Euroland Foods S.A.

Weihan Zhang

Marshall University

Euroland Foods S.A.
Introduction:
This case discusses Euroland Foods' the eleven projects that was financial reporting. This case indicates that Euroland Foods draft the company's capital budgeting in the New Year, but the eleven projects spend EUR316million far beyond EUR120 million spending limit prescribed by the board. It will be a challenge for senior managements to allocate funds for these projects .This case will analysis the project which is more beneficial to the company. It will include new product introduction, acquisitions, market expansion, improve efficiency, preventive maintenance, safety and pollution control.

Company’s Background:
The Euroland Foods was established in 1924 by the Belgian farmer Theo Verdin. This was a multinational company in the production of high quality food, such as ice cream, yogurt, fruit juices and bottled water. Ice cream, the most popular product, had a loyal customer base that was causing ice cream accounted for about 60% of company's revenue. Yogurt, was introduced by Verdin in 1982, contributed about 20% of revenue, the rest of the bottled water and fruit juice were equally divided about 10%. These products have been sold to some Europe countries, such as Britain, Belgium, Luxembourg, the Netherlands, Scandinavia, northern France and western Germany.
Because Verdin focused on product development and shrewd marketing, the company grow steadily over the years. The company continued to grow and went public in 1979. By 1993, the Euroland Foods was listed for trading on Frankfurt, London and Brussels exchanges. As the company continues to grow, it faced some financial considerations that need management focus.

Company’s current situation: The board of directors of Euroland Foods has 12 members that included three Verdin family's members, the four management and five outside directors. Each member has different tradable shares, such as the Verdin family owns 20% share, the company's executives holds 10%, Venus Asset Management holding 12% of Venus and Banque du Bruges et des Pays Bas holding 9%.
The company's problems began in the Euroland Foods' sales all the time being static since 1998. Through these data, managers found that the problem were the northern European market saturation and low population grow. Some observers attributed these problems to the introduction of new products. Most members wanted the company to expand market share, and introduce more innovative products to increase more sales and revenue. Company needs a plan to reduce debt, and improve the return on investment, because of the company debt- to- equity ratio of 125%. Because of this problem, the senior managers discussed eleven proposals and two financial test payback and internal rate of return (IRR).
In 1999, the management committee according to requirement established a new capital project acceptance. Those asking to see the table below: Type of Project | Minimum Acceptable IRR | Maximum Acceptable Payback Years | 1. New Product or New Markets | 12% | 6 Years | 2. Product or Market Extension | 10% | 5 Years | 3. Efficiency Improvements | 8% | 4 Years | 4. Safety or Environmental | No Test | No Test |

Euroland Foods had seven the excellent managers who prepared capital budget. Verdin Wilhelmina, one of seven executives, who was the founder of the company and the spokesman of the board of directors. Trudi Lauf was the financial director, he introduced the modern financial control and system in 1995. Heinz Klink was the managing director responsible for the allocation. Maarten Leyden was responsible for production and procurement. Marco Ponti was a sales manager. Fabienne Morin was marketing general manager, Nigel Humbolt was responsible for strategic planning. They spent a lot of time to discuss, through experimental tests, they choose two to four alternative capital budgets, and discusses the eleven suggestions to solve the problem. Analysis of eleven projects: Committee has allocated the found in a series of projects, the summary table and a detailed description is as follows: Proposal | Category | IRR | Cost ( in millions of €) | Replace and Expand Fleet | Efficiency | 7.8% | 33 | New Plant | Market Extension | 11.3% | 45 | Expand Plant | Market Extension | 11.2% | 15 | Snack Foods | New Product / Market | 13.4% | 27 | Plant Automation | Efficiency | 8.7% | 21 | Effluent Water Treatment | Environmental | N/A | 6 | Market Expansion- South | Market Extension | 21.4% | 30 | Market Expansion- East | Market Extension | 18.8% | 30 | Artificially Sweetened Ice Cream/Yogurt | New Product / Market | 20.5% | 27 | Inventory Control | Efficiency | 16.2% | 22.5 | Strategic Acquisition | New Product / Market | 27.5% | 60 |

