The Hidden Traps and Benefits of Expansion

Transcription

1 The Hidden Traps and Benefits of Expansion By Stu Rosen Good morning. Thank you Scott Fischer and thank you ASB for inviting me to speak. (Slide 2) Today I want to kind of talk about what I titled here nicely, The Hidden Traps and Benefits of Expansion, getting the most out of your bakery. I described it yesterday to somebody as kind of solving mistakes we have made along the way. We could share them to hopefully have other people avoid them. I will say at the beginning here that as many kind of mistakes or stuff that you do not know that will happen before you get into a project, many of those get avoided by the help and assistance that other bakeries provide so as far as Dave mentioned, it is some of his themes. I think one of my themes and our themes is just that lending helped other members of the baking community either in the same segment or different segments. To us it is always good and it is always helpful and I know we would not have gotten to where we are today without the help of other bakeries and so we appreciate that along the way. As I look at expansion really we kind of see two layers of it. One is the really obvious stuff and even this is not so obvious sometimes, but you are looking at the cost, what is the cost of equipment. My presentation is more along the lines I think about adding a new line, a new capacity to your business. (Slide 3) So what is the cost of the equipment? What is the cost of the install? And, if it is something you have never installed before, we found you do not really know what that cost is until after you are done with the first one, but trying to get a hold on that and then the easy benefits are: (Slide 4) Is it going Mr. Stu Rosen, Executive Vice President of Highland Baking. When this gentleman is not focusing on finance, long-term strategy and business development, he is hands-on with his family-owned business in the bakery processes. Page 72

2 Traps & Benefits of Expansion to increase capacity? How much am I going to be able to sell off this line? What is my margin going to be? What is the potential efficiency savings if I am moving this from a less automated version to a more automated version? How much labor might I save? And then, is this going to add to just generally what I can do for our customer, whether it is a captive bakery, whether it is a private label or foodservice retail? Whatever it is, just, am I becoming more valuable and am I doing more for the customer? (Slide 5) Where we found we learn each time is in this second tier. We usually find as we do one line install and we learn something and then the next one we cover that, but then we learn something new and just try to keep building. These are the secondtier costs of expansion that sometimes do not become readily obvious until you are doing it. One is a utility and support upgrade. You might be able to put two or three lines in with your electric service that you have got and then unbeknownst you do not even know it until you start installing...you need to totally revamp, bring in another 4,000 amps or something into your building that just puts you into a whole...a really new cost situation with that expansion and usually these things creep up after you have already committed to the expansion. They are not always things you can go back and retool the decision, but you just try to add your next decision-making process. For us, startup time and focus is always a huge one too. You are usually expanding because you are in a busy situation and that is always a good thing, but that creates even more of how distracting are you going to get from your existing business and how much focus are you going to lose on that. One of the things we try to do is always try to have the biggest part of the install happen in one of the down parts of the year as much as we can. We are a little bit seasonal, and so to the best of your ability you try. Half the time, it does not work out correctly, but try your best. This is one we ran into actually with our last installation: Potential EPA and Regulatory Factors. I think environmental issues are becoming more and more prevalent in our industry depending on which state you are in. They can be more or less prevalent, but in our last install unbeknownst to us we went to apply to the Illinois Environmental Protection Agency. The capacity we were adding was going to put us into what is called a major source of environmental emissions as opposed to being at the lower level and that really was going to constrain us. Either we could not have run all our lines at the same time, or in this case we went to add, needed to add a catalytic oxidizer, reduce our emission significantly. The decision to go to catalytic oxidizer has a lot of benefits and it was a really good decision for us, but the cost of it really added about 10 percent to the cost of the line installation. Taking that into account at the beginning, we probably would have still done it, but it would have been nice to know at the beginning, the bank would have probably liked to know about it at the beginning also...little things like that. In all seriousness, it is one thing when you are able to go to your bank or whoever is lending to if you need to and say, This is my project, and that is where your project comes out. When you keep going over budget, they start to really look at you with different eyes the next time you go back and especially now where it is even harder to go back, you want to try to get everything in the first bundle. Tax consequences of increased efficiency. As the person who pays the bills or at least writes the checks in the bakery, that whole dollar thing is really important to me and I have found the tax both ways, that you can be harmed or helped by an installation. Lately with some of the good programs on bonus depreciation that the government has ran a couple of times over the last decade, it can be a tremendous savings to install a line. As a matter of fact, one of our line expansions really was tipped by that bonus depreciation to get it in this year and just take the risk and it can really change your cash flow model especially in your one, where if you are having...kind of scraping together to meet your part of the project, it can really be significant especially obviously if you are in a profitable situation where you would owe taxes. The other side of it is, your labor saving can be a disincentive because you are going to make a little bit more money which is always good, but you are going to pay more taxes then too. Changes to the plant environment, something that we continue to run into every day. Unfortunately, our industry is one where most bakeries are not environmentally perfectly controlled. Humidity, temperature. I know a few out there, but my experience is most are not and just in the summer in Chicago on the days it hits 100, just getting rid of the heat can be a tremendous challenge to both your operations for product quality as well as the safety of your people. Just looking at that and what changes to your plant might or maybe your plant just has a capacity that is really based Page 73

