JOHNSON TURNAROUND CASE STUDY ANALYSIS

INTRODUCTION

Johnson Pte. Ltd., a public non-listed subsidiary of a fast moving consumer goods (FMCG) group of companies based in Southern Indian region. Before the takeover, JPL was wholly-owned by the Indian government. Then, 20 years after it began operations, the Hong Kong group of companies acquired 80% of the companys shareholdings and the company were involved in a similar industry operating within the Asia Pacific region. JPL manufactured and distributed a range of products, including frozen, chicken, noodles, pastries, bread products, yeast and fats. It also traded in commodities such as oil. It owned a chain of restaurants and retailing outlets. Azmi, the new Chief Executive Officer in November 2009 had been assigned by the chairman to plan and execute a turnaround programmed for the company due the besieged with problems ever since they took over its operation from the previous owner. Addition, the sales figures is on a decline but their operating costs are up. So, the chairman directed Azmi to check what is happening to the company credit control and inventories management. Therefore, Azmi had to plan and execute an appropriate turnaround strategy.

EXECUTIVE SUMMARY

The case is about a company based in southern Indian region, named Johnson Pte Ltd, (JPL). It a nonpublic listed firm operating in Fast Moving Consumer Goods Industry, (FMCG). The company manufactures and distributes products which include frozen Chicken, Noodles, pastries, bread products, yeast and fat. Also the company owned a number of restaurants and retailing outlets and it deals in trading of oil products as well. It was initially owned by Government of India, has operated 20years in this industry (FMCG), before Hong Kong group of companies acquired 80 percent equity share to become its parent company. The acquisition was in line with the Hong Kong group of companies strategic objective of expanding their business operations globally and to reach it targeted customers in Middle East and Indian subcontinent states.

In subsequent years after the acquisition, the company experienced steady decline in sales and increasing operating cost. In November 2009, Encik Azmi was employed as the chief executive officer (CEO) of JPL. His appointment was facilitated by the Chairman of the group with the task of salvaging the company by constituting a turnaround strategy that will facilitate the revitalizing and sustainability of the companys before the situation get worsen.

JPL is among the major players in FMCG industry in India, with other contenders like Nestle and Unilever dominating the market. In 2007, JPL controlled 30% market share while Nestle and Unilever shared the balance. These rival companies invest lot of resources for research and development, advertisement and promotion. Also they spend 2% to 3% of their revenues to maintain their market.
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TERM OF REFFERENCES

Azmi, the Chief Executive Officer of Johnson Pte Ltd (JLP) had appointed me, a charted accountant to give the best choice and convince the other boards on how to solve the problem. The report had been made so that it is easy for the other boards to see or review my works. The calculations and information that will be written is quite hard to see if it is no on paper. So, the report will help the boards to understand better. There are two alternatives that Azmi suggested and should to do. The first option is to purpose plan and execute a turnaround programmed for the company and analyze financial statement and others related document to determined problem. So, I have prepared analysis the financial statement that obtained from finance manager and was pondering the way forward for JPL. Based on the income statement of JPL as of 31 Dec 2008, this company was facing big problem which is sales figure decrease and cost also increase. This company also had losses for every year from 2005 until 208 based the financial statement given. So, based on the information given by the top management, I have prepared the calculation to calculate ratios analysis of the financial statement that shows what alternative the company should take and make comparison of economic value added (EVA) as it measures performance while taking into account capital investment required for the economic return.

PROBLEMS/OPTIONS

PROBLEM Sales figure decrease and cost also increase Factors increase cost Low entries barriers The existence of multiple private labels Existence of external forces such as rising raw material prices also posed a threat to players in the FMCH industry

OPTION Plan and execute a turnaround programmed for the company. Assign Azmi, Chief executive officer (CEO) to execute the programmed. Analyzed financial statement and others related document to determined problem

FINANCIAL EVALUATIONS

1) Short term solvency or liquidity ratios i. Current ratio = current assets current liabilities

2005 2006 2007 2008

$42,531,460 = $34,130,000 $40,478,080 = $36,135,000 $37,626,380 = $38,140,000 $35,109,820 = $40,133,000

1.246 times 1.120 times 0.987 times 0.875 times

In 2005, the calculation above show that in every $1 liability Johnson Pte Ltd could cover with $1.246 of their asset In 2006, it is clearly show that the current ratio decrease from 1.246 to 1.120 In 2007 and 2008, Johnson Pte Ltd could not cover all total current liabilities as the current ratio below 1

ii.

