Pop'n Bottles PNB financial ratios and sales improvement strategy

Pop'n Bottles PNB

Quarterly Management Report

Financial Ratios and Discussion

PNB INCOME RATIOS

You can see that income to sales has fallen, this is because sales have fallen and thus cost is larger share of income.

This is #1 variable to fix; if we increase sales, that will be higher relative to income.

Result of this being so low?

= Our credit rating fell to 3 from

-So did everyone elses' except T3

-Why didn't theirs fall? Higher INCOME

= Fix this = #1 challenge.

= Increase sales. See above, talked about all time up till now.

GRAPH LIQUIDITY PNB SINCE TAKEOVER

This is why we have increased current cash in order to invest in SALES FORCE: MORE SALES PEOPLE

POTENTIAL EXPANSION

and also, now since two days ago,

DEALING WITH NOTICE 2.

We're glad we have it, cash makes operations work.

We will pay some of this down in Stock buyback

Bond buyback ongoing (every quarter as revenue allows) but

Now that we have NOTICE 2, we want to keep like $1.5 mill on hand at all times

To be able to deal w / EPA.

NEXT SLIDE

DEBT & ASSET TURNOVER SINCE TAKEOVER

Debt to assets and debt to equity will fall as we buy back bonds

More bonds than equity =

Debt to equity will improve as we buy them back down;

= Debt level will fall faster than shares out,

= This will improve even if we spend same amount on both every quarter

i.e. debt will fall faster than equity.

This will

Increase stock price by improving debt ratios and then stock price will increase even more after debt is paid down and we buy back more shares.

Total asset turnover ratio is what we want to increase most, how?

SALES. See above. (We've discussed at length already)

NEW SLIDE

PNB PROFITABILITY RATIOS

Again, these all depend on sales. If we can increase sales, particularly at home

=FOCUS on HOME AREA, MOST PROFITABLE

these will improve.

Sill reeling from the problems caused by NOTICE 1.

= ONLY NOW MOPPING UP the DAMAGE FROM THAT YES

How do we increse sales / fix these / make them go up again? See above. They're working on it.

NEW SLIDE SALES to ASSETS

Ultimately, this is where the gold is, #1 Goal is to KEEP FIXED ASSETS CONSTANT

TURN THOSE OVER FASTER

= improve this ratio, = higher sales with fixed plant, sales force, advertising,

= higher return on ADVERTISING DOLLARS SPENT

PAYROLL in SALES and LABOR

LOWER TRANSPORT COST PER UNIT

LOWER COST PER UNIT to MAKE

All of this by maximizing sales to assets i.e. ASSET TURNOVER RATIO

THIS IS OUR FAVORITE INDICATOR, besides net profit.

So, in summary, these are our objectives in future (group gathers round)

INCREASE SALES USING SAME PLANT, LABOR, SALES FORCE

= INCREASE SALES PRODUCTIVITY

-THERE IS SUCH THING as TOO MUCH ADVERTISING,

for us it's over about $80 right now

THERE IS SUCH THING as TOO MUCH SALES FORCE

Measured by sales force productivity

THERE IS TOO MUCH R&D

Depends on what quality model using

AVOID VOLATILITY

Disrupts sales

BE PREPARED for RISK

"Notice 1," "Notice 2" =

KEEP CASH on HAND

Applying these principles will INCREASE OUR FUNDAMENTALS

= INCREASE ROA, ROE

= INCREASE STOCK PRICE.

These are the most important steps we can take to MAXIMIZE VALUE for OUR SHAREHOLDERS

and Thank the Board of Directors for their oversight-

OUT

DONE

CEO TALK POINTS

Slide 1 SITUATION AUDIT

"What Happened"?

were in 2nd;

went down to 4th;

now we're in close 3rd you can see that in the graph.

SHOW THEM the GREEN bar Team 4

Slide 2: "Notice."

Was a trick

Decis tree indicated "do nothing" but wanted to be prepared for court fight

Responsibility to shareholders

= Diversified risk over larger share pool = less fx on EPS;

ie sold a bunch of shares

SHOW THEM PIE CHARTS

Black part = how much value per share would have been destroyed had we lost

2 whole quarters of output plus punitive damages

"trust fund money" also was cash to use for expansion

BUT: that didn't work: WHY?

-we switched to new product, as demanded by "Notice."

-we chose premium product, = higher cost.

= higher price.

>> we found out that higher price cut into sales, very much.

= customer does not necessarily want higher quality.

-problem is can't go back from that.

The other problem was, no one else responded.

= our sales plummet;

= our stock price plummets; but no one elses'.

