Growth by Addressing Working Capital Opportunities

John Ahearn | Murat Demirel | Steve RobsonApril 4, 2019

Working Capital Progress Varies by Industry

Working capital change

2013-2017 expressed in days

Source: Navigating uncertainty: PwC’s annual Working Capital Study 2018/19

11 out of 17 sectors

have improved their

working capital (WC)

performance since 2016

However, many sectors

are still leaning on their

suppliers to improve

their working capital

and a significant gap

between best and worst

performers remains.

TRADE WARS

(US and CHINA)

causing inefficiencies

across supply chains

Working Capital Management Remains Critical to All

Current global dynamics are in flux…

a strong Working Capital Management strategy can act as a controlled insulator to help

guard against the impact of market uncertainties.

PROTECTIONISM and

REGULATION

highlighting need for risk

mitigation tools

INTERNAL METRIC

GOALS

driving business strategy

and goals

Which of these 3 factors is most concerning to your business right now?:

a) Impact of ongoing Trade Wars

b) Modification of existing Trade Agreements and International policy

c) Pressure to meet internal business metrics targets

d) Other _____________

Poll Question

Under the trade dispute, US exports to China alone have

plummeted by 22 million tonnes, or

over 90 percent forcing a new

divergent stream of flows from other

markets (Brazil) to China.

SOYBEANS

The US-China trade dispute led to zero

crude oil imports from the US in

August and November, clients redirect shipments

thus creating several stops in the supply

route.

OIL

When in March 2018 the US administration announced duties of

25% against all steel imports, the market found a way to self-

adjust with an increase of US steel

prices.

STEEL

Trade Wars Creating Supply Chain Inefficiencies

IMPACT:

• Shift in trading patterns and flows

• New trading partners leading to new FX

and regulatory implications

• Need to offset of capacity results in

increase/decrease in sales and

purchasing

IMPACT:

• Additional stops in the supply route

• Longer delivery times

• Higher delivery costs and/or storage costs

IMPACT:

• Creation of inflationary cycle driving up the

costs of manufactured goods.

• Higher financing costs, value of Letters of

Credit drawn to support steel imports are

higher

Lack of Certainty Drives Need for Risk Mitigation

Sudden changes in tariff barriers, trade rules and the economic outlook have the

potential to disrupt supply chains, considerably increase costs and significantly

heighten risks for corporates.

• Regulatory changes and changes in Trade Agreements

Companies need to review sourcing locations, how they move physical goods, and

manufacturing locations

• Tax Treatments

Changes in Import/Export tax treatments can drive up costs of goods and raw

materials

Changes in Corporate tax treatments can impact corporate footprint

• Foreign Exchange

Impact of increase FX volatility could impact payment terms and cost of goods

RIS

KS

!

Working Capital Helps Drive Returns and Cash Flow

1. Enhancing Return on Capital • Reducing the amount of capital tied in the

cash conversion cycle can shrink the capital

base – improving ROIC

2. Improving Free Cash Flow • Working Capital improvements impact

OCF…the foundation of a company’s Free

Cash Flow and ability to invest, grow and

distribute without reliance on external

markets

A 1% Improvement in

Working Capital (as a % of Revenues)

+ 6% of OCF + 19% of FCF

For the median company in the S&P 500, Working Capital

accounts for 14% of Total Capital

Improvements in working capital efficiency can be material to

a company’s cash flow and return on capital goals

The priorities expressed by corporate leaders today: enhancing returns and improving cash flows are inter-connected – working capital improvements are a way to impact both goals. Companies who have deployed WC strategies have been shown to

also improve their valuation.

Trade has traditionally focused on Working Capital Solutions that target DSO and DPO.

The Inventory market to date has lacked attractive financing alternatives.

This market offers growth and profit opportunities for Citi clients:

– Allows clients to improve their cash conversion cycle by reducing days inventory outstanding (DIO)

– It decreases immediate and longer term liquidity needs by increasing cash flow from operations

Inventory Finance: the Next Link in the Chain

CCC BUSINESS METRICS

DSO

51.8 daysCiti Sales Finance

DPO

67.7 daysCiti Supplier Finance

Dynamic Discounting

Citi Commercial Cards

DIO

58.2 daysCiti Inventory Finance

Metrics Global Averages Source: Navigating uncertainty: PwC’s annual Working Capital Study 2018/19

Advances to Support Working Capital Optimization

A recent review of Citi client metrics highlights that while improvements in the Cash Conversion Cycle (CCC) have been made over the past 5 years, there is still an opportunity for improvement. New and technically advanced solutions

are becoming essential to continued success.

