Working capital optimization

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Tamsin Bishop
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1 Working capital optimization Simon Rockcliffe Ernst & Young

2 Background Methodology and approach Canadian Financial Executives Research Foundation (CFERF) Methodology: FEI Executive Survey (November 2012) CFERF Executive Research Forum Outcome: Shared experiences Lessons learned Page 2

Executive Survey (November 2012) CFERF Executive

3 Background Survey focus Working capital optimization Looking back Current state Looking forward Performance trend Degree of importance Competing priorities Challenges faced over last 12 months Governance Planned improvements / focus Page 3

trend Degree of importance Competing priorities Challenges

4 Background Participant demographics Annual revenue Position Corporate structure 9% 17% 27% 11% 36% CFO 56% VP Finance 17% Controller 9% Treasurer 6% Owner 3% Other 9% 35% 4% 4% 2% 55% Less than $50m $0-99m $ m $ m $1 billion or more Private Public (incl. Sub of public) Government Agency Not for profit Other Page 4

Other 9% 35% 4% 4% 2% 55% Less than $50m $0-99m $100-499m $500-999m $1 billion or

5 Background Working capital defined AP (DPO) Cash conversion Working capital considers the net liquid assets a company has to meet its short term needs AR (DSO) NWC (DWC) AR (DSO) AP (DPO) Focus = operational improvement for processes underlying the three largest areas of working capital (receivables, payables, Inventory) Inv. (DIO) Current As state Is Inv (DIO) NWC (DWC) To Be Aspiration Increasing or decreasing the velocity of the process cycles impacts the speed with which cash is converted Page 5

three largest areas of working capital (receivables, payables, Inventory) Inv.

6 Looking back Recent performance trends FEI Research Canada Top 400 How has working capital performance changed over the last 12 months? Deteriorate 24% Similar 37% Improve 39% How would you compare performance against industry peers? Days All Industries excl. O&G and MIN Total % companies worse DSO Worse Same Better DIO 17% 55% Do not know = 4% 24% DPO Source: Publically available financial statements; EY analysis Page 6

5 All Industries excl. O&G and MIN Total 28.5 23.2 29.6 23.3 54% companies worse 31.4 24.5 2007 2008 2009 2010 2011 26.2 40.2 28.4 28.5 29.6 31.4 39.8 39.

7 Looking back Does size matter? Factors to consider: Small Contractual demands Pricing Degree of control Defined processes = Reduced ability to impact working capital performance Large Page 7

8 Looking back Internal and external factors External Economy Cost of capital Regulation Competitor strategies Customer behaviour Supplier behaviour Resource availability Internal Working capital performance Tactical Mgmt Standard policy Reporting/visibility Incentivization Trade-offs Strategic Decisions Sales locations Sourcing locations Outsourcing Product breadth Page 8

Working capital performance Tactical Mgmt Standard policy Reporting/visibility

9 Looking back Key challenges over the last 12 months No impact Low Medium High Payment slowdown 12% 28% 26% 34% Customer term pressure 17% 35% 29% 19% Demand forecasting accuracy 19% 35% 31% 15% SLOB inventory 32% 33% 22% 12% Supplier cost pressure 6% 17% 37% 40% Supplier term pressure 15% 36% 35% 14% Resource availability 13% 46% 26% 15% Page 9

accuracy 19% 35% 31% 15% SLOB inventory 32% 33% 22% 12% Supplier cost pressure 6% 17%

10 Looking back Initiated an improvement program Undertaken improvement program in last 12 months? Main drivers for increasing focus on working capital? Meet FCF Targets 52% Yes 48% Yes 69% Debt repayment Fund M&A 28% 40% No 52% No 31% Return Cash to stakeholders Stakeholder pressure 26% 25% Program? Success? Reduce gap to peers 10% Page 10

Meet FCF Targets 52% Yes 48% Yes 69% Debt repayment Fund M&A 28% 40% No 52% No 31%

11 Current state Importance of working capital Rate level of importance placed on working capital in organization? 4% Leaders set the tone 15% 23% Importance varies across the organization 28% 30% High = more proactive Public companies > Private companies Very high High Somewhat high Low Very low Competing priorities Page 11

4% Leaders set the tone 15% 23% Importance varies across the organization 28%

12 Current state Governance Organizational structure for managing working capital? How frequently do you monitor working capital performance? 57% Decentral 17% Partial Central 12% 12% 17% 18% 34% Central 71% 71% 48% 9% 13% 14% 5% AR AP Supply chain Daily Weekly Monthly Quarterly Never Sufficient visibility and control? Yes = 75% Page 12

57% Decentral 17% Partial Central 12% 12% 17% 18% 34% Central 71% 71% 48% 9% 13%

13 Current state Governance Is working capital or Free Cash Flow performance embedded in variable compensation? No 69% Yes 31% 25% average of variable compensation Increasingly common Aligns reward and behaviours Ensure metric in line with influence (i.e. Trade-offs) Page 13

No 69% Yes 31% 25% average of variable compensation Increasingly

14 Looking forward Competing priorities What areas do you anticipate will require management attention in the next 12 months? Operational efficiencies/ Cost reduction 80% Profitability 75% M&A 54% Implementating new system 50% Increasing product offering 42% Outsourcing processes 32% Overseas expansion 25% Page 14

Operational efficiencies/ Cost reduction 80% Profitability 75% M&A 54%

15 Looking forward Misconceptions Misconception Limited return on investment Will be detrimental to relationships with customers and suppliers Primarily focused on extending payments Finance responsibility Reality Rapid cash inflow (10-20% each area) Improved service levels; customer service increased; increased collaboration Leading practice policy to increase standardization and improve visibility Company wide challenge Page 15

Reality Rapid cash inflow (10-20% each area) Improved service levels; customer service increased; increased

16 Panel introduction Experienced panel for today s discussion: Danielle Parent VP Finance, Fujitsu Canada Derek Petridis VP Finance, Shikatani Lacroix Design Nancy Lala CFO, About Communications Barry Levine Associate Partner, Ernst & Young Page 16

Finance, Shikatani Lacroix Design Nancy Lala CFO, About

17 Polling Six questions Voting device at your tables First valid entry will be accepted Results are anonymous Start with a test question Page 17

18 Q&A XX Month 200X Page 18 Presentation title

19 Looking forward Lessons learned No silver bullet Requires a tailored approach influencability Measure if you want to improve A company-wide challenge Requires a change of behaviour Page 19

20 Many thanks for attending! XX Month 200X Page 20 Presentation title

Liquidity: Squeezing the Most out of Your Working Capital. Milan, February 8th

Liquidity: Squeezing the Most out of Your Working Capital Milan, February 8th Days Cash released from working capital generates value Improved cash flow is important in any economic environment Net working