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AFC Consultants International

FROZEN FRENCH FRIES PLANT

TABLE OF CONTENTS

1 EXECUTIVE SUMMARY............................................................................ 2

2 PROJECT DESCRIPTION ......................................................................... 2

2.1 MAIN GOALS: ................................................................................................... 3 2.2 INVESTMENT REQUIREMENTS................................................................................... 3 2.3 STAFFING STRUCTURE .......................................................................................... 4

3 PRODUCT STRATEGY.............................................................................. 4

3.1 CURRENT PRODUCT LINES ...................................................................................... 4 3.2 PRODUCTION PROCESS......................................................................................... 5

4 MARKET ANALYSIS ................................................................................ 6

4.1 MARKET TRENDS ............................................................................................... 6 4.2 COMPETITION ANALYSIS........................................................................................ 7 4.3 TARGET MARKET ................................................................................................ 7 4.4 SWOT ANALYSIS ............................................................................................... 8

5 MARKETING PLAN.................................................................................. 8

6 FINANCIAL PLAN................................................................................... 8

6.1 MAJOR ASSUMPTIONS .......................................................................................... 9 6.2 PROJECTED INCOME STATEMENT .............................................................................11 6.3 PROJECTED BALANCE SHEET ..................................................................................12 6.4 PROJECTED CASH FLOWS .....................................................................................13 6.5 RATIO ANALYSIS ...............................................................................................14 6.6 BREAK-EVEN ANALYSIS ........................................................................................15 6.7 SENSITIVITY ANALYSIS ........................................................................................15

7 RECOMMENDATIONS AND KEY SUCCESS FACTORS................................ 16

8 ECONOMIC IMPACT EVALUATION......................................................... 16

LBN/B7-4100/IB/99/0225/JC20/0105 AFC Consultants International

Feasibility Study – Frozen French Fries Plant – Akkar, Minyeh, Donniyeh 2

1 Executive Summary The proposed project consists in establishing a frozen French fries plant in Akkar caza. The plant will supply the local market focusing on Akkar and the North region and will penetrate the exports markets. The company will focus on implementing and maintaining high quality standards of production. The initial investment for this project is estimated at $1,260,000, which includes construction, machinery, office furniture and working capital. The plant’s capacity is for 0.5 tons/hour, i.e. 4 tons per day. The main assumptions consider average production at 70% of plant’s capacity.The projections are taken over a period of 5 years. The plant is expected to provide an average annual net profit of $111,740. The business provides an internal rate of return (IRR) of 17% and a payback period of 6 years 9 months. These results show that the project is feasible. A worst-case scenario was developed with the assumption of producing at 60% of plant’s capacity. This scenario gives an average annual profit of $68,525. In this case the IRR is at 12% and the payback period is 8 years 3 months. A best-case scenario was developed with the assumption of producing at 80% of plant’s capacity. This scenario gives an average annual profit of $154,954. In this case the IRR is at 21% and the payback period is 5 years 9 months. The frozen French fries plant is expected to positively reshape the economic and social environment of Akkar by offering 23 job opportunities and responding to a growing demand for frozen French fries in the local and exports markets.

2 Project description The project consists in establishing a frozen French fries plant in Akkar caza. It will be a modern, high capacity plant, which allows the production of high quality frozen French fries. The plant will purchase its potatoes from suppliers in Akkar at a fixed price for a pre-determined quantity delivered every 6 months on average. The company will focus on implementing and maintaining high quality standards of production, which will allow exports to European countries as well. The plant’s full capacity is around 0.5 tons of French fries per hour. The plant will operate based on one shift of 9 hours: 8 hours for production and 1 hour reserved for cleaning purposes. Hence the plant’s total capacity is around 4 tons per day.



