Beyond EBITDA: The Importance of Liquidity December 15, 2009 Bruce C. Lynn Managing Partner Richard L. Schmitt Director
Agenda Today s s Business Environment Bank Credit Market A Recipe for Business Success Treasury s s Traditional role The Modern Treasury Managing the Modern Treasury Planning for the Future 12/15/09 The Financial Executives Consulting Group LLC 1
Today s s Business Environment The perfect business All factors are known Competitor s actions are predictable All decisions are rational Profitability Risk Liquidity 12/15/09 The Financial Executives Consulting Group LLC 2
Today s s Business Environment Today s s Business environment is not perfect markets/ customers are cautious Sales & profit outlook 2009 - not so good for many industries 2010 - not looking much better?? Liquidity has become as important as profitability. Why? Can no longer buy liquidity: What credit is available has tighter terms / higher prices Bank capacity (appetite?) to refinance old loans AND issue new ones is suspect Extend and Pretend is not a strategy 12/15/09 The Financial Executives Consulting Group LLC 3
Bank Credit Market Most banks tightened credit in April; remaining banks now tightening credit Tightening Standards implies More restrictive covenants Lower loan limits Shorter maturities Higher loan spreads More collateral Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices Oct09 12/15/09 The Financial Executives Consulting Group LLC 4
Bank Credit Market - Banks still increasing loan spreads - Spreads over LIBOR remain high (often double old spreads) - Use of a LIBOR floor becoming common Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices Oct09 12/15/09 The Financial Executives Consulting Group LLC 5
Bank Credit Market Last one to refinance maybe shut out? Maturing of Bank Debt at 9/30/09 Source: (Loan Pricing Corporation) Maturing Volume ($ Bn) 1,200 1,000 800 600 400 200 0 220 75 300 115 325 345 385 180 410 2010 2011 2012 2013 2014 I grade leveraged other Almost $1Trn will be seeking refinancing in 2012 285 175 80 195 232 3 12/15/09 The Financial Executives Consulting Group LLC 6
Bank Credit Market Refinancing by quarter Yr 2010 = 600MM Yr 2011 = 780MM Yr 2012 = 985MM 12/15/09 The Financial Executives Consulting Group LLC 7
Bank Credit Market When will credit standards by banks return to normal? (Fed: July 09) Investment Grade Companies 11% in 1 st half 2010 36% in 2 nd half 2010 20% credit standards to remain high (i.e. after 2010) Non Investment Grade 29% in 2 nd half 2010 31% in 2011 23% credit standards to remain high (i.e. after 2011) Conclusion For investment grade look to bond markets? Non investment grade companies - wait longer Operating cash flows to become a more important source of liquidity (make it, don t t buy it) 12/15/09 The Financial Executives Consulting Group LLC 8
A Recipe for Business Success Optimize revenues & expenses then generate profits! When will profits occur? What happens if wrong? Capex needed upfront regardless Earnings and assets shrink but liabilities never do (due?) How would you know? (metrics needed) What about the markets?? Competitors? Profits Customers Business Units Products 12/15/09 The Financial Executives Consulting Group LLC 9
A Recipe for Success Primary metric for success = EBITDA EBITDA assumes : Capital is free (no interest, no dividends) No need for upfront cash (capex? R&D?) No change in FX markets (no FX gains /losses) After tax income the same around the world Must go beyond EBITDA in today's environment. Need for: Total, global cash visibility (the cash flow statement) Liquidity metrics to supplement EBIDTA (keep it honest ) Changes in Treasury s s role (less processing, more planning) 12/15/09 The Financial Executives Consulting Group LLC 10
The Traditional Treasury Focused on Processing Resources devoted to repetitive tasks Advanced Risk Mgt (Mkt, Credit, Ops) Cash Management (focus on balances) Investment Cash Debt Basic Cash Accounting (focus on creating, posting, reconciling transactions) 12/15/09 The Financial Executives Consulting Group LLC 11
The Traditional Treasury (2) Bottom line Treasury viewed as a Processing unit (not a strategic one) Control or cost-center center (value difficult to quantify) Limited planning responsibilities Problems are solved rather than prevented Highly dependent on spreadsheets / emails Treasury systems not priority for corporate IT No integrated views of global cash flows Low staff levels - outgunned by Controllers or other financial or operating units 12/15/09 The Financial Executives Consulting Group LLC 12
The Modern Treasury Treasury to be a strategic planning unit that can add significant value to the corporation once: Routine cash/banking transactions have been automated Workload has been shifted to strategic analysis/decision making, replacing transaction processing Treasury generates value by becoming pro-active and visible in the company Adopt a global approach to funding/banking/fx Focus on forecasting and future events Becomes a focal point for risk management expertise Control risk through policies that set limits Serve as a problem solving resource for business units Forge strong links between operational and financial cash flows (increases treasury staff career choices) 12/15/09 The Financial Executives Consulting Group LLC 13
Modern Treasury (2) Debt Management Financial Markets & Institutions Cash Management Risk Management Company & Operating Units Investment Management Policies Highly Visible Interactive Communications Plan, Actual & Forecast in Sync Functions & Systems integrated Performance Metrics in Place to Demonstrate Value 12/15/09 The Financial Executives Consulting Group LLC 14