USE OF

TO SUPPORT WORKING CAPITAL OPTIMIZATION

Technology + Platforms

Technology Impacting Working Capital Management

Via digitization, automation, and the use of technology banks like Citi are

driving cost and processing efficiency and improvements in client experience.

• Digitizing the core of Trade by converting paper based processing to an automated digitized process

• Results in: faster transaction processing and reduced manual errors and enhanced compliance AML reviews

OCR

• Partnership with EY and SAS creates AI engine to streamline compliance reviews

• Results in: less false escalations, more detailed reviews and associated metrics, and reduced review times

AI

• Using data as a strategic differentiator through analysis engine tools Treasury Insights and Data Analytics

• Results in: faster and more insightful decision making and strategic alignment Data

When considering the benefits of new solutions, __(select from below)__ is most important

to my organization:

a) Ensuring financial stability of my supply chain

b) Receiving cash faster

c) Fraud mitigation and management

d) Other _______________________

Poll Question

A 7 bank consortium designed this trusted trade

information registry which allows banks to extend

financing to corporates much deeper into the supply

chain (pre invoice acceptance)

The Network allows data sourced directly from

Buyers to create a verified information base from

which Sellers can request PO or Invoice financing

helping to stabilizes supply chains and reduce

fraud risk though a network effect

New Industry Approaches

Trade providers have come together to deliver bank-agnostic industry solutions aimed at addressing clients concerns and challenges and creating a new type

of ecosystem for global commerce.

Availability of

Financing

Fraud Mitigation

Streamlined

Processing

Blockchain based solution with 15 founding

shareholders consisting of banks, an inspection

company and energy traders – critical mass from the

start

By digitizing contracts, LCs, invoices and other

paperwork and putting them on blockchain, Komgo

is expected to lead to faster, cheaper and more

secure ways completing a trade transaction

How aware are you of Card solutions for Supplier Payments?

a) Not aware, managed elsewhere

b) Some awareness

c) Very aware

Commercial Cards Poll Question

Why Consider Card Payments?

WORKING CAPITAL

%

Optimize

Working

Capital

PAYMENT EFFICIENCY

Optimize P2P

Process

Why Consider Card Payments? Working Capital

WORKING CAPITAL

%

Optimize

Working

Capital

Day 1 Day 30 Day 55

Buyer pays using Card Card Statement Generated Buyer Pays Citi

Buyers take on average up to 40 days of free working capital on every payment cycle.

Supplier Payment confirmed

B2B Card Solutions – Working Capital

DSO

30

DPO

30

DSO

30

DPO

70

DSO

15

DPO

55

Flexibility to maximise revenue from regular supplier payments whilst offering early payment to suppliers.

Buyer

Why Consider Card Payments? Efficiency

EFFICIENCY

Optimize P2P

Process

Cost of Purchase

US$64

Standard P2P Process

Why Consider Card Payments? Efficiency

EFFICIENCY

Optimize P2P

Process

Standard P2P Process

Cost of Purchase

US$20

Catalogue Suppliers – Case Study

About the Company

Pharmaceutical Company

Objective

Have an efficient P2P process for suppliers

with large number of purchases

Avoid processing large volume of invoices at

Accounts Payable

Context

E-catalogue (Jaggaer) rolled out for purchases with

select high-frequency vendors

ERP

e-Proc System Supplier

Citi Data Repository

Employee

1. Employee

raises a PO

5. Citi feeds data to ERP along with PO

number/LID for each card txn

6. ERP receives PO

data from e-proc

system

The Solution

Suppliers: 7 catalogue suppliers on-boarded

Invoices: 6700+ invoices over a period of one year

removed from Accounts Payable from just these 7

suppliers

The Outcome

2. Order details

transmitted

3. Supplier

charges card on

file

Trend: VCA - A Payment Solution On Card Rails

No physical card

Tokenised + payment controls

Strong data and reconciliation

API connectivity

Travel industry first adopters but

widening

What’s new? Integrating to the Payment Ecosystem

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