2.1 Main goals: Among the company’s main goals:

Providing high quality frozen French fries. Differentiating the product from the present competition through the possibility of

adding flavors to the produced French fries. Creating a brand name that would allow to differentiate the company from competition Increasing sales turnover through widening target markets and penetrating exports

markets in the Middle East, Gulf region, Africa and Europe. Recruiting and training competent technical staff and skilled labor. Securing reliable sources of raw materials. Increasing deals with suppliers of potatoes

to obtain continuous supply at competitive prices. 2.2 Investment requirements The total investment amounts to $1,260,000, including construction, machinery, office furniture and working capital, as shown below:

Items Quantity Unit Cost (in $) Total Cost (in $) EquipmentPlant construction (1,000 m2) 1 100,000 100,000 Processing line (0.5 ton / hour) 1 500,000 500,000 Refrigerator and freezer 1 300,000 300,000 Packaging machine 1 60,000 60,000 Machinery installation 1 200,000 200,000 Refrigerated truck 1 18,000 18,000 Generator 1 15,000 15,000 Furniture and office equipment 1 7,000 7,000 New Investment Cost 1,200,000 Working Capital 60,000 Total New Investment Cost 1,260,000

Items Total Cost (in $) 120 tons of potatoes (covering 30 days of operations) 36,000 30 tons of production materials 22,000 Palm oil (covering 10 days of operations) 2,000 Total Working Capital Cost 60,000

Investment Requirements

Working Capital Requirements



2.3 Staffing structure The company will have 23 employees, out of which 4 in the administration department, and 19 in the production department. The following table shows the staffing structure:

STAFFING Nbr ofstaff

MANAGEMENT / ADMINISTRATIVEGeneral Manager 1Sales person 1Driver 1Storekeeper 1Total management 4

PRODUCTIONProduction managers 1 Quality control manager 1 Technician 1 Workers 16 Total production 19

Total staff 23

The general manager will be responsible for the plant’s operations. He will handle the public relation part and the accounting tasks. The sales person will be responsible for contacting the main clients and advertising the products. The storekeeper will maintain the inventories and keep records of all production sold and stored. The production manager is in charge of the daily workers’ operations, while the quality control manager is responsible of the maintenance of quality standards. A technician will constantly supervise and maintain the well functioning of the machines.

3 Product Strategy 3.1 Current product lines The company will produce frozen French fries characterized by its superior taste and appealing look, where all pieces have the same size and shape. Moreover, the potatoes will be easily cooked and will significantly save preparation time. The product processing line will follow international quality standards as the machines are manufactured abroad.



The product expiry date is 1 year from production date. Several flavors will be added to the product, and will help to differentiate it from competition. The company will offer delivery services to its clientele.

Cleaning

Peeling

Cutting

Blanching

Frying

Drying

Freezing

Packaging

3.2 Production Process The product follows several stages before it gets filled into bags with three different frozen French fries sizes. These bags are in their turn packed in 10 Kg boxes. This production process is fully automated and hence no workers are required to transfer potatoes from one stage to another, implying lower labor costs and faster, higher quality production.



4 Market Analysis 4.1 Market Trends The demand for frozen French fries has been growing over the years, marked by the growing demand for fast food products. This is shown by the growth and remarkable performance of fast food restaurants in the local market. Moreover, the constantly growing number of working women is resulting in increased demand for easy to prepare foods such as partially cooked frozen meals. French fries constitute an essential element in the restaurants menus, as French fries are highly demanded by clients. Consequently, restaurants consume large quantities of frozen French fries ranging from 50 Kg to 1,000 Kg per day. Those who consume less than 50 Kg per day don’t need to purchase frozen French fries as peeling by themselves the quantities of potatoes they require is feasible. The local market size for frozen French fries is estimated at around 40 tons/day per normal weekdays. This quantity doubles during holidays, vacations, weekends, summer season, and Ramadan. Consequently, the average consumption of frozen French fries for 26 working days per month reaches an average of 60 tons per day, i.e. a total market value of around USD 25 to 30 million per year. Restaurants and hotels constitute around 90% of the total market consumption.

