Managing Working Capital Globally Trends in today s markets we re not in Kansas anymore!

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1 Managing Working Capital Globally Trends in today s markets we re not in Kansas anymore! Robin Veariel, Working Capital Advisor, Bank of America Merrill Lynch Larry Cook, Treasury Manager, Mavenir Systems, Inc Ramona Rodriguez, Assistant Treasurer, CTP, Energy Alloys

2 Corporate Panelists Biographies Larry Cook, Treasury Manager Mavenir Systems, Inc. Mavenir Systems is a leading provider of software-based networking solutions for mobile carriers headquartered in Richardson, Texas with technical support operations in locations that include California, India, UK, Korea and Japan Larry has 20+ years of treasury management experience in the construction, oil & gas, and retail industries. His experience includes daily cash management in both the domestic as well as international realms, banking relationships, letters of credit, debt management, debt compliance, investment management and cash forecasting His cash management career has included working for Enserch, Citigroup, Turner Corporation, e-rewards, and Furmanite Corp as well Ramona Rodriguez, Assistant Treasurer, CTP Energy Alloys Energy Alloys is a privately held global provider of oilfield metals solutions to the energy industry headquartered in Woodlands, TX with operations in Singapore, South Korea, Dubai, UK, Canada, and the US Ramona received her Bachelor s Degree in Finance from Texas A&M University. She has 15+ years of treasury management experience in oil & gas and energy. Her experience includes daily cash management domestically as well as internationally, fx, banking relationships, letters of credit, debt management, debt compliance, investment management, global insurance, and cash forecasting Her cash/debt management career has included working for the City of Houston, Browning Ferris Industries (BFI), Air Liquide, Enron, Citgo Petroleum, and Nabors Industries Ramona is a member of the Association of Finance Professionals (AFP) and the Houston Treasury Management Association (HTMA) 2

3 Defining Working Capital A Basic Measure of Liquidity & Efficiency (Adjusted) Working Capital = Accounts Receivable + Inventory Accounts Payable [Expressed as an absolute $ amount measuring liquidity & managerial efficiency] Cash Conversion Cycle = Inventory days (DIO) + Receivables (DSO) Payables (DPO) [Expressed as # of days measuring how efficiently short-term assets & liabilities are being used to generate cash] OPTIMIZING RECEIVABLES OPTIMIZING PAYABLES BETTER MANAGING LIQUIDITY 3

4 Meeting Liquidity Objectives Best Practices OBJECTIVES Enhance yields on operating, excess, strategic and reserve cash BEST PRACTICES Capitalize on yield-producing opportunities globally Better control over regional and global liquidity Consolidate bank relationships and accounts Comply with a rapidly changing regulatory environment Deploy cash management effectively to respond to changing regulations Improve cash forecasting through enhanced visibility Utilize online tools view cash position and investments in real time Optimize working capital Consolidate multiple currencies across multiple markets 4

5 Global Working Capital Trends global working capital performance has improved by 2% year over year (1) (1) Source: PwC Annual Global Working Capital Survey, Cash for Growth (July 2014)

6 Global Working Capital Performance Factors Behind Performance Variations Payment practices Payment terms and behaviors, payment usage, legal frameworks and cash collection effectiveness Focus on cash & effectiveness of WC management Intensity of management focus on cash & WC management processes Logistics & distribution infrastructure Supply chain costs, services levels and risks 6

7 Global Working Capital Management DPO is the only working capital measure that has shown a consistent year over year improvement across the globe (1) #1 Biggest improvement to working capital came from improved payables performance Comparison of Days Payable Outstanding (DPO) by region Europe 1 day improvement Americas 1 day improvement Asia, Africa & Australasia 2 day improvement Source: PwC Annual Global Working Capital Survey, Cash for Growth (July 2014). 7

8 Global Working Capital Management Europe has generally seen an improving trend in DSO over the last six years although this improvement has plateaued in 2013 (1) For the rest of the world, the achieved gains have been eroding slowly over the following years Comparison of Days Sales Outstanding (DSO) by region Europe 0.1 day deterioration Americas 0.5 day deterioration Asia, Africa & Australasia 1 day deterioration Source: PwC Annual Global Working Capital Survey, Cash for Growth (July 2014)

