The
Hidden
Traps
and
Benefits
of
Expansion
By Stu Rosen
Good morning. Thank you Scott Fischer and thank you
ASB for inviting me to speak.
(Slide 2) Today I want to kind of talk about what I
titled here nicely, “The Hidden Traps and Benefits of
Expansion,” getting the most out of your bakery. I
described it yesterday to somebody as kind of solving
mistakes we have made along the way. We could share
them to hopefully have other people avoid them. I will
say at the beginning here that as many kind of mistakes
or stuff that you do not know that will happen before
you get into a project, many of those get avoided by the
help and assistance that other bakeries provide so as
far as Dave mentioned, it is some of his themes. I think
one of my themes and our themes is just that lending
helped other members of the baking community either
in the same segment or different segments. To us it
is always good and it is always helpful and I know we
would not have gotten to where we are today without
the help of other bakeries and so we appreciate that
along the way.
As I look at expansion really we kind of see two layers
of it. One is the really obvious stuff and even this is not
so obvious sometimes, but you are looking at the cost,
what is the cost of equipment. My presentation is more
along the lines I think about adding a new line, a new
capacity to your business. (Slide 3) So what is the cost of
the equipment? What is the cost of the install? And, if it
is something you have never installed before, we found
you do not really know what that cost is until after you
are done with the first one, but trying to get a hold on
that and then the easy benefits are: (Slide 4) Is it going
Mr. Stu Rosen, Executive Vice President of
Highland Baking. When this gentleman is not
focusing on finance, long-term strategy and
business development, he is hands-on with his
family-owned business in the bakery processes.
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Traps & Benefits of Expansion
to increase capacity? How much am I going to be able
to sell off this line? What is my margin going to be?
What is the potential efficiency savings if I am moving
this from a less automated version to a more automated
version? How much labor might I save? And then, is
this going to add to just generally what I can do for our
customer, whether it is a captive bakery, whether it is a
private label or foodservice retail? Whatever it is, just,
am I becoming more valuable and am I doing more for
the customer? (Slide 5) Where we found we learn each
time is in this second tier. We usually find as we do one
line install and we learn something and then the next
one we cover that, but then we learn something new
and just try to keep building. These are the secondtier costs of expansion that sometimes do not become
readily obvious until you are doing it. One is a utility
and support upgrade. You might be able to put two or
three lines in with your electric service that you have
got and then unbeknownst you do not even know it
until you start installing...you need to totally revamp,
bring in another 4,000 amps or something into your
building that just puts you into a whole...a really new
cost situation with that expansion and usually these
things creep up after you have already committed to
the expansion. They are not always things you can go
back and retool the decision, but you just try to add
your next decision-making process.
For us, startup time and focus is always a huge one
too. You are usually expanding because you are in a
busy situation and that is always a good thing, but that
creates even more of how distracting are you going to
get from your existing business and how much focus
are you going to lose on that. One of the things we try
to do is always try to have the biggest part of the install
happen in one of the down parts of the year as much as
we can. We are a little bit seasonal, and so to the best
of your ability you try. Half the time, it does not work
out correctly, but try your best.
This is one we ran into actually with our last installation:
Potential EPA and Regulatory Factors. I think
environmental issues are becoming more and more
prevalent in our industry depending on which state you
are in. They can be more or less prevalent, but in our
last install unbeknownst to us we went to apply to the
Illinois Environmental Protection Agency. The capacity
we were adding was going to put us into what is called
a major source of environmental emissions as opposed
to being at the lower level and that really was going
to constrain us. Either we could not have run all our
lines at the same time, or in this case we went to add,
needed to add a catalytic oxidizer, reduce our emission
significantly. The decision to go to catalytic oxidizer has
a lot of benefits and it was a really good decision for us,
but the cost of it really added about 10 percent to the
cost of the line installation. Taking that into account at
the beginning, we probably would have still done it, but
it would have been nice to know at the beginning, the
bank would have probably liked to know about it at the
beginning also...little things like that. In all seriousness,
it is one thing when you are able to go to your bank or
whoever is lending to if you need to and say, “This is my
project,” and that is where your project comes out. When
you keep going over budget, they start to really look at
you with different eyes the next time you go back and
especially now where it is even harder to go back, you
want to try to get everything in the first bundle.
