ES1870 Summer 2016 Examination Case Study

Contents
1. Introduction...................................................................................................................1
2. Economic Environment.................................................................................................2
3. The Food, Drink and Tobacco Processing Machinery Industry....................................4
4. Limons PLC Annual Report..........................................................................................6
4.1. Chief Executive Officers Statement......................................................................6
4.2. Divisional Operating Reviews................................................................................6
4.3. Financial Review..................................................................................................10
4.4. Directors Report..................................................................................................11
5. Sales and Marketing...................................................................................................11
5.1. Sales....................................................................................................................12
5.2. Marketing..............................................................................................................12
6. New Product Development Projects...........................................................................12
7. Project Management Software Acquisition.................................................................13
8. Budgeting....................................................................................................................14
9. Disclaimer and References........................................................................................15
In answering the examination questions, assume that it is currently January 2016.

1 Introduction
Limons PLC is an international business providing high performance, specialist
machinery and services for the production and packaging of consumer products,
particularly the Fast Moving Consumer Goods (FMCG) market including tobacco, food
and other high volume products. The company is comprised of three Divisions:
Tobacco Machinery Division: The Division is a major
supplier of machines, spares and related services to the
tobacco industry worldwide. Its major customers are the
principal global tobacco companies such as Philip Morris
International, British American Tobacco and China National
Tobacco.
The Division specialises in the design,
development and manufacture of tobacco processing
machinery, particularly mid-speed cigarette makers, packing and handling equipment
and is one of the foremost companies in the tobacco machinery industry.
The Division has a global presence with sales and service operations in the UK, USA,
Brazil, Singapore and Russia. It has well established manufacturing facilities in the
Czech Republic and Brazil, which are supported by the centralised logistics and
engineering centre in the UK.
Packaging Machinery Division: The Division comprises
the CMTC (Custom Machinery Technology Centre), based
in Coventry, UK and Limbox, based in Milton Keynes, UK,
Toronto, Canada and in Nijmegen, the Netherlands.
CMTC is a world leader in custom machinery for
packaging and processing applications.
Its major
customers are quite a diverse group, mainly third party
packaging companies such as Linpac, Tetra Pak or Amcor, all of whom handle the
packaging of products for retail companies such as high street supermarket chains.
The business helps its customers develop and launch new products and achieve
improvements in factory productivity through the design and build of special purpose
School of Engineering

Page 1 of 15

ES1870 Summer 2016 Examination Case Study

machines that are unique to each customer and each product. With over 25 years'
experience in the business, CMTC also supplies solutions to speed up existing
production lines, improve product quality and increase flexibility, enabling significant
reduction in operating and maintenance costs.
Limbox has over 50 years' experience in FMCG machinery markets. The business has
a wealth of experience in the supply of highly automated product handling, cartoning
and robotic end-of-line machinery and systems. There is also a specialisation in tube
packing machinery.
Scientific Services Division: The Division trades under
the name Limons Scientific and is the market-leading
supplier of quality control instruments and analytical
smoke constituent capture machinery to the tobacco
industry. It also provides an independent tobacco and
cigarette smoke constituent testing laboratory for
regulatory, research and product development purposes.
As such, its major customers are the tobacco corporations
that also form the customer base for the Tobacco Machinery Division but also bodies
such as governmental Departments of Health particularly in countries such as the US
or UK that are increasingly monitoring and controlling by legislation tobacco sales. The
Division is based in Milton Keynes, UK with sales and service offices in a number of
other key geographical areas to support its global customer base. The main testing
laboratories are in Richmond, Virginia, USA and Kingston upon Thames, UK, which are
accredited with the American Association for Laboratory Accreditation (A2LA) and the
United Kingdom Accreditation Service (UKAS) respectively. The business serves both
multinational customers and regional tobacco organisations with a breadth of testing
capabilities.
Before introducing more detailed information about Limons PLC the economic
prospects for UK manufacturing will be considered.

2 Economic Environment
Much of the following economic review is taken from The Engineering Employers Federation (EEF, The
Manufacturers Organisation) December 2015 Manufacturing Outlook report.

UK economic growth eased to 0.5% in the third quarter of 2015, from 0.7% previously.
The main growth driver was fixed investment, followed by private consumption.
Manufacturing fared less well, contracting for the third consecutive quarter. The largest
decline was in basic metals, highlighting that UK steel makers are struggling amid an
oversupply flowing from weaker global demand. Also, mechanical equipment declined
sharply, due to the effects of the collapse in crude oil prices on investment in the North
Sea. It is currently predicted that the economy will have grown 2.4% over 2015 (slightly
down on previous predictions) and to expand 2.1% in 2016, again, a small downward
The second estimate of UK GDP in the third quarter saw a strong rise in fixed
investment. Manufacturing remained in recession, falling 0.3% after dropping 0.5% in
the second quarter and declining 0.1% in the three months to March.
Strong real wage growth and high employment have supported consumer spending.
Real wage growth has benefited from inflation hovering around zero since early this
year and wage growth trending upward since late 2014. Also, the employment rate
the proportion of people aged from 16 to 64 who have a job remains at a record high.
Looking ahead, private consumption is expected to moderate but remain the main
growth driver. Consumer spending is likely to come under pressure from slower jobs
School of Engineering

