Britvic - Performance and Risks Management - Case Study Example

Britvic Plc: Performance and Risks Management Study 02125 Introduction 2. Business and Key Market Study 3. Cooperate and Financial Actions 4. Financial Trends a) Profitability b) Liquidity c) Financial Gearing d) Investment 5. Risk Management a) Exchange rate Risk Management b) Political Risk Management I. Firm Based II. Country Based III. Global Risk Management 6. Conclusion and Recommendations 7. References Britvic PLC Risk Management Introduction Britvic Plc is the number two supplier of soft drinks in the UK in both retail sales value and volume. Coca Cola has been the top soft drink producer for many years. A study by Plunkett (2009 p. 4) posits that many consumers changed their soft drink buying pattern by 2006, opting for healthier foods shopping. This company is not only a member of FTSE Index, but also it is in the London Stock Exchange (Pringle 2008 p. 12). In 1938, this company started producing juices in Chelmsford. It acquired the name Britvic in 1971. By 1995, this company had merged with Canada Dry Rawlings, Corona, and Tango Brands from Beecham, and currently owns the UK Pepsi franchise. By 1995, Britvic bought Robinson’s from Reckitt and Colman. The company’s first Initial Public Offering (IPO) in 2005 allowed shareholders to realize their investment. However, the consumer drink industry has faced challenges because of the changing consumer spending affected by economic crisis. Britvic Plc 2014 interim reports a 4.7% revenue growth, 3.7% volume growth, and 0.8% ARP growth. The Great Britain revenue went up by 5.0%, 7% in France, and 5.2% down in Ireland due to the difficult consumer environment. Britvic Plc like many other countries faces some business risks (Plunkett 2009 p. 5). This paper analyses this company’s financial trends, and some of the risks faced by Britvic and its management. Business and Key Market Study 28 weeks ended 28 weeks ended % change % change 13 April 2014 14 April 2013 actual exchange constant(1) £m(1) £m(1) rate exchange rate Group Revenue 670.7 639.2 4.9% 4.7% Group EBITA(2) 60.5 53.6 12.9% 12.9% EBITA Margin(2) 9.0% 8.4% 60bps 60bps Group EBIT(7) 59.0 52.0 13.5% 13.5% Group Profit Before Tax 45.3 37.5 20.8% 20.8% Group Profit After Tax 34.0 28.5 19.3% 19.3% Group Profit After Tax, After 27.5 24.7 11.3% 11.3% Exceptional And Other Items Adjusted Earnings Per Share(3) 14.5p 12.4p 16.9% 16.9% Weighted Average No. of Shares 245.6 242.4 1.3% - Interim Dividend Per Share 6.1p 5.4p 13.0% - Underlying Free Cash Flow (4) (30.8) (24.4) (26.2)% - Group Adjusted Net Debt (5) (479.4) (503.7) 4.8% - Adjusted Net Debt: EBITDA 2.6x 2.9x - - Chart 1 Britvic Plc’s EBITA went up in 2013 by 12.9% that translates to £60.5million because of the revenue growth and tight cost control. EBITA is the operating profit before payback and other items. On the other hand, the EPS rose to 16.9% with the interim dividend going up by 13.0%. This company’s focus mainly been base on building of margin improvement and sustainable profits. In addition, the company hopes to deliver by 2016 £30million as cost saving (Plunkett 2009 p. 16). This process shows a strong progress on strategic cost initiatives. The company intends to introduce new operating models that may have significant program change. Britvic is the second largest supplier of soft drinks and hopes to distribute fruit shoot to the whole of United States secured through new independent agreements, and additional PAB territories. In India, the company already distributes Fruit Shoot, and hopes to start with an in-market production as soon as possible. In 2013, the dividends went up by 13% reflecting the company’s confidence in its future prospects, progressive dividend policy, and a strong free cash flow generation. Corporate and Financial Actions Britvic plc’s rapid growth makes it necessary to own a healthy organisational structure. Lack of good organisational structures makes it hard for a company to resolve any upcoming problems (Segal 2011 p. 8). As a result, a good structure helps the company in owning a good chain of command that mostly helps in proper decision-making. In order to quantify the right number of people in a department, a company uses a span of control. This approach equally helps in creating different functional divisions like marketing, and sales among others. As a result, the company ensures right authority, and according to Pringle (2008 p. 14), Britvic Plc applies this approach hence its success. The first financial action by Britvic included Britvic recommending final dividends of 14.8p per share, a 13.8% increase from the previous year on Nov 2014. The total value of this dividend was 36.3million pounds payable in Feb 2015 according to the directors (http://www.britvic.com/investor-centre/shareholder-centre/dividends.aspx). According to the report, the shareholders willing to reinvest their dividends could now purchase the shares from the company. However, the dividend reinvestment plan must receive the applications 15 days prior to the next dividend payday. Secondly, Britvic cut costs and Take Fruit Shoot to India according to a report by Reuters May 22, 2013. According to Reuters, Britvic would close down two of its factories, and a warehouse in the UK. In addition, the company would introduce Fruit Shoot in India as a new strategy with interim results. A 30million proposal to deliver annual savings according to this report showed that Britvic would close a warehouse in Ireland, and two factories in Britain. In addition, Britvic would create a mutual Irish and British