Frozen French Fries Market Consumption

Restaurants and Hotels

90%

Others10%

The following charts show the evolution of frozen French fries imports and exports over the years:

Frozen French Fries Imports Trend

563,000

393,000

503,000

421,000

200,000

300,000

400,000

500,000

600,000

2003 2004 2005 2006

USD



Frozen French Fries Exports Trend

38,000

21,000

5,0008,000

-5,000

10,00015,00020,00025,00030,00035,00040,000

2003 2004 2005 2006

USD

Source: Lebanese customs Custom duties on frozen French fries are 5%. Moreover, 10% VAT and imported margin at an average of 15% are added to the original order to calculate the market size. The market size for imported frozen French fries is estimated to be around USD 750 thousand per year. The below chart shows the market size trend over the past four years:

4.2 Competition analysis Currently, there are only two large factories in Lebanon: Hdayed (North) and Abou Fadel (Nahr El Mot), which use modern technologies and advanced machineries to produce frozen French fries.

- Hdayed in the North was established in 2001 and produces 32,000 KGs per day. - Abou Fadel in Nahr El Mot was established in 1996 and produces 8,400 KGs per day.

All other players can produce a maximum of 400 Kg per day and hence don’t compete with large factories. Companies compete at various levels including quality, price, network, reputability, customer services, distribution channel (proximity to customers), the product’s presentation and taste, etc... 4.3 Target market The company will mainly target restaurants as well as hotels. As previously mentioned, restaurants and hotels constitute 90% of the total product clientele as they consume more than 50 Kg per day. Consequently, they require continuous supply of frozen French fries which insure their loyalty. Another target market is the supermarkets and hypermarkets not only in Akkar region but throughout Lebanon.

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4.4 SWOT analysis STRENGTHS WEAKNESSES

High quality products

Enforced quality control procedures

Differentiated flavored products

Delivery service offered to all clients

Technically advanced and modern factory.

The factory might face shortages in potatoes supply. This will be solved through storage of large quantities of potatoes covering one month of production.

OPPORTUNITIES THREATS

The demand for frozen French fries has been constantly growing at a fast rate.

French fries constitute an essential element in the restaurants menus as fries are highly demanded by clients

The Middle Eastern, Gulf and African countries offer major opportunities for exports, where satisfactory margins can be achieved.

Competition is still limited

Electricity and water shortages

Raw materials deficiencies

Unstable political situation, which could lead to cuts in sales turnovers.

5 Marketing Plan The plant will base its marketing strategy on the following:

Increasing brand name recognition among general public, industry professionals, restaurants and hotels owners and market players through on-going contacts.

Working, through advertising campaigns, on creating a brand name image, relating to: Lebanese product, high quality, quick delivery, continuous supply and competitive prices.

Assigning professional sales people to visit several regions in Lebanon in order to facilitate the operations and benefit from a better market coverage.

Building direct contacts in Syria, Jordan, UAE, Bahrain, Qatar, Africa and Europe and increasing the company’s efforts to establish contacts in regional countries in order to expand the business.

Establishing direct personal contacts with owners of large restaurants and hotels, offering high quality frozen French fries and ensuring supply continuity.

Implementing ISO and HACCP quality standards for management and production. This will allow the upgrading of operations to international standards of quality, safety and hygiene, which will ultimately reinforce the company’s brand image and market penetration.

6 Financial Plan This section details the calculations, assumptions and methodology used as a basis for the projections of the expected financial performance of the frozen French fries plant. The assumptions are conservative and are based on market achievable levels.



6.1 Major Assumptions The new fully automated processing line has a production capacity of 0.5 ton of frozen French fries per hour, thus, 4 tons per day (the day is on an 8-hour shift). The sales revenues are assumed at 70% of the plant’s capacity. Moreover, the company will have 75% of its production for the local market and 25% for exports market. The Kg of French fries will be sold at $1.11 locally and at $0.98 for export market.

Tons per day 4 tonsNumber of working days 336 daysTotal tons per year 1,344 tons% in local sales 75%% in exports 25%Price($)/Kg 1.11 dollarsExports sales 0.98 dollarsCapacity 70%

Sales will increase gradually over the years to increase the plant’s actual capacity.

