The pandemic recovery is under way, but companies face powerful headwinds. Treasury teams in the UK and US cite Brexit, rising costs and cash management as key priorities.
Ever since Brexit ended 50 years of frictionless trade between the EU and UK, alongside ushering in new custom rules on shipments from mainland UK to Northern Ireland, UK business spanning shellfish to fashion have been scrambling to adjust. Simple rules guiding access to a market which accounted for 43% of exports and more than half of imports in 2019 have morphed into a bureaucratic nightmare under the post-Brexit EU-UK Trade and Cooperation Agreement (TCA). Further afield, the US earnings season is highlighting corporate concerns of rising costs, most visible in soaring commodity prices. Against the backdrop of ongoing supply-chain shocks, businesses face a myriad of challenges scaling up production to meet new demand. It is a difficult time for treasury, where key strategies remain cash management, nurturing growth and scenario planning.
Brexit and Northern Ireland
For Shipley-based aerospace manufacturer Produmax, Brexit fallout remains an enduring headache, none more so than grappling with the new duties and costly customs paperwork now needed for its exports to Northern Ireland. Although the bulk of the SME’s flight control components go to markets outside Europe, 20% go to Northern Ireland, home to customers like the former Bombardier factory now owned by the US’s Spirit AeroSystems.
“Having a border within a country is nuts,” laments Produmax’s Owner and Financial Director Mandy Ridyard. “My customers pay to pick the goods up from me, but ultimately, whether I pay or the customer pays, there is a charge that makes the costs of my goods more expensive. Currently, we are in a position whereby goods shipped within our own country have become more expensive because of Brexit.”
She estimates it will cost the salary of half an employee annually to fill in the required paperwork. And although Produmax’s worldwide trade means the team are well versed in the complexity of export form filling, she says the SME would have benefited from having a unique point of contact at HMRC like large corporates have. “Even though the government has put in lots of help, there is nothing like a relationship. We have spent a long time sitting on helplines and talking to someone generic,” she says.
Witness how processing relief became a minefield thanks to unknowns around whether sales to Northern Ireland counted as an export. “One of the things we couldn’t get to grips with was if we could use our inward processing relief for what we ship to Northern Ireland – we didn’t know if we were transferring the duty. The rules on Northern Ireland were written at the last minute and it was complicated.” Fortunately, she has been able to draw on key support from her customers – something she links particularly to the close-knit aerospace sector. “In aerospace, you typically have lots of small companies supplying one big customer; our customers are close to what is going on.” She also valued the expertise of the sector’s trade body. “You need to make sure as a business you are invested in your trade body and that you have good relationships with your customers.”
Although Brexit hasn’t resulted in any delays in essential flows and components into the factory from EU suppliers, it remains to be seen if this is due to reduced trade flows because of the pandemic. “When you don’t have customers screaming for parts it doesn’t matter so much – there is more time to get things through.” Moreover, the UK hasn’t introduced import checks for goods from the EU yet, raising fears of even more bureaucratic problems when that happens next January.
Cash is king at Kodak
The UK’s departure from the EU and ensuing bureaucratic quagmire may not be on the radar to the same extent for US manufacturers, but other treasury challenges are just as real. None more so than cash management, says Matthew Ebersold, Treasurer at US photography pioneer Kodak, who explains in an interview from the company’s Rochester, New York headquarters that identifying and driving efficiencies in cash management remains his overriding concern.
Kodak, which lacks a positive operating cash flow, had to make tough decisions to reduce its cash use through the height of the pandemic – a spend which still hit US$34m in 2020. “Through a combination of vendor payment changes, general spending limitations, employee furloughs and pay reductions, Kodak mitigated the reduction in sales,” says Ebersold. Although tough choices are “never easy,” he is resolute this early action ensured the company’s ability to shore up its cash position. “We were able to avoid any liquidity concerns through these actions and also stabilised the cash used in, and provided by, our core businesses during 2020 including US$25m in a liability clean-up and US$12m investment in our growth areas.”
Now his focus is on creating a more robust and efficient cash management system ahead. “We are a global company with over 40 active legal entities and hundreds of bank accounts around the world. We are investigating potential changes to our banking structure across the globe and opportunities to reduce bank accounts and associated fees. We will also be investigating the use of AI and new banking products through this process,” he says.
Such is the importance and value of cash since the pandemic, its generation at Kodak is now viewed as a key metric of success. Ebersold’s team prepare weekly cash flow forecasts by country, followed by detailing the extent forecasts tally with reality to senior management and finance teams around the globe. “We are relied upon to ensure cash spend is controlled, review spending at the vendor level and support cash needs across our businesses and locations,” he says.
Cash and freeing up working capital is also a priority at Produmax. As a consequence of both pre-Brexit planning and now pandemic overhang, the manufacturer has been left holding much more stock than usual. The company increased its stock before Brexit, then COVID hit, demand fell away, and orders got pushed back, explains Ridyard. “For a small company, it is a bit of double whammy,” she says. “Our working capital requirements have escalated because we held stock for Brexit. On the other hand, customers haven’t been taking the orders we expected, and we are holding finished goods waiting for payment.”
Elsewhere, she explains how the company is also tapping new raw material sources to meet different order specifications. It makes for an expensive, cash hungry business, and holds the ingredients of a potentially perfect storm. “We can’t sell what we’ve already made because it’s not needed and won’t be for a while, and we’ve got more raw materials than we need. We’ve recently won new business which is now coming in, but it requires us to buy different raw materials to make the components. This will take longer, and ultimately means we’ll have to wait longer to get paid.”
