Options Are Good. A Treasury Perspective on Driving Value from Payments. Jody L. Lutz Senior Vice President PNC Treasury Consulting Group

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1 Options Are Good A Treasury Perspective on Driving Value from Payments Presented to: April 20, 2015 Jody L. Lutz Senior Vice President PNC Treasury Consulting Group (412)

2 Traditional B-to-B Payment Options Source: 2013 Electronic Payments Survey, The Association for Financial Professionals as presented in the AFP Payments Decision Guide To Creating a Payables Strategy, Part II

3 Options Enable Payment Optimization Increasing Cash Flow Increasing EBITDA Reducing Working Capital Shareholder Value Other??? 1 st 2 nd 3 rd 4 th Card ACH Check Wire Establish a Payment Protocol to prioritize options Payment Optimization but Payables Optimization goes beyond creating the right mix of Card, ACH, Check and Wire

4 it s about maximizing the relative capital effectiveness related to. Card Rebate Incentives Maximizing Early Pay Discounts AP Processing Costs Cost Per Payment Discount Capture Payables Optimization Payment Float Trade Terms Improving DPO Maximizing Purchasing Card Options

5 Card Deployment Options Distributed Cards For travel & entertainment expenses Preferred method of payment for these vendors Improves financial controls (SOX compliance) For smaller dollar decentralized purchasing Reduces time for receipt and payment of goods Value for both buyer and vendors T&E Cards Traditional P-Cards Non-Distributed Cards For preferred (contract) vendor ordering Facilitates online ordering and payment Value for both buyer and vendors For one time and specialty payments Web Services integration an option Improves payment cycle time Payments requiring backend approval Enables card settlement on P.O. s Automated solution (both push & pull) Embedded Ghost Cards Single Use Ghost Accounts Virtual AP Cards

6 Current Accounts Payable Process Remains the Same Invoice Virtual AP Cards Sourcing Receiving Voucher Payment Decision Pull Settlement (Seller-Initiated) Approved funds added to dedicated supplier card account Electronic remittance advice directed to supplier Supplier processes along with other card transactions Push Settlement (Buyer-Initiated) Funds directed to suppliers established merchant service account Electronic remittance advice directed to supplier Supplier funded in hours Single Use Pull Settlement Approved funds added to single use card account directed to supplier Supplier will obtain single use card account number, expiration date, CVV

7 Cost/Benefit of Payment Maximize Card Option due to Payment Economics $80.00 $70.00 Based on Average $5,000 Transaction $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 ($10.00) $24.11 $50.00 $3.29 ($0.00) ($0.13) ($1.59) ($7.00) Card ACH Check Wire Cost Working Capital Gain Revenue Share Payment Type

8 Days Payables Outstanding Days Payable Outstanding-REL Top Quartile Median The difference between the median and top performing companies represents $30.3 million of cash flow per $1 billion of sales. Source: REL 2013 US Working Capital Survey 8

9 Accounts Payable As Source of Internal Liquidity Announced extension of supplier payment terms from 45 to 75 days (in alignment with peer average of days) Combined with Supply Chain Finance solution to provide less expensive borrowing cost to vendor base Savings to fund stock buy-back, overseas expansion and dividend 9

10 Payment Options and DPO 0 days ACH File transmitted Funds Deposited 2 days into Vendor s 0 days bank account ACH transactions funded by daily Treasury payment to disbursement bank A/P CYCLE COMPLETES 1 day CHECKS Checks Mailed ~ 3 days Vendor receives and deposits check ~ 1 days Check is presented to disbursement bank 0 days Checks funded by wire to disbursement bank 0 days Virtual AP Card 1. Card Funded 2. Remittance send to vendor ~ 1 days Vendor charges AP Card Account ~2 days Vendor receives funds daily from its merchant processor ~22 days on average AP Card transactions funded by monthly Treasury payment to issuing bank

