Beyond EBITDA: The Importance of Liquidity · Hyperion Strategic FinanceHyperion Strategic Finance...

Beyond EBITDA: Beyond EBITDA: The Importance of LiquidityThe Importance of Liquidity

Bruce C. LynnBruce C. LynnManaging PartnerManaging Partner

Richard L. SchmittRichard L. SchmittDirectorDirector

December 15, 2009

12/15/0912/15/09 ©© The Financial Executives Consulting Group LLCThe Financial Executives Consulting Group LLC 11

AgendaAgenda

TodayToday’’s Business Environments Business EnvironmentBank Credit Market Bank Credit Market A Recipe for Business SuccessA Recipe for Business SuccessTreasuryTreasury’’s Traditional roles Traditional roleThe Modern TreasuryThe Modern TreasuryManaging the Modern TreasuryManaging the Modern TreasuryPlanning for the FuturePlanning for the Future


TodayToday’’s Business Environments Business Environment

Risk Liquidity

Profitability

The “perfect” businessAll factors are known

Competitor’s actions are predictableAll decisions are rational


TodayToday’’s Business Environments Business EnvironmentTodayToday’’s Business environment is not s Business environment is not perfect perfect –– markets/ customers are cautiousmarkets/ customers are cautiousSales & profit outlookSales & profit outlook•• 2009 2009 -- not so good for many industriesnot so good for many industries•• 2010 2010 -- not looking much better??not looking much better??

Liquidity has become as important as Liquidity has become as important as profitability. Why?profitability. Why?•• Can no longer Can no longer ““buybuy”” liquidity: What credit is liquidity: What credit is

available has tighter terms / higher pricesavailable has tighter terms / higher prices•• Bank capacity (appetite?) to refinance old Bank capacity (appetite?) to refinance old

loans AND issue new ones is suspectloans AND issue new ones is suspect•• ““Extend and PretendExtend and Pretend”” is not a strategyis not a strategy


Bank Credit MarketBank Credit Market

Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices – Oct09

“Tightening Standards” implies• More restrictive covenants • Lower loan limits• Shorter maturities

• Higher loan spreads• More collateral

Most banks tightened credit in April;

remaining banks now tightening credit



- 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



Maturing of Bank Debt at 9/30/09Source: (Loan Pricing Corporation)

325 345 410

80

75 115180

175232

220300

385

285195

30

200

400

600

800

1,000

1,200

2010 2011 2012 2013 2014

Mat

urin

g Vo

lum

e ($

Bn)

I grade leveraged other

Almost $1Trn will be seeking refinancing in

2012

Last one to refinance maybe shut out?Last one to refinance maybe shut out?



Yr 2010 = 600MMYr 2011 = 780MMYr 2012 = 985MM

Refinancing by quarter Refinancing by quarter


Bank Credit MarketBank Credit MarketWhen will credit standards by banks return to When will credit standards by banks return to ““normalnormal””? ? (Fed: July 09)(Fed: July 09)•• Investment Grade CompaniesInvestment Grade Companies

11% in 111% in 1stst half 2010half 201036% in 236% in 2ndnd half 2010half 201020% credit standards to remain high (i.e. after 2010)20% credit standards to remain high (i.e. after 2010)

•• Non Investment GradeNon Investment Grade29% in 229% in 2ndnd half 2010half 201031% in 201131% in 201123% credit standards to remain high (i.e. after 2011) 23% credit standards to remain high (i.e. after 2011)

ConclusionConclusion•• For investment grade For investment grade –– look to bond markets?look to bond markets?•• Non investment grade companies Non investment grade companies -- wait longerwait longer•• Operating cash flows to become a more important Operating cash flows to become a more important

source of liquidity (make it, donsource of liquidity (make it, don’’t buy it) t buy it)


A Recipe for Business SuccessA Recipe for Business SuccessOptimize revenues & Optimize revenues & expenses then generate expenses then generate profits!profits!WhenWhen will profits occur?will profits occur?What happens if wrong?What happens if wrong?•• Capex neededCapex needed

upfront regardlessupfront regardless•• Earnings and assets Earnings and assets

““shrinkshrink”” but liabilitiesbut liabilitiesnever do (due?)never do (due?)

How would you know? How would you know? (metrics needed)(metrics needed)What about theWhat about the““marketsmarkets””? Competitors?? Competitors?