Quick Ratio= Current Assets - Inventory Current Liabilities

2005 2006 2007 2008

$42,531,460 - $13,000,000 = $34,130,000 $40,478,080 - $13,000,000 = $36,135,000 $37,626,380 - $13,000,000 = $38,140,000 $35,109,820 - $13,000,000 = $40,133,000

0.865 times 0.760 times 0.646 times 0.551 times

In 2005, without considering the inventory, Johnson Pte Ltd had its current liabilities covered 0.865 times over from the figure above, Johnson Pte Ltds quick ratio decreasing year by year

iii.

Cash Ratio=

Cash . Current Liabilities ($1,468,540) = -0.043 times $34,130,000 ($4,521,920) =- 0.125 times $36,135,000 3

2005 2006

2007 2008

($7,873,620) =-0.206 times $38,140,000 ($10,890,180) = -0.271 times $40,133,000

In 2005, the cash ratio was -0.043 . This figure showed that Johson Pte Ltd could not cover their current liabilities at all as there was bank overdraft of $1,468,540. Johnson Pte Ltds cash ratio worsen year by year as the ratio decreasing continuously

2) Financial Leverage Ratios i. Total Debt Ratio

The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a companys assets that are financed by debt.

Total Debt Ratio = Total Assets Total Equity Total Assets

2005 = $233,286,460 - $194,806,460 $233,286,460 = 0.16 @ 16%

2006 = $232,423,080 - $192,038,080 $232,423,080 = 0.17 @ 17%

2007 = $230,571,380 - $188,281,380 $231,571,380 = 0.18 @ 18%

2008 = $225,044,820 - $180,961,820 $225,044,820 = 0.20 @ 20%

The higher this ratio, the more leveraged the company and the greater its financial risk. A debt ratio of greater than 1 indicates that a company has more debt than assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's risk level. Therefore, as the results above we can see that the companys debt ratio every each year became increased. So, the comp any should take it seriously as the financial are become more risky.

ii.

Debt-Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Debt-equity Ratio = Total Debt Total Equity 2005 = $38,480,000 $194,806,460 = 0.20 2006 = $40,385,000 $192,038,080 = 0.21 2007 = $42,290,000 $188,281,380 = 0.22 2008 = $44,083,000 $180,961,820 = 0.24

The results above shows that each year the company leverage ratio became increased. A high ratio is generally considered bad, because the company has a high amount of debt, and is therefore exposed to high risk in terms of interest rate increases or credit rating.

iii.

Equity Multiplier

The equity multiplier is a way of examining how a company uses debt to finance its assets. Also known as the financial leverage ratio or leverage ratio.

Equity Multiplier = Total Assets Total Equity

2005 = $233,286,460 $194,806,460 = 1.20

2006 = $232,423,080 $192,038,080 = 1.21

2007 = $230,571,380 $188,281,380 = 1.22

2008 = $225,044,820 $180,961,820 = 1.24

The results above show that the company ratios increasing year by year. Equity multiplier is a financial leverage ratio which is calculated by dividing total assets by the shareholders equity. It tells about assets in dollar per dollar of equity. A higher equity multiplier indicates higher financial leverage, which means the company is relying more on debt to finance its assets.

3) Asset management, turnover and measures i. Inventory turnover

A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days."
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2005

8,

0, 000

, 000, 000

= 2.942 times 2006 = = 3.469 times 2007 = = 3.489 times 2008 = = 3.269 times

In 2007, they turned their inventory over 3.489 times during the year. The higher ratios for inventory turn to sale, the more efficiently they manage inventory.

ii.

Days sales in inventory

A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. Generally, the lower (shorter) the DSI the better, but it is important to note that the average DSI varies from one industry to another. Here is how the DSI is calculated : =

2005 = = 124.065 @124 days

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2006 = = 105.218 @ 106 days 2007 = = 104.615 @ 105 days 2008 = = 111.655 @ 112 days

In 2007, they turned their inventory over 105 days during the year. The higher ratios for inventory turn to sale, the more efficiently they manage inventory.

iii.

Receivables turnover

An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. Formula:

Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sales.

