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Debottlenecking and Victrex (VCT)

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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Debottlenecking and Victrex (VCT)

#308065

Postby TheMotorcycleBoy » May 12th, 2020, 5:10 pm

Hi folks,

Over the past year or so, I find that whenever I read a communication from the polymer and parts manufacturer Victrex, the term "debottlenecking" is mentioned. That very phrase comes up several times in their AR2019.

From page 7
Outlook
Looking forward, Automotive and Electronics are showing signs of stability, although we will retain some caution on these markets at this early stage, with an initial assumption that current trends will continue through the first half year. Our cost-effective debottlenecking project is underway, enabling Victrex to gain significant incremental capacity in support of our medium-term growth programmes, although an extended shutdown will mean some under-recovered overheads.

From page 19
Brexit
As previously communicated, the Group continues to consider the potential impact of Brexit, with a team in place comprised of senior leaders to manage various contingencies through any transition period and beyond. For now, existing laws and trading arrangements are unchanged.

Victrex has indicated previously that the principal risk is a sustained period when the Group may not be able to import certain raw materials or export finished goods through customs, which could curtail sales if regional inventory levels were depleted. As part of our contingency plans, additional warehousing for finished goods stock was secured in mainland Europe (Germany) and China with a minimum of eight weeks of finished goods stock held outside the UK. Our German warehouse has been operational since February 2019, with capability to supply European customers. We also secured additional raw material stocks. Group inventories reached £92.2m in FY 2019 as a consequence (FY 2018: £69.3m) and with continued uncertainty over Brexit, as well as reduced production availability in our polymer assets due to debottlenecking, we anticipate maintaining a continued higher level of inventory through FY 2020.


From page 20
Debottlenecking investment underway
Debottlenecking’ of our existing Hillhouse polymer manufacturing facilities is underway, which will allow the site to move towards its ‘nameplate’ capacity of 7,150 tonnes. At a capital cost of approximately £15m, weighted to FY 2020, this represents an efficient and smart use of cash, as well as enabling us to defer any large‐scale organic capacity investment by a number of years. The project will result in an extended shutdown during FY 2020, which will lead to under-recovered overhead in the region of £8m–£10m, which we intend to treat as an exceptional charge. This project also influenced our inventory build, to ensure we effectively manage security of supply for our customers during an extended shutdown of our polymer manufacturing facilities...

Do anyone here know what exactly debottlenecking is, especially in terms of Victrex? I've looked on the internet for some help, for example:

https://www.logisticsmgmt.com/article/h ... ory_pileup
https://www.investopedia.com/terms/b/bottleneck.asp

But I'm not 100% sure those articles really satisfy my curiousity. Anyway, I've tried to interpret the words in the AR and review the current assets from years 2017-2019, and I know think that I have a clearer picture.



Basically, I believe that VCT have concerns that due to external factors such as Brexit negotiations and Trade wars could lead to raw material shortages, and that that would result in them being unaware to satisfy customer orders. As such as, shortages would imply a bottleneck in their production lines. Based on this assumption of mine, I'm now of the view that "debottlenecking" seems to be a process where VCT are trying defend themselves against such shortages, and are hence building up excess inventories, which seeing as their outputs are not perishable, could mean both raw input materials and finished goods (i.e. popular items that clients would need to replenish). This inventory buildup is certainly apparent from 2018 and 2019, where inventory rose by 33%, and resulted in Cash from operations in the same interval falling from £135.8M to £90.3M.

Would anyone here be able to confirm or deny my above assumptions, and/or elaborate on them if necessary?

thanks Matt

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Re: Debottlenecking and Victrex (VCT)

#308084

Postby monabri » May 12th, 2020, 6:30 pm

I think (but am not fully sure) that the 'debottlenecking' is investment to increase output.

They mention/use the term "nameplate" which Wiki tells me:-

https://en.wikipedia.org/wiki/Nameplate_capacity


reading through your link

https://www.logisticsmgmt.com/article/h ... ory_pileup

I think they might be attempting to look to increasing ROCE by reducing the amount of inventory ("asset turn" side of the equation ?). But then I see your table above and see inventory is increasing so I'm not sure what gives!

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Re: Debottlenecking and Victrex (VCT)

#308097

Postby tjh290633 » May 12th, 2020, 6:59 pm

I would have thought that de-bottlenecking is an obvious operation. At some stage in their production process they are constrained because of the limited throughput of one operation, be it the production of a component or a stage in the process. They would therefore be looking to provide a parallel path at that point, or an increase in production rate, to remove the constraint.

TJH

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Re: Debottlenecking and Victrex (VCT)

#308098

Postby TheMotorcycleBoy » May 12th, 2020, 7:00 pm

monabri wrote:I think (but am not fully sure) that the 'debottlenecking' is investment to increase output.

They mention/use the term "nameplate" which Wiki tells me:-

https://en.wikipedia.org/wiki/Nameplate_capacity


reading through your link

https://www.logisticsmgmt.com/article/h ... ory_pileup

I think they might be attempting to look to increasing ROCE by reducing the amount of inventory ("asset turn" side of the equation ?). But then I see your table above and see inventory is increasing so I'm not sure what gives!