Page 2 of 15

ES1870 Summer 2016 Examination Case Study

growth and rising inflation. Employment growth has been on a weakening trend since
early 2015 following very strong gains. Inflation is likely to rise, reducing households
purchasing power, as the downward pressure from the fall in oil prices in late 2014
passes out of the annual rate.
The Bank of England (BoE) expects inflation to rise to 2%, its target, by late 2017. Yet
consumer spending should get some support from the introduction of the national living
wage for low-paid workers aged over 25 early next year, which will be higher than the
current minimum wage. Also, oil prices are likely to remain relatively low, keeping a lid
on petrol and diesel prices.
There is speculation about when the BoE will find it appropriate to start raising interest
rates, with some forecasts suggesting that it may be as early as the first half of 2016.
The risks to the UK outlook are weighted to the downside, with the main threat a
collapse in China triggering a major global downturn.
Exchange Rate (/)
Exchange Rate ($/)
Exports
Imports
Current Account (% GDP)
Manufacturing
GDP
Average Earnings
Oil Price (Brent Oil $/bl)
Manufacturing Employment(000s)
Other Employment (000s)
Unemployment Rate (%)

2013
1.18
1.56
1.2
2.8
-4.5
-1.1
2.2
1.2
108.6
2,557
29,712
7.6

2014
1.24
1.65
1.8
2.8
-5.1
2.7
2.9
1.4
99.0
2,592
30,715
6.2

2015
1.38
1.53
2.4
2.9
-4.7
-0.1
2.4
2.7
53.9
2,612
31,109
5.4

2016
1.37
1.46
1.8
3.5
-5.0
0.8
2.1
3.4
52.8
2,579
31,300
5.4

Table 1: UK Economic Forecasts (% change except where stated).

Source: Oxford Economics and EEF

Global growth has eased in 2015, led lower by China, but is likely to pick up in 2016.
The world economy is expected to have expanded by 3% over the whole of 2015,
revised down one-tenth of a percentage point from last quarters forecast. Global
growth is expected to accelerate to 3.5% in 2016, revised two-tenths of a percentage
point lower than previous forecasts.
In China, official real GDP growth is likely to slow to 6.9% this year and 6.3% in 2016.
Policymakers are struggling to rebalance the growth drivers away from fixed investment
toward private consumption. Consumer spending is under pressure from recent
weakness of housing and stock markets dragging on households perceived wealth.
The central bank has eased monetary policy to support the economy and is likely to do
so again.
Exports are set to weaken on softer demand from other emerging markets. The recent
weakness of commodity prices has hit emerging economies that rely heavily on exports
of oil and iron ore, such as Russia and Brazil respectively, hard. Also, companies in
emerging markets that borrowed cheap funds flowing from the US Feds quantitative
easing are struggling to repay their debts as the subsequent end of the program has
pushed up borrowing costs.
US economic growth is forecast to be steady at 2.4% over 2015 and to pick up to 2.7%
in 2016. Domestic demand is set to strengthen as the improving labour market lifts
private consumption, and the resulting wider profit margins encourages business
investment. Yet exports are likely to be under pressure from weaker demand from
emerging economies and the US dollar remaining strong.
School of Engineering

Page 3 of 15

ES1870 Summer 2016 Examination Case Study

In the eurozone, economic growth is expected to be up by 1.4% over 2105 and is
forecast to increase by 1.8% in 2016. Consumer spending is likely to benefit somewhat
from steady job growth. Also, government spending will help as some members ease
their fiscal policy slightly. Inflation is forecast to rise but remain well below the
European Central Bank (ECB)s target of 2% for a prolonged period. The ECB is
concerned about the risks associated with inflation being too low for too long and has
signalled it will extend its quantitative easing program in early 2016 if necessary.
Japans economy is expected to expand by 0.6% over 2015 and 1.5% in 2016. Private
consumption is likely to recover gradually as the labour market improves. Also, healthy
corporate profits should support a modest expansion in business investment. Exports
will probably weaken on softer demand from emerging markets. The likelihood of the
central bank easing monetary policy further recently increased after the economy went
back into recession in the third quarter.
The risks to the global outlook are also skewed to the downside, with the key threat a
collapse in China. Another major risk is that the higher borrowing costs flowing from
the Fed starting to raise interest rates triggers a wave of corporate defaults in emerging
markets.
A potential source of international trade improvement for the UK and EU is presented
by the expected culmination of the Comprehensive Economic and Trade Agreement
(CETA) which has been negotiated between the EU and Canada and which is
estimated will boost the UK economy by 1.3 billion per year. It aims to improve trade
and investment between the EU and Canada through the removal of customs duties,
increasing access to public contracts, opening up services market, offering more
predictable conditions for investors and protecting EU innovations and traditional
products. It is estimated that CETA could be applied from early 2017, provided that the
Council, European Parliament and the Canadian legislature approve CETA in 2016 as
expected.

