Improving working capital performancewith Supply Chain Finance

September 20, 2012

Big challenges to working capital performance

“Despite a global business environment where companies can be harshly punished by Wall Street for even small missteps in predicting revenue or earnings, most large companies say they cannot correctly forecast operational basics like inventory, receivables, payables, and the underlying cash requirements to support them…”

“... typical large companies in the annual REL 1000 analysis could generate nearly $2 billion in additional cash annually by optimizing working capital management.” REL Consulting (a division of The Hackett Group, Inc.), Working Capital: Successes, Challenges, and 2012 Objectives, (April 26, 2012)

“Since, on average, roughly 50% of companies’ working capital is tied up in the supply chain, there are very significant benefits to taking a more holistic view of the supply chain...”

Ernst & Young insight: Getting the most from your supply chain (March 12, 2012)

Payables… Extend Days Payables Outstanding (DPO)

Control financing costs

Manage A/P processes more efficiently

Receivables… Shorten Days Sales Outstanding (DSO)

Improve “quality” of receivables

Lower financing costs

Expand sales markets (revenue growth)

Reduce payment and FX risk

Inventory… Lower Cost of Goods Sold (COGS)

Align procurement terms to match sales terms

Accelerate inventory turnover

Ensure a predictable supply chain

may be the solution

3

More efficient financing

How do you improve performance?

Working capital benchmarking analysis — an example

Peer

com

pari

son

*

From a working capital perspective,how would you stack up against your peers?

* Standardized in USD MM 360-day calendar, based on the latest FYE results and average two-year balancesSource information: 2011 corporate annual reports (available online)

5

Evolution of finance in the global supply chain

Management of the Supply Chain has involved over time to a more holistic view

Convergence of the physical and financial supply chains

• Historically, the Supply Chain has addressed physical aspects: inventory flows, transportation spending

• Supply Chain Finance (“SCF”) expanded the focus to Inventory control and A/R reduction

• Today, efficiency in Payables has become a key component of Cash Conversion Cycle discussions

Effect of Global Financial Crisis on Working Capital Optimization

• The Global Financial Crisis illustrated that the cost and availability of capital can change dramatically in a short period of time and underscored the importance of counterparty and supplier risk management

• As a result, working capital optimization became a renewed area of high interest

Best in Class Companies

• Today most Fortune 500 companies are using programs such as Card Solutions, ePayables, SCF that enable them to generate a value proposition from their payables:

• Card solutions as a bottom up solution that can extend terms or more often generate fee rebates

• SCF provides a top down, more cost effective, solution for larger suppliers

Purpose

• Provides a “Buyer” with a means to stretch out payables or reduce COGS while also offering suppliers the ability to receive payments as quickly as possible

• Create a “value exchange” that can improve working capital or, alternatively, allow negotiation of pricing concessions

Program

• Suppliers can tap into funds earlier in their receivable cycle by allowing them to secure discounted funds against those receivables

• Web-based technology can provide a seamless solution for both parties

• Available to both domestic and international suppliers and can be used for foreign currency purchases

Pricing

• Suppliers bear the on-going cost of the program, at a cost of funds aligned with the Buyer, set as a per annum rate, fixed spread over the relevant LIBOR for the period of the discount

• Discount rate charged to vendors incorporates the credit spread and the program’s administrative costs

• Cost is generally lower than the suppliers’ cost of debt and well below their Cost of Capital, WACC or IRR

Overview of Supply Chain Finance

SCF: who it benefits

Buyers benefit by… Improving cash flow by extending DPO while

maintaining trade payables classification

Alternatively use a mechanism to negotiate better pricing

Reduced administration through end-to-end payables reconciliation solution

Strengthening supplier relationships/sustainability

Can be part of an integrated payment network solutionSuppliers benefit by…

Improving cash flow by reducing DSO in an accounting neutral way

Obtaining funding based on receivables as a financial asset, rather than supplier creditworthiness

Obtaining financing at rates more favorable than those offered by alternative finance mechanisms

Avoiding use of often limited credit availability from their bank

Improving cash flow forecasting and flexibility

Having a tool to manage the concentration of receivables

for both buyers and suppliers

A win-win

SCF: how it works

Bank System

Buyer Supplier

Purchase order

Invoice

A

ppro

ved

invo

ice

Payment

Deb

it

D

iscount

request

1. Buyer transmits purchase orders to Supplier

2. Supplier submits invoices to Buyer

3. Buyer reconciles and feeds approved invoice file into Bank’s platform (web-based)

4. Supplier selects and requests discount of approved invoices (or auto-discount) – all or part

5. Bank discounts invoices and remits proceeds to Supplier

6. Bank debits Buyer account on invoice maturity date for total due and remits amounts not discounted.

Objective: Decrease DSOs Objective: Increase DPOs

Assets Equity & Liabilities Assets Equity & Liabilities

BuyerA/R

ABCA/P

ABC A/R = Buyer A/P

Traditional negotiation of terms - “zero-sum game”

