break out working capital

Wholesale Banking

ING’s e-commerce event:

Transaction Services Solutions Group

Enhance working capital performance in a ‘brick & click’ scenario

Brussels • November 15, 2016

Wholesale Banking

1. Working Capital - concept

Enhance working capital performance in a “brick & click” scenario | November 15 2016 3

The current market scenery places working capital in the fore front

Buyer

Supplier

• Working capital (W/C) management has moved to the top of the agenda

• Treasurers seek ways to unlock funds trapped in their supply chains

• W/C initiatives release cash and increase liquidity that can be used for strategic investments or debt reduction

Balance Sheet

€Assets Liabilities

Accounts payable

Inventory

Accounts receivable

Cash Drain Cash Source

Net W/C Funding gap opportunities

Enhance working capital performance in a “brick & click” scenario | November 15 2016

Net cash tied up in W/C impacts short term liquidity and operational efficiency

4

Timeline

Order Placed

Stocks

Order Receive

d

Cash Paid Out

Cash Receive

d

Purchase to Pay (Payables)

Order to Cash (Receivables)Forecast to Fulfil (Inventory)

Net Cash Tied up in W/C

Working capital performance metrics

W/C % of sales=

(Trades receivables + inventories –

Trade payables)÷

Sales

Days Sales

Outstanding

(Trade receivables÷

Sales) x 365

Days Payables

Outstanding

(Trade payables÷

COGS) x 365

Days Inventories

Outstanding

(Inventories÷

COGS) x 365

Cash Conversion

Cycle(CCC)


Internal optimisations and external solutions lead to improvement opportunities

Internal optimisations External solutions

A/P process improvement

Inventory management

Incentives alignment

A/R process improvement

Centralise treasury

Rationalise purchasing

$

€ ¥

£

Supply Chain Finance

Receivable-based finance

Letters of credit & guarantees

Payments & cash Management

Risk management

Liquidity management

Cards solutions

Value Chain

Financial supply chain

Physical supply chain

Pu

rch

ase

to

pa

y p

roce

ssO

rde

r to

ca

sh p

roce

ss

Platform Payables

ReceivablesGoods delivery

CashWork in progress

Suppliers

Customers

Wholesale Banking

2. Outside-in view on working capital


(8) (7) 9 10 15 20 24 27 27 35 38 43 45 45 51 84

25

50

75

100

Hy

pe

r-

ma

rke

ts

Foo

d R

eta

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g

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res

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ve

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tail

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me

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ing

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rove

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nt…

Sp

eci

alt

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res

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s

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ys

DSO DIO DPO CCC

15

4035

27

16

47

38

27

6

50

25

3733

5550

39

10

20

30

40

50

60

DSO DIO DPO CCC

Da

ys

Asia & Pacific Europe US & Canada South America

2 16 23 28 30 30 50 53 60 62 64 67 70 74 80

25

50

75

100

Tra

vel

& L

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DSO DIO DPO CCC

7

Opportunities to release cash from W/C exist globally and across industries…

1. DSO, DIO, DPO and CCC are medians, calculated based on sales and end of year balances for comparability. (panel of 11,300 companies) Sources: Capital IQ, ING adjustments, PwC’s “201 Annual Global Working Capital Survey of the Retail Sector

• W/C improvement remains a focus point in many sectors

• In 2016, REL has identified a W/C improvement potential of €1.0tr assuming all companies become top performers

• DPO appears to be the shortest in the US & Canada whereas they seem to be best-in-class for the DSO

• Inventory is the largest area forimprovement

• PwC has identified around€84bn of cash opportunity across the sector

• Overall improved W/C performance due to enhanceddemand forecasting and more agile supply chains as e-commerce requires more accurate availability

• Driven by short receivables, Retail’s W/C intensity seems to differ among subsectors with payables and inventories setting the business mixes

W/C

da

ys

by

ind

ust

ry (

20

15

)1R

eta

il W

/C d

ay

s b

y s

ub

sect

or

(20

15

)R

eta

il W

/C d

ay

s b

y

reg

ion

(2

01

5)


14

%

9% 1

2%

(2%

)

27

%

21

%

17

%

4%

(4%

)

(6%

)

1%

(2%

)

(5%

)

(2%

)

17

%

(1%

)

(3%

)

(2%

)

14

%

11

%

12

%

(2%

)

27

%

23

%

19

%

5%

(3%

)

