10. Discuss WWL's synthetic carpet options (March 21)

Question 1

What was the research results from Felicity looking into synthetic carpets in March 21?

Answer 1

Demonstrated that the vast majority of carpets sold in the UK is synthetic

So whilst WWL branding dictated should aspire at higher end of market, this ignores huge proportions the market

She asked for perspectives from the board about diversifying into PP carpet

Question 2

What was the marketing perspective when considering moving into PP carpets (Thilo Keogh)?

Answer 2

• WWL has had multiple requests for retail clients wanting to promote WWL synthetic carpets , as feel would be big market
• Research indicated potential orders of 140,000m2 in first year launch of PP carpet range (@ £10/m2)
• Can help promote WWL as more sustainable business
• But concerned about potential growth: uncertain economic client so growth may be 0-5% once established the product range
• Selling & distribution costs = best av £2.90/m2

Question 3

What was the procurement perspective when considering moving into PP carpets (Kas Mukesh)?

Answer 3

• PP yarn is readily available commodity & significant cheaper than wool
• Found Turkish supplier (Iplik Ltd), which can supply UK-equivalent price at £1.10/m2 (invoiced in Turkish lira)
• Identified purchase option Albert Carpets Ltd (Albert) - large scale carpet manufacturer, supply a limited range of WWL branded cut pile PP carpet.
• Albert = low volume so relatively high cost (£7.30/m2)
• But Albert would meet any warranty claims
• Albert manufactures its own synthetic yar, but doesn’t current offer it to sell

Question 4

Describe the manufacturing perspective for synthetic carpets (Fay Drost)

Answer 4

• In principle, PP carpet could be manufactured using WWL’s existing equip if suitably reconfigured at average cost of £6.80/m2 (including £1.10m2 yarn cost identified by Kas)
• Fay pointed out reconfiguration would be highly disruptive option, less disruptive to purchase another dedicated tufting machine. Could be housed in existing tufting shed & existing operatives could manage the manufacturing.
  But could increase annual fixed costs totalling £40k (additional admin exp associated w PP carpet manufacture)
• Would require initial one-off capital outlay and initial set up costs, set £300k
• So without high volumes, WWL risked over investing in PP manufacturing capacity

Question 5

What is the financial perspective on the PP synthetic carpets (Dilanee Acharya)?

Answer 5

Dilanee presented a high-level NPV assessment at annual cost of capital of 10% (which Dilanee deemed suitable for WWL)

• NPV indicated that PP carpet manufacture by WWL would be commercially viable if sales growth was over 4%
• Subcontracting the manufacture of PP based carpet to Abert and re-selling under WWL brand would generate small loss per m2

Question 6

What was the final decision made in March 21 regarding Felicity Darchon on PP synthetic carpets?

Answer 6

• grateful for boards views and research
• Decided to do pilot project on 1 July 21, selling limited range, and outsourcing the manufacturing to Albert
• Approach provides WWL with low-risk pilot to hep explore the pP market
• Pilot would run until sufficient info had been obtained to revisit the decision

Question 7

When would the PP pilot scheme begin?

Answer 7

1 July 2021

Question 8

What would the capital outlay required be for new PP tufting machine?

Answer 8

£300k

Question 9

When would the project of PP carpets generate a positive NPV

Answer 9

With reasonably significant level of sales of 140,000m2 in the first year, the estimates indicate that the venture into PP carpet manufacture will generate positive NPV only if WWL achieves annual growth in sales in excess of 4%

Question 10

How ambitious is the 4% required growth annual sales growth required to generate a positive NPV?

Answer 10

Whilst the PP carpet market is large, this growth rate appears to be ambitious for a product time the company hasn’t;t made or sold before (according to Dilanee)
Also need to consider that it is likely to flatten out after a few years

Question 11

What was Dilanee’s suggestion for piloting the PP carpet line?

Answer 11

Rather than immediately manufacturing, could explore the market via the purchase option identified by Kas Mukesh.
Operating on small scale does mean loss making model of £0.20/m but even if 140,000m2 of sales is achieved, only leads to £28k loss.
Acceptable cost for a pilot scheme to explore the move and gives real option to explore larger investment in manufacturing in due course

Question 12

What would be the net operating cash flow for making PP carpets?

Answer 12

Selling price £10/m2
Less
Materials (yarn) £(1.10)/m2
Other production costs £(5.70)/m2
Total production costs £(6.80)
Net production cash flow £3.20
Selling and distribution costs £(2.90)
Net operating cash flow £0.30/m2

Question 13

Whats the estimated operating cash flow per m2 for buying PP carpets?

Answer 13

Selling price £10/m2
Purchase cost £(7.30)/m2
Selling and distribution costs £(2.90)
Net operating cash flow £(0.20)

Question 14

How does the NPV analysis work for manufacturing PP carpets?

Answer 14

Cash flow estimate = 140k * £0.30 = £42k
Discount factor = 1/(10% - G)
PV of cash flow = £XXk

Less admin exp £(40k)
Discount factor = 1/(10% - 0)
Pv of admin expenses £(400)

PV of net cash flows less admin exp = £XX

Diff growth rates = 0%, 3%, 4% and 5%
Less capital cost and set up £(300k)
Potential PV

Question 15

What are the assumptions for the NPV for manufacturing PP carpet?

Answer 15

1. WWL’s annual cost of capital (K) = 10%
2. PV of growing CF perpetuity perpetuity = CF at end f first year / (K-G)
3. Estimated CF occur at the end of each year
4. Annual fixed admin expenses of £40k won’t increase