GENERATING CAPITAL BY OPTIMIZING CASH FLOW

Transcription

1 GENERATING CAPITAL BY OPTIMIZING CASH FLOW August 2010 Aaron: Eric Giesecke: And with that, and without any further delay, let's go ahead and begin today's PNC Advisory Series Webinar. I am pleased to introduce our moderator for today, Mr. Eric Giesecke (ph), Marketing Manager with Corporate Banking. And, Eric, with that, I'll turn the floor over to you. Okay. Thanks, Aaron (ph). Good afternoon, everyone. Welcome to another PNC Advisory Series webinar. As Aaron mentioned, my name is Eric Giesecke. I manage the marketing function for Corporate Banking here at PNC. Before we get started today, I just wanted to briefly address the ads that you may have seen rotating on your screen as you were dialing in. As part of what we see as our ongoing commitment to helping our clients achieve, it's important for us and it's actually crucial for us to understand what you and your company needs to perform on all fronts, both the day-to-day issues and the strategic, kind of the broad, sweeping goals. And we strive to provide you with ideas, advice and solutions to do just that. So if you're not familiar with PNC or you're interested in our perspectives on the way we go to business or the way that our philosophy plays out around working with companies like yours, please visit pnc.com/meetpnc to learn more. And now on to our event. Today's focus is on "Generating Capital by Optimizing Cash Flow" and you'll see that the optimization that we're talking about is driven by a focus on working capital efficiency. Many of you have joined us for past webinars and for those who have not, I wanted to just quickly remind you that today's webinar is part of PNC's Advisory Series, which is a series of educational programs and events that are focused on delivering the ideas, advice and solutions to companies like yours across the country. After today's session, we'll send each of you an with more information on our past webinars, only some of which we've identified here, but all of which have been recorded and are available on our website at pnc.com/joinus. In addition, we wanted to let the folks on the phone here know about our upcoming webinars. On September 9th there's a manufacturing webinar focusing on "How to Drive Immediate Supply Chain Cost Savings." It's co-presented by PNC's Business Banking Division and Smart Business magazine. Also, on October 7th, we'll have an economic and investment outlook webinar presented by our Chief Economist, Stu Hoffman, and our Chief Investment Strategist, Bill Stone. 1

2 And, as always, you can register for these upcoming webinars through the URLs listed on your screen. We're building the rest of our calendar of webinars for the remainder of the year and, obviously, we continue to try to choose topics based on the input that we get from you. So at the end of today's session, please provide the feedback we need to keep focusing on the right content for you. Okay, so now on to today's topic. We have two industry specialists and banking experts with us today. Joe Rockey is Executive Vice President of Commercial Banking and Bill Booth is Executive Vice President of Treasury Management. And together, both Joe and Bill will discuss what we see as some important concepts that we feel are particularly relevant in today's economy. Today's presentation will focus on the current environment as it relates to what's on the minds of our business partners. We'll also talk about the importance of pursuing working capital efficiency, not only in this environment, but really every day and we'll touch on the idea of making this pursuit part of your organization's culture. Joe and Bill will outline five strategic focus areas for driving working capital efficiency and best practices in each area. And finally, they'll offer some perspective on what we see as a holistic approach and the benefits that it can offer. So Joe Rockey will be starting us off today. So now let me turn it over to the experts and they'll take us from here. And, again, thanks for joining us. Joe? Joe Rockey: their morale. You're focused on growth and margins and the aspects of business such as succession planning and efficiencies. But today what we really want to help you focus is capital management, capital liquidity and really the core of all that is working capital. So as you look at your business every day, we believe that one of the number one things you have to do on a daily basis is focus on improving the working capital that your business generates. 2

