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

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

2 Days Cash released from working capital generates value Improved cash flow is important in any economic environment Net working capital = A/R + Inventory - A/P AR (DSO) Inv. (DIO) As is AP (DPO) NWC (DWC) AR (DSO) Inv (DIO) To be AP (DPO) NWC (DWC) Working capital is the cheapest source of incremental cash Cash is released through quick wins and longer-term sustainable improvements reducing working capital levels On average, a typical company can release 35M of working capital for every 500M (7%) of sales Optimizing cash and working capital is a key driver of value creation even though it is often not the primary focus of the business Private Equity owners may need to release cash from working capital to pay down debt or fund shareholder return Growth businesses may need to create liquidity to fund investment, acquisition or other forms of CAPEX Where there is financial distress, releasing cash from working capital may facilitate preservation of the business Optimizing working capital creates funding for business transformation programs Page 2

3 Cash improvement levers Their interplay has an important impact on sustainability Cash elements within a business Critical success factors Culture, Visibility and Control Establishing the foundations for sustainable cash flow improvements Working Capital Management Tactical Short term measures to achieve short term needs Operational Embedding changes in operational processes and commercial arrangements to optimize cash Structural Measures which impact organizational working capital needs (through market, product, partnering or radical redesign) Other Cash Elements Increase cash generation via improved efficiencies including balance sheet cleansing and releasing trapped cash Timely, clear and precise management reporting, including focused KPIs Clearly aligned targets and incentives, across all functions Clear roles and responsibilities and ownership of cash flow Accurate cash flow forecasting Tax including transfer pricing with tax efficient supply chain Phasing of capital expenditure Cross-border cash strategies, including repatriation of cash Cash leakage 1. Communicate the importance Make working capital improvement important to management and communicate benefits to the business 2. Integrate with other priorities Embed cash objectives into other key change initiatives, both existing and new 3. Measure and improve Establish baseline reporting and metrics early on in the program 4. Operational change plans Engage with the business units on a root and branch basis 5. Sustainable changes Focus on sustainable changes and not on short term fixes Page 3 3

4 Cash improvement levers A program should consider both the value and sustainability of cash levers Example cash levers Maturity of cash improvement levers 1 2 Tactical Payment deferrals Discounted stock disposals Example measure Retain cash by paying after agreed terms Generate cash via discounted sale of stock Cumulati ve Cash Impact Tactical Operational Structural 3 Debt factoring Reduce collections work through debt factoring 4 Collections push (discounts) Speed up cash intake via early payment discount Operational Example measure 1 Customer terms Negotiate more advantageous customer terms 2 Speed to bill Reduce billing cycle time 3 Collections Customer segmentation 4 Supplier terms Negotiate more advantageous supplier terms 5 Payment practices Stop early payments, optimize payment policy 6 Product management SKU rationalization 7 Inventory planning Align sales forecasting with operational planning 8 Measure & incentivize Leading KPIs, CFF and scorecards Structural Example measure 1 Fulfillment strategies Online or partner fulfillment Sustainability 2 Sourcing strategies VMI or inventory outsourcing 3 Product design Customer products which optimize cashflow 4 Outsourcing Collections or payables outsourcing Page 4 4

5 KEY DRIVERS PROCESSES Key drivers of working capital opportunities It is critical to quickly focus on key drivers of working capital opportunities within the primary processes SUPPLIERS Procure To Pay Procurement planning & Demand Management Supplier Selection & Contracting Requisitioning Ordering & Goods Receipt Invoice Receipt & Processing Discrepancy Management Payment Forecast To Fulfill Product Range Management Forecasting & Demand Planning Order Processing & Customer Service Planning Purchasing & Replenishment Manufacturing Scheduling & Execution Distribution Order To Cash Sales & Quote Management Credit & Risk Management Order Processing & Customer Service Invoicing / Billing Collections Dispute Management Cash Application CUSTOMERS Contracts / Terms PO vs Contract vs System Terms Payment Trigger Clock Frequency Life cycle planning Customer service levels Forecast error & bias Replenishment methods Supplier relationships Lead times / cycle times Network structure Contracts / Terms Order accuracy Invoice accuracy & speed Collection strategies Dispute resolution Cash application Page 5