Planning for the future by mapping the present CAPEX Operating Forecasted Receipts Decision to Borrow Send Accounting entries to G/L (Book Cash) Actual Data (by bank) Invest. Bal. & Transactions + Debt + Bank Transactions + Bank Balances + Mkt Rates Collect Prev. + Curr. Day Transactions Balances Rates Etc By Organization by period FX Exposures (Non functional currencies) Sum Data actual + forecasted cash flows By Organization by period FX Exposures (Non functional currencies) Price & Buy Buy? Review exposures? Sell? Price & Sell No? Negative? Cash Position Positive? Issue Hedge + Transfer Instructions To 3 rd Parties Front Office CAPEX Operating Forecasted Disbursements Middle Office Decision to Invest Get Confirms, Create reports (Treas. Cash) Back Office 12/15/09 The Financial Executives Consulting Group LLC 15
Investment Portal (Position, asset class, etc) FX System 3rd Party (buy / sell /confirm) Bank FTP Site Bank (Balances) FTP Site (Balances) (transactions) Bank FTP Site (balances) (transactions) (transactions) (2) New System Relationships Planning for the future (2) Inv. Data FX Bank Data Annual Plan & Rates (Balances) (Transactions) Treasury Workstation (TWS) Forecasted Cash Flows / Rates : (Operating) + (Financial) Info Acctng Mgt Info Pmts Out General Ledger (Accounting Data) (Regulatory Rpts) AP Pmts Out Financial Institutions (Non AP EFTs) Mgt Reports / Graphs / Trends Actual vs Plan Actual vs Forecast Forecast vs Forecast Data In Processing Information Out 12/15/09 The Financial Executives Consulting Group LLC 16
Planning for the future (3) Front Office Automation Collect global balances & transactions Create global, cash position Middle Office (Decision Making) Investment / borrowing target setting Consolidate cash forecasts Back Office Accounting & Reporting Cash reconciliation Plan / actual trends & reports 12/15/09 The Financial Executives Consulting Group LLC 17
Planning for the Future (4) Use metrics to measure actual vs. forecast Metric examples: Free Cash Flow (op cash flow CAPEX) Exposure to market + % hedged Non functional currency assets / liabilities Variable vs. fixed rate debt Cost of liquidity All in cost of debt Net interest spread (%) = cost of debt inv. return earned Liquidity available within X days (COH + S/T inv. + available credit) As a total amount As % of liabilities due in X days. Compare to target Leverage ratios (not GAAP use credit agreement terms) Bank relationships Total paid to bank x?? All banks? 12/15/09 The Financial Executives Consulting Group LLC 18
Planning for the Future (5) Demonstration - how to integrate profitability, liquidity & risk Profits: metric = EBITDA (P & L) Liquidity: metric = Free cash flow (operating cash CAPEX) Risk: leverage metrics Debt / Equity Variable debt as % of total Free cash flow as % of total debt When planning: what is more important? Being absolutely right? Being about right (i.e. within agreed to tolerances) Modeling the future Base case Likely scenarios 12/15/09 The Financial Executives Consulting Group LLC 19
The new normal? Source: CFO Magazine, 9/1/2009, Hard Lessons One year after the Wall Street meltdown, CFOs say business will never be the same 1
Aligning strategy with execution Strategic Planning Long-Term Planning Corporate Development Treasury Strategies Value Management Update Strategic Plans with Latest Forecasts Strategic Planning Operational Planning Seed Budgets with Strategic Targets Annual Budget Periodic Forecasts Workforce Planning Capital Planning Planning, Budgeting and Forecasting 2
Translating this alignment to technology Strategic Strategic Planning Planning CFO CFO Investor Investor Relations Relations Treasury Treasury Hyperion Hyperion Strategic Strategic Finance Finance M&A M&A Consolidation Consolidation tools tools Operational Operational Planning Planning tools tools 3
Cash flow focus is the key Ratings Credit Ratings Bank Covenants Earnings Debt/Equity Key Metrics Interest Coverage Valuation Free Cash Flows Cost of Capital Net Present Value Fully Integrated Financials Financing Balance Sheet Income Statement Cash Flow Operational Plan Term Debt Revolving Debt Common Stock Preferred Stock CAPEX Working Capital Equity Debt Revenues COGS OPEX Net Income Operating Investing Financing Revenue and Expense Investment limits Working capital levels Key Assumptions Business Specific Drivers Market Growth % Days Sales Inventory Turns Historicals Income Statement Balance Sheet Cash Flow 4
A comprehensive platform for a range of strategic analyses HSF 5
Demo Focus Business Issue Scenario Detail Customers paying more slowly A/R Days forecast increase of 3 days Critical investment to capture growth Capex increase in early 2010 Necessity of covenant compliance Back solving investment levels given covenant constraints 6
Rich Schmitt 847.226.0934 rschmitt@bluestoneinternational.com 7
Base Consolidation Hierarchy
Base Case - Key Metrics
Scenario 1 - AR Downside
Scenario 1 - Covenant compliance intact
Scenario 2 - Capex increase of $250mn in March
Scenario 2 - Covenant and revolver limits broken
Goal seek to allowable capex level
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Q & A FECG Contact Information www.thefecg.com Bruce Lynn Phone: 203-655 655-4806 Email: blynn@thefecg.com BlueStone International LLC www.bluestoneinternational.com Richard L. Schmitt Phone: 866-224-28412841 x127 rschmitt@bluestoneinternational.com 12/15/09 The Financial Executives Consulting Group LLC 20