3 So with that, making sure that you have the cash to pay your employees, to support those strategies and futures that you have, to make sure you can deliver on those growth plans that are in front of you. And so, as we work our way through this, we really believe that the management of working capital and generating efficient working capital is one of the key success factors of businesses as they drive forward. So with that, what we focus on is really what we can control and as you look at an organization, the best organizations in the world focus on increasing their cash flow by generating internal capital. And by internal capital, what we mean is the ability to actually create more cash flow than what your net income was and as you drive to greater cash flow, you have the ability to invest that cash flow and actually accelerate your business' top-line revenue growth and thus, your bottom-line net income. And that can become a cycle of constant improvement. And today what we really want to make sure that you walk away from this conversation with is understanding that it is a cycle and it is an opportunity to continually reinforce and build that cash flow, which creates greater revenue for you, ultimately, and can lead to greater net income. Additionally, we want to point out that it's important to build a liquidity cushion inside your organization. If we, as a country, have learned anything over the course of the last 36 months, it's the importance of having a cushion inside of our financial position so that we can sustain the difficult times that we've just lived through -- and, hopefully, they are over -- but to sustain those difficult times that we're living through and making sure that if there is a tough month or a tough quarter we have the cash flow to work our way through and be able to come out the other side ready to grow. And one of the really important things is that our competition may not be doing this. So as we really focus on cash flow and as we drive cash flow efficiency, we actually separate ourselves from our competition, thus positioning us to grow faster than them and when the cycle changes and the economy changes, we will be better positioned as companies who have managed cash flow well and have optimized our cash flow, to actually capitalize while many of our competitors will still be struggling and working their way through the difficulties that are in front of them. So as business managers, what our challenge is, for you as all the folks that are managing your businesses and managing the cash flow, the challenge is to maximize your cash flow so that you can capitalize on it as you move forward. One thing I will point out is that no business has ever-- or every business that has ever gone bankrupt fundamentally starts with a liquidity crisis. And so you can see over the course of the last 24 months how businesses have really focused on growing cash inside their business to protect themselves against the difficult economic environment. You see on the screen in front of you a quote that-- from the Washington Post that acknowledges that American businesses, the Fortune 500, have an astonishing $1.8 trillion of cash on their balance sheets, thus positioning them for a dramatic investment when the time is right in each of their businesses to make that investment and to move forward. 3

4 At PNC, we surveyed 400 financial managers across our customer base and across the industries, as well. Many of you may have even been part of that. What we heard from those managers is, is that really inside a business today, people are still hunkered down. In many ways, the changes that have gone in over the course of the last 24 months of businesses looking at themselves have become the new norm of how people look at their business and how they think they need to manage their business as they go forward. And despite all the improvements and investments that have been made and the growth in cash, 95% of the folks that we surveyed responded that they still have the opportunity to improve in working capital management, which we think is a staggering number that demonstrates that there is further opportunity, even in the best companies, even in the companies who have put the most amount of time into working and focusing on working capital, they still believe they have an opportunity to improve their position as they move forward. And so what we want to do today is help you improve your position and think about how to improve your position. And what that will do is give you an opportunity to have the cash flow available to you when it's time for your organization to make that investment and to take the competition's customers. So how do you do that? How do you position your company in this environment to really move forward? And what we would suggest to you is that it's an ongoing focus of working capital efficiency. It is really, in many regards, a cultural change to focus on working capital and to challenge the aspects of your business that drive working capital. And Bill will talk further about specific areas to look at and specific ways and the best practices associated with it, but we really think that it is a differentiator for you as an organization if you make it a way of life. If you bring it to life every day in all aspects of your business. And if you focus on the ongoing working capital, it will lead to improved working capital and, of course, improved liquidity. And the results of that are going to be an improvement in your internal working capital and it'll give you a chance to seize the opportunities that are out there. Companies that have focused on improving working capital end up with lower costs. They have improved operating performance. They boost their competitive position and really position themselves for when capital is needed externally, they are actually in a better place to get that capital, be it from a loan or from an investment source. Because companies that have great working capital management actually can acquire capital, additional capital, more efficiently and effectively. So what does this all mean? There are five areas of working capital efficiency that we think every business should focus on. And they include improving your information reporting. You've got to know the details of working capital to actually be able to improve it. Focusing on the collection of receivables. 4