3 The Food, Drink and Tobacco Processing Machinery

Industry
The food, drink and tobacco processing machinery industry manufacture thousands of
different products for varied clients in the food, drink and tobacco industries. A recent
study states the value of the global business to be over $40billion. It also forecasts that
demand will grow 5.2% annually through to 2017, with gains in developing countries
outpacing demand in the US, Western Europe and Japan. Labelling and coding
equipment will be the fastest growing type, while filling and form/fill/seal equipment will
remain the most widely used.
A recent review of the industry by the European Commission reports:
[In the European Union alone] The industry employs about 100,000 people with a
production of 10billion, and accounts for approximately 5% of the mechanical
engineering sector. The production of food, drink and tobacco processing machinery is
a European specialty: while the available statistical data do not allow an exact
comparison, the EU is undoubtedly the world's largest manufacturer, with a production
at least three times as large as that of the Unites States, which comes in second
position. The competitive strength of the EU in this sector is reflected by its trade
performance: some 30% of EU production, amounting to a value of 2.8billion, is
exported to the rest of the world. Exports are almost seven times larger than imports,
implying that the sector is a large contributor to the EU's trade balance. ..... About 80%
of the imports of food, drink and tobacco processing machinery by Member States
School of Engineering

Page 4 of 15

ES1870 Summer 2016 Examination Case Study

originates in other EU countries. The industrial structure of the EU food, drink and
tobacco processing machinery industry is characterised by a very strong presence of
small and medium-sized enterprises. Firms with fewer than 100 employees account for
35% to 50% of sectoral employment and value added. Very small companies (fewer
than 20 employees) mainly serve markets with many small customers (such as bakery
equipment for small bakeries, or dairy equipment).
Limons customers fall into two principal markets; the Tobacco Machinery Division and
Scientific Services are almost exclusively dedicated to the tobacco industry. The
Packaging Machinery Division is much more widely dispersed (and striving to diversify
further).
The production of cigarettes still represents a substantial industry in many areas of the
world but is increasingly subject to various forms of Health and Safety and anti-tobacco
legislation in certain markets, predominantly western developed countries. Examples
of this are the ban in the UK on Smoking in Public Places (Health Act 2006) and US
legislation (HR1256) giving the US Food and Drug Administration authority to regulate
the manufacturing and marketing of tobacco. In these countries, particularly, the
tobacco industry has acquired a reputation for being ethically flawed which can (for
instance) make it difficult to recruit personnel. The Far East, Asian, South American
and African markets are still growing in some instances, at a substantial rate - but the
market in China in particular is experiencing increasing levels of domestic provision.
Whilst the Packaging Machinery Divisions core market is the traditional FMCG
packaging industry, it has had successes - often initiated by CMTC - in areas such as
security printing (for instance, security measures such as printing the holographic
images on bank notes or incorporating smart technologies in credit cards), labelling
and coding. There is still a large potential for modernisation in this market; it is not
uncommon to encounter potential customers who believe that their production methods
(and importantly, production rates) are state-of-the-art, only to be astonished when
presented with the potential improvements offered by a process machine developed for
them by CMTC. The packaging industry generally is recognising that there are rising
consumer concerns about the quantity of packaging used in the retail industry
prompting a lot of research into biodegradable and recyclable options. To date,
however, Limons have not been particularly active in this area.
In each case, there is a large element of the customer base being quite wellestablished and consistent there are relatively few new customers to either of the
core industries who might turn to Limons for machinery solutions.
There are five principal competitors to Limons business (although it is notable that
none of them form a particularly close match to Limons total business profile; two of
them are almost entirely tobacco-related, the other three are entirely packagingorientated with very little involvement in cigarette manufacture). Between them, with
Limons included, these businesses account for approximately 60% of the combined
tobacco and packaging markets.

4 Limons PLC Annual Report

The following section presents some edited details taken from the companys Annual Report for 2015.

5 Chief Executive Officers Statement

Outlook; Due to continued uncertainties and slow rate of growth in our core markets
we are taking steps to protect the Group against the effects of the current global
School of Engineering

Page 5 of 15

ES1870 Summer 2016 Examination Case Study

economic environment and position the Group to take maximum advantage of future
stronger upturns. Accordingly it was necessary to announce a number of redundancies
before the year end and we are evaluating further actions. We have developed plans
to mitigate the impact of continued reduced volumes, given the general economic
conditions for the markets each of our Groups businesses operate in and we expect
Group sales overall to remain largely static in the current year, mitigated by reductions
in the cost base and improvements in efficiency in each of the businesses.
We see the principal stakeholders in our company as ranging from our shareholders to
our customers, employees and even the UK Government and we will continue to focus
on providing the best results for all of them that prevailing global economic conditions
allow.
(John Michael Osbourne, CEO, December 2015)