11 Virtual Cards Naturally Extend DPO PURCHASE PAYMENT TERMS n/ Billing Cycle Cut-off Billing Cycle Cut-off Check Payment of $100 ACH to Card Issuer 22 day Float Extension 14 day terms acceleration CUSTOMER CASH BALANCE Offer vendor 14 day acceleration in payment if they agree to accept alternate card based settlement. If managed in relation to card billing cycle cut-off, customer cash flow impact can be unaffected or mitigated 11

12 Maximizing Cash Discounts Traditional 2% 10 days, Net 30 days Early payment yields a return > 36% 12

13 Additional Early Payment Options

14 Additional Early Payment Options Traditional Face Value Discount Dynamic Discounting

15 How do I know what will generate a better return for my organization? Maximizing Early Pay Discounts How do I balance competing options? Improving DPO Maximizing Purchasing Card Options

16 Start with the Vendor Base Misc. Expense, Local Procurement and Individual Travel Centralized/Recurring Expenses (Temp Help, Office Suppliers, Courier, Large Ticket Travel) Remaining Indirect Spend Direct & Strategic Spend Capital Markets, Fiduciary, Tax, Cap Ex

17 Payment Value is Relative Buyer Benefits/Costs Cash Discounts Cash Rebates Transaction Fees = Supplier Costs/Benefits Cash Discounts Cash Rebates Transaction Fees Net Trade Term Value Discount Trade Term Value Card Rebates Transaction Costs Extended Payment Float Card Net Trade Term Value Discount Trade Term Value Card Interchange Costs Transaction Costs Cash Flow Impact Cash Flow Impact Long Term Cost of Capital must be used to determine the relative value of Trade Terms and the Value of Extended Float when evaluating payment options.

18 Which Payment Option? Economic Value Varies by Cost of Capital Economic Value from $2.3MM Vendor $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 Check Net 30 Check Net 60 ACH 2% 10 Card Net 30 Card Net 10 $- Cost of Capital

19 Model Your Options AP Virtual Card Payment Other Payment Types Long Term Cost of Capital Transaction Costs Trade Terms Cash Discounts Cash Rebates Extended Payment Float Value Card Rebate Transaction Cost Savings Long Term Cost of Capital Payment Optimization

20 Payables Optimization AP Payment Method Cost/Benefit Analysis Fundamentals Use Cost of Capital when Weighing Options Long Term Cost of Capital vs. Short-Term Cost of Debt or Investment Returns Weighted Average Cost of Capital (WACC) is a good proxy Cost of Capital Scenario Analysis Measure the Impact of Trade Terms, Discounts and Payment Types: Supplier Discounts/Fees vs. Card Rebate When does a 125 bp Rebate generate more value the a 2% discount? Determine the Break Even Point of different payment options Analyze cost/benefits to strategic suppliers to create a mutually beneficial structure Quantify the Value of Payment Options with Financial Metrics: Impacts on EBITDA, Cash Flow, DPO, EPS, Working Capital, Etc.

21 Payables Optimization A Sample Model

22 Execute on the Optimization Results Current Terms ($64.16) 30 day net terms via check Discount - $0.00 Value of Float Extension - $10,000 X 30/365 X 8.0% = $65.75 Payment Execution Cost = <$1.59> Extended Terms ($195.67) 90 day net terms via check Cash Discount - $0.00 Value of Float Extension - $10,000 X 90/365 X 8.0% = $ Payment Execution Cost = <$1.59> Cash Discount I ($221.79) 2%, 10 days via ACH Discount - $10,000 X 2.0%=$ Value of Float Extension - $10,000 X 10/365 X 8.0% = $21.92 Payment Execution Cost = <$0.13> A/P Card($253.97) 30 day net terms via card Rebate - $10,000 X 1.40% = $ Value of Float Extension - $10,000 X 52/365 X 8.0% = $ Payment Execution Cost = $0.00 Our preferred method of payment is via virtual cards. We will also consider ACH payments in 10 days for vendors offering early pay discounts. Otherwise, we will be moving our standard check payment terms to 90 days. Assume $10,000 payment and 8.0% cost of capital

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