5 How you process payments and how you, as an organization, are sending money out of the organization. So first, receivables. How does the cash come in? And second, the payment process, how does cash go out? How you deploy the excess capital or excess cash that you have in your business. How do you maximize the return on that cash and how is it sitting inside your organization and being used? And then finally, the access to credit and, I would add to that, other capital. Because as you improve working capital efficiency, it creates greater opportunities for you to access capital and to access credit. Together, these five things need to be addressed in a very focused effort. So, how do you go about doing that? Well, it begins by making sure that you understand your current practices, that you've got a clear understanding of what is going on today in terms of the management of working capital. How are you today, as an organization, managing your receivables, managing your payables, how do you look at that information? Once you've got that, understanding and investigating the efficiencies and/or inefficiencies within the process and how and where are there opportunities for you to improve your cash flow by managing your processes in a way which can actually create more working capital for you. Of course, it makes sense to evaluate best practices and you will hear some of those when Bill speaks in a few minutes, some of the best practices that PNC has helped other organizations implement that make them more efficient in the management of working capital. As always, you want to weigh the cost/benefit of what you're going to implement to make sure that it's bringing back a true benefit to you as an organization and, of course, we recommend that you seek help, not just because of the fact that we're a bank and we can be one of the people who can help you, but because we believe that there are a lot of experts in the world and you can learn an awful lot from looking at other companies and learning what other companies are doing to constantly challenge yourself and constantly improve what you're working on. And, of course, making this into a continuous improvement loop is very important, because in doing so, what you do is constantly improve your working capital and thus giving yourself an opportunity to continuously drive for greater cash in your organization and then back again to a greater opportunity to invest that to accelerate revenue growth and, ultimately, profitability. I mentioned before that many companies believe that they still have an opportunity to improve working capital. In fact 95% in our survey came back and said, there's an opportunity for them to get more efficient. We would stress to you that this is not a one-time project, that it really needs to become part of your DNA, that it is a cultural mindset to actually incorporate into your organization a connection of working capital. 5

6 In fact, we would suggest that organizations that do this best have actually made the management of working capital and the measurement of working capital as important as the management and measurement of revenue and profitability and have tied those measures into performance management measures, certainly for the finance staff, but also for executive management and for the departments that have an influence on working capital, including operations and the receivables team, the sales team. They all can influence how working capital flows into your organization. And so by making it a critical measure that everybody has an eye on, it will ultimately get to quicker and better results. So we think coming with that is the need to make it very transparent so that everybody understands how working capital influences the company and ultimately how it can affect them personally, so thus tying it into performance measurement is very important. As you look at working capital, it's-- the measures, et cetera, are important from a perspective of getting yourself compared to best in class. If you know where you stand relative to the management of working capital, it will position you to look at your peers and look at other organizations to challenge whether they are doing it better. So with good metrics and measures you are in a position to look at the outside and see if maybe you are best in class or whether there's an opportunity for you to further improve and actually further drive to a greater cash flow position. Of course, it's important that -- clicking these slides, I'm sorry. It's important that as you look in the outside you challenge yourself by looking at peers and, of course, getting access to information from others across your industry and across the country who might be able to help you as you move forward. There's many organizations and places you can go such as CFO Magazine and, of course, we'd be hesitant to tell you that, of course, your banker can help you as you work your way through that and specifically PNC. So with that, what I'd like to do is turn it over to Bill, who's going to take you through some of the specific areas of improvement and opportunities within working capital. So, Bill? Bill Booth: 6

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15 Eric Giesecke: Thanks, Joe. We'll now move into the Q&A portion of today's event. We already have some great questions and so, time permitting, we'll try to respond all of them. We've got about seven or eight minutes here. Just as a reminder, you can use the Q&A panel in the upper middle of your screen to ask a question. So I will open up the questions here and I think the first one we'll direct to Joe. We have a question here, Joe, that centers around what do you believe needs to happen with the overall economic environment in order for companies that have built this liquidity cushion to actually be able to kind of apply it in their business optimization plan? So, you know, what needs to change or what do we need to see happen before companies can feel like they can fully deploy that excess cash they've generated? That is an exceptional question and I think the one item that is holding back business managers, business leaders like all of you on the phone from actually deploying the capital you have from actually accelerating your investment goes back to the very first slide that I talked about the things that are not in your control. I think there is an awful lot of uncertainty in the market today around things like healthcare, regulatory changes, things about international debt levels, even our domestic debt level, and what does it mean for GDP and, ultimately, our growth as a country and, ultimately, your growth as an individual company within the environment that we operate. So I would say that the biggest thing standing in the way of that $1.8 trillion that is in the top 500 companies and the trillions and trillions more that are in all of your 15