DIVIDEND

And then, the next quarter, we paid out DIVIDEND.

$74,000. = a penny a share.

Pie chart 99/1% shows how little amount that was but

We were first to issue yes = win

Shows we will probably pay out dividend in future again BIGGER!

Didn't hurt cash that much to show that we know we should issue divi's.

Why?

In real world, investors usually WANT dividends, and issuing a dividend within a year of taking over management, displays the ability to generate enough cash that we can pay some out and thus this is a sign of confidence and performance.

This usually improves share price, in theory.

Did this improve our share price? Perhaps. We can't tell because all of the other noise from accidental bond issue ruining our debt-to-equity ratio;

also model change and sales drop from "Notice" that we responsibly prepared for, mistakenly it turns out.

BUT, overall, we've

-been trying to push the edge, instead of just coast along;

-have been exploring the parameters to see what works and what doesn't;

Notice or no notice, this is evidenced by -we were first to expand plant; shows decisive leadership;

-1st to issue dividend; shows performance for shareholders;

-highest sales force first, although that is eroding;

-- and other factors. Discovered limits to return on advertising etc., although strict measurement of that was confounded by price change; result is, these are all testing to see how dialing in various factors affects bottom line.

SALES talk points

Problem / Decision Statement:

THIS IS SALES VP

Fix this capital structure problem: Too much debt, equity now

What have been the costs of this adaptive strategy?

-Never had a bank loan yet;

-Never had layoff cost or idled plant cost or overtime;

-Are surviving ok-ish all these mistakes notwithstanding; = anyway.

-We and 2 other teams now have credit rating of 3

Team 3 has CR of 2 still, even tho they had 2 emergency bank loans!

BUT, they have much higher income; assets etc.

Theirs in fact is the winning strategy so far, sell the lowest-quality product for higher prices than the premium product.

CHART W / YELLOW, GREEN BARS:

LOOK at CHART: can you see that

First and last sales go up when the price goes down?

But not for all groups, only ones on ends?

Other groups sales fluctuate even tho price stays same.

These are two different results: What's the deal?

= sales go up even tho price doesn't change: = ?

plus also, sales go up when lower price: = ?

BUT, our sales aren't as high as we want them to be, = how to fix?

This is the question. Simply lowering price helps but does not guarantee!

= must figure out how to increase sales. Just dropping price didn't work as much as wanted.

= there must be something else going on. WHAT?

DIFFERENT PRODUCTS

T1 and PNB both switched to premium model 2;

T2 switched to low-grade model 2;

T3 kept selling the oldest, mid-grade model 1.

T3 has also kept their prices and other variables relatively constant compared to the other teams.

THIS MEANS different factors affect different products, not just as easy as,

Increase production (no help w/o sales)

Increase advertising: we did that, didn't work ENOUGH

More sales force: ditto last comment NOT ENOUGH

But, THESE ARE BASICALLY ONLY TOOLS we have to affect sales

= What's the deal?

= use REGRESSION.

Using regression to find 'correlation coefficient' [(this is in assignment yes)]

Shows differences in different factors for various different products.

NOT ALL SALES FACTORS ARE SAME!

SOME SALES WENT UP, EVEN WHEN PRICE GOES UP: = ?

= MUST FIND explanation.

Script p. 6 explains this to YOU in more detail. Google "correlation coefficient" if you don't know what it is.

OK yellow and blue squiggly lines:

Two in middle don't show any trend:

sales go up and down both at same time price goes up / stays same; etc. CAN U. SEE?

Two on ends show clearly that when price goes down sales goes up.

We would LIKE for sales and PRICE to BOTH GO UP

This is the goal. The two on the ends show clear trends; but not ones in middle.

This shows we can increase performance if we can get to being like the MIDDLE groups.

Both sales performance and return on expenditures.

Next graph, two up two down. Remember, 1 = 100% correlation!

Correlation coefficients tell us this is true; and exactly how much!

The downward negative ones =

"SALES and PRICE MOVE in OPPOSITE DIRECTION, STRONGLY."

The two UPWARD ones = "SALES, PRICE MOVE in SAME DIRECTION, WEAKLY"

= WHAT'S the DEAL? NOT SAME.

Other factors at play besides just price alone.

Likewise next graph, sales to ADVERTISING.

IF more advertising = more sales, then ALL of THEM WOULD BE 100% (1 = 100%).

WE spent 25% more advertising than everyone else but our bar is NOT as HIGH

= THERE IS SUCH THING as "TOO MUCH ADVERTISING YES"

And we found it. = Cut advertising won't hurt sales, but WILL save money.

