DRIVING VALUE FOR YOUR BUSINESS LOGISTIC BEYOND TRANSPORTATION Reg Kenney President Engineering & Manufacturing Sector DHL Customer Solutions & Innovation
EXCITING AGENDA November 3rd, 2015 Time Agenda Point Welcome 10:00 Driving value for your business - A DHL perspective on future Aviation & Aerospace Supply Chains - Reg Kenney 10:30 Inventory financing - Creating new Supply Chain value David Bruce, DHL Supply Chain Panel David Stewart VP and Global Managing Director Aerospace and MRO, ICF International Brian Hogan 10:50 Former COO, Cebu Pacific Air, and Managing Partner XSQ Aviation Consultancy Rob Higby VP Airlines & Fleets StandardAero David Bruce DHL Supply Chain 11:55 Wrap-up & Close 12:00-13:00 Lunch & DHL Support Clinics 2
Safety Information & Housekeeping No Fire Alarm planned today Locate Emergency Exits Please no private photos and videos during the sessions Please put your phones on mute 3
MILTON FRIEDMAN`S PERSPECTIVE The Social Responsibility of Business is to increase its Profits 4
Our Customerʼs perspective ( ) the Group is embedding long-term value for the benefit of all stakeholders. Tom Enders, CEO Airbus Group ( ) we will find new and better ways to engage and inspire employees, deliver innovation that drives customer success, and produce results to fuel future growth and prosperity for all our stakeholders." Dennis Muilenburg, CEO of Boeing We engage with key stakeholders to ensure that we are managing our business in a way that creates value for those who impact or are impacted by our activity. We place great value in listening to our various stakeholder groups and responding to their views. Rolls Royce, Stakeholder engagement statement 5
The DPDHL perspective 3 bottom lines & living responsibility Customers We cannot form a foundation of trust unless we respect the needs of our stakeholders [ ]. We are drawing attention to this goal because it is at the center of our own aspiration to become the industry benchmark for responsible business. Frank Appel, CEO DPDHL Investors Employees 6
DHL Engineering & Manufacturing white paper Engineering & manufacturing 2025+ E&M environment / trends E&M sector responses Supply Chain implications and action areas www.dhl.com/emtrends_whitepaper 7
Engineering & Manufacturing Major trends Shifting markets Customization & B2B To B2C Convergence Volatility & Exogenous threats Compliance & sustainability Impending labour shortage New technological possibilities 8
Sector responses Intelligent manufacturing Sector responses Sustainable manufacturing New business models New collaboration models 9
Supply Chain implications Regionalized Supply Chains Resilient And Compliant Supply Chains Sustainable Supply Chains Connected Supply Chains Agile And Responsive Supply Chains 10
INVENTORY FINANCING CREATING NEW SUPPLY CHAIN VALUE David Bruce Vice President MRO, DHL Supply Chain
Agenda General overview of DHL s Inventory Financing Services (IFS) Trends and challenges in A&A. IFS as a solution Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 12
Agenda General overview of DHL s Inventory Financing Services (IFS) Trends and challenges in A&A. IFS as a solution Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 13
Why did DHL develop a portfolio of financial solutions in the Inventory Financing space? o Demand from customers for the integration of logistics and financial cycles o Request for innovating solutions to improve efficiency o Desire to increase financial independency and flexibility o Logistics is becoming a commodity In the mind of our customer, the above translates into these financial dimensions: Cash flow improvement Competitive financing ROCE improvement Reduction of net debt Flexibility and resilience Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 14
Why is this the right time for Inventory Financing Services? Within the last 5 years, a number of developments have made inventory financing much more relevant in the logistics business: Increasing global demand on Asset Based Lending (ABL) Cash is king Changing banking regulations on traditional lending Innovation and new products / services. Customer in need for flexible financing Economic business cycles Detailed and timely collateral reporting a must for corporates Visibility.control. Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 15
Finished goods inventory has so far been the least financed segment of working capital on the global market Holistic solution Target Area Raw Materials WiP/ Semi- Finished Goods Finished Goods 1 Finished Goods (under PO) Accounts Receivable High Low Vendor Management Financing Inventory Financing PO Financing Working Capital Solutions Extendable into adjacent areas 1 Including spare parts Source: DSC Inventory Finance Team, A.T. Kearney FOCUS Extendable into adjacent areas Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 16
Eight Derivative solutions were developed to cover DHLs customers needs On-Balance Sheet solution Inventory Financing Inventory Purchasing Commodity Financing Off-Balance Sheet solution Relevance for A&A Trade Model Inventory Financing Services Spare Parts Model N.B. Always IFRS / GAAP compliant Trade + Model Manufacturing + Model Manufacturing Model N.B. Customer characteristics and situation will determine which models are possible Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 17
DHL plays an integral role in the structure of the solutions for both the bank and the customer Innovative partnership: Innovative partner for a new inventory financing solution Faster and cheaper financing: global bank network, advantageous conditions vs. unsecured loans Custodian role: strong collateral monitoring and forecasting capabilities enabled by state-of-theart IT solution Bank/Investor perspective Strong partner: reputable third party logistics provider for large global deals Extensive funder base: global portfolio of funders in different risk categories, geographies, and industries Unparalleled onestop-shop solution: supply chain services and needs-based financing Customer perspective Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 18 18