16 organizations and the rest of America's businesses is cleaning up the uncertainty and getting us to a place where we can see into the future in a way where we have confidence to make investments. And when we get that confidence, we'll start to deploy that cash. And when we start to deploy that cash, quite frankly, in my opinion, that's when the economy will start to roll. Okay. Thanks, Joe. Bill, I think this next question would be a good one for you to take on. The question is, with the escalating number of credit card payments that our customers are using do we -- I think we meaning as a company --- have any recourse to recover the costs associated with the fees that the credit card companies charge? That's a great question, as well. There are-- first of all, if you're concerned about the expense of the merchant interchange, that is the big cost, and that is how these rebates are facilitated. As an acceptor of a credit card payment, you want to make sure that if it's a B2B-type payment, that you are fully understanding the economics of the transaction and that you're-- you know, if you're going to accept a credit card payment make sure that you're getting something out of it, as well. In other words, if you agree to take a payment, then you should, understanding that there's a float advantage for the company making the payment, get your share. Get your share of that time and get paid a little bit sooner. And that'll begin to offset some of those costs. Also, in the industry there is active discussion and opportunities at very high dollar spend levels and that, you know, varies by industry and application but high dollar spend is eligible for, in some cases, negotiated with the card companies, lower merchant discount fees. So that's something you can certainly talk with your TMO about. As far as if-- you know, if you're representing a retail industry, you know, that is-- that's the question of the day and I think another component of some of the uncertainty and the regulatory environment around overall how discount fees are going to be managed in the card industry, going forward. And I can tell you, that's something that the banking industry is not sure about, but it's something that all of us are looking at very-- you know, very carefully. Thanks, Bill. We probably have time for, maybe, one more quick question and then we'll certainly follow up with all of you that have submitted other questions. We'll get the answers out to you. But maybe, Bill, if you want to stay on to tackle this one, the next question regards the fraud protection. The question is, what initiatives have been made to prevent vendors from using a company's card for their personal use? Well, we wouldn't talk with our clients about the deployment of a card into an accounts payable type of an environment if there weren't some really iron-clad security measures in place to make sure those payments are safe. 16

17 When we talk about using a card in a very strategic sense that we talked about earlier, that is probably one of the more secure payments that you can make. Oftentimes, that card number is embedded in the platform that's making the payment. So the actual card number is probably not even shared with the vendor. So that's a very important consideration. There are many other, I would say, security-oriented features in place around the way we deploy these card programs and there's also a lot of liability coverage that's extended as part of the traditional purchasing card program or a-- you know more of a B2B environment program that provides sort of an extra level of insurance, if you will, around fraudulent transactions. But beyond that, just the reporting around these processes is very robust. For example, when a card is embedded into a payment, be it a purchasing card for, you know, traditional small dollars or in the kind of A/P environment that we're starting to see more and more frequently, the controls are such that the payment that you're authorizing through that process is only available on that card for a one-time deal. So, in other words, if somebody-- if you're making a payment and it's a $35,000 piece of technology, when that payment is authorized, we juice the card for $35,000 and once it's hit by the vendor, the card reverts back to a zero. So there is very little fraud implications in the kind of programs that we're talking about today. Thanks, Bill. And we're just about out of time for today. But I wanted to thank our panelists for a great presentation this afternoon and especially I'd like to thank our attendees and the folks that have joined us for the webinar. Just a few reminders -- a PDF of today's presentation, as well as the CTP certification credit will be available for you to download now from the handouts window in the upper right corner of your screen. It's left of the feedback drop down. So you'll see a little icon with several documents there. That's the handouts icon if you want to access that. Now, also, you'll see a link to a short survey on your screen, as well. Again, your feedback is very important to us. We greatly appreciate your thoughts. This concludes our presentation today and thank you very much for joining us. The materials or video that you are going to view were prepared for general information purposes only and are not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction, including with respect to any securities of PNC, and do not purport to be comprehensive. Under no circumstances should any information contained in those materials or video be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any opinions expressed in those materials or videos are subject to change without notice. Investment banking and capital markets activities are conducted by PNC through its subsidiaries PNC Bank, National Association, PNC Capital Markets LLC, Red Capital Markets, Inc., and Harris Williams LLC. Services such as public finance advisory services, securities underwriting, and securities sales and trading are provided by PNC Capital Markets LLC and Red Capital Markets, Inc. Merger and acquisition advisory and related services are provided by Harris Williams LLC. PNC Capital Markets LLC, Red Capital Markets, Inc., and Harris Williams LLC are registered broker-dealers and members of FINRA and SIPC. Harris Williams & Co. is the trade name under which Harris Williams LLC conducts its business The PNC Financial Services Group, Inc. All rights reserved. 17

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