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[Audio] [ Pause: 1] [ AfterClick] [Pause: 1] Hello everyone. What flooring do you usually notice in residential, commercial, and industrial structures? [Pause: 1] Ceramic tiles. These are the ubiquitous flooring chosen by homeowners and interior designers. You encounter them in entryways, foyers, swimming pools, terraces, living rooms, study rooms, corridors, pantries, kitchens, dining rooms, family rooms, recreation rooms, stairways, hallways, bedrooms, bathrooms, laundry rooms, and balconies. [Pause: 1] Besides their aesthetic appeal as walls and floors, ceramic tiles are eco-friendly, hygienic, non-allergenic, durable, water-resistant, stain-resistant, maintainable, affordable, and available in diverse sizes and designs. Cleaning ceramic tiles are as easy as vacuuming loose debris, sweeping up any dirt, and wiping with a mop. [Pause: 1] In this presentation, we will focus on Asia Nova Ceramics Incorporated (or Asia Nova for brevity). Like miniskirt, I will keep this presentation long enough to cover the essentials, but short enough to invite attention. So, as a ceramic tile producer, how broad was Asia Nova's customer base? What was the size of its market share in the ceramic tile industry?.

[Audio] [ Pause: 1] Before the implementation of the ASEAN Free Trade Area Agreement in 1993, Asia Nova was one of the leaders in the ceramic tile industry. [ AfterClick] [Pause: 1] Its customer base covers the whole of Luzon, Visayas, and Mindanao. [AfterClick] [Pause: 1] It is the catalyst in the small tile segment of the ceramic tiles market. [Pause: 1] Despite its vast customer base and its being the small tile catalyst, how did the ASEAN Free Trade Area Agreement in 1993 affect Asia Nova?.

[Audio] [ Pause: 1] The implementation of the ASEAN Free Trade Area Agreement in 1993 opened the gates for foreign competitors to invade the domestic market. [ AfterClick] [Pause: 1] At its onset, only a few foreign producers competed in the domestic market. [AfterClick] [Pause: 1] Later on, more foreign competitors saturated the domestic market. [Pause: 1] After the trade liberalization and the market fragmentation in 1993, what happened to Asia Nova's customer base and market share in 1994?.

[Audio] [Pause: 1] The trade liberalization and the market fragmentation in 1993 negatively shaped the ceramic tile business of Asia Nova in 1994. [ AfterClick] [ Pause: 1] For one, foreign competitors snatched many of Asia Nova's loyal customers. [AfterClick] [Pause: 1] For another, a Malaysian joint venture also produced small-sized ceramic tiles with chemical properties and surface appearances identical to those of Asia Nova. [Pause: 1] Taking into consideration its constricted customer base and its reduced market share, how did Asia Nova's Sales and Profit for 1994 fluctuate?.

[Audio] [Pause: 1] The constricted customer base and the reduced market share in 1994 negatively impacted Asia Nova's financial performance for the year 1994. [ AfterClick] [ Pause: 1] Compared to 1993, Asia Nova's Sales declined from 108,000,000 Pesos for 1993 to 86,400,000 Pesos for 1994. [AfterClick] [Pause: 1] Worse, Asia Nova's Profit shrank from 1,640,000 Pesos for 1993 to only 900,000 Pesos for 1994. [Pause: 1] To put a stop to its worsening financial performance, what did Asia Nova do?.

[Audio] [ Pause: 1] The President of Asia Nova is Alex Valenzuela (or Alex for short). Worried about Asia Nova's worsening financial performance, Alex sought the advice of top-rate consultants. To reduce production costs, the consultants proposed two strategies. [ AfterClick] [Pause: 1] Instead of three, Asia Nova will run only one machinery line at full scale. The useful life thereof will be primarily affected by the degree of use, rather than by the passage of time. Thus, the depreciation charge thereon will tend to track the revenue curve. While idle, the depreciation charge on the two other machinery lines will be suspended. Besides the reduced depreciation charge, repair and maintenance costs on the two idle machinery lines will be avoided. [AfterClick] [Pause: 1] Asia Nova will accumulate an inventory of ceramic tiles equal to half of those sold in the preceding year. To finance the inventory buildup, and to maintain a minimum cash balance of 1,000,000 Pesos, Asia Nova must obtain a sufficient loan from Oriental Bank. [Pause: 1] If the proposed strategies will be implemented, what will be the financial projections for the year 1995?.