business under one leadership team. Britvic and Narang Group came to an agreement in reference to national sales and distribution of Fruit Shoot starting mid 2014 (http://in.reuters.com/article/2013/05/22/britvic-results-idINL6N0E30IL20130522). Jan 23 2013, Britvic Plc announced its agreement with PepsiCo America’s Beverage (PAB) according to Reuters. This joint venture helped accelerating the distribution of the Fruit Shoot raising the supply states to 30 by summer of 2013. In the same year, the Fruit Shoot commenced its distribution in the South West of Europe and Spain. Financial Trends The following charts represent the company’s financial trends based on Revenue and profits, Profitability, Net profit margin, liquidity, financial gearing, and dividends payout ration Chart 2 Gross Profit Margin Chart 3 Chart 3 is a graphical representation of Britvic Plc showing the gradual increase in the company’s gross margin, net profit margin, and return on asset. From this graph, it is clear that the gross margin was highest in 2010 at 55.07%, and later dropped in 2010 to 51.39% in 2011. As earlier mentioned, the drop was subject to problems in the consumer environment in Ireland. However, by 2014, this company’s gross margin went up to 54.07%. In the net profit margin, the chart shows Britvic plc profit margin is on a trendy increase from -4.23% in 2010 to 6.67% in 2014. Lastly, the return on asset seems to have equally a significant increase from -5.07% in 2010 to 8.29% in 2014. These profits were because of the merger with Pepsi and the new markets in North West Europe and Ireland according to Reuters. Liquidity Status Chart 4 The two ratios in this chart increased from 2010 to 2014. The current ration decreased from 1.0 in 2010 and dropped to 0.92 on 2013. However, the ration picked to 1.2 in 2014. However, the value ration is still below 1.0 based on the ability of repayment. On the other hand, the quick ratio assesses the ability of any organization to meet Current Loans (CL) based on higher liquid assets. The chart shows that the company uses Current Assets (CA) to repay CL quicker than previous years. As a result, according to this chart, Britvic Plc has more efficiency in utilizing liquid assets in order to meet their existing obligations. Leverage Status Chart 5 From chart 5, there was a sharp increase from -18.56 in 2010 to 25.48 in 2011. However, this long-term debt/equity gradually dropped to 6.51 in 2014. However, this debt/equity ratio computation has no meaning where there is a negative total equity. However, this negative equity indicates that Total Assets (T) A being less than Total Loans (TL), and this reflects a high risk of liquidation. The decrease in the debt ration shows that Britvic Plc’s tremendous growth can comfortably take care of its production with fewer debts. Many factors may contribute to this including good management. Investment Status Chart 6 Chart 6 shows a rapid rise in earnings per share, and a gradual increase in dividend per share. Reducing dividends is definitely a bad sign not only for the company, but also for the investors. However, the graph shows a bright future for this organization especially in the increase of earnings per share. The ratio went up from -0.21 in 2010 to 0.36 in 2014. From this graph, there are high chances of safe dividend covering, and higher future earnings growth. Risk Management Chapman (2011 p. 52) writes that risk management process involves identifying, evaluating, and managing significant risks faced by an organization in relation to financial year. The process includes quarterly assessments of operational risks, which the group committee reviews, and signs off. This risk structure supports this process, while taking responsibility of the group Risk Committee (Booth 2010 p. 21). It equally controls financial and non-financial risks, while governing the management. In addition, the strategy allows a consistent of risky management approach at business and regional levels. The board monitors the effectiveness of the internal control system. Exchange Rate Risk Management Foreign Exchange risks affect all organizations through potential impacts of different exchange rates, and their adverse fluctuations. Total Assets study by Jolly (2003 p. 28) shows that the two factors affecting exchange rate include cash flow mismatches, and currency mismatches based on a company’s liabilities and assets. Some sources of these risks include Foreign Exchange trading, foreign currency retail accounts, foreign currency dominated accounts, and cash transaction among others (Culp 2001 p. 65). Due to its global coverage, Britvic faces some challenges in foreign exchange, and a falling pound greatly affects this company during its foreign exchange transactions. The current economic downturn due to credit crisis continues affecting most of the global companies (Sadgrove 2009 p. 81). In turn, this affects the countries whose economy depends on import and export of products. A good example is China that depends on the UK and USA to buy their products (Borghesi et al. 2013 p. 42). In that case, it is very important for every organization to manage properly manage their risks related to foreign exchange. Poor foreign exchange risk management can have an impact on accessibility of an overseas investment project. Therefore, there is need for any upcoming international company to evaluate any risks related to foreign exchange. Through leveraging cross-border risks, Britvic ensures best execution with minimum risks through the Risk manager. The company has invested in foreign exchange currencies and the