Investing with TOC Part 2

Transcription

1 Presented By: Investing with TOC Part 2 (Early Results) How terrible is wisdom when it brings no profit to the wise. Sophocles c. 450 BC Date: June 10, 2014 Henry Fitzhugh Camp and Brian Delfield 1

2 Presentation Summary (in reverse order) 4) Your questions 3) Details of the company 2) Examination of preliminary results (Top Line to bottom line in 2 years) 1) Review of TOC Equity Partners Alpha rationale and guidance 2

3 Exploiting the secret (Review) This is normal Use TOC Demonstrate Make money Leave bread crumbs Pull, don t Push 3

4 Summary (Review) Until TOC becomes the way, use the secret Buy companies Improve Sell Repeat Get as much debt leverage as you can finance Use the TOC Distribution Solution to either quickly reduce inventory and pay down debt or Produce capital to buy more companies There is plenty of money chasing deals They are eager to invest in safe lucrative deals TELL ME HOW YOU DO! 4

5 Summary (Review) Until TOC becomes the way, use the secret Buy companies Improve Sell Repeat Get as much debt leverage as you can finance Use the TOC Distribution Solution to either quickly reduce inventory and pay down debt or Produce capital to buy more companies There is plenty of money chasing deals They are eager to invest in safe lucrative deals TELL ME HOW YOU DO! 5

6 Summary (Review) Until TOC becomes the way, use the secret Buy companies Improve Sell Repeat Get as much debt leverage as you can finance Use the TOC Distribution Solution to either quickly reduce inventory and pay down debt or Produce capital to buy more companies There is plenty of money chasing deals They are eager to invest in safe lucrative deals TELL ME HOW YOU DO! 6

7 Hawkeye Engine Services Around Christmas 2012 we bought 51% of Hawkeye Buys commercial aircraft engines Tears down the engines Sells the parts 7

8 Hawkeye Results (year 1) 8

9 Hawkeye Results (so far) Time axis: Year + Quarter The Blue dotted line shows when TOC-EPα bought control of Hawkeye Red is the cash flow generated (left axis) Green is the # of employees (right axis) Chicago Presentation 9

10 Hawkeye Results (so far) The Red Curve is profit growth The Green Curve is Complication Chicago Presentation 10

11 Hawkeye Results (so far) 2014 Q1 was spent finalizing the $30m deal for 6 planes Minimum earnings for Q2 equal 2013 s whole year Q3 will be bigger still, maybe 40x the 2012 baseline Chicago Presentation 11

12 Hawkeye Engine Services Baseline Example: Buy a CFM56-7B (Boeing 737 engine) for $2.3 million Sell parts over ~4 years for $5.5 to $6.0 million 12

13 Hawkeye Engine Services Natural reluctance to buy a $2.3 million engine to get a $10,000 part Fast selling parts are in worldwide shortage Slow selling parts are in worldwide surplus 13

14 Hawkeye Engine Services TOC perspective: The company is financially constrained: Previous owners provided capital One owner ready to retire No bank line of credit Searching for capital 14

15 Hawkeye Engine Services TOC perspective: The company is financially constrained: Previous owners provided capital One owner ready to retire No bank line of credit Searching for capital Decision of how to exploit the constraint: Change guiding metric from profit per engine to profit per quarter 15

16 Hawkeye Engine Services Subordination: We become willing to flip engines Lower margins Engine holding period cut in half 16

17 Hawkeye Engine Services Legitimate pressures Don t want to write off parts later that never sell Don t want to pay taxes before we have to Logical actions: Accelerate the write off of the cost of the engine 80% of the selling price of parts sold are considered COGS After a engine s cost is fully expensed, remaining parts have no cost Consequences: We believe our own BS that slow sellers have no cost We wait indefinitely to sell slow movers at a good price Money that could be used to buy another engine remains in stock 17

18 Hawkeye Engine Services Subordination: We become willing to flip engines Lower margins Engine holding period cut in half We aggressively sell parts with no value to recover cash 18

19 Hawkeye Engine Services Subordination: We become willing to flip engines Lower margins Engine holding period cut in half We aggressively sell parts with no value to recover cash We established a Supply Buffer of planes and engines 19

20 Hawkeye Engine Services Subordination: We become willing to flip engines Lower margins Engine holding period cut in half We aggressively sell parts with no value to recover cash We established a Supply Buffer of planes and engines We hired Ballistix (Justin Roff-Marsh) to build us a Sales Machine 20

21 Hawkeye Engine Services Three categories of parts: STEAM Super fast movers WATER Readily sold parts ICE Parts that provide good margin over time 21

22 Hawkeye Engine Services Subordination: We become willing to flip engines Lower margins Engine holding period cut in half We aggressively sell parts with no value to recover cash We established a Supply Buffer of planes and engines We hired Ballistix (Justin Roff-Marsh) to build our sales machine All subordination efforts simply reduce our cash to cash cycle 22

23 Conclusion Especially while TOC remains a secret : Raise money to buy good companies Share with partners who are good at what you ain t Multiply your money Do it again! Questions? 23

24 Your Presenters Henry Fitzhugh Camp is a co-founder & CEO of IDEA Camp is an ex-professor with 30+ years experience in distribution and supply chains. He is a practical entrepreneur who has largely moved from consulting into private equity, using TOC to enhance the value of portfolio companies. He is a Louisville, Kentucky native and earned a BA in Mathematics from the University of Virginia and is a world-wide authority in Theory of Constraints Replenishment. When in doubt, choose the less efficient alternative. Brian Delfield is an entrepreneur and investor who finds hidden value Delfield uses TOC to grow top line sales and explode bottom line profits. Being a former, and very unconventional, Big Six CPA, Senior Executive, and TOC guy who spent 20+ years successfully running businesses across a spectrum of industries and niches, he now leverage his deep "operator" and TOC expertise with his own and others capital to buy and build return on investment machines. Along the way, and just for fun He teaches, colleagues, associates and friends like you some of his TOC-inspired business building 24 ideas.