2005 = = 1.452 times 2006 = = 1.719 times 2007 = = 1.662 times 2008 = = 1.515 times
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In 2006, they collected their outstanding current accounts and recovered the money 1.719 times during the year. This is because, the lowest ratios the more efficient to collect their outstanding current accounts and recovered the money. iv. Days sales in receivables

A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money. Formula :

2005 = = 251.377 @ 251 days 2006 = = 212.333 @ 212 days 2007 = = 219.615 @ 220 days 2008 = = 240.924 @ 241 days

In 2006, they collected their outstanding current accounts and recovered the money 212 days during the year. This is because the lowest days, the more efficient to collect their outstanding current accounts and recovered the money.

v.

Total asset turnover

This is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company. Companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Companies in the retail industry tend to have a very high turnover ratio due mainly to cut-throat and competitive pricing. This ratio is more useful for growth companies to check if in fact they are growing revenue in proportion to sales.
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Formula :

2005 = = 0.193 times 2006 = = 0.237 times 2007 = = 0.234 times 2008 = = 0.222 times

In 2005, for every dollar in assets, they generated $.193 sales. While, in 2006, for every dollar in assets, they generated $.237 sales and 2007 they generated $.234 sales. In 2008, for every dollar in assets, they generated $.222 sales. The higher ratios, the assets could be more productive and efficient.

4) Profitability Measure i. Profit margin = net income Sales Year 2005 calculation (5,193,000) 45,000,000 = (11.54)% (12,768,380) 55,000,000 = (5.03)% (3,756,700) 54,000,000 = (6.97)%
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2006

2007

2008

(7,319,560) 50,000,000 = (14.64)%

Profit margin use to know how many sales can generate profit. In year 2005, -11.54% was generate in profit for every RM in sales. Even though, a sale was high but still high loses of income. In year 2006, - 5.03% was generate in profit for every RM in sales. A sale was increase while profit margin was decrease and it wills lowering loses of income. In year 2007, - 6.97% was generate in profit for every RM in sales. A sale was decrease and profit margin was increase compared to 2006. In year 2008, -14.64% was generate in profit for every RM in sales. Compared to previous year, sales was decrease and increasing loses of income.

ii.

Return of asset = Net income Total asset Year 2005 calculation (5,193,000) 233,286,00 = (2.27)% (12,768,380) 232,423,080 = (1.19)% (3,756,700) 230,571,380 = (1.63)% 2008 (7,319,560) 225,044,820 = (3.25)%

2006

2007

Return of asset shows how efficient management is at using its assets to generate earnings.

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In year 2005, -2.27% was generate in profit for every RM in asset. It shows that low ROA earning for every asset. In year 2006, - 1.19% was generate in profit for every RM in asset. Asset return was high and better than previous year. In year 2007, - 1.63% was generate in profit for every RM in asset. Asset return decrease and In year 2008, -3.25% was generate in profit for every RM in asset. ROA was decrease tremendously compared to previous year. It means that, asset was not efficiently controlled

iii.

Return of equity = Net income Total equity

Year 2005

calculation (5,193,000) 194,806,460 = (2.67)% (12,768,380) 192,038,080 = (1.44)% (3,756,700) 188,281,380 = (1.99)% (7,319,560) 225,044,820 = (4.04)%

2006

2007

2008

Return of equity use to a measure of profitability of stockholders' investments. In year 2005, -2.67% was generate in profit with the money shareholders have invested. It shows that company didnt generate income efficiently. In year 2006, - 1.44% was generate in profit with the money shareholders have invested. Company was efficiently managed their money when high return of equity received for this year. In year 2007, - 1.99% was generate in profit with the money shareholders have invested. Company return of equity was decreased compared than 2006. In year 2008, -4.04% was generate in profit with the money shareholders have invested. Lower return of equity compared previous year means that income wasnt managed efficiently.
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4)

Profit Margin for each Product:

Profit margin are use to measure the immediate amount of sales available to generate income. Segment Bakery measure the higher profit margin at 29% rather than other products. This means that they are more efficient in manage their operation and generate more income with fewer sales.
Analysis : Noodles Profit Margin Computation: Bakery Consumer Flour Further Processes Cooking Oil Retail Food Beverage Bakery Raw Ingredient

Result Explanation

0.14/14% RM1 of sales will generate 14sen of income.

0.29/29% RM1 of sales will generate 29sen of income.

-0.56/-56% RM1 of sales will generate 56sen of loses.

-0.39/-39% RM1 of sales will generate 39sen of loses.

-0.4/-4% RM1 of sales will generate 4sen of loses.

-1.014/-101% RM1 of sales will generate RM1.01 of loses.