So yeah, it's my contention that for the reasons I cited in my OP, Victrex consider supply shortages as presenting bottlenecks. Even worse is the lost gross profit should they have to resort to paying above the odds for their ingredients if a customer demands more Victrex parts. So I believe that when inputs are available they fill their boots so to speak. This is certainly evident in their balance sheets. That said, why they don't just say "inventory build" instead of debottleneck is beyond me.

Matt

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Re: Debottlenecking and Victrex (VCT)

#308100

Postby TheMotorcycleBoy » May 12th, 2020, 7:06 pm

tjh290633 wrote:I would have thought that de-bottlenecking is an obvious operation. At some stage in their production process they are constrained because of the limited throughput of one operation, be it the production of a component or a stage in the process. They would therefore be looking to provide a parallel path at that point, or an increase in production rate, to remove the constraint.

TJH

Yes sure - thanks Terry.

Indeed the theory is quite obvious. But how would one in practice explain it re. Victrex's recent communications?

Do you agree with my interpretation in the OP, ie they are increasing raw supplies in order to reduce the chance of a future bottleneck, which in their case, might be a reduction of available inputs at the front of a production line?

EDIT: Sorry to seem obtuse but as a computer programmer by trade, I see very little of happenings in my own day-to-day.

Matt

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Re: Debottlenecking and Victrex (VCT)

#308103

Postby tjh290633 » May 12th, 2020, 7:16 pm

TheMotorcycleBoy wrote:Do you agree with my interpretation in the OP, ie they are increasing raw supplies in order to reduce the chance of a future bottleneck, which in their case, might be a reduction of available inputs at the front of a production line?

EDIT: Sorry to seem obtuse but as a computer programmer by trade, I see very little of happenings in my own day-to-day.

Matt

It could be. It may be that they need to find an alternative source of something to ensure that they can get up to capacity.

I know nothing about Victrex, what they produce, how they produce, or where they source their raw materials.

TJH

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Re: Debottlenecking and Victrex (VCT)

#308371

Postby xeny » May 13th, 2020, 6:42 pm

TheMotorcycleBoy wrote: That said, why they don't just say "inventory build" instead of debottleneck is beyond me.

Matt


Is it possible they're also buying more manufacturing plant? If it is a multi step process and one step has lower throughput, you'd seek to increase the performance of that part of the process.

If you're a programmer, compare it to profiling a piece of CPU bound code, to find where the "hot spot" is and concentrating on improving that part.

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Re: Debottlenecking and Victrex (VCT)

#308441

Postby AsleepInYorkshire » May 13th, 2020, 9:15 pm

If you consider the process of making something let's say a sausage and we'll call it a sausage machine.

At one end you shove all the stuff into the machine and the other out comes a sausage.

In the middle bit of the sausage machine let's imagine there's a little area where everything has to stop for a minute so they can add a little bit of spice and let's refer to this as a bottleneck. Ultimately this bottleneck dictates the overall speed of production. It also has a large bearing on the amount of material you need to feed in one end of the machine.

If the sausage machine could be "debottlenecked" at the spice stop there's a chance the number of sausages being produced will increase. And if you anticipate that happening soon you may want to arrange additional sausage making stock to cope with the increased speed of your sausage machine.

AiY"t"n'U

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Re: Debottlenecking and Victrex (VCT)

#308477

Postby monabri » May 13th, 2020, 10:16 pm

Vegetarian sausage I hope?

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Re: Debottlenecking and Victrex (VCT)

#308518

Postby TheMotorcycleBoy » May 14th, 2020, 5:03 am

xeny wrote:
TheMotorcycleBoy wrote: That said, why they don't just say "inventory build" instead of debottleneck is beyond me.

Matt


Is it possible they're also buying more manufacturing plant? If it is a multi step process and one step has lower throughput, you'd seek to increase the performance of that part of the process.

If you're a programmer, compare it to profiling a piece of CPU bound code, to find where the "hot spot" is and concentrating on improving that part.

Thanks xeny,

Well I'm clear on bottlenecks per se. Yes profiling code, i.e. the famous 80/20 rule. However, I'm eager to really understand it in the VCT context. Looking at their 33% inventory rise, it seems that, for them, debottlenecking==stockpiling. Either raw materials or finished goods.

Hmm.. It's not more plants. Check out another quick break down I've done of the years 2017-2019:


But their AR2019 can't get enough of the term. Some more programmer talk, just grep for it in the .pdf. It comes up many times.

Matt

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Re: Debottlenecking and Victrex (VCT)

#308519

Postby TheMotorcycleBoy » May 14th, 2020, 5:06 am

AsleepInYorkshire wrote:If you consider the process of making something let's say a sausage and we'll call it a sausage machine.

At one end you shove all the stuff into the machine and the other out comes a sausage.

In the middle bit of the sausage machine let's imagine there's a little area where everything has to stop for a minute so they can add a little bit of spice and let's refer to this as a bottleneck. Ultimately this bottleneck dictates the overall speed of production. It also has a large bearing on the amount of material you need to feed in one end of the machine.