Sales Growth Year2 Year 3 Year4 Year5Local sales 10% 10% 5% 5%Exports sales 10% 10% 5% 5%

The following tables summarize the income statement and balance sheet assumptions, which are mainly based on expected performance levels:

Income Statement AssumptionsCost of goods sold local 65% of local salesCost of goods sold exports 73% of exports salesMaintenance expense 0.5% of total salesElectricity 1.0% of total salesTransport 2.0% of total salesAnnual increase in salaries 2%Annual increase in general expenses 4%Increase in rent 5% every 3 yearsIncome Tax Rate 15%

The cost of goods sold includes the percentage of expected waste. In fact, the company has taken into consideration the use of 2 kg of raw potatoes to obtain a net of 1 kg of high quality frozen French fries.

Balance Sheet AssumptionsAccounts Receivable 0.5 months of salesInventories 3 months of cost of goods soldAccounts payable 1 months of cost of goods soldExpenses payable 10% of general expenses



The following table shows the depreciation rates, which are based on international accounting standards:

DEPRECIATION RATESConstruction 2%Industrial tools and machinery 7.5%Fixture and installations 10%Vehicles 12%Furniture 7.5%

Staff structure The plant will need a total of 23 employees, 4 are in the management and administrative department and 19 in the production department. The following table shows the staffing structure along with the salaries:

STAFFING Nbr of Monthly Totalstaff salary Salaries

MANAGEMENT / ADMINISTRATIVEGeneral Manager 1 1200 1,200Sales person 1 450 450Driver 1 350 350Storekeeper 1 350 350Total management 4 2,350 2,350

PRODUCTIONProduction managers 1 500 500Quality control manager 1 700 700Technician 1 600 600Workers 16 300 4,800Total production 19 2,100 6,600

Total staff 23 4,450 8,950

Note: the monthly salaries are inclusive of the social security charges.



6.2 Projected Income Statement The following income statement is based on conservative assumptions of revenues as well as costs.

The company is profitable starting year 1 with a net income of $69,654. The net profit margin improves over the years to reach 10.8% in year 5. The new fully automated processing line has a production capacity of 500 Kg of frozen French fries per hour. As stated earlier, the plant is expected to gradually increase the sales turnover over the years to increase the production capacity throughout the years. Consequently gross profit margin is expected to improve over the years in parallel with the increase in local and exports sales. The land will be rented at an average annual rent of $10,000 Total administrative salaries include salaries for the General Manager. The company will hire a

FROZEN FRENCH FRIES PROJECTED INCOMESTATEMENT Year 1 Year 2 Year 3 Year 4 Year 5

Local sales 783,216 861,538 947,691 995,076 1,044,830 Exports sales 230,496 253,546 278,900 292,845 307,487 Total sales 1,013,712 1,115,083 1,226,592 1,287,921 1,352,317 Cost of goods sold local 508,032 558,835 614,719 645,455 677,727 Cost of goods sold exports 169,344 186,278 204,906 215,152 225,909 Rent of land 10,000 10,000 10,000 10,500 10,500 Maintenance and repairs 5,069 5,575 6,133 6,440 6,762 Electricity 10,137 11,151 12,266 12,879 13,523 Salaries and related charges-production 79,200 80,784 82,400 84,048 85,729 Depreciation-factory 89,785 89,785 89,785 89,785 89,785 Gross profit 142,145 172,674 206,383 223,663 242,382

Gross profit margin% 14.0% 15.5% 16.8% 17.4% 17.9% General & Administrative Expenses Transport of goods 20,274 22,302 24,532 25,758 27,046 Office supplies 1,800 1,872 1,947 2,025 2,106 Cleaning materials 2,400 2,496 2,596 2,700 2,808 Advertising and promotion 5,000 5,200 5,408 5,624 5,849 Salaries and related charges-administrative 28,200 28,764 29,339 29,926 30,525 Depreciation-administrative 525 525 525 525 525 Others 2,000 2,080 2,163 2,250 2,340 Total General & Administrative Exp 60,199 63,239 66,510 68,808 71,198 EBIT 81,946 109,436 139,873 154,855 171,184 Tax expenses 12,292 16,415 20,981 23,228 25,678 Net Income 69,654 93,020 118,892 131,627 145,506

Net profit Margin% 6.9% 8.3% 9.7% 10.2% 10.8%



sales person in order to assist customers. The growth in sales will help to boost the profitability levels to exceed $145,000 by year 5. 6.3 Projected Balance Sheet The balance sheet shows the projected assets and liabilities of the company.

