Converting Growth into EBIDTA

Dan Ginsberg & Fred Langer

November 30 2020

Several pockets of the domestic economy are booming, at least on a temporary basis, as a result of Covid-19.  Private Equity owners of food, personal care, home goods, chemicals and packaging businesses (to name a few) are seeing strong demand for the portfolio companies’ products and services that could propel growth well above expectations for 2021 and beyond.  However, recent results show that the boom in customer demand is not so easy to convert into EBITDA due to capacity constraints, limited resources, inflating input costs, and ongoing uncertainty.  Many PE investors are hearing from frustrated customers about stock-outs and delayed shipments that, in turn, lead to lost sales and EBITDA opportunities – and in some cases, to customer defections.  In other cases, companies are adding facility space, new equipment and additional labor to meet increasing demand, only to find their businesses unable to simultaneously manage day-to-day operations while bringing new capacity online.  The steps these companies are taking right now and over the next 6-12 months to enable growth will reveal winners characterized by steadily increasing sales growth, expanding EBITDA margins and high customer retention; and losers dragged down by stockouts, declining margins and customer defections.

 

The key issue these companies must address is how to maximize output and improve margins with very limited available capacity.  That is, how will the business generate more output from the same base of facilities, equipment and labor during a period of maxed-out floor space, labor shortages, higher costs, limited supply chain flexibility and insufficient data visibility?  The good news is that it can be done – in fact, it is being done right now in some businesses – and doing so does NOT necessarily require “buying more capacity” through more labor and capital expenditures on plant and equipment. Nor does it require months’ or years’ long transformation.

A case in point: We worked with a manufacturer of tissue products who struggled to meet increasing demand for paper towels.  In this nightmare scenario, the company had more orders than it could fill, and customers were frustrated with stock-outs and delayed deliveries.  After an on-site evaluation of operating activities, and remote data analysis of KPIs and production trends, GH developed and implemented both floor-layout and process changes to reduce changeover time, decrease equipment downtime and accelerate material flows.  In addition, GH trained staff on how to properly work on both old and new equipment and installed physical “Dashboards” of key operating metrics to ensure accountability to goals.  These changes resulted in less downtime for maintenance and changeovers, optimized plant and warehouse layouts, and streamlined supervisory routines.  Within just a few weeks, the company improved manufacturing efficiency by 33% and ultimately, added $20M in incremental income.

 

What if a company has recently invested in buying or leasing additional space, adding equipment or more production lines, or installing software to enable further growths?  How will these businesses ensure these investments payoff – and quicky?  In this scenario – where “failure is not an option” – and an increasingly common scenario in multiple industries positively affected by Covid-19, the keys to success are advance planning and logistics, experienced project management, risk mitigation plans and focused training.  Recently, a pet food contract manufacturer client installed a brand new manufacturing line, utilizing a new technology with which the company had no experience.  Through the creation of a step-by-step, cross-functional implementation and risk mitigation action plan, and by installing disciplined project management resources, our client successfully installed the new equipment, and is meeting its production and scheduling goals.

 

GHValens is currently working with companies and sponsors to capitalize on expansion opportunities in the chemicals, food, distribution and other growing industries.  We bring data analytics, automation, process improvement and project management to the forefront of our clients’ operations while training and up-skilling staff to embrace higher productivity.  Our clients are accomplishing their near-term goals and positioning for continued success, quickly and with minimal to zero capital expenditures on plant, equipment and technology systems.

The results of capitalizing on growth opportunities are impressive:

  • 25% to 40% increase in labor and equipment productivity
  • 20% to 50% increase in manufacturing throughput
  • 40% to 60% increase in available floor space for operations
  • 50% to 90% reduction in cycle times
  • 50% to 100% increase in inventory turns
  • 5 to 10 times return versus the cost of implementation within the first year.

Our experience in successfully enabling business expansion during periods of disruption or market volatility has proven that there are multiple ways to confront growth opportunities with limited or no capex.  We also found that alternative methods to boosting throughput and productivity often lead to faster and longer-lasting results that could be expected from acquiring more space, assets or labor.

For more information, contact Dan Ginsberg (917) 669-3717 or email him at dginsberg@ghvalens.com.

The GH Companies, based in New York for over 50 years, have developed a strong track record assisting both stable and underperforming companies in the middle market.  The firm consists of two operating companies that serve a wide variety of industries including light and heavy manufacturing, distribution, aerospace, consumer goods, food, technology, professional services, retail, and healthcare, to mention a few.  For stable, middle market companies, GHValens provides operational diligence and performance improvement services for revenue and margin growth, cost reduction, and working capital efficiency.  For distressed businesses or their creditors, Getzler Henrich & Associates provides restructuring, turnaround, interim management and bankruptcy advisory services.  Together, The GH Companies assist organizations around the world with an approach that emphasizes fact-driven, pragmatic decision-making, planning, and implementation.  The firm has been recognized as one of the country’s top ten turnaround firms over a dozen times and was recognized for excellence by the M&A Atlas Awards in 2019.