Once the equipment arrives and is installed, production ramps up rather quickly, with sales beginning in the sixth month after funding. Positive cash flow and net profit are achieved within the first year.
With fixed costs of about $184,000 per month in the first year, and variable unit costs at roughly 52% of prices, we need to produce and sell 715,963 units per month to break even. We will far exceed the break-even point in our first full month of sales.
The rapid growth of sales in year one and two is due primarily to increase in capacity over that period, as we add new extrusion equipment. The plan assumes the sale of all production capacity as it is added. The favorable gross margin projections are in part due to the vertical integration of the two processes. Our Managements' ability to handle all initial sales and marketing allows us to predict virtually no sales or marketing expense.
Cash flow is predicted to turn positive in the sixth month of operations, which is the tenth month after funding. The Cash Flow table shows our planned repayment of the long-term loan, as well as the purchase of new extrusion equipment in the first two year of the plan. Dividends to founders and the outside investor are shown near the bottom of the table.
The vertical integration, immediate sales contracts and rapid ramp up of production combine to project a Net Worth at the end of year one in excess of the total invested capital. By staying on plan, the Company will achieve rapid growth compared to invested capital.
Standard business ratios are included in the following table, along with comparison ratios for the Thermoplastic Materials industry (SIC Code 2821.02). The ratios show a plan for healthy growth. Our return on investment increases each year and will allow for new equipment to be financed internally should the Company choose to do so. While the ratios indicate rapid growth and profitability, it may be explained in part by the fact of the integration of three business sections into the one facility. Our ratios differ significantly from the rest of the industry because of our ability to use low-cost recycled materials to manufacture our products.
The plan calls for maximum production rate for flake in the sixth month from funding. Approximately one third of that production will be converted into extruded sheet beginning approximately at the same time. A second sheet extruder, which will also consume one third of the flake produced, is planned to be added at the end of year one, coming on line mid year two. A third extruder, which is planned to produce high-strength strapping, is expected to come on line late in year two. By the beginning of year three, it is expected that all of the 46,200,000 lbs. of RPET cleaned & recycled annually will be converted into extruded products. Up until this time, excess flake produced will be sold to other extruder companies.
The plan assumes a 5% increase in the sales price of all products and a 5% increase in the cost of raw materials and labor in each of years 2 through 5.
The result of the above is rapid growth in revenue and profit through year three, and moderate growth in years four and five, assuming no expansion of capacity during that time.
Management is indifferent as to the question of looking to sell the Company after 4-5 years or retaining ownership and the resulting annual cash flow. They will look to the investors for their direction and will generally support their wishes.
Recent information on private sales of similar industry companies has indicated that transactions under $25 million have averaged 5.3 times EBITDA, while transactions in the range of $25-250 million have averaged over 7 times EBITDA.
Such multiples would put the potential sales price of Replay, after 4-5 years of operation, in excess of $100 million based on current projections.
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