INTRODUCTION:

Euroland Foods S.A is a multinational producer of high quality ice cream, yogurt, bottled water and fruit juices. Its products are primarily sold throughout Scandinavia, Britain, Belgium, the Netherlands, Luxembourg, western Germany, and northern France. In early January 2001, the senior management committee of Euroland Foods S.A was called together to come up with the firm’s capital budget for the new year. There were 11 projects up for consideration that the committee was faced with and had totaled more than (euro) EUR316 million. Unfortunately the board of directors had set in place a spending limit of EUR120 million. Even with this restriction the investment at this rate would cause a major increase in the firm’s current asset base of EUR965 million. The firm’s main challenge was to allocate the funds among a range of projects to satisfy the following: new-product introduction, acquisition, market expansion, efficiency improvements, preventative maintenance, safety, and pollution control.

BACKGROUND OF FIRM: Theo Verdin, a Belgium Farmer, as an offshoot of his dairy business, founded Euroland Foods S.A in the year 1924. Theo paid great attention to product development and marketing, and because of his close attention to detail the firm had grown steadily over the years. The company had gone public in 1979, and by 1993, was listed for trading on the London, Frankfurt, and Brussels exchanges. In the year 2000, Euroland Foods S.A had approximately EUR1.6 billion in sales.

Ice cream accounted for most of the company’s revenue, at 60%, yogurt was at 20%, and the remaining 20% of sales was divided up equally between bottled water and fruit juices. Euroland Foods S.A leading brand name was “Rolly”, which was represented by a fat dancing bear in farmer’s clothing. The company’s main product in ice cream had a loyal base of customers who sought out their high butterfat content, large chunks of chocolate, fruits, nuts, and a wide range of original flavors. Even though the firm had this loyal customer base they had plateaued since 1998 as seen in Exhibit 1 below. Gross sales have practically remained unchanged, which management attributed to low population growth in northern Europe, and because the market was saturated in some areas. EXHIBIT 2 | Summary of Financial Results (all values in euro millions, except per-share amounts) | | | | Fiscal Year Ending December | | | | | 1998 | 1999 | 2000 | Gross Sales | | | 1,614 | 1,608 | 1,611 | Net Income | | | 77 | 74 | 56 | Earnings Per Share | | 1.13 | 1.08 | 0.81 | Dividends | | | 30 | 30 | 30 | Total Assets | | | 716 | 870 | 984 | Shareholders' Equity (BV) | | 559 | 640 | 697 | Shareholders' Equity (MV) | | 1,271 | 1,258 | 784 |

Some outside observers had faulted recent failures in new-product introductions as a cause for the company’s static growth. Most members of the management team however wanted to expand the company’s market presence and introduce more products to boost sales, they had hoped that this would improve the overall company’s market value. The company’s current stock was 14 times earnings, which was just below the book value. This price/earnings ratio was below the trading multiples of similar companies, and it gave little value to the company’s brands.

STATEMENT OF SITUATION: Euroland Foods S.A has a 12-member board of directors in which 3 members are of the Verdin Family, four members of management, and five outside directors who were prominent managers or public figures in northern Europe. The members of the Verdin family accounted for 20% ownership of the company’s shares outstanding, and the company executives combined owned 10% shares. Venus Asset Management, a mutual-fund management company located in London, hold 12% of the Euroland Foods S.A. Banque du Bruges et des Pays Bas held 9%, and had one member on the board. The remaining 49% of the firm’s shares are widely held and are traded in Brussels, and Franfurt, Germany.

The company faces high debt-to-equity ratios and a low price-to-earnings ratio when compared to their competitive counterparts. The president of Banque du Bruges had stated in the board meeting that he would like to see the company restore some strength to the right side of the balance sheet, as it should be a main priority. He went on to say that expansion of assets should be financed from cash flow after debt amortization until the debt ratios returns are at a more comfortable level. If important investments cannot be made the president emphasized that the company cut the dividend. The senior managing director of Venus disagreed with Banque’s du Bruges president in that cutting the dividend just cannot happen. It would show a sign of weakness in the future of the company.

CONSTRAINTS OF SOLUTION: When dealing with some constraints the company faces one that immediately jumps out at you is the high debt-to-equity ratio of 125%. Euroland Foods S.A was leveraged much more highly then its competitors in the European consumer-foods industry. Another issue is that management has relied too much on debt financing, especially in the past few years so that they could keep up with the firm’s capital spending and dividends during a period of price wars that was initiated by Euroland Foods S.A. Other area of constraints are that the price-to-earnings ratio of 14 times, shares of Euroland Foods common stock were priced well below the average multiples of competing companies and the average multiples of all companies on the exchange where Euroland Foods S.A was traded. Euroland also had to look out for price changes for their raw products. Euroland Foods S.A has also been experiencing some deadline issues. Its Neremberg, Germany plant has reached full capacity. This situation has made it difficult for scheduling of routine equipment maintenance.