Buyer receivables are a substantial part of its suppliers’ working capital costs

Supplier Buyer

Benefit: Decreased DSOs Benefit: Increased Lending Benefit: Increased DPOs

Assets E&L Assets E&L Assets E&L

BuyerA/R

BuyerA/R

ABC A/P

Buyer DPO = 51(reduce working

capital)Bank owns A/R 41Supplier DSO = 10

(unlock cash flow)

Supply Chain Finance offers a “win-win” solution

SCF enables Buyer suppliers to discount approved invoices at a very competitive rate

ABC Company Bank Buyer

Typical financing inefficiencies – both domestically and internationally

A Supply Chain Finance (SCF) program can help allocate financing more efficiently to the benefit of both

parties

While many suppliers face… High cost of debt or other capital

alternatives

Non-investment graded

A/R concentration limit issues

Restrictive or limited bank credit lines

Many buyers enjoy… Low cost of financing

Investment graded

Strong balance sheet

Access to low cost capital

Many banking options

* Based on S&P 2012 rating scale

Cash flow improvement — an example

Imp

roved

cash

flow

2.30% 4.97%$46,875 $5560.1875% 0.0022%

$1,736,111 $1,736,111$0 $2,013,889

Supplier's Break-Even RateSupplier's Interest Savings ($)Supplier's Interest Savings (%)Supplier's Cash Flow Increase

Buyer's Cash Flow Increase

Supplier's A/R

$2,083,333 $347,222 $347,222

Buyer's A/P

$2,083,333 $2,083,333 $4,097,222

Supplier's Interest

Rate5.00% 2.30% 2.30%

Supplier's Interest

Cost$104,167 $57,292 $103,611

Payment Terms

30 30 59

DSO 30 5 5

SCF Rate 2.00%LIBOR 0.30%

TodayToday's Terms

Target Terms

Target Terms 59Invoice Approval Days 5Supplier's Capital Rate 5.00%

Supply Chain Finance Benefits Calculator

Supplier NameSupplier Sales to Buyer $25,000,000

Current Terms 30

2.49% 4.98%$95,868 $7640.3835% 0.0031%

$3,819,444 $3,819,444$0 $3,819,444

Supplier's Break-Even RateSupplier's Interest Savings ($)Supplier's Interest Savings (%)Supplier's Cash Flow Increase

Buyer's Cash Flow Increase

Supplier's A/R

$4,166,667 $347,222 $347,222

Buyer's A/P

$4,166,667 $4,166,667 $7,986,111

Supplier's Interest

Rate5.00% 2.49% 2.49%

Supplier's Interest

Cost$208,333 $112,465 $207,569

Payment Terms

60 60 115

DSO 60 5 5

SCF Rate 2.00%LIBOR 0.49%

TodayToday's Terms

Target Terms

Target Terms 115Invoice Approval Days 5Supplier's Capital Rate 5.00%

Supply Chain Finance Benefits Calculator

Supplier NameSupplier Sales to Buyer $25,000,000

Current Terms 60

Company A multinational company with over $2BN in revenues in the wholesale manufacturing market

Objective Dramatically extend its very short supplier terms and improve its Cash Conversion Cycle.

Situation Company was well below its peers in both DPO and CCC, had already extracted all possible benefits in inventory control and was being pressed to extend sales terms to its customers

Response Through our recently established program the Company expects to achieve the following:

Dramatically extend its DPO, which will approach industry leaders

Generate approximately $60mm in additional cash flow by year end 2011 and increasing to $150mm by year end 2012

Set a new standard for negotiations with new suppliers as to terms

Seek to further extend supplier terms in the future

Example of successful application of Supply Chain Finance

In Summary

Corporate focus on working capital metrics can be a more cost-effective effort than capital raising or increasing bank debt

Solutions that benefit both a buyer and a supplier are an easier sell

Payables programs can often be easily implemented and should be targeted where supplier adoption is most likely and provides the most benefit

Can be part of an overall streamlined and automated payment process designed to generate capital/revenue and reduce administrative burden and cost