3 on your heat production and other things rather than your physical equipment. And then lastly, looking at your staffing needs. (Slide 6) There are a lot of second tier benefits of expansion. More spread-out overhead. In essence if you can expand and get your volume up, what you are making today hopefully becomes cheaper, again positive tax benefits I mention usually. With expansion, that is through depreciation. That can also be through R&D credits if R&D is involved and a lot of other things out there. Redundancy for customers. This is something we see a lot more. We are right now a single location bakery and we hear more customers saying, Well, what happens if a tornado hits your bakery? Unfortunately, adding stuff to your current plant does not help that, but it does answer questions that if you are going from one line to two lines of ability, it makes your customers feel a little bit more secure that even with hiccups to your operation you keep on going. And then opportunity for advancement in the organization. Continued expansion, continued pushing the envelope of what you are able to do we have found helps you retain good people because it gives you places for as people need to move up or have the ability to move up rather than moving to other organizations, you can retain them in house and so that is always been a big thing. So again, the whole thing to us is a balance...positive and negatives. Usually it starts with the costs of the equipment and the install and what you are going to be able to produce and sell off. But then you get into a lot of the other balancing acts. (Slide 7) Comparing the tax hit to the cost savings can really be a big item especially in cash flow if kind of decisionmaking is focused on cash flow. hopefully overall it is moving the bakery in the right way? Sometimes it can have a little bit of both in there and it usually starts with the quantitative side and projects for us usually do not advance, if they do not need a certain quantitative benchmark. (Slide 10) But then really it a lot of times also gets down to a qualitative side where your numbers are within some range and it could be good, it could be bad and then it is more of almost a gut feel of how do we feel we are going to be able to go forward, how do we feel our customers are going to react. Sometimes it is more not just guessing at that, but going out and talking to the customers, talking to your suppliers, talking to your equipment suppliers, talking to everybody that makes a difference to your company and just saying...hey, this is what we are thinking, what do you think of it...and it a lot of times will lead back. Take lots of feedback and opinions into account especially ultimately it is the manager/owner s decision, but taking the employees opinions into account. Even if you go the opposite way from what you thought, usually having them be part of that process is always a win. And not only taking the feedback opinions into account before the project, but getting them after the project and what went right, what went wrong, what could we do better for next time is always a huge thing for us. It has allowed us to keep on hopefully improving, growing and being better than we are. (Slide 11) And then, finally make a decision, get people onboard one way or another and then hope it all works out in the end. Thank you very much. (Slide 8) The labor situation. Not only are you giving people a chance to move up, but also do you have enough people to staff what you are expanding into and with the right skills. Sometimes you do. Sometimes we have found that very skilled people, a one size bakery can make the transition and then others cannot and so putting the right people in place to make sure you are getting the most of your investment. (Slide 9) And then really looking at it from the customer s perspective. Does this make you more valuable to them, less valuable to which of your customers and Page 74

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