ORGANIZATIONAL STRENGHTS: Euroland Foods S.A organizational strengths come from that they have a diverse set of products that all seem to be contributing to the company’s revenue/sales. In 2000 they had sales reaching almost EUR1.6 billon. It was listed for trading in London, Frankfurt, and Brussels exchanges. Euroland Foods S.A has a wide portfolio of plants spread all across Europe which lowers their transportation costs, and makes it quicker for customers to receive products with multiple areas of distribution as shown in exhibit 2, the locations of the facilities in Europe.

EXHIBIT 2 | Nations Where Euroland Foods Competed | 1 | Headquarters, Brussels, Belgium | | 2 | Plant, Antwerp, Belgium | | 3 | Plant, Strasbourg, France | | 4 | Plant, Nurember, Germany | | 5 | Plant, Hamburg, Germany | | 6 | Plant, Copenhagen, Denmark | | 7 | Plant, Svald, Sweden | | 8 | Plant, Nelly-on-Mersey, England | | 9 | Plant, Caen, France | | 10 | Plant, Melun, France | |

POSSIBLE SOLUTIONS: There are 11 possible solutions that Euroland Foods can pick to choose from. The 11 possible projects considered totaled more than EUR316 million. The board of directors had imposed a spending limit of EUR120 million, so they could only pick from a limited amount of proposals. Project one suggests replacing, and expanding the truck fleet. Heinz Klink the managing director for distribution proposed that they purchase 100 new refriegreated tractor-trailer trucks, 50 in 2001 and then another 50 in 2002. By doing this the company could sell 60 old, fully depreciated trucks over the two years for a total of EUR4.05 million.

The second project is a new plant. Maarten Leyden managing director for production and purchasing noted that Euroland Foods S.A yogurt and ice-cream sales in the southeastern region of the company’s market exceed the capacity of its Melun, France, manufacturing and packaging plant. Leyden had proposed that the new manufacturing plant located in Dijon, France would ease some of burden of the Melun, and Strasbourg plants. This project is labeled as a market extension.

The third project is an expansion of a plant. The Nuremberg, Germnay plant has reached full capacity and is experiencing maintenance issues, which created, deadline problems. The Nuremberg plant could be expanded up to 20% EUR15 million. The increased capacity was expected to result in additional production of up to EUR2.25 million a year, yielding an IRR of 11.2%. This project is a market extension as well.

The fourth project is the development and roll-out of snack foods. Fabienne Morin, managing director for marketing, suggested that the use of the excess capacity to produce a line of dried fruits to be test-marketed in Belgium, Britain, and the Netherlands. She noted that the Rolly brand in those countries was strong and that the success of other food and beverage companies that had expanded into snack food production. Working capital investments were expected to total EUR22.5 million and EUR45 million.

Project five was plant automation and conveyer systems. Maarten Leyden requested EUR21 million to increase automation of the production lines at six of the company’s older plants. The benefits would be improved speed and would reduce the number of total accidents, spillage, and production tie-ups. Cost savings and depreciation totaling EUR4.13 million a year for the project were expected to yield an IRR of 8.7%. This project is classified in the efficiency category.

Project six deals with effluent-water treatment at four plants. Euroland preprocesses a variety of fresh fruits at its Melun, and Strasbourg plants. One of the first stages involves cleaning, and removing the dirt, and pesticides. Dirty water is sent down the drain and into the Seine or Rhine Rivers. The European Community directives called for any wastewater containing even minute traces of poisonous chemicals to be treated at the source and had given the companies four years to comply. This project is classified in the environmental category.

The seven and eight projects deal with market expansions southward and eastward. Marco Ponti, managing director of sales recommended that the company expand its market southward to include southern France, Switzerland, Italy, and Spain, and/or eastward to include eastern Germany, Poland, Czechoslovakia, and Austria. Ponti believed that with this expansion could come increased sales of ice cream, and yogurt, geographically. The initial cost is EUR30 million and after tax cash flows were expected to total EUR56.3 million for southward and EUR48.8 million for eastward expansion.