The projected balance sheet shows the initial capital investment of $15,000 and $1,245,000 to be invested by the shareholders as loan in year 1. These amounts will finance the fixed assets of $1,200,000 and working capital of $60,000. The net amount of shareholder loan by end of year 1 will be $1,200,000, as they will be able to withdraw $45,000 from the cash flows generated from operations. As the cash flows from operations allow it, the shareholders’ loan will be gradually decreased over the years.

FROZEN FRENCH FRIES BALANCE SHEET Year 1 Year 2 Year 3 Year 4 Year 5

ASSETS Cash and banks 25,850 26,971 27,435 28,217 29,417 Accounts receivable 42,238 46,462 51,108 53,663 56,347 Inventories 169,344 186,278 204,906 215,152 225,909 Total current assets 237,432 259,711 283,450 297,032 311,673 Construction 100,000 100,000 100,000 100,000 100,000 Industrial tools and machinery 875,000 875,000 875,000 875,000 875,000 Fixture and installations 200,000 200,000 200,000 200,000 200,000 Vehicles 18,000 18,000 18,000 18,000 18,000 Furniture 7,000 7,000 7,000 7,000 7,000 Accumulated depreciation 90,310 180,620 270,930 361,240 451,550 Net Fixed Assets 1,109,690

558,700



6.4 Projected Cash Flows The following table shows the projected cash flows of the plant.

FROZEN FRENCH FRIESSTATEMENT OF CASH FLOWS Year 1 Year 2 Year 3 Year 4 Year 5

Net income 69,654 93,020 118,892 131,627 145,506 Adjustments to reconcile net incometo cash provided by operating activitiesDepreciation 90,310 90,310 90,310 90,310 90,310 Changes in receivables (42,238) (4,224) (4,646) (2,555) (2,683) Changes in inventories (169,344) (16,934) (18,628) (10,245) (10,758) Changes in payables 62,468 5,949 6,536 3,645 3,825 Total Adjustments (58,804) 75,101 73,572 81,154 80,694 Cash provided by operating activities 10,850 168,121 192,464 212,781 226,200 Cash Flow from Investing ActivitiesCapital expendituresInvestment in fixed assets (1,200,000) - - - - Net cash used in investing activities (1,200,000) - - - - Cash flow from financing activitiesChange in shareholders' loan 1,200,000 (167,000) (192,000) (212,000) (225,000) Invested capital 15,000 - - - - Cash provided by financing activities 1,215,000 (167,000) (192,000) (212,000) (225,000)

Cash at beginning of year - 25,850 26,971 27,435 28,217 Changes in cash 25,850 1,121 464 781 1,200 Cash at end of year 25,850 26,971 27,435 28,217 29,417

The statement of cash flows shows the cash provided/used in operations, investing and financing activities. It shows the initial net investment in fixed assets of $1,200,000. This amount is financed by owners’ injection. The statement shows the reimbursement of the owner’s account over the years from the operating cash flows.



6.5 Ratio analysis The following table shows the main financial ratios for the plant.

Ratio AnalysisLiquidity Ratios Year 1 Year 2 Year 3 Year 4 Year 5Current Ratio 3.80 3.80 3.78 3.78 3.78Quick Ratio 1.09 1.07 1.05 1.04 1.04Working capital 174,964 191,295 208,497 218,434 229,250Profitability Ratios Gross Profit Margin 14.0% 15.5% 16.8% 17.4% 17.9%Net Profit Margin 6.9% 8.3% 9.7% 10.2% 10.8%Financial StrenghDebt to equity ratio 14.91 6.20 3.09 1.65 0.85 Management EffectivenessReturn on Assets 5.2% 7.3% 9.8% 11.6% 13.7%Return on Investment = ROI 6% 9% 13% 16% 19%Return on Equity = ROE 82% 52% 40% 31% 25%Asset Mnagement (Efficiency)Total Assets Turnover (sales/total assets) 0.75 0.87 1.01 1.13 1.28 Total Debt to Total Assets 94% 86% 76% 62% 46%Working capital cycleDays Receivables 15 15 15 15 15Days of Inventory 90 90 90 90 90Days of payables 30 30 30 30 30 Working Capital Turnover=Sales/Working Capital 5.79 5.83 5.88 5.90 5.90