9 Global Working Capital Management Companies in the Americas are holding significantly less inventory than their global competitors (1) Year over year improvements in working capital performance are driven in part by improved inventory performance Comparison of Days Inventory Outstanding (DIO) by region Europe 1 day improvement Americas 0.2 day deterioration Asia, Africa & Australasia 0.1 day improvement Source: PwC Annual Global Working Capital Survey, Cash for Growth (July 2014). 9

10 Liquidity Trends

11 Global Liquidity Trends A Timeline to Today Fully Automated Liquidity Management Multicurrency notional pooling Global cross-border sweeps Trapped liquidity sweeps (e.g., China) Multibank visibility and sweeps Portals for investing excess cash 70 s 80 s 90 s 21st Century Visibility Control Efficiency 2014 and Beyond Continued centralization of Treasury Increased focus on internal sources of liquidity Increased need for multicurrency liquidity tools Multicurrency notional pooling International ECR Increased focus on risk and regulatory reform Basel III compliance Money market mutual fund reform 11

12 Payment Trends

13 Focus on Automation to Reduce Costs Integrated systems and standardized files allow for centralization and automation which may reduce payment costs Internal payment efficiencies remains critical paper to electronic (P2E) migrations may provide the most significant cost reductions. 88% 84% 78% of companies surveyed have started or plan to launch automation initiatives within the year (1) of respondents cited reducing overall processing costs was the top factor for driving a focus on electronic payments (2) of companies surveyed indicated they either already have moved or plan to move to a centralized payment structure (3) 1. PayStream s Invoice and Workflow Automation Benchmark Report 2013; 2. Electronic Supplier Payments; PayStream Advisors Q gtnews 2013 PAYMENTS SURVEY. 13

14 Global Liquidity Management Techniques Centralization of Cash Flexible options 1 Physical Cash Concentration Sweeping is an automated process that will physically concentrate funds of the same currency into a single account in a designated location within the same country or across different countries, within the same bank or across different banks 2 Notional Pooling A short term working capital tool where debit balances are notionally offset against the credit balances of the same or different currencies held within the same country for interest offset purposes, no cash actually moves in this structure 3 Interest Optimization A solution that improves interest earnings at account level based on balances maintained with the same bank across different countries and currencies, including trapped cash 14

15 Global Liquidity Management Techniques Centralization of FX Management A Netting Center provides. Centralized and controlled hedging strategy Improved visibility to total exposure Reduced hedging costs and exposure Reduced costs associated with payment processing Flows without Netting Flows with Netting 15

16 Global Liquidity Management Techniques Shared service centers and On Behalf Of Centralizing receivables (as well as payments) may provide efficiencies Anticipated Benefits Cost reduction through economies of scale (elimination of repetitive processes) Reduction of risk associated with errors Enables greater receivables straight-through processing which may deliver: More precise forecasting that can enhance working capital management More efficient customer account posting leading to a better customer experience ALL UNDER ONE ROOF Large global, multi-unit companies are moving towards in-house banks (for Pay on Behalf of and Receive on Behalf of transactions) Anticipated Benefits Increased efficiency for working capital processes Reduced banking fees Greater visibility over cash flows Improved control resulting from enhanced compliance and risk management By concentrating cash in an in-house bank, companies can reduce their liquidity requirements, as well as their trapped and idle cash, (1) by up to 75% 1. In-House Banks: Gaining in Popularity; on 10/22/

17 Customers Global Liquidity Management Techniques Centralization of Transaction Processing: In-House Bank & Payment Factory Robo Pobo Customer Billing Sub 1 Internal account Sub 2 Internal account Sub 3 Internal account Supplier Billing IHB Local EUR bank account IHB Local USD bank account Sub 1 Local bank account Cash-Less Settlements Concentration Account (in name of IHB) Bank 1 EUR Bank 2 USD Bank 3 Currency x Suppliers, Tax, Other Clearing & reconciliation of internal payments Internal Funding & Internal Loans IHB & Payment Factory 17