The ninth project is development and introduction of new artificially sweetened yogurt, and ice cream. Fabienne Morin noted that with artificially sweetened products comes significant cost savings to food and beverage products, as well as stimulating a demand from low-calorie products. The challenge was to create product that they created a product with the right flavor to compliment or enhance the other ingredients. EUR27 million would be needed to commercialize the yogurt line and receive promising lab tests. The overall IRR was estimated to be at around 20.5%.

Project ten was networking, computer-based inventory-control system for warehouses and field representatives. Heinz Klink presented a cash flow forecast that reflected an initial outlay of EUR18 million for the system followed by EUR 4.5 million in the next year for ancillary equipment. The inflows dealt with tax shields, tax credits, cost reductions in warehousing, and reduced inventory. The projects IRR was expected to reach 16.2%.

The final project proposal, project eleven was the acquisition of a leading schnapps brand and associated facilities. Nigel Humbolt managing director for strategic planning, had explored six possible related industries in the general field of consumer packaged goods and came to a conclusion that liqueurs offered odd opportunities for real growth, and at the same time, market protection through branding. The proposal was costly at EUR25 million to purchase the company and EUR30 million to renovate the facilities. The expected returns were very high and the IRR was as well at 27.5%. This project would be classified under new-product category of proposals.

RECOMMENDED SOLUTION: The projects that would be a good fit for the Euroland Foods S.A, and would meet the budgeting requirements of EUR120 million are project three, project five, project six, project seven, and project ten. The main components when it came to determining the projects chosen were based off of payback period, IRR, and amount of risk the project could have on the company.

Project three or the expansion of the plant cost is EUR15 million. Since the plant was experiencing maintenance issues which resulted in deadline issues, the company’s name and there customer loyalty could potentially be damaged if the resulting matter was not fixed. This plant was one of two highly automated facilities that produced the Euroland Foods S.A entire line of bottled water, mineral water and fruit juice. With an expansion of the plant capacity of 20% they would increase their productivity and would yield an IRR of 11.2%, making one of the company’s most important plants much more effective.

Project five or plant automation and conveyor systems cost is EUR21 million. Maarten Leyden has managed production operations at the company’s 14 plants. He is a fanatic about production-cost control, and has the firm’s best interest in mind. With the EUR21 million would be used to increase automation production lines at six of the company’s older plants. This would result in improved speed, and reduce the mishaps the company faces. The last two plants the company had built had the conveyor systems, which eliminated heavy lifting for employees. This reduced the chance of injury for employees. Overall cost savings and depreciation totaling about EUR4.13 million for the project. An average of EUR150, 000 a year was lost due to injuries employees had sustained from heavy lifting, so this would save the company a nice chunk of cash yearly due to the automation conveyor systems, reducing the risk, increase productivity, increasing speed, and overall efficiency.

The sixth project or effluent-water treatment at the four plants cost totals EUR6 million. The company’s image could suffer if they do not comply with the regulations, and that they are eco friendly. In doing so and purchasing the equipment at EUR6 million today it would save them money, as the same equipment would cost EUR15 million in four years when immediate conversion would be mandatory.

Project seven or the expansion southward cost totals EUR30 million. Southward expansion should be implemented. It would expand to France, Switzerland, Italy, and Spain. By going this route they would penetrate an unsaturated market and would establish an entirely new customer base. This is above the 12% minimum acceptable IRR requirement at 21.4% IRR. Expansion eastward is 18.8%, which is also very good, but Ponti doubts that the sales and distribution organizations could handle both expansions. Ponti is labeled as the most vocal proponent of rapid expansion on the senior management committee. He is a success hired from Unilever in 1993, to revitalize sales, which he successfully accomplished and will lead the southward expansion in the right direction.

Project ten or networked, computer-based inventory-control system for warehouses and field representatives, is the final project chosen out of the eleven. Heinz Klink has tried to get the computer-based inventory control-system implemented for the last three years and has been unsuccessful. The benefits that the system possess is that shorter delays in ordering and order processing, better control of inventory, reduction of spoilage, and faster recognition of changes in demand at the customer level. He presented a cash flow forecast that had an initial outlay of EUR18 million for the system followed by EUR4.5 million in the next year. He forecast the benefits to last for three years. The IRR for the project is 16.2%, which is above the minimum expected. Project three totaling EUR15, project five totaling EUR21 million, project six EUR6million, project seven EUR30 million, and project ten EUR27 million. These five projects totaling EUR94.5 million, it is under the available EUR120 million that was the company’s maximum spending limit, which allows the company to have to leeway for future expenditures. These five projects will increase the effectiveness of the current plants, reduce risk, increase speed of production, increase sales, and decrease costs.