6 Divisional Operating Reviews

Tobacco Machinery Division; As expected the Tobacco Machinery Divisions profit in
the year was lower than in the previous year, with the division delivering operating profit
of 5.2m (2014: 6.0m), reflecting an increase in production costs owing to the relative
weakening of the value of sterling. Sales in the year were a little higher at 34.9m
(2014: 32.9m), with overall level of orders at the end of 2015 at similar levels to that of
twelve months previously. Sales of aftermarket products, including spare parts,
declined slightly in the year as expected. Whilst good progress has been made in the
performance of the Czech manufacturing and assembly factory, pressures for
significant increases in the local labour rates compared with the previous year has
more than offset these efficiency gains and led to increased costs for the division,
which is a concern. The division has not experienced evidence of a significant
reduction in demand for its products as a consequence of the static economic
environment; nevertheless action has been taken to improve efficiency through the
reduction of employee numbers in the UK and USA. There is also a root-and-branch
review of all suppliers underway that is targeting a 5% reduction in material costs by
mid-2016.
The division specialises in the design, development and manufacture of tobacco
processing machinery, particularly mid-speed cigarette makers, packing and handling
equipment. There is little perceived threat of substitution within this field, that is to say,
machinery capable of manufacturing cigarette products at the required rate. It is widely
acknowledged however that there are a number of recent developments addressing the
health concerns of the wider tobacco industry. The increase in market uptake of nontobacco alternatives to cigarettes, such as e-cigarettes is notable. This has recently
led to some disagreement amongst the senior management of the division. One
director in particular has referred to a recent report published by Public Health England
(PHE, 19th August 2015) in which an expert independent review concludes that ecigarettes are around 95% less harmful than smoking. He feels that, in the face of
such evidence and on ethical grounds Limons should strategically distance itself from
the business of producing cigarettes. Many of the other directors however, disagree;
they are reluctant to move out of one of the companys traditionally key markets and
core competencies whilst it is still producing a significant proportion of Group profits.
The division continues to provide a full range of service and support activities which,
together with service engineers based in various countries, provides the ability to meet
customers needs efficiently in all parts of the world. Continuous improvement in
service performance to its customers remains of key importance to the Group, and
momentum in this area has been maintained through the year. Order intake in the
School of Engineering

Page 6 of 15

ES1870 Summer 2016 Examination Case Study

European, Middle Eastern and African regions increased in the period for all product
groups. The region is managed from the UK, with continued focus on key customer
contacts and on-site support where appropriate. Order intake was also strong in South
America and Asia Pacific although demand from China continued to reduce; Chinese
governmental initiatives continue to encourage their national tobacco companies to
purchase locally-produced equipment to support their domestic industry. Whilst
Limons products can still claim a quality advantage over the locally-sourced
equipment, the erosion of this market is expected to continue in 2016. However the
threat of new entrants to the South American and Asia Pacific markets (in comparison
to the situation that has arisen in China) is thought to be slight; in these regions, in the
absence of preferential government support there are still significant barriers to the
entry of this business. Demand was also generally weaker in North America but profits
were maintained as the business continued to focus on its cost base as well as
delivering projects cost effectively. Overall, net growth in this market is expected to be
slight (~1%) for the short-medium term but with increasing health concerns and the
growth, particularly in western markets for non-tobacco alternatives, it must be
accepted that the longer-term prospects for the tobacco industry generally are for
gradual decline.
The divisions principal products are the Cigmaster and TabFlow mid-speed cigarette
makers. The TabFlow is very well established and has a market reputation as the
industry standard machine within its class, designed to operate at about 5,500
cigarettes per minute (cpm). This model is currently estimated to account for
approximately 30% of the cigarette-making machinery market. The Cigmaster has
recently been launched and is undergoing commissioning trials with its first customer.
Whilst based on the earlier machine, it includes a number of technological
improvements and offers the potential for 8,000cpm with tighter product quality control.
These productivity improvements, it is estimated, will make it the competitive option for
upgrade for approximately 40% of the market (but it is acknowledged that much of this
business will be at the expense of the existing TabFlow installations indeed,
upgrades for existing customers are anticipated to be a major sales route for this
product). Peripheral handling and packaging machines are often sold together with
these machines, and spares, servicing and performance upgrade services also account
for a significant proportion of business. Prospects for the machine remain favourable,
although timing of orders is uncertain. The UK and Brazilian-based engineering teams
continue to focus on the development of upgrade and enhancement kits for the large
number of installed Limons machines in cigarette factories world-wide, as well as the
development programme for the Cigmaster.
Market conditions in the cigarette manufacturing industry remain challenging, with
continued consolidation and relocation of manufacturing activity. The division, though,
has positioned itself to service its customers from a cost effective supply base
(although costs have been impacted by adverse currency movements) and focused its
product development activities in areas where good prospects exist. Demand remains
potentially volatile, with general uncertainty in all markets and territories, and the timing
of orders for new machinery will have a significant bearing on performance in the year.
Accordingly expectations are for a lower level of performance in this division during
2016 compared with 2015.
Packaging Machinery Division; The divisions operating profit was 0.2m (2014:
1.2m) on sales of 37.0m, 4.6% down on last years sales of 38.7m, but 14% down
assuming constant exchange rates.

