.92. A recent increase in the current ratio of Britvic Plc signifies that the company will not face any difficulties in paying off its obligations (Weil, Schipper and Francis, 2012). Financial Gearing Ratio Analysis Debt to equity ratio A steady decrease in the debt to equity ratio is revealed in the graph. A steady decrease is may be due to the reason that Britvic Plc decreases its long term debt to maintain a decreasing ratio. The ratio is 6.81 in 2014 which is very low as compared to 25.67 in 2011. A continuous decrease in the ratio signifies the greater security and protection to the capital of Britvic Plc (Damodaran, 2002). Efficiency Ratio Analysis Asset turnover ratio The asset turnover ratio of Britvic Plc was highest in the year 2013 and recorded at 1.27. It was same in 2010 and 2012. The ratio has slightly decreased to 1.24 in 2014 as compared to 1.27 of 2013. A slight decrease in the ratio indicates that Britvic Plc need to make use of its asset more efficiently in order to generate more revenue (Sheeba, 2011). Investment Ratio Analysis Earnings per share The earnings per share (EPS) of Britvic Plc was -0.21 in 2010 but it showed a great increase in 2011 and was recorded at 0.24. It was almost same till 2013 but again augmented in the year 2014 and recorded at 0.36 which is really a great increase. The boost in the earnings per share of Britvic Plc shows that they have more earnings to allocate to their shareholders. A high EPS frequently makes the share price to rise to a great extent (Gibson, 2010). Dividend per share The figure shows that the dividend per share (DPS) of Britvic Plc has risen since 2010. It was 0.17 in the year 2010 and then it remained constant till 2013 and recorded at 0.18. However, in the year 2014 it again increased to 0.21 which signifies that the company can draw additional investments from the investors. Further, an increase in DPS is an indication that the development or growth of Britvic Plc can be continued (Khan and Jain, 2006). Risk Management Risk management is referred to the process of recognizing possible threats in advance, examining them and then taking necessary steps in order to reduce or control the risk (Jolly 2003). When an enterprise makes the decision to invest, it exposes itself towards various financial risks. The financial risks may takes place in the form of bankruptcy, high inflation, capital market volatility, recession, etc (Economictimes, 2015). The risk or threat can be endured if the possibility of its happening is adequately remote and the outcomes are not rigorous. It can be reduced or eliminated by implementing change in the prevailing process or by transferring part or all of the risk. The risk management method of every company is different because their threats are different, operations and the business culture is also unique (Borghesi and Gaudenzi, 2012; Fragniere and Sullivan, 2007). Britvic Plc operates a strong risk management method which continues to develop and improve in order to meet the requirements of their business. They applies all the five stages i.e. identification of risk, analysis of risk, risk lessening planning, risk review, and risk monitoring in order to control the level of risk in their business operations. Risk recognition, analysis as well as reduction of risk planning are carried out at all business levels through operational and functional teams. A dedicated Insurance and Risk manager supports and manages this process. Risks are continuously reviewed as well as monitored by the team of functional management or business unit. The Executive Team re-examine the main risks athwart the group to make sure that the supervision of these threats has proper focus (Annual Report, 2014). Exchange Rate Risk Management It is a vital part in each company’s decision about the exposure of foreign currency (Allayannis, Brown and Klapper, 2001). Hedging strategies of currency risk entail reducing or eliminating this risk and also necessitate understanding of means that this risk could influence the functions of the economic agent as well as understanding of techniques to manage the consequent implications of risk (Homaifar, 2004; Moguillansky, 2003). The exchange rate risk is mainly in the form of exposure towards variations to the euro-US dollar, sterling-US dollar, and sterling-euro exchange rates. Britvic Plc operates in the euro-denominated nations and funds these through the utilization of borrowings of foreign currency which evade the translation threat of net/total investments in the overseas operations. Moreover, generations of cash from the euro-denominated operations could be used to meet the obligations of euro payment in the sterling denominated corporations, as a result granting a normal hedge. Britvic Plc also has the transactional exposures taking place from the purchase of capital expenditure, prime materials and costs of interest in currencies except the functional currency. Purchase of non-functional currency and the interest costs are mostly in the Euros and US dollar currencies. In September 2014, the company has hedged almost 72% of projected net exposure by making use of forward contracts of foreign exchange. When financing is raised in another currency apart from what is needed by the company, interest rates cross currency swaps are used in order to change the cash flows to requisite currency. These swaps also have the similar critical terms and duration as the original borrowing (Annual Report, 2013). Political Risk Management It is a risk that the company or investor could suffer due to the instability in country or because of political changes. Instability affecting the returns of investment can stem from the alteration in the policies of legislative bodies or government (McKellar, 2010). A credit swap can be employed to hedge the political risk towards which institutional lenders are exposed. Though such a strategy includes high level of basis risk if it is not structured properly (Moran, 2001). There are broad range of rules that Britvic Plc are needed to comply with, such as controlling the content, packaging and labelling of products and the marketing of such products. Changes in all these regulations or laws in the marketplace where they operate may lead to direct extra taxation on their products. Moreover, change in the regulation of government may impact the ability of Britvic Plc to sell or market certain/definite products or connect with particular consumers. In order to manage the political risk, the company engage with the appropriate authorities directly