Presentation - The ESOP Association

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Communicating &
Leveraging Value
Opportunities
Hillary Hughes
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Tom Pientok
Jim Schmitt
Setting
Click toObjectives
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• Where do we want to be?
• As employee-owners, are we all in this
together?
• What are our common goals?
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Objective
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Increase Profitability &
Returns to Employee
Owners
Improve Team Member
Communication
Continue to Provide a
High Level of Client
Service
Obstacles
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Varying
Degrees of
Understanding
Performance
Metrics
Changing
Competitive
Environment
Multiple
Locations
Have & Have
Nots
Customer
Demands
Limited
Transparency
for some
departments
Communication
Goal title style
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Transparency
of Information
Increased
Profitability
Positive
Process
Improvements
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Timely Metrics
to Team
Members
Empowered
Employees
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Apache
Click toBackground
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• Founded in 1963 in Cedar Rapids, as a regional supplier
of belt and hoses by Mr. Robert South
• Became a partial ESOP in 1985 and 100% in 1989
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Apache
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Numbers
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• 100% employee owned company (ESOP)
• $100+ million in Revenue for 2014
• 310+ employees
• Average tenure is 10 years
• 6 operating locations across the U.S.
• European and South American Sales
• Asian sourcing and engineering presence
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Apache
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The
Apache
Companies
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ClickCustomers
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Our
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Industrial
/ Agricultural
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Master Belting
title style
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Moldedto
Rubber
Products title
/
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Industrial Hose
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style
Consumer
Products
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ESOP
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• Mr. South was looking for an alternative to selling the
company to a competitor. He had built a strong bond
with his employees and the community.
• After considerable research and thought, the ESOP
was formed in 1985 and owned 49% of the company.
• By 1989, 100% of the company was owned by the
ESOP.
• ESOP loan was repaid in 1995 and 100% of shares
were allocated to participants
• Very few changes have been made to the original plan
documents over the past 29 years.
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Communicating
Value title style
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• At what level of value should you
start? How technical should it be?
• Is there a good understanding of the
Plan?
• Do employees have insight into the
process?
• Myth: You do not need to share the
financial statements to discuss value
and value drivers.
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Valuation
Process
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Why is an Independent Appraiser Involved?
ESOP Trustee
• Internal or External
Engages Independent Financial Advisor
• Reports directly to the Trustee
Equity Per Share Value
• Based on “fair market value”
VALUATION PROCESS
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What Exactly Occurs During the Valuation Process?
Phase 3
Phase 1
Phase 2
Phase 1
Engagement
by ESOP
Trustee
Phase 2
Data
Collection
-
Financial
Statements
Internal
budget
Phase 5
Phase 4
Phase 3
Due Diligence
-Interview
members of
management
team
Phase 4
Build
Valuation
Models
Phase 7
Phase 6
Phase 5
Review
Projections/
Comparables
with
Management
Phase 6
Prepare
Draft
Report
Phase 8
Phase 7
Present
Draft Value
Conclusions
to ESOP
Trustee
Phase 8
ESOP
Trustee sets
the stock
price
Communicating Valuation Can be
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Challenging
What are we Valuing?
“A”
= “L + C”
Net Working
Capital
ESOP
Company
All Other Fixed
and Intangible
Assets
Long Term
Liabilities
“Enterprise
Value”
Equity
“Equity Value”
Communicating Valuation Can be
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title
style
Challenging
Does this look more familiar?
“A”
= “L + C”
Furniture &
personal items
Bank Mortgage
Your House
Market
Value
Your house & lot
“Enterprise
Value”
Equity
“Equity Value”
Value Can Grow in Two Ways
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Grow Asset Values
Net Working
Capital
Net Working
Capital
Net Working
Capital
Long Term
Liabilities
Pay Off Debt
Long Term
Liabilities
All Other Fixed
and Intangible
Assets
All Other Fixed
and Intangible
Assets
Equity
All Other
Fixed and
Intangible
Assets
Equity
Grows by:
Increasing Revenue
Decreasing Expenses
Becoming more
efficient
Equity
Apache
Communicating
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title
– Here’s what we did….
– Forms of Communications
– Areas of focus…
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style
Leveraging
theMaster title style
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Understanding of Value
• Employees are empowered with
information and the desire to improve.
• How can we jump start the process?
• What are challenges to engaging
employees?
• Do they have the resources to drive
out cost?
• Jim this is where I see your slides
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How
are title style
ClickBusinesses
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Managing
75%
Reduce operating costs
44%
Increase productivity
37%
Reduce capital investments
34%
Introduce new products to gain…
28%
Restructure
22%
Seek merger/acquisition…
16%
Hire talent that would not have…
11%
Leave certain markets
Increase hedging
No steps
Source: McKinsey Global Survey, 4th Quarter 2008
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5%
4%
Cost
reduction
can be
profitable
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title
Column1
Revenue
Direct operating costs
Labor costs
Non-core indirect costs
Net profit
After tax (40%)
Business Value = 6 P/E
Baseline
20% Cost
Reduction
style
Equivalent
In Sales
$ 100
$
100
$ 140
$
35
$
35
$
49
$
35
$
35
$
49
$
20
$
16
$
28
$
10
$
14
$
14
$
6
$
8
$
8
$
36
$
48
$
48
20% cost reduction = 40% increase in Net Profit
$4M in expense savings = $40M revenue increase
Typical
reductions
by style
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expense category
Common
misconceptions
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• Pricing from suppliers is applied evenly to similar
customers.
• Your expertise in purchasing in one cost category will
produce similar results in another.
• National pricing agreements are always better than
local or regional agreements with the same company.
• Loyalty to a supplier translates into best pricing and
service.
Expense
management
challenges
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• Multiple suppliers and multiple order points.
• No internal benchmark data on purchases.
• Staff and management have limited time and resources
to address non-strategic costs.
• Employees with limited purchasing experience are
making buying decisions.
The
bottom
line
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To get best market pricing:
•
Use benchmark data (your own, plus market data)
•
Hire cost-category expertise (each category has its
own pricing model, methodologies, jargon)
•
Put yourself in the shoes of your suppliers
•
Become a better customer to suppliers
•
Keep suppliers competing for your business
Action
Plan
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• Develop an overall cost-management strategy
• Develop cost-reduction goals for each category
• Set expectations for each person who will
participate in the cost-management process
• Set a timeline for results
• Audit savings on an ongoing basis
Company
Growth
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Sales Revenue
CAGR
Apache 8.1%
Trico Belting
Seals Unlimited
Ex-Cel Belting
Ag Belt
Hose Central
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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Validation
of Success
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Share Price
CAGR
Apache 18.5%
S&P 500 = 9.2%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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Thank
You
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Questions?
Comments
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