dollar account helps Britvic in its exchange rates. Operating through the dollar account ensures that a company does not suffer much during the exchange rates compared to operating a local currency account. In addition, the foreign exchange affects any income received from abroad, and a good example is if Britvic has to export its products on credit bases of six months. The number of pounds it receives from the credited country may vary after six months based on the exchange rate (Chew 2008 p. 26). In a case where the value of the pound drastically rises, then products become very expensive for export, and this could lead to job cuts. Ireland experienced an environmental risk due to the country’s poor performance, and Britvic’s revenue went down by 5.2%. In addition, foreign exchange affects the valuation of foreign assets, liabilities, and liability assets. Many organizations like Britvic own property abroad incurring liabilities in foreign currencies. As a result, operating the wrong currency at the wrong time may have a negative effect on the company. Lastly, during imports of some future dates, may experience fluctuated exchange rates hence affect the amount to repay. The types of exchange rate risks include transaction risk mostly involving a time delay between contract entry and the time of settling the contract. According to Fragmiere and Sullivan (2007 p. 71), the greater the contract gap, the higher the foreign exchange risks. Britvic experiences transaction risks when dealing with foreign countries. Sometimes this company borrows in foreign currencies exposing themselves to foreign exchange risks. Translation risk is another type of foreign exchange risk, and it involves foreign assets or currencies on their balance sheets. The company may face higher translation risks if they have a greater proportion of assets, equity, and liability. Economic risk is another type of foreign exchange risk especially during a downturn in economy as earlier mentioned. Political Risks Political risks remain high in the current markets because politics tend to influence highly the market trends (graham et al. 2006 p. 24). However, Britvic Plc remains cautious of any risks, and it has set aside department-managers to take care of all the risks. Firm Based Through internal control, Britvic Plc is safe, and it signs its contracts with the foreign government ensuring proper insurance for its products. Through its risk assessors, this company the company can identify the risks and protect itself upfront. In case of any boycotts in the country (Anderson 2014 p. 6), Britvic complies with the arrangement. A good example includes one country deciding to exclude another country in business transactions due to some political reasons. Although Britvic has not experienced such situations, the management is aware that it could happen similar to Coca Cola case whereby the Arab countries banned its use for many years. Country Based Different countries have different political instabilities. However, Britvic beats all these risks using assessors who manage to identify the instabilities upfront. In addition, the company ensures quality and healthy products in order to avoid any misconceptions and politics. A study by Arthur (1995 p. 26) shows that sometimes politics influence company operations and Britvic abides fully with the country’s expectations. In addition, Koblin (1982 p. 76) argues that the country politics through their policies may demand statements for this company. It is upon the Britvic management to ensure that it provides any required document to the government. On the other hand, each government has its taxation procedures, and Britvic ensures that it pays all the taxes and provides its tax return forms to the government as required by law hence its success. Global Risks The organization may not be able to have control over the global risks, but it takes necessary precautions. This company ensures that the employees understand foreign investment relations, and abides with each county’s law and regulations (McKellar 2010 p. 65). Considering its global market, Britvic serves in several countries and it owes its consumers great products of great health. A report by ENZ (2010 p. 35) shows that different countries have different cultures hence different prevalence. As a result, Britvic Plc ensures that it provides the right products to the people. In addition, this company ensures 100% healthy products considering the risks related to food and drinks. It ensures that it meets all demographics even in the remotest areas. Conclusion and Recommendation Britvic Plc like other companies faces several risks, but it is clear that through its risk managers, the company remains safe in the market. In addition, through its assessors, the company can beat any risks upfront locally and internationally. Due to these risks, Britvic should ensure enhanced relationships with its foreign investors, while embracing their cultures. In addition, having local employees is an added advantage to Britvic ensuring they receive proper training especially in relation to risk management. Britvic ensures to follow rules and procedures of every transacting government making sure it avails it taxation documents on demand as provided by the law. The company is a great employer although occasionally many employees remain challenged over salary packages. These recommendations may enhance the smooth running of Britvic Plc. However, Britvic Plc is on an uptrend and the charts are a living testimony on the upward revenue curve. 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