School of Engineering

Page 7 of 15

ES1870 Summer 2016 Examination Case Study

Limbox have produced a diverse range of packaging machines basically for making
various forms of carton and flexible tube packaging for over 50 years. Whilst there is
a core product line of basic machine configurations, one of the features of this
business is that the modern demands of the packaging industry require a high degree
of customisation of these machines. Consequently it is unusual for the same machine
specification to achieve a production run of more than a dozen units. It is estimated
that Limboxs principal product lines account for approximately 12% of the overall
packaging machinery market, which itself is predicted to grow by approximately 5%
annually in the medium term. In 2014 Limbox benefited from a high opening order
book, resulting in a reasonable level of profit at year end but even after implementing a
series of particularly stringent efficiency measures, 2015 was disappointing with profits
reduced compared with the previous year. The drop in sales was further impacted by
cost over-runs on some projects. Consequently, particular attention is being applied in
this business to its project management processes. A wide-ranging improvement plan
was instigated and whilst further improvement is anticipated, the business has made
significant progress in the year. There remain some legacy costs from projects taken in
2013 and 2014 which impacted in 2015 and detracted from its overall performance, but
these are largely resolved and are not expected to hinder the business going forward.
Even though Limbox is more secure operationally, the slow improvement in global
economies has led to a low level of order intake in recent months (not as much
improved compared with the previous year as had been hoped), and the business has
entered 2016 with a relatively low order book. Quoting activity remains high, however
decision making by prospective customers is extended and the actual placement of
orders is often being deferred. The Canadian part of the business has suffered over
the last two years from a strong Canadian dollar compared with the value of the US
dollar, which has weakened that groups competitive position. However, the relative
values have changed over the last few months and this currently puts Limbox overall in
a position where it can compete more effectively for prospective orders in the USA.
CMTC specialises in bespoke solutions to new packaging, printing and handling
machinery applications. The nature of the business is invariably working to unique
project specifications ranging from banknote security printing to innovative teabag
production lines. Despite having supplied this service for over twenty years, there is
still a high degree of novelty in this work as many FMCG businesses have yet to
appreciate how their familiar production methods could benefit from CMTCs
technologically innovative solutions. Overall market penetration by this group is still
small but the potential for growth is considerable and the role of CMTC in developing
new markets for the rest of the Packaging Machinery Division to exploit is regarded as
essential. In 2015 CMTC delivered sales slightly higher than in the previous year and
with operating profit margins maintained at the previous years levels, the business
delivered a strong level of profit. Order intake was slightly improved on the previous
year but it is evident that customers are being cautious in committing significant
expenditure whilst much of the global economy is still exhibiting faltering growth.
In the last five years, the CMTC has seen a steady loss of its most experienced
engineers, initiated by two of the original team leaving to set up a competitor company
of their own and then subsequently recruiting a number of their former, senior
colleagues. Whilst it has not been too difficult to recruit qualified replacements, there is
evidence that the experience-base of the company has suffered, most notably with
regard to project management skills, with a number of recent projects over-running in
terms of time, budget or in a couple of cases, both.
Scientific Services Division; The Scientific Services Division delivered increased
sales of 19.6m (2014: 17.7m) and operating profit of 3.4m (2014: 2.2m).
School of Engineering