18 GLOBAL SUPPLY CHAIN Trade trends Supply chain financing (SCF) Shifting from traditional optimization of working capital to a more strategic level (e.g., finding new trade partners) 59% perceive SCF as a strategy that helps to create business opportunities Components to manage for maximizing financial value and opportunity Challenges faced when managing the financial activities component Improvements companies can make to effectively meet those challenges Physical Activities Logistics & Carriage Financial Activities Treasury Management & Financing Information Technology & Knowledge Management Financing How do you evaluate options to improve cash flow efficiency? Compliance How can you best comply with government regulations for global trade and record keeping? Risk What options are available for mitigating risk of trade countries and counterparties? Expansion What best practices exist to manage larger trade networks, inventories, markets and exposures? Payables Extend days payables outstanding (DPO) Lower cost of goods sold (COGS) Control financing costs Receivables Improve quality of A/R and tighter management of earnings Lower financing costs Shorten days sales outstanding (DSO) Expand sales markets (revenue growth) Reduce payment and FX risk Processing Save time/eliminate document discrepancies through automation Address issues through in-country support Expand supplier base and strengthen supplier relationships 18 Source: 2014 Aite Group Survey, Supply Chain Finance: The Corporate Perspective (July 2014)

19 Global Working Capital Management Techniques Supply Chain Finance According to industry sources, Supply Chain Finance could unlock $100 billion to $500 billion of liquidity by accelerating the cash conversion cycle for suppliers and extending days payables outstanding for buyers. SCF: From Myth to Reality, McKinsey 2010 Six easy steps to improve your working capital via Supply Chain Finance Buyer 1. Delivery of goods and/or services & submission of invoice Supplier 6. Debit of invoice amount on due date (100% invoice value) 2. Buyer checks invoice and submits confirmed payables to the bank 3. Supplier receives info from bank about confirmed payables of buyer together with a financing invitation from the bank 4. Supplier can auto-finance or select invoices for financing and sends financing request to the bank 5. Credit of financed invoice less discount prior to due date of invoice Non-financed invoices are credited in full to the supplier by the bank on the due date 19

20 Global Working Capital Management Techniques Letters of Credit EMEA Limited Usage for trade within Western, Central and Eastern Europe Still used frequently in Mid East and Africa Still used heavily for trade with Turkey and Russia Standby LC s still actively used (bid, advance payment, performance bonds); large corporates moving away from bank to corporate guarantees Bank Payment Obligation (BPO) gaining some traction ASIA/PAC Although prevalent, flat usage in Asia Pac, primarily with countries such as Bangladesh, Cambodia LATAM Declining usage for trade with Mexico Declining usage for trade with Brazil 20

21 Global Working Capital Management Techniques Early Pay Discounts EMEA Occasionally still found in Western Europe (2% Net 10/30) but declining Middle East not standard to offer discount ASIA/PAC Liquidity crunch in China, limited early pay discount offered Reliance on Banker s Acceptance Drafts (BADs) for payment due to illiquidity in the market Local banks not as willing to discount BADs LATAM Not popular in Brazil but past due charges are applied at CDI-based rate Not widespread in Mexico 21

22 International Bank Account Opening/Funds Transfer and Letters of Credit for Trade

23 Contents I. Contents Energy Alloys Overview and Locations II. III. IV. International Bank Account Opening Requested Documents Specific Challenges of Requested Documents and Out of Country Transfer Dubai, South Korea and Singapore Letter of Credit Trade Transactions 23

24 Energy Alloys Global Footprint EDMONTON, CANADA SCOTLAND (2 locations) CONROE TX THE WOODLANDS, TX Corporate Headquarters TULSA, OK ENGLAND (2 locations) LAFAYETTE, LA HOUMA, LA DUBAI, U.A.E. HOUSTON SERVICE CENTER S. KOREA SINGAPORE 24

25 International Bank Account Requested Documentation In addition to the account opening forms, customer information form, etc., you will need the following for the specific legal entity: Board Resolution Articles of Association for the legal entity of the account to be opened Certificate of Incorporation Notarized passports of authorized signers 25

26 Specific Challenges of Requested Documents Dubai requires Board Resolutions and Articles of Association to have the legalization by UAE embassy in USA and attestation by the Ministry of Foreign Affairs in UAE. Third party document service used for the legalization process. Funds are transferred out of the country with no documentation requested by the bank 26

