Smuckers

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Smuckers
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Smuckers Pro-Forma Valuation

• Goals of Case
• Build Pro-Forma Statements
• Make sales projections 1993 to 1997
• Analyze financial statements and firms
  operations
• Use projections and analysis to generate
  pro-forma financial statements
• Valuation
• Use pro-forma and terminal value to generate cash
  flow
• Value Smuckers using pro-forma cash flow
  (sequential valuation)
• Perform sensitivity analysis to evaluation
  assumptions.
• Examine different scenarios and calculate
  expected value.

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Smuckers

• Time frame for analysis 1992 is current year
• Fiscal statements dated 4/30/92
• Industry Manufacturing and marketing of food
  products
• Reports one segment (2033 SIC code jellies,
  etc)
• Market Predominantly in US with some sales in
  Canada, Australia, UK, and Latin America.
• In 1992, 91.6 of sales are domestic (US)
• Entered International markets in 1990
• Expresses intentions to expand international
  sales.
• Competition The company is the market leader in
  jellies and jams and has a large of the overall
  canned fruits industry.

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The Fruit Products IndustryAll Segments with
2033 as primary SIC code
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Sales Projection

• Domestic Sales
• 90 of business
• Established brand
• International Sales
• 10 of business
• Still penetrating markets
• Product Type
• Staple good
• Demand does not vary with economic conditions
• Do you really buy more jam when the economy is
  stronger.
• Growth in US sales may be related to growth in
  population

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Sales Projection

• Projections
• Determine sales growth using constant dollars
  (CPI adjusted).
• Put sales in 1992 dollars.
• For simplicity, use CPI index to adjust US and
  International sales.
• Ex. 1986 sales 262,802 x (142.2 / 110.8)
  337,278
• Examine historical growth
• US ranges from 11.5 to 0.23.
• Average US real growth of 4.7.
• Intl growth only two year of growth data. One
  year 20 growth and one year of 0.
• Average Intl growth is 10

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Sales Projection

• Project domestic sales growth using changes in
  economy
• Demand per consumer relatively constant
• Does growth in number of household determines
  growth in real sales?
• Regress change in real sales on change in
  households
• 1 change in number of households will lead to a
  1.97 change in Smuckers real sales.
• Historically, the number of households grew an
  average of 1.4.
• Expected real annual sales growth 0.02 (1.97
  .014) 4.8
• R squared is 6 and p-value of coefficient is gt
  10
• Thus, this is not a good predictor or sales.
• Does real growth in GNP determines growth in real
  sales?
• Regress change in real sales on real growth
  in GNP.
• R squared is 16 and p-value of coefficient is gt
  10
• Thus, this is not a good predictor or sales.

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Sales Projections

• US sales
• Per-capita consumption of jam and jelly will
  remain constant.
• What will happen to Smuckers market share?
• Trends in the jam industry
• Smuckers as a high quality provider
• Possible scenarios
• Smuckers US market share remains constant and
  the growth in the jam industry is same as
  historical
• Smuckers US sales grow at the 4.7 historical
  average
• Smuckers increases US market share.
• Growth for the next few years is higher. This
  would increase smuckers market share from 10.4
  to 11.1.
• 4,645 1992 market growth at 4.7 for 3 years
• Smuckers must grow at 148 of 4.7 or 6.97

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Sales Projections

• Assumptions regarding US growth
• Smuckers increases US market share.
• Real Growth for 1993 thru 1995 is 7.00 and then
  stabilizes at 4.7
• Project international sales growth
• International sales in 1991 20 (very high)
• International sales in 1992 0 (low)
• Expectations
• Short-term growth to continue at faster rate
  (between 1990 and 1992 rates)
• Long term growth to approach domestic long term
  growth.
• Project 10 international growth for 1993 1996
• International growth drops to 4.7 in 1997 and
  going forward.
• Assume inflation will be 4 worldwide

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Expected Financial Performance

• Analyze historical performance relative to sales.
• Full analysis should adjust for changes due to
  acquisitions and expansions (information not
  provided)
• Assume no acquisitions
• Operating Costs
• Depreciation related to COGS and SGA not
  separated
• Regression
• Negative Fixed Costs and Variable 88 of Sales.
• (COGS SGA depreciation) / Sales
• Operating are constant between 86 and 87
  (assume 86.5)

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Expected Financial Performance

• Working Capital
• Days Receivables between 29 and 33 (higher
  recently)
• Project at 32 days
• Inventory Days in most years is between 54 and
  63, but jumped to 67 in 1992
• Why did inventory build up in 1992? Will this
  continue?
• If yes, then 70 projected out.
• If temporary, then 60 projected out.
• Assume increase is temporary and will be 67 again
  in 1993 but return to 60 in 1994 and forward
• Days Payables between 21 and 34 (lower recently)
• Project at 25 days

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Expected Financial Performance

• Capital Expenditures (see exhibit 7.7 and 7.8)
• Smucker must replace retired assets as they
  become obsolete to remain at current level of
  fixed assets
• Retirement of assets 3,148 in 1992
• Assume retirement also grows at sales growth
  rate.
• Smucker expanded production in recent years
  (Sales to fixed assets declining)
• 1986 4.01 and 1992 3.2
• Smucker has excess capacity as of 1992 (assume at
  capacity in 1986).
• Smucker want to expand market share and grow so
  need to maintain high level of fixed assets
  despite excess capacity.
• Smucker must increase fixed assets to keep pace
  with increase in sales.
• Land and Total Depreciable assets (at cost)
  remain the same percentage of sales (i.e. they
  grow at rate of sales growth).
• Depreciation expense averages about 8 of
  depreciable assets per year.

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Building the Pro-Forma

• Financing policy
• What is the firms optimal leverage?
• How much dividend should the firm pay?
• What should the firm do with excess cash?
• Smuckers preferences
• Management prefers to avoid debt.
• Historically pay 1/3rd of profits as dividends.
• In the past, the firm has retained excess funds
  and invested in marketable securities.
• Assume that these practices continue.
• Assume that return on marketable securities is
  5, which is equal to the rate at which we will
  discount these investments (i.e. this investment
  has an NPV0)
• Use debt retirement schedule to determine debt
  balances

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Building the Pro-Forma

• Use the financial statements for 1992 as a
  starting year.
• Simplify 1992 balance sheet (se Exhibit 7.11).
• Use the previous analysis and the following to
  build a pro-forma income statement and balance
  sheet.
• Historical statements have dividends payable of
  approximately 25 of dividends.
• Use this going forward
• Historical statements have income taxes payable
  of approximately 10 of dividends.
• The book assumes the firm owes one quarter of
  taxes and uses 25 going forward. To remain
  consistent we will use 25.
• Interest rate on debt 8 (from footnotes of
  statements).
• Effective tax rate 42
• After 1997, the firm enters into steady growth.

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Building Pro-Forma

• In this pro-forma, the firm retains excess cash.
• What if the firm did not have excess and depleted
  all cash and marketable securities? Is cash and
  marketable securities still the plug?

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Valuation

• 1997 is first year of stabilized cash flows.
• Assume that after 1997 the operating FCF grows at
  the sales grow rate. The riskless depreciation
  tax shield will remain at its 1997 level going
  forward.
• Value is the FCF for 1993 to 1996 plus the
  terminal value.
• FCF and terminal value must be discounted at the
  appropriate discount rate (risky and riskfree
  components).
• Value to equityholders value of firm less debt
  and warrants.

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