6 Working capital performance indicators They are fairly simple to understand, but they are not easy to change Performance Indicator Meaning People in charge Driven by Days of sales outstanding (DSO) + Days of inventory outstanding (DIO) - Days of payables outstanding (DPO) Average time a receivable remains on the balance sheet, measured as the number of days sales represented by the AR balance How long does it takes to get paid? Inventory in terms of number of days of sales/usage How long will it take to consume the inventory? Value of the creditor balance in terms of number of average days of purchases. How long does it take to pay? Sales Customer Service Credit Collections Sales / Marketing Customer Service Manufacturing Supply Chain Distribution Purchasing Finance Payment terms Timeliness of Invoice issuance Collection effectiveness Issues that cause late payment Inventory policies Poor forecast accuracy Inflated lead-times Low cost sourcing Payment terms Payment triggers Payment clock Payment methods = Days of working capital (DWC) Value of the NWC in terms of number of average days of sales. How many days of sales do we carry as working capital to run the business? CEO/COO &CFO The lower the better Page 6

7 Page 7 * Fuente: Estados Financieros Públicos 20

8 INDAS, a strong, modern and innovative company, leading the Spanish industry of sanitary and hygienic products with total 2010 sales of 163 million (6.5% CARG 07-10), and with a track record of continuous growth for over more than 50 years. Since 2007, the majority shareholders are: Vista Capital and Ibersuizas. The Group's staff numbers stand at 460 employees: Sales network 100 people. 260 employees at the manufacturing plant in Toledo. 35 employees at the production plant in Casablanca (Morocco). Lines of business Complete product portfolio, with over 40 active brands and a portfolio of approximately customers. Absolute leader in Spain in the categories of pads for severe incontinence, pads for light urine loss and bed protectors. Market share: 40% in products for severe incontinence; 36% in light incontinence; 75% in protectors. Manufacturing plants Novés (Toledo): Total surface m2 and built surface m2, distributed in 26 buildings. Daily traffic at this plant amounts to 60 trailers and it has a storage capacity of pallets. Casablanca (Morocco): Built in 1995, this plant produces children s hygiene products for the Maghreb countries International presence Presence in 24 countries. 10% of the revenues earned by INDAS come from foreign markets.

9 Improving working capital at Laboratorios INDAS Business rationale behind an integrated working capital approach In recent years, Laboratorios INDAS had conducted some individual actions aimed at reducing its working capital needs, such as introducing factoring in its accounts receivable. However the company lacked an integrated working capital approach across the whole organization, particularly as the crisis on the public health sector was worsening the collection terms. Based on this, the company wanted to embrace an inclusive working capital project to stir its business culture, adding to its sales driven approach a cash focused one. In this context, an all-inclusive program of process analysis and implementation of cash release opportunities was launched in early The benefits and goals set for the program were: Challenge as-is OTC, PTP and FTF processes vs. best practices Identification and priorization of sustainable working capital improvements Reduce financial costs, uncovering new almost-free cash sources Use new cash for debt repayment and/or to create more headroom for covenants Spread a cash culture along the whole company

10 Working Capital performance at INDAS Laboratorios INDAS has improved its working capital performance over the recent years by more than 10m INDAS Working Capital evolution * Stock Trade AR Trade AP TWC TWC/Sales Source: INDAS Performance indicators INDAS vs. Industry Industry Avg 2009 INDAS 2010 DSO DIO DPO C2C 12% 10% Source: INDAS, E&Y Cash on prescription report on Pharma industry 8% 6% 4% 2% 0% Despite the deterioration of the economy in Spain that has dramatically impacted INDAS: i.e. Account Receivables - driven by a raise of 48% on pre-factoring A/R debt in Public Health business line, INDAS has managed to improve its working capital performance. Some focus areas have been: working close with suppliers to extend terms, while providing them with financial tools (reverse factoring); establish consignment agreements; actively refining demand forecasting for procurement accuracy, move rest of clients towards payment methods that allow a rapid cash collection The comparison versus the main working capital indicators of the main players in the global Pharma industry (Bayer, Johnson & Johnson, Merck, Pfizer.) show that INDAS has offset its worse performance on inventories and AR by achieving a much better DPO than the industry average.