The first project, replacing and expanding truck fleet, was proposed by Heinz Klink. These two years Euroland Foods would buy 100 new trucks and sell 60 trucks fully depreciation, they would earn EUR4.05 million from selling trucks. New trucks would be bigger than olds and could carry 15% more of the goods, it could be achieve fuel and maintenance efficiency. In addition, more trucks would lead to flexible scheduling, efficient routing, shorter delivery time, support long-term expansion. The project was expected to yield EUR11.6 million in additional sales and cost savings over the past seven years. The second project is a new plant. Maarten Leiden pointed out that the company needs to build a new production and packaging plant in the southern edge of Euroland Foods. Because yogurt and ice cream of Euroland Foods sold to southeast areas including manufacturing and packaging plant. It had the high transport costs. He also suggested to set up a new plant in Dijon, France. The equipment would be paid in installments within seven years and the plant over ten years, over the next 10 years the IRR of 11.3%. Next one is the expansion of the plant. Managers agreed with the company needed to greater production capacity at the south-east of Euroland Foods, because the difficulties of Equipment maintenance would affect to create production scheduling and deadline. The plant was one of the two facilities of completely bottled water, mineral water, and fruit juice. This increased capacity was expected to result in additional production of up to EUR2.25million per year. The next plan was development and promotion of snakes. Based on the strength of the brand in Belgium, Britain, the Netherlands, put forward the market test. The company hoped to brand awareness would increase sales of the company's other products among health- conscious consumers. Assuming the test market was successful, it hoped the project would support further expansion of plant in the strategic position.
Proposals five was automation equipment and conveyor system of six old plants. This project would increase production speeding and reduce accidents, leak, and production tie-ups. Every year an average of 223 missed-worker days at each plant was costs more than EUR150000. In addition to reducing interest rates, it would also reduce the possibility of a lawsuit or serious injury, and cost savings of EUR4.13million every year. Next project was purchasing the effluent-water treatment equipment, it would not produce any currency return for Euroland Foods. The European Community issued instructions that requirements within four years to formulate better source of sewage treatment. By buying this equipment now the Euroland wish to avoid in the future at a higher price to buy the same equipment. It could improve the company's image, if the Euroland's pollution record was publicly or compliance date approaches. Seventh and eighth, there were two projects talking about market expansions to the southern and eastern. Marco Ponti suggested the company to expand market to southern and eastern. If the company expanded to eastward, it needed to make greater frozen dairy products because they are more competitive. The eastern market expansion would include Germany, Poland, Czechoslovakia, and Austria. This area was more competitive and reduced the purchasing power of consumers. The expansion would be responsible for plants in Nuremberg, Strasbourg, Hamburg. After-tax income was about EUR48.8 million. The overall risk of the eastward expansion was less than the southward expansion. Market expansion to southern would include Switzerland, Italy, Spain and the south of France. Less competitive in this direction than in the east, but the consumers had more purchasing power in this region and had the less demand for ice cream and yogurt. This would require more markets to build up consumers' demand. If neither of the plant proposals was accepted, then the southward expansion would need to be supplied from plants in Melun, Strasbourg, and Rouen. After-tax income is expected to EUR56.3 million. Nineth, the plan was developing and introducing new artificially sweetened yogurt and ice cream. Fabienne Morin said if the company developed a new artificial sweetener, it would save costs and growing low quantity of heat of the product. The plan would protect market share because the other high quality ice cream makers had the same research introduce their products. If Euroland Foods' ice cream had innovation, it would introduce low fat products to consumers.
Tenth, the project was the network computer, warehouse and inventory control system in the field of representative. Heinz Klink supported computer inventory control system because it had benefits for shorter delay, order processing, good control of inventory, reduce corruption, and to identify the level of customer faster.
The last one was a leading schnapps brand of acquisition and related facilities. Nigel Humbolt advocate diversified mergers and acquisitions. The reason was the use of technology to improve the company's core business. Nigel Humbolt found six related industries and four products to explore their strength. Finally, managers choose a company and bought it, who is made in European. Conclusion: The first is the Heinz Klink proposed a bigger truck fleet, the truck's total net investment is EUR30millions, and working capital EUR3millions. Against the project, it is a long time for 7 years, amortization project strategic acquisition is better than the first one, because this project has a high IRR of 27.5%, although it has EUR55 millions of spending, it has EUR198.5 millions of return on capital.
Second, Maarten Leighton said that a new factory need EUR45 millions of cost and working capital. Opponents also argue that the development and introduction of new artificial sweeteners is second best. Reason is that second project EUR45 millions of high cost and lower IRR of 11.3% than artificial sweetener, it has a low cost EUR27 and high IRR of 20.5%.
Third, expand plants low spending, but it has a long time in the 17 years. Four sewage treatment plant project cost is low than the third EUR6 million, it is mandatory for the European Community, and can get high company image in the eyes of the consumers.
Another objection is seventh and eighth. There are two projects about market expansion to the south and east. The south have more purchasing power and less competition. The south and east of the IRR of 21.4% or higher IRR of 21.4% with the same spending EUR30millions. Project snacks, automation and conveyor systems, and inventory control system are not suitable for the company. The reason is that each one has a high cost, long-term returns, and low IRR for Euroland Foods.
Project Four, sewage treatment plant project, is in the first execution of a project, because this project is the mandatory for Euroland Foods, it is the first. The second one is the acquisition of schnapps. The reason is higher IRR and ROR than the third and fourth, when they have the same return. Project artificial sweeteners is the third, because if the company completed the innovation, they can put the new product to the fourth project southward expansion. Finally, Euroland Foods can obtain higher profit and revenue. Through the financial data, obviously, the total capital budgeting of four projects, sewage treatment plant project, strategic acquisitions, artificial sweeteners, and southward expansion, is EUR118 million. They will have a very good spending suggested for Euroland Foods.