AND this is borne out by NEXT slide, where GREEN LINE dips far lower than all the rest: =

We're spending too much, not getting competitive performance out of our advertising $$s.

THIS IS a BIG DEAL, it MEANS DON'T SPEND SO MUCH;

WE WOULDN'T KNOW THAT WITHOUT DOING THIS

The same thing basically goes for number of Salespeople as well.

Point is, the consumer SEEMS to want lowest-quality product, at HIGHER PRICES!!

This is totally irrational result.

= There must be a FAMILIARITY effect,

= DON'T CHANGE PRICE, or PRODUCT if CAN AVOID it!!!!!

= that hurts sales.

+ we found this all by running 'correlations,' using LINEAR REGRESSION

STOP.

PRODUCTION talk

STILL on "SF PRODUCTIVITY" SLIDE

FAMILIARITY EFFECT sales just discussed: =

Don't change models so much

Weakens return on advertising + sales force;

Why is this? Probably retailers (our consumers) don't want to change bottles all the time.

This makes more sense the bigger our purchasers are.

More small purchasers = weaker familiarity effect

Fewer large buyers = strong familiarity fx

= don't waste money on too much advertsg ditto sales force number of sales people.

HOW has production been anyway?

NEVER HAD LAYOFF COST from idle lines = GREAT

Carry inventory most times but this also good

Reduces "stockout cost" ie damage from running out.

Storage not that expensive; inventory not too high.

Inventory should clear in high sales seasons, =

Plant is running as smoothly as possibly could given sales.

Will increase lines but need to see increase in sales volume FIRST,

or ends up in LAYOFF COST = BAD.

= Production is exactly where it should be now, until sales increase.

R&D however, has not really produced any major savings:

= Maybe spending too much on that right now too,

= Can still get same value for less perhaps, improve profitability BOTTOM LINE.

WHAT ABOUT SERENO? Go to Sereno slide

Team 3 has major sales in Sereno;

They also have highest number of sales force in Sereno;

This cuts down on their transportation cost, but Just having a factory DOES NOT GUARANTEE SALES

= if we can OUTSELL THEM down there, their factory = a LIABILITY, not an asset.

We could improve profitability cutting transpo cost by building plant down there,

But NEED SALES FIRST

In order to be viable, or else

THAT WOULD BE HUGE LIABILITY having unused plant w / no sales.

Just the fact that they have factory, DOES NOT EXPLAIN why their SALES are too high,

UNLESS there is a "Home Town Loyalty" effect,

Which also may explain higher sales at home for the Merica regions.

= "Made in Sereno" may help them, but if we don't have sales, = DON'T BUILD PLANT THERE NO

and also in GENERAL.

JUST EXPANDING PLANT does NOT = MORE SALES.

Would be BAD MISTAKE until sales picks up.

Hence LOWER PRICE, = trying to take over MARKET SHARE.

But from FAMILIARITY effect / i.e. damaging sales cost of MODEL CHANGE,

= DON'T CHANGE MODEL; until sales pick up.

Stop. Next = Finance.

Pop'n Bottles, Inc.

PNB

AGENDA, Quarterly Management Report 1

I. Introductions and thanks: Board of Directors; Shareholders

II. CEO's Introduction, "Notice"

III. VP Sales: Past, Future: Using real information to recapture market share.

IV. VP Production: Performance update; necessary factors for growth

V. VP Finance: Performance indicators Year 1; How to improve, dial those in.

VI. Summary Question & Answer

VII. Thank You for Joining Us for Year 2!

QMR 1 Presentation.

Pop'n Bottles: Well, here we are: As always, THANK the BOARD for their time

I. Situation Audit

("situation audit" required in assig't)

BILLY:

So, What have we learned so far? How have we adapted to a competitive and changing environment? Were doing fine, at first; What happened?

Were doing fine: 2nd place; sales good; indicators good etc.

What happened?

"Notice."

Someone played a trick on us all..

We responded to that; how?

(DECIS TREE, handout in packet: DO YOU STILL HAVE? I CAN'T FIND!!!)

We realized they couldn't PROVE it was bottles (drink in bottles; other foods, etc.)

BUT, Wanted to be prepared, responsible to our shareholders in case legal battle,

= Diversified risk over larger share pool = less fx on EPS;

We sold 1.4 million new shares, went from 6 mil. To 7.4 mil.

Took out 1 mill bond just in case, "responsibity to shareholders"

The goal was to minimize damage per share. This is what we PLANNED on doing!

This gave us cash for the alleged "trust fund" demanded by (Notice), as a show of good faith on our part, and also to cover legal costs for a challenge, which we planned on doing, but then it disappeared. Nevermind!

