Background and Challenge
A leading exploration and production (E&P) drilling equipment manufacturer has seen strong revenue performance but EBITDA has lagged. Management believes there are several reasons for the decline in EBITDA margins:
- Manufacturing variances driven by rising raw material costs
- A shift toward less profitable products
- A shift toward lower-margin mining and industrial sales
- Royalty fees for patents
- A reversal of a positive audit adjustment
The client engaged L.E.K. Consulting to perform a rigorous and detailed analysis to identify the key drivers of recent performance trends, and to devise recommendations on how to improve performance.
Approach and Recommendations
We examined margin declines to determine whether pricing strategy or cost management could be modified to improve profitability. We performed a fully loaded cost allocation to understand what product lines and geographic areas were driving the decreasing margins and then performed in-depth analysis in these areas:
- Analyzed pricing and cost trends by line of business and product type
- Addressed historical balance sheet trends
- Identified trends in the industry affecting profitability by region and product type
We found that by carefully monitoring sales metrics and accountability throughout the organization, the client can increase its return on investments and improve overall cash flows. We analyzed the client’s fleet management metrics with the goal of improved returns on investments in growth sales areas. We outlined best practice industry models and recommended ways for the client to better align the sales organization with the company’s cash return goals, including making changes to the incentive plan.
We also provided a comparison with a close competitor to identify operational and strategic levers that might be pulled to improve performance over the next one to three years.
Finally, we outlined a high-level approach for implementation and next steps to support management and the board of directors in further evaluating and executing on these levers.
We identified improvement initiatives that led to an additional ~$10 million in annual cash flow for the client.