Page 8 of 15

ES1870 Summer 2016 Examination Case Study

Limons Scientific is primarily concerned with tobacco product quality control,
measurement and analysis and the supply of instrumentation and equipment to enable
this work and providing laboratory analytical services to the market, in the face of
increasing tobacco-related legislation. The companys products include smoking
machines (which are designed to provide smoke-analytical test data) and a large range
of particulate analysis equipment which are largely marketed as Quality Measurement
Units (QMUs). These bundle a series of machines and instruments that permit the
regulatory assessment of tobacco products. These may involve integration with the
cigarette making-machine itself and consequently are often sold in conjunction with a
Tobacco Machinery Division equipment sale.
Limons Scientifics order levels in 2015 for quality control and analytical instruments
were particularly strong in the first half of the year and, although demand reduced a
little in the second half, overall the value of orders exceeded those in the previous year.
Investment plans in the tobacco industry remain uncertain, although early 2016 has
seen order intake at similar levels to last year.
The instruments business increased its sales compared with the previous year by 10%
and improved its profit margins. Having experienced a loss of market share in Asia,
and China in particular over the last few years, a renewed sales approach has seen
activity in that region improve. Overall, demand for both Limons Scientifics wellestablished, as well as the recently introduced range of instruments, increased in the
year although demand for smoking machines reduced. Product development, which is
central to Limons Scientifics market leadership and strategic development, was
concentrated on both the incremental improvement of existing products, and
development of a range of innovative new products to meet emerging demands.
Sales for the testing services have grown, together with an increase in new project
work as well as increased routine testing work. There is quite a large degree of
uncertainty in the main market in North America arising from the significant rise in the
market for smokeless products such as e-cigarettes, although the company is well
placed to benefit from work that may become available during 2016 despite this
challenging competitive environment. Different opportunities exist in the testing of
smokeless tobacco products, which are now being promoted by the major cigarette
manufacturers. In 2009, President Obama signed the Family Smoking Prevention and
Tobacco Control Act (HR1256), a landmark legislation which gave the U.S. Food and
Drug Administration authority to regulate the manufacturing and marketing of tobacco.
This has since led to significant levels of mandatory testing in the USA, and has
provided significant medium range opportunities for Limons Scientific. With similar
legislation either already enacted or being considered in other countries, the
expectation is that there will continue to be considerable opportunities in this area.
Although the division operates to short order lead-times which can change the outlook
quite quickly, it is expected that as a whole it will continue to perform satisfactorily. It is
estimated that the division accounts for approximately 40% of the current global market
for tobacco-related analytical services.
This sector is anticipated to grow by
approximately 15% annually in the short-to-medium term as various legislations insist
upon greater levels of measurement and analysis in the industry. However the longer
term prospects will be determined by the condition of the tobacco industry itself. With
this in mind, the company commits significant resources to research and development
activities, including widening the product portfolio. In particular, the division is currently
looking to develop the analytical services provided to cater for the Food & Drink and
Pharmaceutical sectors; these are similarly regulated and offer impressive potential for
growth in this aspect of the business.
School of Engineering

Page 9 of 15

ES1870 Summer 2016 Examination Case Study

7 Financial Review
Profit in the period was 8.8m (2014: 9.4m). Earnings per share amounted to 16.1p
(2014: 18.0p).
Operating Results; Group revenue was 91.5m, a small increase compared with
89.3m in 2014, although on constant exchange rates this equates to a reduction of
4%. Sales in the Tobacco Machinery Division increased to 34.9m (2014: 32.9m) but
operating profit decreased to 5.2m (2014: 5.97m) reflecting an unfavourable change
in sales mix. Packaging Machinery Division sales decreased to 37.0m (2014:
38.7m) and operating profit decreased to 0.2m (2014: 1.211m). Scientific Services
Division sales increased to 19.6m (2014: 17.7m) and operating profit increased to
3.4m (2014: 2.219m).
Reorganisation Costs; The Group incurred reorganisation costs of 1.4m in the year,
mainly in respect of the Tobacco Machinery Division, comprising redundancy payments
and related pension costs. The total number of employees in the Group fell from 884 in
2014 to 792 in 2015.
Economic and Market Cycles; Overall, the companys strategy has delivered
the following results in recent years in terms of Profit Margin (Figure 1) and
Return On Total Assets, (ROTA), (Figure 2);

Figure 1: Profit Margin

Figure 2: Return on Total Assets (ROTA)

A considerable proportion of the Groups turnover is derived from the tobacco industry
and is potentially affected by changes in the commercial, industrial and legislative
environments of that industry. This is demonstrated by the figures above; the latter
years of the last decade showed steadily improving results as the company increased
its penetration of the extensive market in China. However, this was curtailed by
changes in the regulation of the Chinese tobacco companies that resulted in a big
increase in Chinese local sourcing and a consequent large-scale reduction in business
in the region for Limons. However, the customer base is geographically diverse and
the Group sells a range of products and services to the industry, including those that
relate to the regulation and quality control of cigarettes, as well as to their manufacture.
The Group is also potentially affected by economic cycles and changes in other
industrial sectors more generally. Given the slow recovery (particularly in Europe) from
the last global recession and continued concerns about the strength and stability of
economic growth in China, the risk of trading partners (including both customers and
suppliers) ceasing to operate has increased. The Group monitors such risks and
mitigates them as and where appropriate, but the loss of any such partner could have
an adverse effect on the Groups operating results and financial condition. The prices
received for the Groups products and services depend on numerous factors, some of
which are beyond its control and the exact effect of which cannot be accurately

School of Engineering

Page 10 of 15

ES1870 Summer 2016 Examination Case Study

predicted. Such factors include general economic and political activities, including the
extent of any governmental regulation and taxation.
Exchange Rate Movements; The majority of the Groups operations are outside of the
UK, and therefore a significant portion of its business overseas is conducted in
currencies other than sterling. Consequently, its financial performance is affected by
fluctuations in foreign exchange rates. As a result a change in the exchange rates of
the US dollar, Canadian dollar, euro, Czech koruna, Brazilian real and other currencies
against sterling may affect the sterling value of profits achieved. The Groups
competitiveness and profitability is also affected by changes in the relative values of
foreign currencies where the Groups operations outside the UK trade with businesses
in different foreign jurisdictions.