(7%

) (0%

)

(2%

)

(6%

) (2%

)

17

%

(1%

)

(10

%) (2

%)

14

%

10

% 13

%

(1%

)

27

%

21

%

20

%

5%

(3%

)

N/A

(0%

)

(2%

)

(6%

) (2%

)

16

%

(0%

)

(11

%) (2

%)

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

25%

30%

Ap

pa

rel

Re

tail

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bie

& F

itch

H &

M

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cess

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ize

2013 2014 2015

8

Peer comparison: W/C as % sales

The W/C performance of selected retail companies active in e-commerce

Sources: Capital IQ, company publications, ING estimates

Comments

• Overall the selected companies show a better w/c performance than the respective sector

• The selected companies have different degrees of adoption of the online channel in their sales strategies (Amazon 100%, Otto 65%, Tesco 6.5%, Zalando 100%, Metro 2.4%, Carrefour 1.8%, etc.)

• Differences in business profile, geographic presence, financial reporting might influence comparability

Subsectors within the Retail industry Companies identified in each subsectors


19

8 9 7

49

36

24

32

23

10

18

10

3

26

56

10

3 4

18

6

9 7

50

37

29 3

4

23

9

23

10

3

27

52

9

3 4

16

5

8 7

52

36

31 33

22

N/A

18

11

4

28

48

12

5 4

0

10

20

30

40

50

60

9

W/C metric analysis for the selected group of companies and respective subsectors

Sources: Capital IQ, company publications, ING estimates

60

35

47

36

86

68

47

30 3

6 38

69

37

33

27

38

25

22

16

64

47

47

37

86

81

50

31 34

34

57

38

36

30

42

25

21

18

66

45 5

0

37

88

69

50

32 35

N/A

61

40

34

30

44

25

19

16

0102030405060708090

100

29

11 14

51

38

29

8

47

74

71

85

55

54 6

2

32 3

8

35

2730

12 13

52

38

36

10

48

68

68

81

56 6

1 64

31 3

7

60

3031

14

12

50

40

30

10

48

70

N/A

80

57 59 6

4

34 38

63

27

0

10

20

30

40

50

60

70

80

90

Ap

pa

rel

Re

tail

Ab

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& F

itch

H &

M

Ind

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ize

2013 2014 2015

Subsectors within the Retail industry Companies identified in each subsectors

DSO

DIO

DPO

Wholesale Banking

3. Ideas to optimise working capital performance

Wholesale Banking

a. Internal corporate initiatives


Closely related and overlapping, they determine the amount of cash reuired to finance operational activities

The level of W/C is the result of three main processes

Purchase-to-Pay

Planning and Strategy

Sourcing and supplier

management

Requisition and ordering

Receipting and Evaluation

Invoice Processing

Dispute Management

Payment Initiation / Cash

Management

12

Order-to-Cash

Sales and Quote Management

Credit and Risk Management

Order Processing

InvoicingCollections

Management

Dispute and Discount

Management

Collection Initiation / Cash

Management

Forecast-to-Fulfill

Product Range Management

Forecast and Demand Planning

Sales Order Processing

Materials Planning,

Purchasing and Replenishment

Manufacturing Scheduling and

Execution

Inventory Management

Warehousing, Distribution and

Reverse Logistics


Setup of W/C related KPI’s

Strategic level (CEO, CFO)

Working capital

• DSO, DIO, DPO

• Cash Conversion Cycle

• Return on Capital Employed

• W/C as % of sales

• Benchmark (historical, peers, budget)

Tactical level (Division management)

Supply chain management

• DSO, DIO, DPO

• Best possible DSO

• Delinquent DSO

• Aging Balance

Operational level (Department management)

Payables

• Early/Late Payment

• Spend per Term• Supplier pareto• Blocked

payments• Electronic Data

Interchange %

Receivables

• Cycle Time• Cash Target• Dispute reason

ProductionKPIs

ProcurementKPIs

Sales KPIs

Internalfocus

Optimal use of capacity KP

I a

lig

nm

en

t

Setting right KPI’s at each level and cross functional teamwork will stimulate effective W/C control and management

13


e-commerce’s impacts on W/C performance

DPO

• Digital data: control supplier relationship, better administration of account payables

• More transparent win-win communication along the value-chain, performance gap identification

• Extended ERP platforms, whichstandardize and integrate tradeinformation from trading partners, banks and logistics providers

