Published: November 01, 2012
Working capital optimisation is an objective for corporations globally, but this may require quite different approaches in each case. For example, for many companies, optimising collections by linking payment terms to counterparty risk, and implementing more efficient collections processes is a priority. For companies such as Bombardier Transportation, which has a highly rated customer base with a strong payments record, treasury has had to find alternative working capital solutions, as Andre Bloemen, Head of Structured Finance and Treasury at Bombardier Transportation explains.
Bombardier’s Aerospace and Transportation functions have separate treasury centres: Aerospace is managed in Montreal, while we manage the Transportation treasury in Zurich. With the exception of placing deposits and loans and the actual trading of currencies and derivatives, which is handled in Montreal at the group’s head office, all other activities for Transportation, including advisory to divisional and project management and back-office processing, take place in Zurich.
The Transportation division alone has 62 production and engineering sites in 25 countries and more than 40 service centres at customer locations, so managing FX risks is a key treasury priority. In addition, however, working capital has become increasingly important, particularly as customers are pushing for extended payment terms. For example, although most customers are national railways that have very low cost of funds, the governments that fund them aim to delay major expenditure, even though the final cost may be higher if suppliers need to include the cost of extended payment terms into the contracts.
Declining days sales outstanding (DSO) has a major impact on our business, so we needed to find new ways to manage working capital without affecting our core ratios. The way we approached this was different from some other industries, in that our customers are highly rated and have a very strong payment record. Therefore optimising collections would not be beneficial for us. Instead, we engaged with our banks that were able to offer alternative financing solutions and share experiences and best practices from other customers.
Treasury co-operates with the Structured Finance team on this. This group typically creates financing schemes for customers, but the team had valuable expertise it could share. For example, we have been proactive in reviewing and implementing financing solutions such as factoring. We also consulted our Aerospace treasury to identify opportunities to cross-fertilise ideas, although their business model tends to differ from that of Transportation.
As a consequence of this evaluation, we implemented a variety of factoring schemes, leveraging the strong credit rating of our customer base, together with a variety of derivatives. We have therefore been able to sell receivables at a good price and without incurring debt on the balance sheet. We invited a variety of banks to quote for this business. As a company that retains a strong family interest, we are a highly relationship-oriented business that values long-term partnerships. We were therefore pleased to appoint SEB as one of our partner banks for our factoring solutions, with which we already had a relationship in both structured finance and treasury, based on the quality of the relationship, breadth of solutions and commitment to customer service.
Implementing a complex factoring programme brings some challenges, not least due to need for close co-operation between multiple stakeholders, including different business units, shared service centres and treasury. Each of these has diverse day-to-day responsibilities and objectives, and in a global business may also bring together different language and cultures. However, this collaboration proved very successful as we were able to establish common goals and expectations, and a commitment to efficient internal processes to facilitate efficient factoring, such as ensuring that the correct invoices were presented to the banks.
As a result of implementing our factoring schemes, we have been successful in reducing working capital on the balance sheet. We have also been able to extend into new financing solutions. For example, and except in some cases during the build phase, we aim not to carry large amounts of inventory within Bombardier Transportation, as we order parts and components according to individual customer specifications,. However, our customers require inventories of spare parts, so we have worked with SEB and other relationship banks to offer additional value to our customers by taking over the financing, holding and management of these inventories. We then implement sophisticated monitoring systems to optimise our customers’ operations whilst minimising the number of stock parts required.[[[PAGE]]]
Working with SEB to implement efficient financing programmes has proved very successful, building on our long-term relationship. We have found that SEB is large enough to provide the comprehensive portfolio of solutions and services that we require, whilst being small enough to respond quickly and adopt a pragmatic approach to addressing business challenges. Like any large multinational corporation, we work with a panel of banks, but we have been pleased to be able to expand the business that we offer to SEB as a result of our successful on-going relationship.
Bombardier is the world’s only manufacturer of both planes and trains through Bombardier Aerospace and Bombardier Transportation. Our impressive product offering includes high speed and intercity trains, metros and light rail transit systems, business jets and commercial aircraft. The company is present in more than 60 countries, with 76 production and engineering sites and 70,000 employees.
Bombardier is headquartered in Montreal, Canada. Our shares are traded on the Toronto Stock Exchange (BBD), and we are listed on the Dow Jones Sustainability World and North America indexes. In the fiscal year ended December 31, 2011, we posted revenues of USD18.3bn.
A company such as Bombardier is a large manufacturer, and therefore shares the challenges of rising input and energy costs and large capital requirements with other manufacturers of equipment for all industries. As Bombardier produces large-scale transport equipment, namely aircraft and trains, its fortunes are affected by government spending on public transport, demand for air travel and courier services, and changing consumer transport requirements. In this Industry Insight, Julian Roberts, PwC shares his expertise on one aspect of the transport industry, namely logistics, which in itself is vulnerable to shifts in a range of other industries.
The global logistics industry has yet to climb back to the levels of profitability seen during 2007. A declining manufacturing base, the EU financial crisis and slowing economic growth in China have all impacted on the sector’s performance and propensity for on-going recovery.
In recent years we have seen on-going consolidation in the logistics sector, most recently highlighted by UPS’ proposed buyout of TNT Express. This has given rise to globally integrated networks leveraging significant buying power, sophisticated technology platforms and an opportunity to reduce the cost base.
As the provision of logistics services has been largely commoditised, customer loyalty has waned and the cost of switching supplier reduced. This has put significant pressure on pricing and the need to invest in the infrastructure required to deliver global solutions, and at the same time enhance the overall customer experience.
Whilst the sector will generally hedge against increases in diesel costs and have a contractual ability to pass through any necessary additional costs, there is on-going pressure from the extended supply chain (most notably the retailers) to keep input costs to a minimum and absorb as much as possible.
Based on the results of PwC’s 2012 working capital benchmarking study (covering seven of the largest logistics providers), it appears that performance has remained consistent over the past three years with working capital at 4% of sales. If the poorer performers were to achieve 1st quartile levels they would generate an average of €190m each.
From our work in the logistics sector we have summarised below the key drivers impacting working capital:
NOTES
This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, ‘PwC’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