11 Sample of opportunities identified Opportunities are classified for easy prioritization Ref Opportunities: quick wins Type Dif. Opp value 1 Raw material - Security stock adjustment ( 0,2m) P,S 2 7 Raw material slow movers elimination ( 0,2m) HK Challenges: 1,9m Must: 1,5m 10 Demand forecasting on Medical products( 0,2m) P Inventory consigmen for spare sparts( 0,1m) Elimination of early payments( 0,2m) P HK, S HIGH >0.5 m Alligment of due dates on international supplier invoices( 0,2m) P Ensure appropriated customer terms on invoices ( 0,2m) T Ref Opportunities: must Tipo Dif. 6 Enhancement of demand forecasting on finished goods ( 0,9m) P,S 2 Invocing timeliness( 0,6m) P Ref Opportunities: Tipo Dif. LOW <0.5 m Low priority: 1,5m Quick wins: 1,3m Raw material consigment( 0,7m) Terms negotiation( 0,7m**) Proactive management of bad debt ( 0,5m*) T T HK HARD 1 AR 1 AP 1 Stocks EASY Difficulty: Hard Easy Type: P Process T Terms HK Housekeeping S Systems 11

12 Lessons learnt The appropriated assignment and commitment of key resources is crucial Commitment Participation of key people within the organization Resources Resources assigned or not integrated Analysis Expected outcome not realistic Common errors Follow up Tracking on opportunities identified and planned actions Priority Coordination with other corporate programs and daily business issues Change management Underestimation of change impacts

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14 About Nycomed Background Nycomed is a privately owned, global pharmaceutical company with headquarters in Zurich, Switzerland. The company employs 12,000 associates worldwide and has affiliates in more than 50 countries. Nycomed has a strong presence in Europe and in the emerging markets in Russia/Commonwealth of Independent States, Asia and Latin America. In 2009, total sales reached 3.2 billion, with an adjusted EBITDA of 1.1 billion. Nycomed ranks 28th among global pharmaceutical companies and is the 16th largest provider of OTC medicines Nycomed s differentiated portfolio of branded medicines is focused on gastroenterology, respiratory and inflammatory diseases, pain, osteoporosis and tissue management. An extensive range of OTC products completes the portfolio Page 14

15 New operating model Europe split in 4 different HUBs from a Finance perspective Finance Hubs: PL, ES, N, D Service Centre Europe (SCE) in Poland FI FI FI FI SCE OUR NEW FINANCE MODEL Europe split in four HUBs for transactional management Finance kept at local level for business partnering Ensuring one single source of information Ensuring full responsability from regions on cash flow KPI s FI Cost saving initiative Page 15 Nycomed February 2011 Slide 15

16 From a cash flow perspective Initiatives in place in SE Internal Communication Cash flow is not a Finance topic, but a business one; Finance needs to ensure full involvement and understanding from management Pharma market special situation: we need to accept the game rules on health care budgets and payment terms from government However let s plan for it and keep it in our agendas as a priority (and not just focus pure P&L KPI s) Then if AR are not fully manageable, focus on management of inventories and payables AR Management South Europe heavily impacted by increasing DSO from public sector Factoring wo recourse in Italy Externalization of receivables management Litigation process as mitigation in Spain (interest claim) Ensure appropriate lobby and information sharing within pharma associations Page 16 Nycomed February 2011 Slide 16

17 From a cash flow perspective Initiatives in place in SE Inventory Management Safety stocks as a priority (pharma issue) Understand full supply chain process and focus on bottlenecks SAP at European level as an enabler for process optimization Replenishment concept in place for several products AP Management New procurement organization at European level aligned with Finance Appropiatte seggregation of duties regarding payment method and payment terms Focus on cost reduction initiatives through intensive negotiation and bundling Page 17 Nycomed February 2011 Slide 17

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