Food / Regulated Markets / CAP


Summary:

Turnaround of a Є200m+ JV operating across Hungary, Slovakia & the Czech Republic. Prepration for EU accession.

Date:

2003 – 2004 (13 Months)

Assignment:

Multi national JV shareholding (Fr/Ger/UK): Group turn round; legal protection of the business and market share optimisation.

Role:

Interim Group CEO

Assignment Length:

13 + 2 months

Background:

The Group was a joint venture between a FTSE 100 business and a large French private company (itself a wholly owned subsidiary of one of the largest food based companies in Germany) and had production and distribution operations in Hungary, Slovakia and the Czech Republic. With sales well over Є200 million, 5 large factories throughout the region and more than 1,100 employees, it operated in an EU-like regulated market of quotas and prices. The actual market conditions were less stable with each country sustaining upheavals during the assignment.

The business in the Czech Republic, in particular, had suffered huge losses and had a cash-burn of over Є1.5m per month. The Czech government also announced that the company’s quota allocation would be cut, effectively taking away c.30% of the company’s domestic market share. The business was in default with two large national banks due to failure to meet repayment schedules and substantial year-end audit issues remained.

As a result of significant shareholder activity and changes to Group senior management in the second half of 2002 and early 2003, it was agreed to install a senior interim CEO and FD.

The Brief:

The overall goal was to prepare the business in Central Europe for EU accession in May 2004 by bringing it up to international standards in respect of operational performance, financial reporting, treasury and balance sheet management.

The shareholders emphasised particularly: “…the Czech Republic situation must be addressed in terms of its financial condition, its organisational issues and its significant variation from the Annual Operating Plan…. Hungary and Slovakia have serious problems developing in their markets which have to be understood “.

The Initial Position:

After preliminary review, it was clear that additional shareholder funding would be required. To this end, an emergency business plan and an 18 month cash flow forecast was produced.

In the meantime, the Czech business had clear cash problems and was struggling to meet supplier payments, the accounting records were out of control, there was a real risk of being put into administration, work out plans were being operated with the banks, deliberate obstruction from local minority shareholders was being faced through court challenges to every General Meeting decision made, rumours were being circulated by competitors of impending bankruptcy and serious concerns remained regarding the Government’s intentions to reduce the company’s quota.

Local environmental and tax authorities were deliberately obstructive in various ways, stimulated by antagonistic third parties. Finally, a third party with previous company management links lodged a fraudulent bankruptcy petition.

The Achievements:

1. An emergency plan was prepared, approved and implemented for the Czech business. Key deliverables were:

  • Financial restructuring, including new bank facilities totaling €36m
  • New equity injection of €12m from the JV shareholders
  • A cash transfer of €3m from the Hungarian and Slovak businesses
  • A realistic sales plan was launched, based on actual market conditions
  • Liquidation of ‘surplus’ stock was undertaken to release cash

2. In 2003/04, the following key operational improvements were achieved:

  • The Slovak business produced PBIT €0.5m above plan, and 21% RONA
  • The Hungarian business achieved PBIT €5.0m above plan, and 9% RONA
  • The Czech business produced an operating result c.€8m ahead of plan
  • Czech monthly losses were brought to break-even leading up to EU accession
  • After EU accession, monthly results achieved firm forecast profits from pre-sales
  • A radical major raw material sourcing strategy for Hungary was created
  • Initiated regional client supply and service for post EU accession operation
  • Strengthened the senior management team, including new Czech MD and FD, senior sales managers and new Head of Legal Affairs

3. The Finance function was reinforced, delivering several key benefits:

  • Czech management accounts were fully cleaned up in 4 months
  • Reduced Group monthly reporting and consolidation from 20 to 5 days
  • Group reporting expanded to cover local currency, € and IAS compliance
  • The statutory audit timetable was reduced from 13 to 4 months
  • Subsidiary audit sign-off was concluded in under 3 months
  • Established 12 month rolling cash flow forecasts
  • Reduced overdue debtors by c.€2m
  • Implemented tight credit control procedures

4. A range of governmental and legally based activities were successfully undertaken

  • Encouraged the rapid amendment of Hungarian import controls to avoid severe market disruption from cheap imports
  • In the Czech Republic, legal challenges were made and encouraged with respect to the relevant 2003 damaging decree
  • The Dutch holding company launched a formal international challenge against the Czech Government for breach of bilateral treaty obligations
  • Restructured the Czech balance sheet to comply with the Commercial Code
  • A fraudulent petition for bankruptcy was successfully challenged and the plaintiff became the subject of criminal action
  • A 12 year old debt and court case for c.€13m was settled quickly out of court for c.€2m
  • A Czech trading company was set up to handle market regulatory issues effectively
  • Successfully influenced the Slovak government to minimise their illegal disruption of the local country market

5. In November 2003, the rolling cash flow forecast predicted a renewed crisis in the Czech Republic due to a market slump.

New emergency actions included further financial support from Hungary and Slovakia (€3m), more stock liquidation (‘spot’ sales) and the renegotiation of covenants with the banks that would be breached, in order to avoid the declaration of default. A work-out team became involved again, successfully overcoming the problem.

The Final Position:

Permanent replacements for the Group CEO and FD were found and put in place. The 2004/05 business plan was prepared, coupled to a much more aggressive ‘stretch plan’ targeting a 15% RONA and positive cash flows.

Addendum: Re-called to the Business

As part of strengthening the group’s management, a new country MD was recruited for The Czech Republic, enabling the incumbent to focus on the Slovak business alone. About 2 months after the initial assignment concluded, the Slovak MD was critically injured in a ‘contract’ attack on his life, leaving him in hospital after serious brain surgery. Only a month later, the new group CEO was very badly injured in a car crash leaving him in a coma, in critical condition in hospital.

The client requested a return at short notice, to see the business through a difficult period.

The company’s Annual Operating Plan was established, the senior management team was focused on delivering the plan and product development was put in place to help enrich margins further.

It is pleasing to report that both injuries were recovered from, with the group CEO taking up his position again later in the year. The Slovak MD was supported through a difficult personal transition back into the world of work over the next 12-18 months.

International Tribunal:

As mentioned above, the group took the Czech government to International Tribunal over its alleged attack on the assets of the company and in violation of its international treaty obligations (the group was a wholly owned subsidiary of a Dutch ‘BV’) requiring mutual national protection of each others’ foreign direct investments.

The 5 day Tribunal hearing was held in Paris about 2 years after the assignment conclusion, with the interim group CEO as a material witness. The 3 man panel awarded penal damages to the company in recognition of the damage sustained over several years of operation.

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