[Audio] [ Pause: 1] After implementing the two strategies proposed by the top-rate Consultants, Alex projects stable Sales, along with an upsurge in gross margin and profit margin percentages. [ AfterClick] [Pause: 1] For Gross Profit, Alex projects it to increase from 20,400,000 Pesos for 1994 to 32,830,000 Pesos for 1995. [AfterClick] [Pause: 1] For Net Profit, Alex also projects it to increase from 900,000 Pesos for 1994 to an enormous amount of 8,510,000 Pesos for 1995. [Pause: 1] Given these financial projections, what will Asia Nova's Income Statement and Balance Sheet for the year 1995 look like?.

[Audio] [ Pause: 1] Given a stable amount of Sales, a gross margin percentage of 38%, a profit margin percentage of 9.85%, and a minimum cash balance of 1,000,000 Pesos for 1995 onwards, Asia Nova needs to borrow 26,000,000 Pesos from Oriental Bank. [ AfterClick] [Pause: 1] For the Income Statement, the rates of Interest Expense and of Income Tax for 1995 are assumed the same as those for 1994. [AfterClick] [Pause: 1] For the Balance Sheet, the Inventory for 1995 is half of the Cost of Goods Sold for 1994. Moreover, the Depreciation Expense on the Plant and Equipment for 1995 is only 2,500,000 Pesos or 1/3 of the 7,500,000 Pesos of Depreciation Expense for 1994, because only one of the three machinery lines will be run at full scale for 1995. Finally, the ratio of Accounts Payable to Cost of Goods Sold for 1995 is assumed the same as that for 1994. [Pause: 1] If Oriental Bank approves the Loan Application, how long will it take Asia Nova to repay the loan?.

[Audio] [ Pause: 1] If the financial projections of Alex will come true, and Oriental Bank will approve the Loan of 26,000,000 Pesos, it will take Asia Nova more than two years, but less than three years, to repay it. [ AfterClick] [Pause: 1] For the interest alone, Asia Nova's Operating Profit is more than sufficient to pay it annually. [AfterClick] [Pause: 1] For interest and principal, the Operating Profit will be insufficient for the Repayment. Two years' worth of Operating Profit will still be insufficient to pay for two interest amounts and one principal amount. Satisfactorily, three years' worth of Operating Profit will be sufficient to pay for three interest amounts and one principal amount. [Pause: 1] So, how confident is Alex that Oriental Bank will approve Asia Nova's Loan Application?.

[Audio] [Pause: 1] Speaking of how confident Alex is? Very confident. He advances these persuasive arguments. [ AfterClick] [ Pause: 1] Despite lower selling prices in 1995, Asia Nova will maintain for 1995 the Sales for 1994. [AfterClick] [Pause: 1] Due to reduced production costs, the gross margin percentage for 1995 will be higher than that for 1994. [AfterClick] [Pause: 1] Consequently, the profit margin percentage for 1995 will also be higher than that for 1994. [AfterClick] [Pause: 1] Considering these favorable statistics, Asia Nova can afford to repay the Loan of 26,000,000 Pesos in only three years. [Pause: 1] Wondering how Alex might look like when he advanced these arguments at Oriental Bank? [AfterClick] Here he is. Elegantly groomed and very confident indeed! [Pause: 1] If you were the Manager of Oriental Bank, what other financial ratios would you look into?.

[Audio] [ Pause: 1] After implementing the strategies proposed by the top-rate Consultants, how many days will it take Asia Nova to convert its Inventories into Receivables? [ AfterClick] [Pause: 1] For 1995, how many times will Asia Nova sell and replace its Inventories? Not even twice. [AfterClick] [Pause: 1] If not even twice, how many days will Asia Nova store its Inventories before selling them to Customers? Seven and a half months. [Pause: 1] Given its slow-moving Inventories, how long will it take Asia Nova to complete one cash cycle for 1995? Can Asia Nova quickly repay its Loan of 26,000,000 Pesos if it desires to?.