The current ratio, which is current assets divided by current liabilities and the quick ratio which is similar to the current ratio but excludes inventories increase slightly over the years as the current assets increase at a faster rate than current liabilities. Working capital, which is a measure of cash flow levels, is positive over the years, showing the company’s ability to meet its short term liabilities. All profitability margins increase gradually over the years with the increase in turnover and the improved leveraging of the operations and the increased utilization of the machineries. The total debt to equity ratio decreases from 14.91 in year 1 to 0.85 in year 5 as the company reimburses the shareholders’ dues. Return on assets increases gradually over the years as the plant’s utilization rate increases and the profitability of the company improves. The return on investment improves also over the years led by the growth in profitability to reach 19% by year 5. The assets turnover, which is sales divided by total assets increases over the years with the growth in sales that is faster than the growth in assets. Total debt to assets declines over the years as the company reimburses its dues. The days of receivables are based on 2 weeks of sales, the inventory turnover is based on 3 months of cost of goods sold and the days of payables are based on 1 month of costs of goods sold. These levels are based on the expected performance of the company taking into consideration the nature of the business and the market conditions.



IRR 17%Payback Period 6 years 9 months

The business provides an IRR of 17% and a payback period of 6 years 9 months. 6.6 Break-even analysis The following table shows the break even revenues required in each year to cover operating expenses. Revenues exceeding these levels start producing net income. Thus, in year 1, revenues of $737,601 are needed to break even.

6.7 Sensitivity analysis A worst-case scenario is taken by assuming that the sales are at a production level of 60% of total capacity in year 1. In this case, the plant will have an average profitability of $68,525 annually and an average net profit margin of 6.5%. This scenario provides an IRR of 12% and a payback period of 8 years 3 months. A best-case scenario is developed considering that the plant will have sales at a level of 80% of total capacity in year 1. In this case, the plant will have an average profitability of $154,954 annually and an average net profit margin of 11.2%. This scenario provides an IRR of 21% and a payback period of 5 years 9 months.

Sensitivity Analysis Worst Case Most Likely Best CaseWorking capacity 60% 70% 80%

ProfitabilityAverage net income 68,525 111,740 154,954Average net profit margin 6.5% 9.2% 11.2%

Internal Rate of Return (IRR) 12% 17% 21%Payback Period 8 years 3 months 6 years 9 months 5 years 9 months

FROZEN FRENCH FRIES Break-even Analysis Year 1 Year 2 Year 3 Year 4 Year 5

Total Revenues 1,013,712 1,115,083 1,226,592 1,287,921 1,352,317 Total Variable Costs 712,856 784,142 862,556 905,683 950,968 Total Fixed Costs 218,910 221,506 224,163 226,882 229,666 Break-even Revenues 737,601 746,348 755,300 764,463 773,841



7 Recommendations and key success factors The business has strong development potentials. It will be able to rely on its highly advanced factory to expand its sales in the exports markets. In order to achieve good results, the company needs to focus on the following key success factors:

Establishing several sales points to cover all the local market. Developing a good marketing strategy including advertising and promotion to

strengthen its market position Developing networking and public relations efforts to attract the largest number of

restaurant owners. Expanding exports into new markets and new countries and increasing contacts with

strategic partners. Maintaining tight control on operating expenses, especially during the setup period

and following the installation of the new plant. Seeking stable sources for raw materials to ensure supply continuity and stability. Implementing ISO quality standards for management and production. This will allow

the upgrading of operations to international standards of quality, which will ultimately reinforce the company’s brand image and market penetration as well as significantly enhance exports activities.

8 Economic Impact Evaluation The frozen French fries plant is expected to positively reshape the economic and social environment of Akkar. It will offer 23 job opportunities for Akkar residents. Moreover, the project will respond to a growing demand for frozen French fries in the local and exports markets.

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