8 Directors Report
Research and Development; Group policy is to retain and enhance its market position
through the design and development of specialist machinery and support services. To
achieve this objective, engineering and product development facilities are maintained in
the UK and overseas, notably the CMTC facility in Coventry, UK. Research and
development expenditure incurred in 2015, net of third-party income, amounted to
1.098m (2014: 1.161m).
Generally, company investment in research and
development (shown in Figure 3, below as a percentage of Total Revenue) is still
struggling to recover from a difficult period dating back five years that saw the loss of a
number of key personnel at the CMTC facility to a competitor company. A focus on
recruitment to remedy this shortfall has met with some success but the reduced
experiential skill base is still resulting in a lack of new project activity.

Figure 3: R&D Expenditure as a % of Total Revenue

It has also been identified that there is scope for improvement in the groups adoption
of recent developments in Management Information Systems. Technical advances in ebusiness and web-based customer support technologies, as well as better project
management systems all offer potential for greater efficiencies and effectiveness.

9 Sales and Marketing

A large element of the customer base for all Limons three divisions are wellestablished and consistent there are relatively few new-entrants to either of the core
industries who might turn to Limons for machinery solutions. The companys sales and
marketing effort is therefore dominated by existing customer renewal-of-business or
FMCG trade-fair presence. The latter has generated the bulk of CMTCs novel
business projects.

School of Engineering

Page 11 of 15

ES1870 Summer 2016 Examination Case Study

10 Sales
In 2015 Limons total revenue (or sales) rose by 2.5% to 91.5m (2014 89.3m), Figure
4. Operating profit fell by 6.4% to 8.8m (2014 9.4m)

Figure 4: Total Revenue

Figure 5: Turnover by Region.

Whilst sales overall rose slightly, this was principally by an increase in Continental
European business offsetting a similar fall in UK sales. Other regions were largely
stable (Figure 5), with a small increase in the Rest of World representing the increased
efforts to open up new markets.

11 Marketing
The company is keen to develop other market opportunities beyond its historical
background of tobacco machinery. Whilst the current success of the Scientific Services
Division (helped by its close adherence to the business opportunities presented by the
increase in international tobacco-related legislation) is helpful to the overall business, it
is recognised that this is probably only providing a soft landing for the ultimate decline
of the tobacco industry overall in the longer term. There is certainly potential for these
services to be extended to the Food and Drug industries. The Packaging Machinery
Division, whilst it is currently struggling to increase its contribution to Limons overall
performance, is also seen to have great potential for generating new markets for the
company and in this respect, the activities of CMTC are recognised as being of crucial
importance.
Limons actively promotes its core businesses at international trade shows, organised in
conjunction with their various overseas subsidiaries. There is also a great deal of effort
placed in customer support and in-factory demonstrations, recognising that existing
customers renewals are an essential part of the companys business. Customer
training is also undertaken around the world.

6. New Product Development Projects

Limons core competencies are based within its background of developing fast-process
machinery for the tobacco industry. It was realised some decades ago that the novel
aspects of these machines could be usefully employed in a range of other applications,
resulting in the expansion of the company (largely by acquisition) with what is now the
Packaging Machinery Division. Much of the companys work involves a bespoke
approach to customer contracts, particularly in the case of the business of CMTC.
Recently, a project has been agreed on behalf of a potential customer for a packaging
machine. The product is a high-value pharmaceutical powder, the packaging is to be
blister-packed capsules. The customer is interested in the potential for significantly
increased production throughput whilst continuing to meet (or improve upon) the
current essential (and very closely regulated) weights-and-measures, hygiene and
School of Engineering

Page 12 of 15

ES1870 Summer 2016 Examination Case Study

Health & Safety constraints. CMTC has agreed to undertake a proof-of-concept
project to demonstrate the capabilities of their technologies to deliver to the customers
specifications. The customer has agreed to fund the project to fixed cost of 300,000
to cover 6 months (26 weeks) of work, at the end of which a report will be produced to
accompany a demonstration rig capable of outlining CMTCs proposed packaging
solution to the customer. The project will entail the following tasks (Table 2):
Code
1
2
3
4
5
6
7
8
9

Description
Specification and Initial Design Concept
Module Configuration
Control System Design
Module Detail Design
Module Manufacture
Control System Manufacture
Module & Control System Assembly & Test
Proof-of-Concept Trials & Analysis
Compile Report & Proof-of-Concept Demo.

Predecessors

Duration (weeks)

1
1
2,3
4
3,4
5,6
6,7
8

2
2
3
5
6
3
7
2
1

Table 2: CMTCs Proof-of-Concept Project Plan

The Initial Trials stage of the project involve running the prototype machine with the
customers pharmaceutical powder, specifically to check the powders high-speed
handling characteristics such as flow, clumping and clogging. In the last few days, the
technicians operating or working in the vicinity of the rig have been complaining of
experiencing symptoms ranging from mild respiratory problems to occasional
headaches and dizziness and they have noticed that fine air-borne powder is escaping
from the process. They are aware that the workshop in which the trials are being
conducted is equipped with only standard workshop air conditioning and that they
have not been issued with any specific respiratory equipment beyond simple workshop
dust-masks. These issues have been raised with the companys Health and Safety
Officer.