Supporting growth
Cash management is integral to helping fund Kodak’s growth plans as the company hunts new markets and products in a post-COVID world. Despite coming up with a prototype for the first digital camera back in 1975, Kodak stuck with film, misjudged the digital revolution and filed for bankruptcy in 2012. Since then, new business lines have included a cryptocurrency and expansion of its ability to manufacture ingredients for pharmaceuticals. Now its traditional printing segment, Kodak’s largest segment, has had and is expected to continue to have declining revenues, acknowledges Ebersold. Growth will be focused on niche areas in print like a digital packaging business following the company’s wide-ranging re-financing in 2021. “The print industry was adversely impacted by the COVID pandemic but has been recovering. It remains unclear whether print volumes will fully return to pre-pandemic levels. These declines within our print businesses are expected to be partially offset through growth in specific areas like digital packaging.”
The company certainly monitors interest rate policy, but our current debt and preferred stock are at fixed interest and dividend rates and any current change in policy would not have a direct impact on our structure.
Matthew Ebersold, Treasurer, Kodak
It leaves Ebersold preparing treasury for “active participation” in the company’s growth strategy. “We will be engaged with the finance and business teams leading our growth spend initiatives with a focus on controlling spend within approved guidelines and expectations,” he says, describing a balancing act ahead: using cash to invest in growth on one hand but keeping spending disciplined, and a focus on achieving a significant ROI on “any and all” investments on the other. “We need to ensure our cost controls remain in place, look for opportunities to settle legacy liabilities at a reasonable cost and ensure the company continues to move from cash use to cash generation.”
At Produmax, strategy is focused on diversifying sales into new markets – in stark contrast to recent years in the aerospace sector when Ridyard has struggled to meet demand. “We have too much capacity for the orders we have now,” she reflects. Investment has also been toned down. Produmax is running a “tight ship” in terms of cutting its usual investment spend, but the company is still investing in a key new satellite factory in Silverstone. “Our investment strategy is specifically focused on increasing our ability to sell. This factory is not a general investment – we have put a lot of stuff on hold.”
Price rises
Treasury teams are also having to grapple with higher prices. Executives at the world’s largest brewer Anheuser-Busch InBev in Belgium recently cautioned that pressure on margins would continue due to higher commodity prices and packaging costs for drinks consumed at home. Elsewhere, European manufacturers have been hit by a surge in the price of polymer resins used to make plastic. According to market information service ICIS, polyethylene and polypropylene prices, the most commonly used plastic resins, have risen 25% since December to €1,500 per tonne, the highest level since 2015. A worrying shortage of cardboard packaging is on Ridyard’s mind, something she attributes to the “Amazon effect” and jump in online shopping. “Apparently the mills can’t get the raw material. If you can’t package your goods, you can’t sell them.”
In the US, more companies are warning of higher prices ahead, thanks to supply-chain bottlenecks and spikes in raw material and labour costs. Like Coca-Cola, where CFO John Murphy said during the company’s first quarter earnings that he expected a “relatively benign impact in 2021 from rising commodity costs due to the company’s hedged position,” but that inflation could become more of a headwind particularly around inputs like high fructose corn syrup metals and other packaging materials. Add in President Biden’s plans for the first major federal tax hike since 1993 with proposals to increase corporate taxes to 28% from 21%, and corporates will feel another bite.
The prospect of the US government raising interest rates to counter inflation isn’t a concern for Ebersold. “The company certainly monitors interest rate policy, but our current debt and preferred stock are at fixed interest and dividend rates and any current change in policy would not have a direct impact on our structure,” he says. The policy change he is most mindful of is LIBOR reform. “We are actively monitoring the LIBOR cessation programme and the transition to an alternative reference rate. While the majority of our LIBOR references are linked to inter-company loan agreements, our ABL Credit Agreement and Letter of Credit Facility also reference LIBOR. We want to be in a position where our path forward is set prior to the cessation date with changes to our contracts complete well in advance of the ultimate transaction date at the end of the year,” he says.
Navigating the dual impact of Brexit and the pandemic has meant treasury and finance solutions have played an unprecedented central role at Produmax. Ridyard is constantly scenario planning and running budgets in a proactive strategy to ensure she has a finger on the pulse, or as she puts it, instant recall of her P&L balance sheet and sales ledger. “I have never run as many scenario plans as I have now,” she says, listing forecasts spanning raising more finance to scenarios on slowing down depreciation on machine tools which have lain idle during the pandemic. Elsewhere she has looked at moving the year end and modelled outcomes on R&D tax credit to release cash.
Pushing finance centre stage for an SME is more challenging than at a big company which has in-house experts. “We have had to learn and upskill really quickly. Especially around things that we wouldn’t have considered in the past because they are quite technical.” Quite an achievement for only a five-strong finance team of whom only herself and one other are at the “top end of treasury.”
Similarly, Ebersold concludes with reflections on how treasury at Kodak now reaches into so many parts of the business. “The great part of my job is being involved across so many important projects within Kodak and interacting with all levels of employees across the company,” he concludes. “I know with certainty my days will be filled with challenging and interesting work. I also know that no matter my plans, most days what I expect to work on can and will change as new questions and projects arise. It is an exciting time to work for Kodak and I look forward to the successful turnaround to cash generation.”