Customers

Products

Business Units

Profits


A Recipe for SuccessA Recipe for SuccessPrimary metric for success = EBITDAPrimary metric for success = EBITDAEBITDA assumes :EBITDA assumes :•• Capital is free (no interest, no dividends)Capital is free (no interest, no dividends)•• No need for upfront cash (capex? R&D?)No need for upfront cash (capex? R&D?)•• No change in FX markets (no FX gains /losses)No change in FX markets (no FX gains /losses)•• After tax income the same around the worldAfter tax income the same around the worldMust go beyond EBITDA in today's Must go beyond EBITDA in today's environment. Need for:environment. Need for:•• Total, global cash visibility (the cash flow Total, global cash visibility (the cash flow

statement)statement)•• Liquidity metrics to supplement EBIDTA (keep Liquidity metrics to supplement EBIDTA (keep

it it ““honesthonest””))•• Changes in TreasuryChanges in Treasury’’s role (less processing, s role (less processing,

more planning)more planning)


RiskMgt

(Mkt, Credit, Ops)

Cash Accounting(focus on creating, posting, reconciling transactions)

DebtInvestment

Cash Management(focus on balances)

The Traditional TreasuryThe Traditional Treasury• Focused on Processing

• Resources devoted to repetitive tasks

Basic

Advanced

Cash


The Traditional TreasuryThe Traditional Treasury (2)(2)

Bottom lineBottom line•• Treasury viewed as aTreasury viewed as a

Processing unit (not a strategic one)Processing unit (not a strategic one)Control or costControl or cost--center (value difficult to quantify)center (value difficult to quantify)

•• Limited planning responsibilitiesLimited planning responsibilities•• Problems are solved rather than preventedProblems are solved rather than prevented•• Highly dependent on spreadsheets / emailsHighly dependent on spreadsheets / emails

Treasury systems not priority for corporate IT Treasury systems not priority for corporate IT No integrated views of global cash flowsNo integrated views of global cash flows

•• Low staff levels Low staff levels -- ““outgunnedoutgunned”” by Controllers or by Controllers or other financial or operating unitsother financial or operating units


The Modern TreasuryThe Modern TreasuryTreasury to be a strategic planning unit that can add Treasury to be a strategic planning unit that can add significant value to the corporation once:significant value to the corporation once:•• Routine cash/banking transactions have been automatedRoutine cash/banking transactions have been automated

•• Workload has been shifted to strategic analysis/decision Workload has been shifted to strategic analysis/decision making, replacing transaction processingmaking, replacing transaction processing

Treasury generates value by becoming proTreasury generates value by becoming pro--active active and visible in the companyand visible in the company•• Adopt a global approach to funding/banking/FXAdopt a global approach to funding/banking/FX

Focus on forecasting and future eventsFocus on forecasting and future events

Becomes a focal point for risk management expertiseBecomes a focal point for risk management expertise

•• Control risk through policies that set limitsControl risk through policies that set limits•• Serve as a problem solving resource for business unitsServe as a problem solving resource for business units•• Forge strong links between operational and financial cash Forge strong links between operational and financial cash

flows (increases treasury staff career choices)flows (increases treasury staff career choices)


Modern TreasuryModern Treasury (2)(2)

Cash Management

Risk Management

Debt Management

Investment Management

FinancialMarkets

&Institutions

Company&

OperatingUnits

• Policies Highly Visible

• Interactive Communications• Plan, Actual & Forecast in Sync

• Functions & Systems integrated

• Performance Metrics in Place toDemonstrate Value


ActualData

(by bank)

Invest. Bal. & Transactions

+Debt

+Bank

Transactions+

BankBalances

+Mkt Rates

CollectPrev. + Curr.

Day Transactions

BalancesRates

Etc

CAPEXOperating

Forecasted Receipts

Sum Data

actual + forecasted cash flows

CashPosition

Decisionto

Borrow

Decision to

Invest

By Organization by period

FX Exposures(Non functional currencies)

Issue Hedge +Transfer

InstructionsTo

3rd Parties

Reviewexposures?

CAPEXOperating

Forecasted Disbursements

By Organization by period

FX Exposures(Non functional currencies)

Negative?

Positive ?

GetConfirms,

Create reports(Treas. Cash)

Send Accounting

entries to G/L(Book Cash)

No ?

Price &Buy

Buy?

Sell?

Price &Sell

Planning for the future by mapping the present

Front Office

Middle Office Back Office


Planning for the future Planning for the future (2)(2)NewNew System RelationshipsSystem Relationships

Treasury Workstation

(TWS)

Annual Plan & Rates

(Balances)(Transactions)

Forecasted Cash Flows / Rates :

(Operating) + (Financial)

FinancialInstitutions(Non AP EFTs)

Pmts Out

AP Pmts Out

Mgt Reports / Graphs / Trends

Actual vs PlanActual vs Forecast

Forecast vs Forecast

Mgt In

fo

General Ledger(Accounting Data)(Regulatory Rpts)

Acc

tng

Info

Data In Processing Processing Information Out

Investment Portal(Position, asset class, etc) In

v. Data

Bank FTP Site(Balances)

(transactions)Bank FTP Site

(Balances)(transactions)

Bank FTP Site(balances)

(transactions)

Bank

Data

FX System3rd Party

(buy / sell /confirm)

FX


Planning for the future (3)Planning for the future (3)

Front Office AutomationFront Office Automation•• Collect global balances & transactionsCollect global balances & transactions•• Create global, cash positionCreate global, cash position