DIO

• Digital data allows better inventory control

• Reduce physical presence: reduce inventory level

• Improved distribution capabilities and / or Outsource logistics / fulfillment

• Build efficient return infrastructure

• Cross channel inventory is critical to retailer success; flexible fulfillment

DSO

• Operational aspects to be considered (payments security, fraud protection),

• Cash at the counter vs. Online payment methods (purchasing behaviours)

• More efficient payment and settlement solutions (through a new generation of payment service providers PSPs)

• Digital data: track-record of payment behavior, anticipate disputes, easier collection process

A balanced combination of physical and virtual operational setups serving the overall business strategy will lead to enhanced commercial and financial benefits, incl. working capital performance

Wholesale Banking

b. External solutions

Wholesale Banking

b1. Online payments considerations


Within Europe still many differences in preferred payment methods

Italy: 83% cards as preferred payment method

Spain: 91% cards as preferred payment method

The Netherlands: 55% iDeal as preferred payment method

Some countries show “dominant” payment methods

And other countries show many different preferred payment methods

Germany: ELV with 38% most dominant

Poland: Cards with 45%, Online banking 35%

45%

35%

15%5%

Credit Cards

Online Banking

Cash

Paypal

83%

13%4%

Visa / Mastercard

Paypal

American Express

38%

25%

16%

15%

6%

ELVVisa / MastercardPaypalSofort BankGiropay

55%

23%

15%

7%iDeal

Credit Cards

Direct Debit

Paypal

91%

6%3%

Visa / Mastercard

Paypal

American Express


Use of different payment types for E – and M-com in Belgium

A closer look at consumer payment behaviour in Belgium

3%

1%24%

56%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

E/M Com payments

in Belgium

Other

Cards

Credit transfer

Direct Debit

E-Wallets/Mobile

6%

43%

64%

5%

9%

9%

3%

5%

13%

37%

5%1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Value Volume

Other

Debit card

Credit Card

Direct Debit

Credit transfer

Cash

Consumer Spending Payment Mix Belgium


Ecommerce process

Collecting PSP

Distributing PSP

Choice of set up has impact on your cash flow:

• Collecting PSP: PSP pays out all funds at once or in split payments. Settlement determined by PSP. Timelines can differ from T+1 up to once per month

• Distributing PSP: payment methods / acquirer pays out directly to merchant. Different timelines applicable

Customers Webpage

Account

Account


Closer look to different Payment methods

Payment method Impact on your working capital compared to POS cards

Impact on working capital compared to cash on POS

remark

Cash on delivery -/- -/- payment on delivery. Settlement at T+A after delivery of goods

Cards payments + / neutral + T+1 after ordering of goods

Paypal - - / neutral Cash flow always directly from Paypal

iDEAL + / neutral + Guaranteed and committed payment

Klarna - - Option to also hand over the debtor risk


Considerations when offering payment methods

Client segment

• Consumers vs. Business

• Consumer: local differences

• Business: mainly credit cards

Conversion

• The more payment methods, the higher the conversion rate.

Costs

Cost structures differ among different payment methods:

• Consumer cards v.s Paypal

• Klarna vs consumer cards

• Cash on delivery vs SEPA credit transfer

Settlement timelines

• Among PSP’s

Wholesale Banking

b2. Receivable-based solutions


• Each solution can be tailored to the company’s specific needs

• Diversification of funding sources; scalable to finance trading growth

• Tailor made and highly flexible (multi-originator, -jurisdiction, -currency)

• Off-balance sheet treatment possible

23

Receivable-based finance

• Receivable-based finance facilitates reducing W/C through the financing of trade receivables

• Depending on the number of debtors, size of the receivables and granularity of the portfolio, various solutions can be offered

Schematic overview

Single debtor

Portfolio approach

A/RA/RA/R

A/RA/RA/R

A/RA/RA/R

A/RA/RA/R

Receivables

Pool

Granular Portfolio

TRPP /

SecuritisationICRF/ Factoring

Approach:

Granularity:

ING Solutions:

Multiple debtors

• Line-by-line approach suited for smaller and multi-country portfolio

• Flexible structure from single receivable financing to a facility for multiple receivables

• Quick execution process

International Corporate Receivables Finance

• Strong balance sheet management tool

• Portfolio approach provides flexibility

• Multiple jurisdictions, originators and currencies can be brought together under one program

Trade ReceivablesPurchasing Program

Non-Granular Portfolio

Single invoice / multiple invoices

What is receivable -based finance?

