Monte Bianco Coffee Case Analysis

Description of the situation

Perform an analysis of the financial statements of Cafés Monte Bianco and make a projection of its cash flow so that we
can advise Giacomo Salvetti President of the company to make a decision regarding the company's line of business.The
aforementioned validating the production capacity of the Company, margins and indicators, in such a way that he has the
necessary information for a good decision making.

Analysis of financial statements year 2000

1. The share of premium line sales represents 82.29% of total sales, while private label sales represent 17.71%.
2. The cost of sales represents 59.23% of sales. To determine whether this is a good margin, an analysis should be
made with respect to other companies in the sector.
3. Financial expenses represent 6.82% of sales, which is consistent with its debt indicator of 79.47%.
4. The company's main asset is property, plant and equipment which represents 67.42% net of total assets, the
second asset is accounts receivable which represent 20.98% of total assets, validating the turnover indicator
calculated, payment is received every 61 days, this value is affected by the high volume of sales presented in the
last quarter of the year.
5. The need for working capital is very high, the cash cycle reaches 100 days due to the high backlog, the presence
of inventories of raw materials and finished products, and the fact that there is no leverage with suppliers, so
they must finance the operation through a short-term line of credit.

The company's results in 2000 could be considered positive considering that it achieved a ROE of 21.23% in the year,
however, there is also a degree of indebtedness of 79.47% and apparently low liquidity indicators (current ratio 0.57 and
acid test 0.41) that increase the company's risk and could lead to cash flow problems in the future.

Projection Concentration in Private Brands

An analysis was performed projecting only private label sales, using the company's total capacity from which we can
conclude:

1. The value of sales decreased by 5.9% compared to the previous year, the cost of sales went from 59.23% to
86.96%, leaving a gross margin of only 13.04% per year.
2. Financial expenses rose by 26.9%, as it must increase its short-term debt to continue financing the operation, so
the debt ratio increased from 79.47% to 87%.
3. The cash cycle increases from 100 days to 162 days, due to the much longer payment term for retail customers.
4. According to the projection, the company would generate a loss, operating income would not be enough to pay
financial expenses and EBITDA would decrease by 43.9%.

Based on the data presented above, this option is not recommended because although the company's full capacity is
being utilized, this option would generate losses for the company and loss of value for shareholders.

Projected Concentration in Premium Brands

By focusing only on premium brands, 16% of production capacity would be utilized and the projected results would be as
follows:

1. The value of sales decreased in comparison to the previous year by 29.02%, the cost of sales went from 59.23% to
65.79%, leaving a gross margin of 34.21% per year.
2. Accounts receivable turnover rates improved from 61 days to 33 days, thus reducing the cash cycle from 100 days
to 72 days, reducing the need for working capital.
3. According to the projection, the company would generate a loss, operating income would not be enough to pay
financial expenses, and EBITDA would decrease by almost 90%.
 4. The value of financial expenses remains the same, however, the degree of indebtedness increases from 79.47%
to 90.9% as the loss decreases the value of equity.

Although the freeing up of resources generates more cash that can even be used for temporary investments, the
profitability indicators show a significant drop, and the idle production capacity added to the temporary investments
deteriorate the company's efficiency and make this decision unsustainable in the long term.

Proposed mix of Premium and Private Brands

A milling analysis was carried out for each of the coffee grades and it was found that coffee A would be the most profitable
option, and the remaining capacity would be covered by private label production in the following quantities:
Premium Private Label
Coffee Grade A D Total
Volume (Kg) 1.792.000 4.000.000 5.792.000

This combination yields the following results:

1. Sales would increase by 76.1%, costs would increase from 59.23% to 69.52%, leaving a gross margin of 30.48%.
2. The cash cycle increases from 100 days to 118 days, this capital requirement would require an increase in the
credit line by 6 million Italian pounds.
3. The operation allows for a significant growth in profits, increasing the value of equity and leaving a return on
equity margin ROE of 38.36%, a much better performance than that obtained in 2000, taking into account that
ROA doubled and indebtedness went from 79.47% to 73.96%.

Sensitivity and Breakeven Analysis

The sensitivity of ROA to the following variables is analyzed: fixed cost, variable cost of the two products, marketing
expenses, R&D expenses, selling expenses, administrative expenses, inventory turnover and accounts payable turnover.
We found that only two of these variables have a sensitivity greater than 1.

1. The variable cost of the private label has a sensitivity of -2.67 implying that for every 1% change in this variable,
ROA decreases by 2.67%. Regarding the break-even point of net income, it was determined that an increase of
37.81% in this variable would bring net income to 0.
2. The variable cost of brand A is the variable with the highest sensitivity in the model, where a 1% increase would
bring a 3.24% decrease in ROA. As for the break-even point of net income, it was determined that an increase of
31.31% in this variable would bring net income to 0.

Recommendation

Based on the projections made, it is recommended that the company make the decision to produce a mix of private
brands and grade A coffee, since although the existing credit line should be expanded, the debt margin decreases and the
capacity to pay interest increases by 67%, additionally the total production capacity is used and the company's profitability
is increased by 144%. Additionally, it is recommended that the company review the need to produce private labels, since it
was studied that the production of grade B, BB and A coffees would be more beneficial for the company.

The analyses, projections and scenarios are attached as an indispensable part of this report.

Presented by: Manuel Alejandro Mosquera Ortega - Marta Elizabeth López Rodríguez