and also through several trade organizations in order to ascertain that they can entirely involve themselves in the future growth of legislation. They also constantly develop their product portfolio as well as new products in expectation of possible regulatory requirements (Annual Report, 2012). Firm Based Britvic Plc is bound to come across the political risk, which they cannot control. The major mode they employed in order to manage these risks is internal control. Britvic Plc signs investment contract with host governments, buy trading guarantees and investment insurance to protect their investment from loss. They can also adopt the economic, political, cultural and social factors of the host markets in order to reduce their goal conflict with host government by means of internal control (Annual Report, 2013). Country Based Britvic Plc takes safety measure when they deal with the competitors by carrying out healthy and legal competition practices. By abiding to the regulations, and following the government terms and conditions of taxation is another tactic of political risk management used by the company. The aim of Britvic Plc is to carry out legal business activities through eradicating corruption from their transactions, if there exist any (Annual Report, 2014). Macro Economic Environment Risk Management Britvic Plc has several exposures towards this risk because of the transformation in macroeconomic environment, especially the counterparty credit risk through their banking relationships as well as currency fluctuations. The company is not directly exposed towards any areas of high risk in the Euro zone. The company closely manage and monitor their exposure to economic factors by hedging their currency requirements. As the company is growing the business through global expansion, they will be better guarded from the regional economic factors which are affecting their European markets (Annual Report, 2014). Conclusion and Recommendations The report aims to provide the financial trends of Britvic Plc over the last five years. It also highlights the financial and corporate actions of the company including its major developments over latest years. The company will soon launch the multi packs of Fruit Shoot in the United States. Further, exchange rate risk, political risk, country risk, and macroeconomic environment risk of the company has been analysed and the focus is also given on the risk management practice of Britvic Plc. It is recommended that Britvic Plc should maintain its local interaction in foreign countries also. It will help the company to adapt to different cultures and will also enhance its political risk management. Through direct involvement and relation with the local people will help the company to understand the regulations and laws of the government. Reference List Allayannis, G., Brown, G.W. and Klapper, L., 2001. Exchange rate risk management: Evidence from East Asia. United States: World Bank Publication. Andrews, J.D., 1968. Financial management: Principles and practice. United States: Freeload Press. Annual Report, 2012. Annual Report 2012: Britvic Plc. [pdf] Available at: < http://www.britvic.com/~/media/Files/B/Britvic-V2/documents/pdf/presentation/2012/Britvic-plc-Annual-Report-2012.pdf> [Accessed 12 February 2015]. Annual Report, 2013. Annual Report 2013: Britvic Plc. [pdf] Available at: < http://www.britvic.co.uk/~/media/Files/Media%20Centre/Reports/Britvic%202013%20Annual%20Report.ashx> [Accessed 12 February 2015]. Annual Report, 2014. Annual Report 2014: Making life’s everyday moments more enjoyable. [pdf] Available at: < http://www.britvic.com/~/media/Files/B/Britvic-V2/documents/pdf/presentation/2014/britvic-annual-report-2014-v2.pdf> [Accessed 12 February 2015]. Borghesi, A. and Gaudenzi, B., 2012. Risk Management: How to assess, transfer and communicate critical risks. Heidelberg: Springer Science and Business Media. Britvic, 2014. Britvic Soft Drinks Review 2014. [online] Available at: < http://www.britvic.co.uk/~/media/Files/Media%20Centre/Reports/Britvic%20Soft%20Drinks%20Review%202014.ashx> [Accessed 12 February 2015]. Britvic, 2015a. Britvic Plc: About Us - Company Overview. [online] Available at: < http://www.britvic.com/about-us/company-overview.aspx> [Accessed 12 February 2015]. Britvic, 2015b. Britvic Plc: About Us - Strategy. [online] Available at: < http://www.britvic.com/about-us/strategy.aspx> [Accessed 12 February 2015]. Damodaran, A., 2002. Investment valuation: Tools and techniques for determining the value of any asset. New Jersey: John Wiley & Sons. Economictimes, 2015. Risk Management. [online] Available at: < http://economictimes.indiatimes.com/definition/risk-management> [Accessed 12 February 2015]. Financial Times, 2015. Equities: Britvic Plc. [online] Available at: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=BVIC:LSE. > [Accessed 12 February 2015]. Fragniere, E. and Sullivan, G., 2007. Risk Management: Safeguarding company assets. United States of America: Thomson Learning. Gibson, C., 2010. Financial reporting and analysis: Using financial accounting information. United States of America: Cengage Learning. Homaifar, G., 2004. Managing global financial and foreign exchange rate risk. New Jersey: John Wiley & Sons. Jolly, A., 2003. Managing Business Risk. United Kingdom: Kogan Page Publisher. Khan, M.Y. and Jain, P.K., 2006. Management accounting. New Delhi: Tata McGraw-Hill. McKellar, R., 2010. A short guide to political risk. England: Gower Publishing Limited. Moguillansky, G., 2003. Corporate risk management and exchange rate volatility in Latin America. Chile: United Nations Publication. Montague-Jones, G., 2013. Britvic turnover grows despite fall in fizzy drink volumes. [online] Available at: < http://www.thegrocer.co.uk/companies/britvic-turnover-grows-despite-fall-in-fizzy-drink-volumes/347622.article> [Accessed 12 February 2015]. Moran, T.H., 2001. International political risk management: Exploring new frontiers. Washington D.C: World Bank Publication. Pandey, I.M., 2009. Financial Management. New Delhi: Vikas Publishing House Pvt. Ltd. Reuters, 2015. Robinson’s maker Britvic on track despite sales dip. [online] Available at: < http://in.reuters.com/article/2015/01/27/britvic-results-idINL6N0V533L20150127?type=companyNews> [Accessed 12 February 2015]. Sheeba, K., 2011. Financial management. New Delhi: Pearson Education India. Weil, R., Schipper, K. and Francis, J., 2012. Financial Accounting: An introduction to concepts, methods and uses. United States of America: Cengage Learning. Read More