Receivable-based finance benefits

Wholesale Banking

b3. Payables solutions


• W/C reduction and free cash flow increase

• Improve supplier relationship combined with better trade terms and conditions

• Reduced operational and payment costs

• Reconciliation tool and early dispute warning

• Automation of payments to key suppliers

• Unlocking W/C and free cash flow improvement

• For worse rated suppliers, attractive source of funding based on Buyer’s credit quality

• For stronger rated suppliers, SCF can still create value, due to improved liquidity, optimised balance sheet and reduction in credit risk

• Transparency regarding status of invoices and timing of payment

• Possible savings in credit insurance

Supply Chain Finance for the upper end of the spend base

• Supply Chain Finance (“SCF”) is a W/C optimisation tool which offers payment certainty, transparency and liquidity to suppliers

• In exchange for these benefits, Buyers are able to improve and modify commercial terms with its suppliers while increasing W/C performance

Benefits for Buyer Benefits for Supplier Schematic overview

2. Supplier sends goods/services and invoice

3. Buyer approves invoice and presents on platform

4. Supplier requests early payment

1. Buyer sends purchase order

5. ING pays invoice amount less discount

6. Buyer pays invoice amount to ING on due date

7. Third parties provide additional liquidity to the program

25

What is Supply Chain Finance?

2

3 4

56

1Invoice

Invoice

PO

7

Buyer Supplier

SCF portal

Funding parties


ING Purchase Control: optimise low-value non-strategic spend

• Purchase Control enables purchasing using virtual credit card numbers. It is based on proven technology/infrastructure

• Purchase Control enables an increase in Straight Through Processing of purchasing, reducing handling cost and enabling extension of payment terms for buyers while improving liquidity for suppliers

Purchase Control mechanism

0,5

2022

1

22 22

0,5

23

0,5

25

20

25

32 32

24

3635

39

0

5

10

15

20

25

30

35

40

Followers (80%) Leaders (top 20%)

% P

C u

se in

va

rio

us

spe

nd

ca

teg

ori

es

Comp hardw, softw & peripherals Printing, copying

Courier, shipping Media, marketing & advertising

Lease & rental Maintenance, repair & operations

Travel expenses Catering

Office supply & equipment

Other possible categories include payments for: subscriptions, seminars, janitorial supplies, telephone/mobile, temporary staff, advertising and promotional items

Purchase Control utilization1

Virtual Card benefits

1.Purchasing cards: Redefining identity in the evolving payments landscape. Aberdeen Group July 2013

What is Purchase Control?

• Cost reduction through less administration, reduced fraud risk, improved supplier negotiation position

• Improve payment terms for buyers, extention up to 90 days

• Control over corporate expenses and compliance

• Convenient and easy to implement

• International solution

Benefits for Buyer Benefits for Supplier

• Faster payments, improve liquidity

• Guaranteed funds

• Reduced collection activity

• Preferred supplier status

Issuing Bank

Buyer/ Importer Seller/ Exporter

BuyerExtend

DPODecrease

DSO

3

4

Suppliers1

Issuing Bank

Issuing Bank

9

8

6

Acquiring bank

2

PO

10

7 7

5

Data flow

Purchase Control™

Wholesale Banking

Annex I. Selected players’ description


Selected listed players’ description

28


Selected listed players’ description

29


Disclaimer

This presentation prepared by ING Bank N.V. (“ING”) is intended to provide information and to serve as a basis for discussion purposes only. While reasonable care has been taken to ensure that the information contained in this herein is fair and reasonable as at the date hereof, ING has not independently verified the information herein and accordingly makes no representation or warranty, express or implied, that the information contained herein is accurate, current, complete or correct. Any estimates in this presentation are provisional only and for indicative, preliminary and illustrative purposes only. This presentation does not constitute any valuation, appraisal or advice and there can be no guarantee that any projected results will be achieved. ING reserves the right, but does not have any obligation, to amend or change such projections or assumptions if ING deems it appropriate to do so. This presentation does not constitute an agreement or a commitment or an offer to commit to or a recommendation to enter into any transaction, or creates any obligations on the part of ING. This presentation and the information contained herein are confidential and may not be disclosed to any third party without the prior written consent of ING. ING does not accept any liability whatsoever for any loss however arising from any use of this document or its contents arising in connection herewith

30