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2017 Oregon Wine Symposium
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Approach – 90 minutes DEB – SETTING THE STAGE KEITH - WHAT DRIVES VALUE IN DIFFERENT BUSINESS MODELS? DEB - KEY TIPPING POINTS: WHAT HAPPENS WHEN I GROW? PANEL
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Who is in the audience? 1. Who is over 5k cases? 2. Who is going through transition? 3. How many would like to become more
profitable?
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Sobering but provocative headlines ‘About 28 percent of Oregon wine producers said they were in poor financial health, compared to 16 percent for the industry overall.’ MATEUSZ PERKOWSKI, CAPITAL PRESS
‘A quarter of winemakers say the financial health of their operations is poor, and many are considering exiting the business. More than 40 percent of Oregon winery owners say they may sell in the next five years.’ PETE DANKO, PORTLAND BUSINESS JOURNAL.
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WHAT is keeping you up at night? 1. Understanding how to drive cash flow. 2. Concerned about profitability. 3. Understanding whether we are spending enough. 4. Establishing realistic sales goals. 5. Do we have the right people in place?
WHAT does a healthy business look like?
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3 KEYS to success 1. Proactively drive revenues and contribution
margins – with 3 levers: ü Cases Produced/Sold + Price + Product/Channel Mix
2. Optimize metrics before trying to grow. 3. Develop a detailed and well capitalized action
plan, before growing.
“IF you understand these keys, you can move from breakeven to a sustainable business at any size.”
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“IT’S NOT WHAT YOU MAKE, IT’S WHAT YOU KEEP”
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What drives value in different business models? Keith Meyers, Perkins & Co
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Shift to running your business (rather than having your business run you)
1. Understand the dynamics of 3 scenarios. 2. Case premise:
ü Applying best practices ü ‘What a winery of a certain size and composition can
achieve when they are driving sustainable results.’ 3. ‘Doing it with purpose.’
ü OK to have cash flow or profitability constraints IF you understand key cost drivers in different models
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5,000 Cases
MetricsAverageRevenues/cs 234$ Breakeven cases 4,221AverageCOGS/cs 106$ Revenues 1,171,350$AverageGP/cs 129$ GrossProfit 643,017GrossMargin 55% OperatingProfit 100,179OperatingMargin 9% NetCashFlow 89,741$
ReturnonEquity 11.2% ReturnonAssets 6.9%
GrapeCosts19%
Production26%
SellingCosts25%
Overhead17%
OwnerComp4%
Interest0%
Taxes1%
Profits8%
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5,000 Cases - - Maximized
MetricsAverageRevenues/cs 260$ Breakeven cases 3,721AverageCOGS/cs 106$ Revenues 1,301,500$AverageGP/cs 155$ GrossProfit 773,167GrossMargin 59% OperatingProfit 197,792OperatingMargin 15% NetCashFlow 153,190$
ReturnonEquity 19.1% ReturnonAssets 11.8%
GrapeCosts18%
Production23%
SellingCosts25%
Overhead15%
OwnerComp4%
Interest0%
Taxes3%
Profits12%
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10,000 Cases
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20,000 Cases
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Summary: 3 scenarios
5kBaseline 5KMax. 10k 20kRevenues 1,171,350$ 1,301,500$ 2,429,467$ 4,511,867$GrossProfit 643,017$ 773,167$ 1,372,800$ 2,398,533$OperatingProfit 100,179$ 197,792$ 388,317$ 655,923$NetCashFlow 89,741$ 153,190$ 285,294$ 475,600$Channelmix:CaseVolume 5,000 5,000 10,000 20,000Wholesale/National/FOBcases 2,500 2,500 6,000 14,000DTC 2,500 2,500 4,000 6,000KeyMetricsAverageRevenues/cs 234$ 260$ 243$ 226$AverageCOGS/cs 106$ 106$ 106$ 106$AverageGP/cs 129$ 155$ 137$ 120$GrossMarginas%ofsales 55% 59% 57% 53%OperatingMarginas%ofsales 9% 15% 16% 15%ReturnonEquity 11.2% 19.1% 19.7% 18.3%
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Key Tipping points: what happens when I grow? Deborah Steinthal, Scion Advisors
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I. Entrepreneurial – ‘working IN your business.’