7. Project Management Software Acquisition

It has become apparent that Limons need to improve their planning and control of
major projects and the company has decided to invest in a new project management
software package. The IT department has conducted an initial review and narrowed
the choice to two different software packages available from Supplier A and Supplier B.
Supplier As project management software has been developed specifically for
manufacturers of machine tools and therefore fits best with Limons management
practices. Supplier Bs software was developed for use by manufacturers of food and
tobacco products and as a consequence is utilised by many of Limons customers. To
win orders some of these customers are specifying the inclusion of project plans as
part of the tender process and some of Limons largest customers have expressed a
preference for project plans developed using Supplier Bs software. Whilst the initial
savings in operating costs with Supplier Bs software are not forecast to be as high as
with Supplier As software, the marketing department predict that in the longer term
more orders will be won and net cash inflows will be higher. Limons currently use a
discount factor of 5% and the company normally expects payback on spending on IT
projects by the end of Year 3 after the investment. The IT and marketing departments
have developed estimates of cash flows for the two software packages and these are
shown in Table 3 below.
Supplier A

School of Engineering

Supplier B

Page 13 of 15

ES1870 Summer 2016 Examination Case Study

End
of
Year

Initial
Cash
Outflow
(k)

Cash
Inflow by
End of
Year (k)

Net Cash
Flow by
End of
Year (k)

Initial
Cash
Outflow
(k)

Cash
Inflow by
End of
Year (k)

Net Cash
Flow by
End of
Year (k)

Discount
Factor
@5%

-250

-250

-280

-280

1.00

-10

100

90

-20

50

30

0.95

-15

100

85

-15

100

85

0.91

-20

100

80

-10

170

160

0.86

-25

100

75

-5

250

245

0.82

Table 3: Project Management Software Acquisition Cash Flows

8. Budgeting
The company has, for a number of years now, been developing the three divisions of
the company in their respective business directions and it has generally proved
sufficient to review the budgets of each with respect to their previous years
performance. However it is now quite noticeable that substantial differences exist in
the profitability and performance of the three divisions: Tobacco Machinery is
maintaining a competitive stand in its market; Packaging Machinery is struggling with
its traditional business and very reliant on the new applications generated by CTCM;
Scientific Services is currently enjoying substantial growth and is well placed to create
commercial advantage from developments in tobacco legislation. These differences,
combined with the need for streamlining in the face of continued slow growth in major
markets suggest that the companys approach to budget setting is due for a major
overhaul.
Typically, the company adopts a fixed approach to the implementation of their budgets.
A large proportion of their work is conducted over quite long lead times and the fixed
approach encourages managers to produce realistic budget forecasts in the first place
and then strive to adhere to them. However the Manufacturing Manager of the Tobacco
Machinery Division believes that this is an unreasonable situation and that the frequent
criticism that he receives for exceeding his budgets is beyond his control it is
commonly the result of the variation in actual production that he is required to
accommodate due to the under-forecasted volume of spares requests from customers.
For instance in 2015, customers preference for maintaining existing machinery rather
than purchasing new led to an unexpected 20% increase over budget in spares sales.
Table 4, below shows a review of the budget set in 2015 against actual expenditure.

School of Engineering

Page 14 of 15

ES1870 Summer 2016 Examination Case Study

Budgeted Costs 2015 Actual Costs 2015 @
@ 100% Capacity
120% Capacity
Variance
(000s)
(000s)
(000s)
Raw Material Costs
Manufacturing
Marketing and Advertising
Direct Sales Expenses
Distribution Costs
Administration Expenses
Total Costs

15,000
7,400
7,500
500
1,500
1,500
33,400

17,200
8,600
7,500
580
1,800
1,450
37,1300

-2,200
-1,200
0
-80
-300
50
-3,730

Adverse/
Favourable
Adverse
Adverse
(On budget)
Adverse
Adverse
Favourable
Adverse

Table 4: 2015 Budget and Actual Costs.

9. Disclaimer and References

All information related to the various employees of the Case Study company is
invented, any similarity to any actual people is entirely coincidental. Whilst the
company presented is based originally on a real company, most of the information
regarding internal operations has been intentionally altered. Some data has been
drawn from the website and annual financial report for one or more real companies,
articles in the financial press, FAME or other Library databases and internet sites
relating to the relevant industry sector. However, other data has been invented to suit
the examination questions and therefore knowledge about the actual industry or real
company might actually conflict with the Case Study and result in weak, or even
incorrect, examination answers. No references have been given intentionally, to
prevent students seeking out the original sources. Please note however that in any
other circumstances at the University references should be provided and sections
copied word for word from their original source should be in quotation marks.
Ian Tuersley and Nigel Denton, May 2016.

School of Engineering

Page 15 of 15