If the sausage machine could be "debottlenecked" at the spice stop there's a chance the number of sausages being produced will increase. And if you anticipate that happening soon you may want to arrange additional sausage making stock to cope with the increased speed of your sausage machine.

AiY"t"n'U

Thanks, that's a good analogy......but how and where does it apply *exactly* in VCTs business model now and going forward? Read my OP in depth.......do you agree that it's stockpiling? If you search for the term debottlenecking in their AR2019 you'll see that they are placing much emphasis on it.

Matt

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Re: Debottlenecking and Victrex (VCT)

#309214

Postby MDW1954 » May 16th, 2020, 8:05 pm

Matt,

I won't go into details, but I am an expert on this. (Former management consultant, and was working on debottlenecking in the late 1980s for ten years.)

Basically, they believe that their production operations have bottlenecks, and that if they relieve those bottlenecks, they increase their overall capacity.

It sounds like you're using the wrong search terms.

Try: "Theory of Constraints" or "Eliyahu Goldratt". "hidden factory" is another one. That should bring you up to speed. Come back if you have any questions.

And yes, it works.

MDW1954

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Re: Debottlenecking and Victrex (VCT)

#314351

Postby TheMotorcycleBoy » June 1st, 2020, 5:38 pm

MDW1954 wrote:Matt,

I won't go into details, but I am an expert on this. (Former management consultant, and was working on debottlenecking in the late 1980s for ten years.)

Basically, they believe that their production operations have bottlenecks, and that if they relieve those bottlenecks, they increase their overall capacity.

It sounds like you're using the wrong search terms.

Try: "Theory of Constraints" or "Eliyahu Goldratt". "hidden factory" is another one. That should bring you up to speed. Come back if you have any questions.

And yes, it works.

MDW1954

Hi MDW,

I've finally gotten round to looking at this, but I'm still not 100% sure on what exactly debottlenecking means for Victrex, I do still believe that inventory control is part of it, but I appreciate (after watching a couple youtube clips) that inventory management may just be part of a larger process.

When I searched on youtube for what I assumed might be more targeted clips, e.g. "theory of constraints inventory", I did get several hits for "buffer sizing" which I believe could have been relevant.

This clip linked below, combined with Victrex AR2019, gave me more reason to believe that my original hunch was quite close to the mark.

If you take a listen to this clip (t=161s which I have indicated)
https://www.youtube.com/watch?v=2mbCBveHLMQ&t=161s

the tutor describes that part of the process (i.e. TOC) is identification of elements in the process "which are not in my control". This is very interesting, because peppered throughout Victrex's 2019 report, the terms "Brexit" and "debottlenecking" come up several times in close proximity. Hence it is my belief that VCT believe that one of the possible outcomes (remember the debottlenecking was initially mentioned by VCT back in 2019, and that's when their inventory build started too) of, say no deal Brexit, was supply problems, which would be hard to control etc. etc.

Quoting from the AR again:

Cash generation impacted by Brexit & debottlenecking inventory build
Operating cash conversion 1 of 87%, impacted by stock build...

in addition to what I quoted in my OP:

Brexit
As previously communicated, the Group continues to consider the potential impact of Brexit, with a team in place comprised of senior leaders to manage various contingencies through any transition period and beyond. For now, existing laws and trading arrangements are unchanged.

Victrex has indicated previously that the principal risk is a sustained period when the Group may not be able to import certain raw materials or export finished goods through customs, which could curtail sales if regional inventory levels were depleted. As part of our contingency plans, additional warehousing for finished goods stock was secured in mainland Europe (Germany) and China with a minimum of eight weeks of finished goods stock held outside the UK. Our German warehouse has been operational since February 2019, with capability to supply European customers. We also secured additional raw material stocks. Group inventories reached £92.2m in FY 2019 as a consequence (FY 2018: £69.3m) and with continued uncertainty over Brexit, as well as reduced production availability in our polymer assets due to debottlenecking, we anticipate maintaining a continued higher level of inventory through FY 2020.

(I would very much appreciate, for you, if you have the time, to download their AR2019, which I linked above, and indeed search for the terms "Brexit" and "debottlenecking", and see if you agree with me).

Interestingly now, post covid-19, leading to a different set of problems, it seems from reading their HY2020, that since (if my earlier theory has any grounding) debottlenecking comprising of inventory build results in expenditure, (and hence re. cv-19, VCT need to prioritise liquidity) they now describe deferring excess expenditure regarding debottlenecking for a year:

Cash conservation
Our range of cash conservation measures includes deferring capital expenditure for the UK debottlenecking programme to FY 2021 (approximately £15m), with other capital programmes limited to essential only expenditure. All discretionary costs including travel and new recruitment have been constrained to those activities critical to supporting customer related activity. We have mapped out a number of different scenarios in relation to our customers' demand and we will be prepared to implement the corresponding action plans should any of them materialise.

I'd be interested to hear what you think,
thanks Matt


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