II. Formalization – ‘working ON your business.’
III. Maturity – ‘developing a team of leaders.’
Tipping points…
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Cousin partners Sibling partners Controlling Owner
Entrepreneurial Expansion/ Formalization Maturity O
wner
ship
Sta
ge
Business Stage
WHAT STAGE ARE YOU IN?
82%
11%
2%
Cristom Adelsheim
PONZI
Bethel Heights
Brittan Vineyards
Bergstrom
Sokol Blosser
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Key decisions: 5,000 growing to 10,000 cases Strategic
1. Plan with 5-year horizon 2. Sales plans driving
consistent revenues 3. Timing of key personnel? 4. Capital expansion trade
offs + timing!
Operational
1. Banking relationships 2. Simple cost accounting
and COGS reporting process
3. Simple sales reporting
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Key decisions: 10,000 growing to 20,000 cases Strategic
1. Cash flow and higher returns
2. Strong brand and customer experience
3. Optimized investments to build scalability
Operational
1. COGS and financial reporting
2. Strong banking partnership 3. Agility in sales 4. Culture of accountability
through management team
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Take aways about growth 1. Hire the right people and develop your own
leadership skills. 2. Focus brand and build a sales machine. 3. Manage complexity at every stage. 4. Embrace analytics before making key decisions.
The more you have at risk, the more costly the mistakes!
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Beware of growing pains ü Increasing production capacity ü Expanding into new markets ü Cash drain from inventory build-up
NEED FOR CAPITAL!
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Q&A - Panel: 60 minutes
3 Panelists 1. Deb Steinthal, Managing Director, Scion Advisors 2. Erik McLaughlin, Director, Exvere Inc. 3. Gary Mortenson, President, Stoller Family Estates
How to build sustainability at each stage? Moderator: Keith Meyers, Perkins & Co.
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Questions?
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Vision Incentives Skills Resources Action Plan CHANGE
Incentives Skills Resources Action Plan Confusion
Vision Incentives Resources Action Plan Anxiety
Vision Skills Resources Action Plan Resistance
Vision Incentives Skills Action Plan Frustration
Vision Incentives Skills Resources False Starts
Managing growth: What is the organization feeling?
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Approach – 70 minutes DEB – SETTING THE STAGE
KEITH - HOW DO YOU KNOW YOU HAVE A HEALTHY BUSINESS?
DEB - HOW TO ASSESS THE HEALTH OF YOUR BUSINESS?
Q&A
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Who is in the audience? 1. Who is over 5k cases? 2. Who is going through transition? 3. How many would like to become more
profitable?
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Sobering but provocative headlines
About 28 percent of Oregon wine producers said they were in poor financial health, compared to 16 percent for the industry overall (surveyed by Silicon Valley Bank, a wine industry lender), BY MATEUSZ PERKOWSKI, CAPITAL PRESS
A quarter of winemakers say the financial health of their operations is poor, and many are considering exiting the business. More than 40 percent of Oregon winery owners say they may sell in the next five years. By Pete Danko, Portland Business Journal.
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WHAT is keeping you up at night? 1. Understanding how to drive cash flow 2. Concerned about profitability 3. Understanding whether we are spending enough 4. Establishing realistic sales goals 5. Do we have the right people in place?
OWA 2017 Symposium
How do I know I am healthy?
2017 Oregon Wine Symposium 6
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“You can’t measure what you have until you know what you want!”
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Core concepts • What is your goal or vision? • What will it take to sustain it? • How to measure your progress?
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“IT’S NOT ABOUT WHAT YOU MAKE, IT’S WHAT YOU KEEP”
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How do you know you have a healthy business? Keith Meyers, Perkins & Co
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IT BEGINS WITH UNDERSTANDING WHAT
DRIVES VALUE
VALUE STARTS WITH CASH FLOW
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Why CASH FLOW is important! 1. Fund business expansion (including inventory) 2. Pay down debt 3. Buy out stakeholders 4. Distribute to stakeholders 5. Fund growth of family members in the business
More flexibility to meet ownership goals
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Cash flow directly impacts VALUE Cash Flow
-------------------- = VALUE Risk
When you increase cash flow, you elevate the return on your investment in the business and increase the value to a prospective buyer.