Middle Office (Decision Making)Middle Office (Decision Making)•• Investment / borrowing target settingInvestment / borrowing target setting•• Consolidate cash forecastsConsolidate cash forecasts

Back Office Accounting & ReportingBack Office Accounting & Reporting•• Cash reconciliationCash reconciliation•• Plan / actual trends & reportsPlan / actual trends & reports


Planning for the Future (4)Planning for the Future (4)Use metrics to measure actual vs. forecast Use metrics to measure actual vs. forecast Metric examples:Metric examples:•• Free Cash Flow (op cash flow Free Cash Flow (op cash flow –– CAPEX)CAPEX)•• Exposure to market + % hedgedExposure to market + % hedged

Non functional currency assets / liabilitiesNon functional currency assets / liabilitiesVariable vs. fixed rate debtVariable vs. fixed rate debt

•• Cost of liquidityCost of liquidityAll in cost of debtAll in cost of debtNet interest spread (%) = cost of debt Net interest spread (%) = cost of debt –– inv. return earnedinv. return earned

•• Liquidity available within X days (COH + S/T inv. + Liquidity available within X days (COH + S/T inv. + available credit)available credit)

As a total amountAs a total amountAs % of liabilities due in X days. Compare to targetAs % of liabilities due in X days. Compare to target

•• Leverage ratios (not GAAP Leverage ratios (not GAAP –– use credit agreement use credit agreement terms)terms)

•• Bank relationships Bank relationships –– Total paid to bank Total paid to bank ““xx””? All banks?? All banks?


Planning for the Future (5)Planning for the Future (5)Demonstration Demonstration -- how to integrate how to integrate profitability, liquidity & riskprofitability, liquidity & risk•• Profits: metric = EBITDA (P & L)Profits: metric = EBITDA (P & L)•• Liquidity: metric = Free cash flow (operating Liquidity: metric = Free cash flow (operating

cash cash –– CAPEX)CAPEX)•• Risk: leverage metricsRisk: leverage metrics

Debt / EquityDebt / EquityVariable debt as % of totalVariable debt as % of totalFree cash flow as % of total debtFree cash flow as % of total debt

When planning: what is more important?When planning: what is more important?Being absolutely right?Being absolutely right?Being about right (i.e. within agreed to tolerances)Being about right (i.e. within agreed to tolerances)

Modeling the futureModeling the future•• Base caseBase case•• Likely scenariosLikely scenarios

1

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 ”

2

Aligning strategy with execution

CorporateDevelopment

Long-Term Planning

Value Management

TreasuryStrategies

Seed Budgets with Strategic Targets

Update Strategic Plans

with Latest Forecasts

Periodic Forecasts

AnnualBudget

CapitalPlanning

WorkforcePlanning

Planning, Budgeting and Forecasting

Strategic Planning

Operational Planning

Strategic Planning

3

Translating this alignment to technology

Operational Planning toolsOperational Planning toolsOperational Planning tools

Hyperion Strategic FinanceHyperion Strategic FinanceHyperion Strategic Finance

CFOCFO

TreasuryTreasury

StrategicPlanning

StrategicPlanning

M&AM&A

InvestorRelations

InvestorRelations

Consolidation toolsConsolidation toolsConsolidation tools

4

Cash flow focus is the key

Key Metrics

• Earnings• Debt/Equity• Interest Coverage

Valuation

• Free Cash Flows• Cost of Capital• Net Present Value

Income Statement

• Revenues• COGS• OPEX• Net Income

Balance Sheet

• CAPEX• Working Capital• Equity• Debt

Cash Flow

• Operating• Investing• Financing

Fully Integrated FinancialsFinancing

• Term Debt• Revolving Debt• Common Stock• Preferred Stock

Business Specific Drivers

• Market Growth %• Days Sales• Inventory Turns

Historicals

• Income Statement• Balance Sheet• Cash Flow

Ratings

• Credit Ratings• Bank Covenants

Operational Plan

• Revenue and Expense

• Investment limits• Working capital levels• Key Assumptions

5

A comprehensive platform for a range of strategic analyses

HSF

6

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

Demo Focus

7

Rich SchmittRich Schmitt 847.226.0934847.226.0934rschmitt@[email protected]

mailto:[email protected]

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

Other sample reports – Valuation Summary

Other sample reports – EPS comparison

Other sample reports – Simulated Bond Rating


Q & AQ & A

FECG Contact InformationFECG Contact Information•• www.thefecg.comwww.thefecg.com•• Bruce LynnBruce Lynn

Phone: 203Phone: 203--655655--48064806Email: Email: [email protected]@thefecg.com

BlueStone International LLCBlueStone International LLC•• www.bluestoneinternational.comwww.bluestoneinternational.com•• Richard L. SchmittRichard L. Schmitt

Phone: 866 Phone: 866 --224224--2841 x1272841 [email protected]@bluestoneinternational.com

Beyond EBITDA: The Importance of Liquidity · Hyperion Strategic FinanceHyperion Strategic Finance...

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