The off-balance sheet solution delivers immediate impact on key financial performance indicators of the customers 1 Immediate cash-flow impact 2 Improved ROCE 3 Improved financing cost Working capital is shifted off balance to financial partner s structure to release cash upfront Reducing working capital has significant impact on ROCE. Optimization of supply chain assets can drive ROCE even higher Financial benefit vs. WACC and cost of working capital programs expected Before After Manufacturing or Supplier Manufacturing or Supplier Cash out (tied up after manuf.) Warehousing Warehousing Cash out B2B/ B2C B2B/ B2C Cash in/ Profit Cash in Customer DHL Solution No cash out Profit Customer Capital Turnover Current Assets Non- Current Assets ROCE Supplies Return on Sales Personnel Depr.& other Before % After 4 Increased financing flexibility & scalability 5 Reduced net interest bearing debt Other client s specific benefits Solution is flexible and adjusts according to inventory level and allows for diversification into an additional funding source Reduced net interest bearing debt improves adherence to financial covenants such as net debt/ebitda. Positive rating impact. Savings on unused contracted loans/bonds Before After Level of inventory Before After Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 19
Agenda General overview of DHL s Inventory Financing Services (IFS) Trends and challenges in A&A. IFS as a solution Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 20
Challenges within the Aerospace sector that impact on the Supply Chain Supply chain management is an extremely interactive, complex system requiring simultaneous monitoring of many conflicting objectives Reduce Cost Reduce logistics costs as they increase in % of sales Reduce working capital and inventory Direct and indirect cost pressure Manage Complexity Improve visibility while increasing supply chain complexity Create Actionable Insight to improve control and subsequently improve reliability Reduce inefficiencies and layers of hidden costs Improve Performance Improve the speed, reliability and flexibility of your supply chain Performance improvements can be achieved in parallel to meeting cost targets, allowing you to improve business competitiveness Supply Chain` Lead Growth Leverage your supply chain as a strategic tool to support your business growth and stay ahead of the competition. Develop a supply chain capable of dealing with market variations as well as leveraging new revenue opportunities quickly Risk and Continuity Manage risk and supply continuity. Avoid supply chain disruptions Strikes, weather, nature, infrastructure Sustainability Sustainability is increasingly driving strategic supply chain decisions Need for carbon measurement and management Reduce environmental footprint and improve waste management! Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 21
Creating New Supply Chain Value - Financing opportunities in the A&A Industry Manufacturing Inventory Financing can help accelerate the achievement of your business goals Challenges Affected Companies What inventory financing can do for you Production backlog OEMs Leverage inventory to free up cash for further Capacity constraints Suppliers investments into production capacities and high growth rates Improve cost of capital and debt for future investments Commercial Aviation Aftermarket Services High cost pressure due to competition and customer demand Increased cost for MRO and leasing due to high customization demand Airport Authorities Airlines OEMs Leasing companies Airlines Financed inventory for airport hubs help decrease cost; frees up cash for invest into new services Seamless Supply Chain financing for consumables of in-flight services Reduce cost of capital for aftermarket spareparts via End-2-End spare parts logistics & financing services Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 22
Creating New Supply Chain Value - Size of the A&A impact Current Situation: High Inventory holding is an A&A industry characteristic and challenge: 1. The value of inventory.. $ 45bn from Tier 1 to OEMs 2. The cost of holding the inventory.. $ 10bn in finance related costs Historic approaches will not support future business needs and operational models. Cash is King and the constant appetite for cash to enable growth / maintain the competitive advantage. Are there alternatives to the Inventory challenge? Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 23
PANEL DISCUSSION David Stewart Aerospace and MRO, ICF International Brian Hogan XSQ Aviation Consultancy Rob Higby StandardAero
See you at the DHL Support Clinics 25
BACK UP
Creating New Supply Chain Value Tailoring to specific customer business needs Off-balance sheet solution: 5 models Off-balance sheet solution Manufacturing model Model description: Inventory is purchased by partner from customer s manufacturing unit and sold on to customer s sales unit when needed Trade model Model description: Inventory is purchased by DHL from suppliers and sold on to customer when needed Manufacturing+ model Model description: Inventory is purchased by partner from customer s manufacturing unit and sold to customer s customer when required Trade+ model Model description: Inventory is purchased from customer s suppliers by partner and sold to DHL, which then sells it on to customer when needed Spare parts model Model description: Asset pool is purchased by partner and written off over time. Asset pool is constantly swapped with customer assets and repaired along the flow 27
Our global logistics and banking network allows us to offer the different solutions on a global basis Partner bank network UK off-balance sheet: UK bank Global bank network European bank network Global insurance network (Continental) Europe on & off-balance sheet: European bank network European bank network Global bank network North America off-balance sheet: Global bank network Global insurance network APAC, Middle East & Africa on & off-balance sheet: Global bank network Global bank network Global insurance network Current coverage by DHL bank/investor network Source: Partner banks, DHL Supply Chain Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 28 28
In order to achieve the off-balance sheet effect, an Off Balance Sheet solution needs to fulfill specific IFRS criteria Off Balance Sheet solutions Relevant accounting criteria IFRS/GAAP Compliant Solution Role and nature of the Financing partner The partner providing a financing solution needs to have own managerial substance and economical independence from the customer Balance of Risks & Rewards Price risk Credit risk The partner has to enjoy a system of risks and rewards where he bears a real inventory risk (investment risks in case of loss of products, damage of products, stolen products and obsolescence risks) The partner needs to have flexibility and responsibility for prices/pricing On supply side and/or On market side (e.g. secondary markets for products or its modules) The partner has to bear the credit risk of the customer Inventory Financing Services Asia MRO Conference Singapore 3 rd of November 2015 29