- Growth
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What is CASH FLOW? Net Operating Profit (after tax) – NOPAT
+ Depreciation and Amortization
+ Change in Working Capital
+ Bought or Sold Assets
+ Borrowed or Paid-Down Debt
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What is NOPAT? + Net Revenue (Sales price or FOB – Allowances) ― Direct Expenses and Indirect Expenses = EBIT (Earnings before Interest and Taxes) ― Taxes = NOPAT
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What is COGS? • Grapes/Bulk Wine
ü Estate = farming costs and depreciation on improvements
ü Purchased Fruit ü Bulk wine purchases
• Bottling Expenses and warehousing • Overhead allocated to COGS
ü Production facility, labor, maintenance and repairs for facility/equipment, supplies, etc.
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What is Capital Employed? + Net Working Capital (cash, receivables, less
payables)
+ Wine (bulk & finished) & Supplies Inventory
+ Net Winery Assets
― Long-term debt
= Capital Employed
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What is Return on Investment (ROI)
Net operating profit after tax (NOPAT)
Capital employed
> After tax cost of debt > 10% > Timeframe: within 3 years
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Base Case – 5,000 case producer
CasesProduced 5,000 ProductMix Cost/ton Ratio Retail/btlCasesSold 100% 5,000 Hi 3,500$ 20% 35.00$Salescosts 25% Med 2,800$ 40% 28.00$Overhead 200,000$ Lo 1,800$ 40% 18.00$OwnerComp. 50,000$
ChannelAllocation CasesRetail 0.4 2,000Distribution 0.6 3,000
Assumptions:
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Base Case – 5,000 case producer Breakeven
MetricsAverageRevenues/cs 203$AverageCOGS/cs 102$AverageGP/cs 100$GrossMargin 50%OperatingMargin 0%
Breakeven cases 5,016Revenues 1,013,460$GrossProfit 501,793OperatingProfit (1,572)NetCashFlow (4,072)$
ReturnonAssets -0.3%ReturnonEquity -0.5%
GrapeCosts20%
Production29%SellingCosts
24%
Overhead19%
OwnerComp5%
Interest0%
Taxes-3%
Profits0%
21 Base Case – 5,000 case producer Value Drivers
• Cases Produced/Sold • Sales Price • Product Mix • Channel Allocation
CasesProduced 5,000 ProductMix Cost/ton Ratio Retail/btlCasesSold 100% 5,000 Hi 3,500$ 20% 35.00$Salescosts 25% Med 2,800$ 40% 28.00$Overhead 200,000$ Lo 1,800$ 40% 18.00$OwnerComp. 50,000$
ChannelAllocation CasesRetail 0.4 2,000Distribution 0.6 3,000
Assumptions:
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Scenario 1 – Increase DTC
MetricsAverageRevenues/cs 217$AverageCOGS/cs 102$AverageGP/cs 115$GrossMargin 53%OperatingMargin 5%
Breakeven cases 4,541Revenues 1,085,850$GrossProfit 574,183OperatingProfit 52,721NetCashFlow 50,221$
ReturnonAssets 3.9%ReturnonEquity 6.3%
GrapeCosts19%
Production27%
SellingCosts25%
Overhead18%
OwnerComp5%
Interest0%
Taxes-1%
Profits5%
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Scenario 2 – Change Product Mix Increase volumes at mid-range
MetricsAverageRevenues/cs 219$AverageCOGS/cs 106$AverageGP/cs 113$GrossMargin 52%OperatingMargin 4%
Breakeven cases 4,632Revenues 1,093,260$GrossProfit 564,927OperatingProfit 41,612NetCashFlow 39,112$
ReturnonAssets 3.0%ReturnonEquity 4.9%
GrapeCosts21%
Production27%
SellingCosts25%
Overhead18%
OwnerComp4%
Interest0%
Taxes-1%
Profits4%
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Scenario 3 – Change Product Mix and Sales Channel
MetricsAverageRevenues/cs 234$AverageCOGS/cs 106$AverageGP/cs 129$GrossMargin 55%OperatingMargin 9%
Breakeven cases 4,221Revenues 1,171,350$GrossProfit 643,017OperatingProfit 100,179NetCashFlow 89,741$
ReturnonAssets 6.9%ReturnonEquity 11.2%
GrapeCosts19%
Production26%
SellingCosts25%
Overhead17%
OwnerComp4%
Interest0%
Taxes1% Profits
8%
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Know your GP per channel/varietal
Pinot Noir– 2,000 cases $35 GP of $25 or $8 Chardonnay – 1,000 cases $28 GP of $19 or $5 Pinot Gris, Blanc – 1,500 cases $18) GP of $11 or $1.50
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Recap
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How to improve CASH FLOW
1. Address periphery varietals 2. Keep volume & sales forecasts current 3. Update your profit scenarios 4. Do a realistic CASH FLOW forecast 5. Raise more cash than you think you need 6. Review capital spending and expense plans
Monitor your winery’s health regularly!
