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2016 Review

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  1. 2016 Review Prepared for the Chronos Board of Directors April 23, 2014

  2. Agenda • 2016 Summary • Finance • Marketing • Operations • 2017 Overview and Future Outlook • Compensation Plan • Game Wrap-Up

  3. 2016 Summary Products • Sprout: High End • Evergreen: Low End Business • Sales: 1st in world 4, 2nd in all worlds • Profits: 3rd in world 4, 4th in all worlds

  4. Competition Landscape • C3 & C5 specializing in P2 • C1 in the middle ground for P1 & P2 • C4 is closely positioned but inferior to Chronos

  5. Items that require Board Approval • Dividend policy: $3MM/quarter • Debt policy: $1MM/quarter

  6. Finance Jason Chen

  7. 2016 Financial Performance

  8. Balance Sheet

  9. Income Statement

  10. Cash Flow Statement

  11. Value created • 3 yr annuity of NI: $35.5MM • 3 yr annuity of Econ Profit: $32.5MM • 3 year annuity of NOPAT: $44MM • Perpetuity of business: $147.5MM • Perpetuity of net income: $4.3B

  12. 2017 Financial Goals

  13. Marketing Madison Rabson & Eric Bae

  14. Goals for 2016 • Push Sprout as a winning product • Increase marketing consulting by 15% by Q4 • Continue to occupy the lower quality market for product 2 with Evergreen • Increase marketing expenses in Europe and the U.S. in order to increase market share • Adjust marketing expenses every quarter so as to stay above 20% in Japan • Focus on winning government contracts

  15. Notable Achievements of 2016 • Won ¾ Government contracts for Sprout • Evergreen green value 98.73% • Highest quality for P1 across all companies • Gained 26% of P1 market share in Japan • 2nd highest overall total sales across all companies

  16. Sprout Sales and Marketing

  17. Evergreen Sales and Marketing

  18. Sprout Quality and Green v World Averages

  19. Product Positioning for Sprout 2013 High Quality 2014 S S S S 2015 2016 Least Green Most Green Low Quality

  20. 2016 Sprout is High-End Product

  21. Evergreen Quality and Green v World Averages

  22. Product Positioning for Evergreen 2013 High Quality 2014 E E E E 2015 2016 Least Green Most Green Low Quality

  23. 2016 Evergreen is Low-End Product

  24. Characteristics of Competition • Company 3 • Highest overall sales (Chronos #2) • Lowest prices in most countries for product 1 (C5) • Lowest quality in product 1 (76.7% below Chronos) • Highest prices in every country for product 2 • Highest quality in product 2 (21.4% above Chronos) • Spending well over $6 million for quality of product 2 • Have essentially abandoned quality of product 1 • Green values are unknown

  25. Characteristics of Competition • Company 4 • Unstable sales record, although currently in 3rd place • Highest quality of product 1 (0.4% above Chronos) • Prices very competitive with Chronos in P1 • Low quality of product 1 (7.8% above Chronos) • Prices competitive with Chronos in P2 • Never wins government contracts • Green values are unknown

  26. Chronos v. Competition

  27. Long Term Plans for Future Management • Build up Evergreen and develop the product through more R&D • Maintain competitive advantage of Sprout through marketing and green • Continue to invest in marketing consultants • Promote Chronos as an environmentally friendly and green brand

  28. Operations Lisa Cherkassky & Sophy Chu

  29. Goals for 2016 • Inventory control: 15% goal • Production consulting: gradual increase Sprout: 80% Evergreen: 20% • Purchase more shipping containers to stay at 110% of sales • Capacity utilization: 100% capacity goal

  30. 2016 Strategy Results • Inventory control: • No stockouts • Sprout jumps at Q4 • Production consulting increased to 600,000: • Variable costs minimally affected • For Sprout: variable cost correlated with Quality • Shipping capacity with respect to demand: • No emergency purchases • Capacity utilization: Closer to 100% utilization

  31. 2016 Inventory

  32. Higher Quality ⇒ Higher Variable Costs

  33. Higher Quality for Evergreen

  34. Shipping Containers

  35. Capacity Utilization Recap (2014-2016) Sprout Evergreen

  36. (Holding fixed costs constant) Total Production Costs: $266,523,000 Total Construction Costs: $2,812,385 Production Budget Projections Variable Cost Assumptions:

  37. Operations Recommendations • Prevent Stockouts: Spend on production and construction costs to prevent stockouts • Capacity Control: Do not decrease units of capacity unless capacity utilization is significantly low • Shipping Containers: 110% of demand; prioritize shipping destinations based on higher opportunity • Consultants: Countries with variable costs that depend on the quality have variable costs correlated positively with quality

  38. Germany for Thought Consider expanding Evergreen to Germany: • R&D efficiency • High quality • Advantage in German and UK markets (no tariffs) • Great profit margin

  39. Future Outlook Jason Chen

  40. Defendable Position? • Sprout has no competitors with a similar position • Evergreen occupies a profitable market segment

  41. Possible Merger • Merge with Company 3 • Company 3 • Premium P2 product • Possibly consider dropping economy P1 product • Chronos: Premium P1 product

  42. Items that require Board Approval • Dividend policy: $3MM/quarter • Debt policy: $1MM/quarter

  43. 2016 Compensation Jason Chen

  44. Salary Increase

  45. Bonus

  46. Modifications and Improvements

  47. Modifications and Improvements • Financial measures: LT vs. ST • Fwd looking/predictive vs. backward looking • Alternative strategy • Golden strategy: High quality/price/profit margin premium product strategy • Strategically wage price war in economy market • Trade payables: Operating Costs • Super cheap P1: max profit in contracts

  48. Appendices

  49. 3 year forward income statement

  50. 3 year forward balance sheet