27 Specific Challenges of Requested Documents Dubai requires Board Resolutions and Articles of Association to have the legalization by UAE embassy in USA and attestation by the Ministry of Foreign Affairs in UAE. Third party document service used for the legalization process. Funds are transferred out of the country with no documentation requested by the bank South Korea opening documents process assisted by third party in South Korea; Power of Attorney (POA) required for documents to be delivered to the bank and open the account; transfer of funds into and out of the country require documentation by the bank to process the transaction (trade payable, dividend payment, capital reduction) 27

28 Specific Challenges of Requested Documents Dubai requires Board Resolutions and Articles of Association to have the legalization by UAE embassy in USA and attestation by the Ministry of Foreign Affairs in UAE. Third party document service used for the legalization process. Funds are transferred out of the country with no documentation requested by the bank South Korea opening documents process assisted by third party in South Korea; Power of Attorney (POA) required for documents to be delivered to the bank and open the account; transfer of funds into and out of the country require documentation by the bank to process the transaction (trade payable, dividend payment, capital reduction) Singapore opening documents processed easily; funds are transferred out of the country with no additional documentation requested by the bank 28

29 Letter of Credit for Trade Transactions Purchaser of equipment used a letter of credit from a bank in India for payment of equipment to be sent to the beneficiary bank All requirements of the letter of credit agreement must be completed and agreed to by both parties prior to the funds being transferred Funds sent to beneficiary bank as stated from the terms of the letter of credit Third party used to assist in the various requirements of the letter of credit by beneficiary to get paid. Third party recommended if there is no expertise in house. For a minimal fee, the guidance provided helped the payment for the equipment process in a timely manner to our beneficiary bank 29

30 Mavenir Systems, Inc. Richardson, Texas

31 Worldwide Working Capital Management Mavenir is a 4G LTE software provide to the worldwide network providers Major customers are AT&T, Vodafone, T-Mobile, Deutsche Telekom Competitors are Ericsson and Huawei 31

32 Worldwide Working Capital Management Operations In 20 countries Companies in US, Canada, UK, Finland, Sweden, France, Netherlands, Germany, Poland, Croatia, India, China, Indonesia, Malaysia, Australia, Brazil, Mexico and Dubai Sales in South Africa, Nigeria, Thailand, Honduras, Tunisia, Egypt 32

33 Worldwide Working Capital Management Setting up companies Lead time Regulations, Background checks Setting up bank accounts Again lead time Chicken and Egg situation KYC 33

34 Worldwide Working Capital Management Operational choices SOX Compliance Centralized Control or Local Control India and China Bank Loan Compliance Issues Funding Choices Revenue Funded Or Cash Advances 34

35 Worldwide Working Capital Management Revenue Generators Why do we generate revenue in certain countries Payroll Choices Intercompany Payables and Receivables 35

36 Worldwide Working Capital Management Board authorizations Hedging / Derivatives authorizations Exchange Gains and Losses APAC Region Performance Guarantees 36

37 Worldwide Working Capital Management BEFORE YOU ENTER, THINK ABOUT YOUR EXIT STRATEGY! 37

38 Summary

39 Global Liquidity Considerations Geographical footprint Organization culture Legal entity structure Existing banking relationships Technology infrastructure Policy and governance Global liquidity structure Currency controls: convertibility and transferability Limits/conditions on intercompany lending Central bank reporting Cross guarantees Taxability of interest Withholding tax Tax deductibility Thin capitalization Transfer pricing Indirect taxes Controlled foreign corporations 39

40 Additional Sources ZeroHedge (online). The New China Syndrome: Receivables/Payables Chain Reaction Meltdown. Author: Tyler Durden. May 16, PWC Treasury Talk (online). The Importance of Working Capital Management. Authors: Robert Smid & Anton Koupenov. October 20, EY Working Capital Management Report 2014 (online) All Tied Up. Hackett Group (online); 2014 Europe Working Capital Survey. The Hackett Group jhtml. PwC Corporate Treasury (online); Treasury shown in a new light. PwC Global Treasury Survey PwC Annual Global Working Capital Survey 2014 (online) Cash for Growth. Authors: Danielle Windaus, Dr Andrew Sentence, Niall Cooter and Christian Terry. July

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