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How to assess the health of your business? Deborah Steinthal, Scion Advisors
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Early Warning Signs
ü Complexity and confusion!
ü Financial misses @$!*
ü Slow like mud …
Trouble in Camelot – WHAT CAN I DO?
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Business performance management: need to diagnose the issues • A set of management and analytic processes,
supported by technology • Enable businesses to define strategic goals • And measure and manage performance against
those goals
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Business health: 5 ways to take your temperature 1. Peer Benchmark analysis 2. Operating gap analysis 3. Scenario planning 4. Market opportunity analysis 5. Business valuations
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PEER BENCHMARK ANALYSIS
WHAT? Compare your financial results against peers and your own progress WHY? To make strategic decisions about growth.
Frequency? Annually + when you have key decision
Sources? 3rd party -
Industry Bank or CPA firm or a company like Scion Advisors.
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Benchmark example
Where are opportunities to improve things?
• Operating expenses • Price, Product and Channel Mix!
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Rules of thumb • Gross margin targets
• $50-100 segment 70% • $25-50 segment 60-65% • $15-25 segment 50-55%
• Marketing, Sales and G&A expense targets 30-35%
• Operating profit (EBIT) targets • $50-100 segment 40% • $25-50 segment 35% • $15-25 segment 25%
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OPERATIONS GAP ANALYSIS
WHAT? Measure your practices against peers or leading practitioner. WHY? To reduce costs and improve effectiveness.
Frequency? Ongoing Sources? 3rd party -
CPA firm or a company like Scion Advisors.
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How do I measure up? 1. Strategic planning? 2. Operations planning? 3. Financial planning? 4. Accounting practices? 5. Market and sales practices? 6. Brand equity? 7. Production planning? 8. Organization and Leadership? 9. Bench strength and Succession? 10. Governance?
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SCENARIO PLANNING
WHAT? Test out concepts BEFORE moving to action. WHY? Avoid making costly decisions, by understanding how profitability is affected by your concepts.
Frequency? Annually + whenever making a key decision
Sources? Strong CFO or
CPA firm or a company like Scion Advisors.
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‘What if I …. want to grow profits?’
TotalVolume
retail$$/case
AverageGP/case
GP%sales
Pinot Noir 1000 $35 $279 66%Pinot Noir 1000 $28 $159 47%Chardonnay 1000 $28 $142 42%Pinot Gris 1000 $18 $33 15%Viognier 1000 $18 $33 15% 5000
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Rationalize your portfolio: Options
1. Decrease costs across the company 2. Reduce assets by varietal (inventory
management) 3. Increase price or change channel
How to drive more profitability?
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Increase price or shift channel
TotalVolume DTCchannel FOBchannel retail$$/caseAverageGP/
caseGP
%salesPinot Noir 1000 900 100 $35 $279 66%Pinot Noir 1000 600 400 $28 $159 47%Chardonnay 1000 500 500 $28 $142 42%Pinot Gris 1000 - 1,000 $18 $33 15%Viognier 1000 - 1,000 $18 $33 15% 5000 2,000 3,000
57% GP%Sales
Volume DTC
channelFOB
channelretail$/Case
AverageGP/case
GP%sales
Pinot Noir 1000 900 100 $35 $279 66%Pinot Noir 1000 600 400 $31 $188 50%Chardonnay 1000 700 300 $28 $176 52%Pinot Gris 1000 1,000 - $18 $141 65%
Viognier 1000 1,000 - $18 $141 65%
5000 4,200 800
65% GP%Sales
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What now? Fill the gaps! Benchmarking ü Fix impacts of
underperforming ü Prune some
products, increase price or change channel
ü Decrease costs across the company
Gap Analyses ü Invest in optics:
Finance, sales, production
ü Implement performance management
ü Develop/hire stronger managers
ü Manage costs & risks ü Get outside-in
perspectives
Run best and worst case Scenarios!
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“RUN YOUR BUSINESS AS IF YOU ARE GOING TO SELL” Enables you …
ü To maximize the value of your business ü To achieve the highest price possible
By adopting best practices!
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Questions?
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