Tax consequences of increased efficiency. As the person
who pays the bills or at least writes the checks in the
bakery, that whole dollar thing is really important to
me and I have found the tax both ways, that you can
be harmed or helped by an installation. Lately with
some of the good programs on bonus depreciation
that the government has ran a couple of times over the
last decade, it can be a tremendous savings to install
a line. As a matter of fact, one of our line expansions
really was tipped by that bonus depreciation to get it in
this year and just take the risk and it can really change
your cash flow model especially in your one, where if
you are having...kind of scraping together to meet your
part of the project, it can really be significant especially
obviously if you are in a profitable situation where you
would owe taxes. The other side of it is, your labor saving
can be a disincentive because you are going to make
a little bit more money which is always good, but you
are going to pay more taxes then too.
Changes to the plant environment, something that
we continue to run into every day. Unfortunately,
our industry is one where most bakeries are not
environmentally perfectly controlled. Humidity,
temperature. I know a few out there, but my experience
is most are not and just in the summer in Chicago on
the days it hits 100, just getting rid of the heat can be
a tremendous challenge to both your operations for
product quality as well as the safety of your people. Just
looking at that and what changes to your plant might or
maybe your plant just has a capacity that is really based
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on your heat production and other things rather than
your physical equipment. And then lastly, looking at
your staffing needs.
(Slide 6) There are a lot of second tier benefits of
expansion. More spread-out overhead. In essence
if you can expand and get your volume up, what you
are making today hopefully becomes cheaper, again
positive tax benefits I mention usually. With expansion,
that is through depreciation. That can also be through
R&D credits if R&D is involved and a lot of other things
out there.
Redundancy for customers. This is something we see a
lot more. We are right now a single location bakery and
we hear more customers saying, “Well, what happens
if a tornado hits your bakery?” Unfortunately, adding
stuff to your current plant does not help that, but it
does answer questions that if you are going from one
line to two lines of ability, it makes your customers feel
a little bit more secure that even with hiccups to your
operation you keep on going.
And then opportunity for advancement in the
organization. Continued expansion, continued pushing
the envelope of what you are able to do we have found
helps you retain good people because it gives you
places for as people need to move up or have the ability
to move up rather than moving to other organizations,
you can retain them in house and so that is always
been a big thing. So again, the whole thing to us is a
balance...positive and negatives. Usually it starts with
the costs of the equipment and the install and what you
are going to be able to produce and sell off. But then
you get into a lot of the other balancing acts. (Slide 7)
Comparing the tax hit to the cost savings can really be
a big item especially in cash flow if kind of decisionmaking is focused on cash flow.
(Slide 8) The labor situation. Not only are you giving
people a chance to move up, but also do you have
enough people to staff what you are expanding into
and with the right skills. Sometimes you do. Sometimes
we have found that very skilled people, a one size
bakery can make the transition and then others cannot
and so putting the right people in place to make sure
you are getting the most of your investment. (Slide
9) And then really looking at it from the customer’s
perspective. Does this make you more valuable to
them, less valuable to which of your customers and
hopefully overall it is moving the bakery in the right
way? Sometimes it can have a little bit of both in
there and it usually starts with the quantitative side
and projects for us usually do not advance, if they do
not need a certain quantitative benchmark. (Slide
10) But then really it a lot of times also gets down to a
qualitative side where your numbers are within some
range and it could be good, it could be bad and then
it is more of almost a gut feel of how do we feel we are
going to be able to go forward, how do we feel our
customers are going to react. Sometimes it is more
not just guessing at that, but going out and talking to
the customers, talking to your suppliers, talking to your
equipment suppliers, talking to everybody that makes
a difference to your company and just saying...hey, this
is what we are thinking, what do you think of it...and it
a lot of times will lead back. Take lots of feedback and
opinions into account especially ultimately it is the
manager/owner’s decision, but taking the employees’
opinions into account. Even if you go the opposite way
from what you thought, usually having them be part of
that process is always a win. And not only taking the
feedback opinions into account before the project, but
getting them after the project and what went right,
what went wrong, what could we do better for next
time is always a huge thing for us. It has allowed us
to keep on hopefully improving, growing and being
better than we are.
(Slide 11) And then, finally make a decision, get people
onboard one way or another and then hope it all works
out in the end. Thank you very much.
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Traps & Benefits of Expansion
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