[Audio] [ Pause: 1] Cash cycle is the period of time to produce Inventories, sell them to Customers, and convert the Receivables back into Cash. [ AfterClick] [Pause: 1] The time it takes Asia Nova to convert from Cash to Inventories, to Receivables, and back to Cash, totals 238 days or approximately 8 months. [AfterClick] [Pause: 1] The amount of Quick Assets is the sum of the Cash, Temporary Investments, and Accounts Receivable. Although Asia Nova will sell its Temporary Investments and collects its Accounts Receivable, its Total Cash would still be insufficient to quickly repay its Current Liabilities (including its Loan of 26,000,000 Pesos if ever it so desires). [Pause: 1] So, if you were the Manager of Oriental Bank, will you approve Asia Nova's Loan Application? I doubt you will. But why did Alex hire the so-called top-rate Consultants?.

[Audio] [ Pause: 1] What is top- rate about the Consultants hired by Alex? Are the Consultants rated at the top of the Consultancy Rankings? Or are they rated at the top of Consultancy Fees? Only Alex knows for sure. Wondering what the Business Meeting of Alex with the top-rate Consultants might have looked like? [ AfterClick] Here it is. Alex is seated at the left. [Pause: 1] Running only one of the three machinery lines certainly reduces production costs. But accumulating inventories does not reduce such costs; it adds to such costs. Again, like a miniskirt, Inventories must be held in quantities large enough to cover the essentials, but small enough to invite attention. [Pause: 1] So, what size of inventories must Asia Nova hold? Most importantly, does Asia Nova still need to obtain the Loan of 26,000,000 Pesos from Oriental Bank?.

[Audio] [ Pause: 1] Producing ceramic tiles more than what Asia Nova can sell defeats its goal of reducing its production costs. Likewise, holding inventories of ceramic tiles more than what Asia Nova needs to fulfill surges in customer demand defeats such goal. If Asia Nova does these, it will be biting off more than it can chew. To reduce production costs, Asia Nova must do it this way. [ AfterClick] [Pause: 1] The size of the Inventories must be limited to the quantity required to fulfill surges in customer demand for ceramic tiles. Holding more than this quantity, and borrowing 26,000,000 Pesos from Oriental Bank to finance the excessive quantity, is a downright absurdity! [AfterClick] [Pause: 1] For the production, its size must be limited to the total quantity of the safety stock and the projected cost of goods sold. Anything more than this total is uncalled for. [Pause: 1] So, besides running only one of the three machinery lines, what other strategies must Asia Nova implement to reduce the production costs of ceramic tiles?.

[Audio] [ Pause: 1] To attain the maximum reduction in production costs, Asia Nova must optimize its process of producing ceramic tiles. These optimization techniques must be implemented. [ AfterClick] [Pause: 1] Clays with high plasticity have more fine particles that result in higher shrinkage and stability during the firing process. [AfterClick] [Pause: 1] Asia Nova must use less water for faster throughput with reduced energy costs. The reduced drying time will also improve product handling and reduce product deformation. [AfterClick] [Pause: 1] Clay products with clay conditioners move through all parts of the production process with reduced losses. Clay conditioners also improve the plasticity and strength of the ceramic bodies. [AfterClick] [Pause: 1] The addition of organic binders to ceramic bodies will improve the mechanical strength of the dry pieces. [AfterClick] [Pause: 1] Harsh temperatures and humidity around the setting machine and dryers must be controlled to prevent the cracking of the bricks. [AfterClick] [Pause: 1] For at least eight hours, bricks must remain in the conditioning room at 85% to 98% relative humidity with temperatures of 27 degrees to 37 degrees Celsius. These are necessary so that the bricks will withstand the more aggressive conditions in the dryer. [AfterClick] [Pause: 1] The temperature in the tunnel dryer must gradually increase from 37 degrees Celsius to above 100 degrees Celsius. Relative humidity must also be maintained at the highest possible level so that the bricks will not prematurely dry and eventually crack. [AfterClick] [Pause: 1] Upon exit from the dryer, and entry into the tunnel kiln, the moisture content of the bricks must be limited to 0.5% to prevent cracking and disintegration. [Pause: 1] There is no forever in this Presentation. It must come to an end..

[Audio] [ Pause: 1] But before I end, what is the moral of this Presentation for Alex? [ AfterClick]. The industry faces many challenges, foremost among which is the uncompetitive cost of local players compared to their foreign counterparts. Local firms have higher costs as a result of high fuel and power cost, the limited local source of and high raw material cost, high repair and maintenance cost of aging machinery, and high domestic inland freight costs. The competition presented by the entry of imported ceramic tiles is heightened by their non-compliance to product standards..