-1.04/-104% RM1 of sales will generate RM1.04 of loses.

Bostons Consulting Group Model

The BCG matrix, invented by the Boston Consulting Group, is a tool that allows to classify and evaluate the products and services of a business. It is a decision making tool in order to balance the activities of a company among those which make profits, those who ensure growth, those which constitute the future of the firm or those who are its heritage. With this tool one is able to define the development policy of the company. The matrix will position the products/services in two ways: - the rate of growth of the market ; -the market share of a product/service offered facing the competitors/segments.

Noodles

Bakery

Consumer Flour

Revenues (RM) Growth Rate Operating Income (RM) Market Share

25,000,000 High 3,500,000

4,000,000 Low 1,178,000

5,000,000 Low (2,800,000)

Further Processes Meat Product 3,500,000 Low (1,350,000)

Cooking Oil

3,500,000 Low (1,400,000)

Retail, Food Bakery Raw and Ingredients Beverage Operation 4,500,000 4,500,000 Low (4,564,050) Low (4,699,900)

High

High

Low

Low

Low

Low

Low

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Question marks

They do not generate profits unless the company decides to invest resources to maintain and even increase the market share (become potential stars). They have a high demand for liquidity and the company must ask the question: Invest or give up the product? Stars

These are promising products for the company, they even can be considered as leaders of the industry. The strategy is to boost these products by appropriate investments to monitor the growth and maintain a position of strength. These products require a large amount of cash but also contribute to the company's profitability. They are becoming progressively cash cows with market saturation. Cash Cows

These are products or services which are mature and which generate interesting profits and cash, but need to be replaced because the future growth will be lower. They must therefore be profitable because they can finance other activities in progress (including stars and question marks . Dogs

These products are positioned in a declining market and highly competitive and that the company wants to get rid of soon as they become to expensive to maintain. The company must minimize the dogs .

Noodles

Consumer Flour, Further Processes Meat Product, Cooking Oil Retail Food &Beverage Operations, Bakery Raw Ingredients

Bakery

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OTHER BUSINESS/MANAGEMENT FUNCTION ISSUES

Johnson Pte Ltd is experiencing decline sales and increasing operating cost. In order to turnaround the company and making company profitable again Encik Azmi as a Chief Executive Officer need to plan and execute a turnaround programmed for the company and also consider other issues in making decision. Business strategy issues: Develop the product segment Products must meet customer requirements. Incurred cost in doing R&D for develop product. Acquired new technology. High risk in making innovative product. Maybe facing failure.

Invest in product segment Low in fund company gain loses every year. High risk to gain loss when investing. The product must high in future value.

Divest the product segment Redundancy of employee. High cost in divest the product. Might damage the reputation of the company. Have other product to make the profit The product surplus can be use as a inventory for other products.

1) 2) 3) 4) 5) 6)

ACTION PLAN

Noodles & bakery market penetration to Europe. Try seeking new partner in Europe for joint venture contract. Entrance to new segment of noodles market ( airlines agencies, hotel). Getting contract with airlines agencies and hotel in supplying noodles for their services. Product development of noodles & bakery- add bambusia powder. In bringing new nutrition to noodles & bakery product, add bambusia powder in the original recipes of noodles & product as bambusia powder rich in fibre nutrition. 7) Finance for investment in poultry farm. 8) As the bakery unit generate cash in excess, they could finance for investment in poultry farm.
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9) Seek of supplier that give relative low cost for consumer flour , further processes meat products, cooking oil, and retail, food & beverage operations.
10) Do survey on suppliers price. Consider supplier that gives best service and relative low price compared the others suppliers. 11) Close down the bakery raw ingredients factory. 12) Close down the bakery raw ingredients factory as this segment having lost highest than the other segments and it sales could not cover its variable expenses. Johnson Pte Ltd may sell that factory to potential manufacturer and income from selling that factory could use for recover bank overdraft . 13) Minimizing the cost of manufacturing further processes meat products by own poultry farm. 14) Johnson Pte Ltd may open up their own farm for supplying poultry product for product segment of further processes meat products. That could reduce cost for manufacturing further processes meat products. 15) Employee from bakery raw ingredients factory may join production in bakery s factory. 16) In avoiding redundancy payment, Johnson Pte Ltd may offer their staff to join the production in bakerys factory. 17) The inventory of bakery raw ingredients can be use for the production at bakerys factory. 18) Bring the inventory of bakery raw ingredient to bakerys factory to avoid loss.

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