Working Capital Management 2010 Transcript

From Treasury & Risk's 15th Annual Alexander Hamilton Best Practices Awards

TOM DUGGAN: Our sponsor this year for Working Capital Management is Ariba and I’m pleased to introduce Peter Lugli, who will present the awards today.  Peter is senior director of working capital management and business development at Ariba.  In this role he is responsible for the company’s strategies in marketing regarding working capital management solutions offered to Global 2000 companies and their suppliers. 

Prior to joining Ariba, Peter served as vice president of marketing and global program management for a global supply chain finance technology solutions provider based in Atlanta.  He pioneered supply chain finance enablement methodologies for companies such as Volvo, Lowes, Kohl’s and others.  An interesting fact about Peter, he also served as chief of staff to Canada’s Minister of International Trade, and senior special advisor to Canada’s Minister of Justice and Attorney General of Canada.  Peter received his law degree from the University of Windsor and a Bachelor of Social Sciences from the University of Ottawa in Canada.  So now I’d like to turn it over to Peter. 

So as practitioners, we’re seeing how these external environmental forces are increasing the effort to look beyond the four walls.  And I think what’s fascinating about our award recipients is that they have each levered or used working capital solutions to address many of the challenges that they’re facing internally and externally.

With respect to Cisco -- and I want to preface that this is in no particular order -- with Cisco, they’ve taken working capital as a competitive solution to meet the challenges faced by the economic environment, by growing sales and helping cash-constrained channel partners, and we’ll hear from Maryann about how they very effectively did that.  Ford -- and its great story of how they’ve used working capital as a driver for renewal by improving agency ratings and delivering tangible liquidity options.  And as well, from Kimberly-Clark, whose working capital objectives and challenges met the objectives and imperatives of creating new shareholder value in what is a tremendous story as well.

The IT space is more and more competitive by the day, and making sure that your channel partners, which for Cisco are the extended sales team for us, making sure that they stayed loyal and stayed with us and actually that we gain share through them through these times was what was top of mind for us.  So what we did specific to Europe was, for about 40 of the top channel partners, we provided 90-day payment terms to them and we leveraged off what we’ve been doing now for over 10 years.

This program is tremendous.  It’s offered in 146 countries now.  About 2 million invoices a year are going through it.  It’s automated and we actually use five banks.  So the banks actually take assignment of the receivable, Cisco gets paid on day 30, and then the banks collect from the resellers.  But the results were that we added $700 million of credit lines to the channel financing program with no risk to Cisco, $15 million of risk to Cisco.  So we transferred all of those credit lines off of open accounts to our bank partners.  We had a significant improvement in the Cisco DSO for these 40 channel partners, and these were the big guns in Europe.  They were paying us on about day 55.  So we went from day 55 to day 30, which was significant.  And this is the blockbuster one, everybody: Their sales growth was up 23% versus the European theater average.  So make no bones or mistake about it, the working capital element of the Cisco incentive program actually drove this. Partners, all of them, shared with us that they would not have been able to place these orders without having this type of program from us. 

And so that was the external environment we were operating in.  And with respect to the internal environment, in early 2008 we got our first quarter of negative free cash flow in many, many years of KC history, and part of that was a big inventory build, and working capital drag was a major component on our RIC underperformance. (RIC is a major financial metric that we use to measure our success and our healthiness.)

We realized through the peer benchmarking that we have outdated terms and we have a lot of opportunities to improve.

So, what’s our result?  We came out with a goal of 2-3 days of improvement on working capital.  At the end of the day, we got 15 days out of working capital, and that equates to us over $900 million of cash flow.  And all of these helped us to form our single-A credit rating. We contributed to over $500 million on the debt reduction and funded $800 million of pension, that is above the line for the cash from ops.  So we generated over 38% of cash flow growth, outside of the pension contribution.  And RIC improvement, over 160 basis points, and we funded modern acquisitions that help our organic growth.  That’s all, thank you.

LUGLI:  Thank you, Jun, that was a great story.  I’m very proud to announce our Gold Award recipient, Michael Seneski of Ford.

Secondly, internally, our cost of capital needed to be at the same level as our key competitors, because even if you’ve got better products, if you’re starting off handicapped by a higher cost of capital, you’re not going to be able to compete in the long run.  So investment grade was the target. 

Now what’s the metric?  One of the other key things that Alan Mulally has brought to Ford is that you don’t get to define your own success.  I think this is really important.  How many of you are measured by budget performance or efficiency levels?  He doesn’t care about any of that.  The only people that determine your success are external.  It’s your customers, it’s your suppliers, it’s your shareholders, it’s your stakeholders, and those are the only metrics he wants to look at. 

As it relates to debt, debt was really simple.  We had a list of every single one of our debt items and we had to prioritize how we were going to get rid of it.  So we looked at the key attributes -- interest costs, collateral, maturity profile, equity linkage -- and we set a priority and every quarter based on our excess liquidity, we determined which one’s next in line and we knock it off.  This is just a simple chart. Just to let you know, I took off the data to protect the innocent.  But this is the type of stuff, these are investment-grade metrics.  We review it every quarter.  We do a business plan update, the entire business plan gets updated every quarter at Ford Motor Co., and we show this and we share it with Alan’s team along with the plan of what are we going to do to achieve those metrics.  It’s very powerful in what we do in moving forward. 

And then finally, what’s been the results?  This is S&P’s view of issuer ratings for us and, obviously, we made it down to double-C in the depths of 2008.  Since then I’m happy to say we’re up six notches to B+.  We’re only four notches away from investment grade; however, Moody’s only has us two notches away and based on our earnings announcement the other day, I got a phone call to make, but we’re very close.  We’re not where we want to be, but we know where we’re going.  We have a very robust plan all based on external metrics and we have the complete buy-in of the operating team to deliver the operating metrics necessary for us to deliver this plan.  That’s it, thanks.

Q:  Hi, this question is for the Kimberly-Clark presentation.  Could you just break down for us the improvement of $900 million in working capital between reduction in inventories, collecting more quickly from customers, and stretching payables?  Where was the biggest part of the opportunity for you?

WANG:  Sure.  Inventory is our biggest opportunity that we materialized last year. This year we started to see the benefits of accounts payable showing up on term extension, because when you think about product and production curtailment and inventory reduction, we produce less, we’re buying less.  So last year is kind of combined, but we can single out inventory as the big one.  And this year, I think, the term extensions and supply term financing and all of those benefits start to show.

LUGLI:  Maybe just another follow on to Maryann.  Could you give us some sense of the size of the program, how many countries, how many invoices, banks, et cetera?

VON SEGGERN:  So there are five bank partners that we use today, so we don’t use Cisco’s money.  You know, one area that I really didn’t touch on is the IT automation here.  Here I am sitting here, it’s the day before the quarter-end close for Cisco, and my phone is not ringing off the hook.  Two million invoices went through this program last year, so the structure is right, but we’ve also got the automation.  Cisco uses an Oracle-based order system that the channel partners order through and the IT that we’ve been able to implement, with the feeds between Oracle and the five banks, and then the portals that the banks have to work with our partners, has just been incredible.  So 146 countries, 2 million invoices, $8 billion of credit lines; over $20 billion of invoices will go through this program this year.

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