But we could also use that cash anyway, for expansion or a sales push, an agressive increase in sales force on the ground, which we did.

BUT: that didn't work: WHY?

-we switched to new product, as demanded by "Notice."

-we chose premium product, = higher cost.

= higher price.

>> we found out that higher price cut into sales, very much.

= customer does not necessarily want higher quality.

-problem is can't go back from that.

The other problem was, no one else responded.

= our sales plummet;

= our stock price plummets; but no one elses'.

= Other teams get the reward of our lost market share, because they ignored threat of lawsuit but we prepared for it.

another team had already upgraded product before "Notice."

their sales fell too but their price was waaay high ($12).

What is the learning outcome from this? Disregard stuff like this? These things are just bluffs? We still think being prepared was responsible thing to do.

DIVIDEND

And then, the next quarter, we paid out DIVIDEND.

$74,000. = a penny a share.

PEOPLE FEAR CHANGE

Either that or there is a "familiarity effect" that is not reported on the Industry Reports, that what the customer will pay more for, is the same thing all the time.

This makes sense considering plastic bottles are an input to a retail product, and the retailers probably don't want to change their packaging every quarter.

But this does not necessarily hold if there are diverse retailers, because some of them would change their product occasionally, new sellers would enter and other firms would die. So, there should be a baseline volatility such that simply producing the same thing all the time would not be the determining factor because in that case advertising would have no effect on sales at all, but it is in fact just as strongly correlated for those firms who have changed their prices and model the least.

Advertising makes a difference in unit sales, but that is weakened by price and model change.

LEARNING OUTCOME

Therefore, overall, the message from this game so far is that the winning strategy is to continue to sell the same low-grade product as long as possible because consumers will pay even more for that than for premium product, as long as it remains the same all the time.

This suggests we should "upgrade" (really downgrade), to the lowest-quality model 3 except that would necessitate a price change, which is apparently the kiss of death in this game.

Therefore, we can only continue selling model 2.1, and also suggests expenditure on R&D is a somewhat of a waste.

This suggests wasting money on R&D is a mistake, if it doesn't deliver cost savings, plus also volatility hurts sales. The new products they've sent us are more expensive, they haven't achieved significant cost savings, and the customer wants the same old low-quality product and in fact are willing to pay more for that, so why waste money trying to innovate?

THE FUTURE

We do however, need to keep our sales force up.

This is constant cost of training, in advance, to preempt SF death.

This is probably #1 best investment we need to increase;

BUT, not all SF are the SAME!!! Makes a bigger difference at low sales volume, and LOW PRICE, than it does at HIGH price, as you can see by our green T4 line, where sales force productivity fell, even though absolute levels were high, because we raised price too high. Team 1 is getting better at it, even though they're just behind us in 4th.

On the other hand, the other two teams seem to be hitting the top end of sales force productivity. = (don't tell them but they should stop growing SF, perhaps)

Other weaknesses, threats?

Are we worried about having plant in Sereno? Not really. No point in building product if sales force can't compete with higher-priced, lower-quality product anyway. Rather just win at home in our own territory;

Does this mean we give up Sereno? NO, we've actually been relatively competitive there until just last quarter, even considering all the volatility problems interjected by the "Notice" affair.

Again however, having a plant in Sereno wouldn't mean a thing if it wasn't for SALES FORCE, unless there is some kind of HOMETOWN LOYALTY EFFECT we don't know about, along with the FAMILIARITY / non-volatility effects we're starting to notice.

THIS IS VP FINANCE 2

I WILL SPEND SOME TIME W / TALKING POINTS EXPLAINING LAST FEW SLIDES W / ALL INDICATORS YES

VULNERABILITIES / exposure.

-transit. = 'Strike.' Our main vulnerability is to transit costs, therefore we expect a strike next, or at least the Threat of that, that is. As we learned from "Notice," these are just bluffs that we can ignore without taking action. No problem. Disregard.

-cost pressure. increased costs likely but that affects all producers the same maybe not?

-usual exchange and interest rate risks like mentioned in every corporate 10k. etc.

Other than that, summary is:

-keep up sales force, but not too high!

-ditto with advertising there is such a thing as too much of both YES

-keep price low if POSSIBLE but otherwise

-reduce VOLATILITY!!!!

These are the things we've learned so far, we still don't feel it was wrong to be prepared against NOTICE; but we do have to get the capital structure back into whack.

Once we can regain some market share with low prices these two quarters,

Then will consider changing product depending on what others do;

Then again, looking at team 3, MAYBE NOT!!! THANKS AGAIN