15 October :00 Treasury Tools for Balance Sheet Management at ABX LOGISTICS Jean-Claude Jossart Treasury Project Manager Case Study Yvo K. Vercouteren Corporate Treasurer

15 October : Presentation Outline Introducing ABX LOGISTICS Introducing ABX LOGISTICS : Who are we ? A Specific environment Corporate Treasury strategy The Corporate Treasury infrastructure Strengthen the Balance Sheet from Treasury ? Other areas of Corporate Treasury

15 October : Corporate Introduction ABX LOGISTICS Worldwide HQ in Brussels, recently established, is in charge of the Group coordination with a minimum staff (35 people) and covers the following main topics : Legal aspects Buying procurement Financial reporting and controlling Treasury co-ordination IT coordination and group projects ABX LOGISTICS, the Belgian Railways owned transport and logistics company, recently established, is today one of the world's front runners among logistics service providers, with an international network covering 35 countries, 500 Offices, which employs 15,000 people and has a consolidated sales equal to 2,7 billion euros in 2002.

15 October : ABX LOGISTICS Worldwide Legal One-stop-shopping We offer one integrated logistics solution, worldwide : The total logistics Matrix ABX LOGISTICS Worldwide combines all the skills of professional transport and logistics under one banner : distribution, storage, consultancy, … We offer one integrated logistics solution, worldwide : The total logistics Matrix Think global, act local Although we have one global strategy, we respect the business culture of each region As it manages these services and products as an integrated whole, ABX LOGISTICS can offer all-in, modular logistics solutions that meet the specific needs of its customers at local level. Although we have one global strategy, we respect the business culture of each region

15 October : Corporate Environment Out of a Belgian Company ABX LOGISTICS has in a 3 years time, i.e. from 1998 to 2001 emerged into an global international one. Recently the company was set-up as a separate holding with its own managing entities. Its area of activity switched from a local market to a world-wide one. All this was possible keeping into account the slackening of the economic situation in 2002 and 2003 and the uncertainties concerning the general economic evolution. The Group has achieved spectacular growth through a combination of massive investment and strategic acquisitions of international companies. One inevitable outcome of acquiring so many local service providers in such a short time frame was an inconsistent network of local sites underlying : The management of undercapitalized entities The need to improve ABX LOGISTICS net worth ratio Ensure a positive return on the cost of acquisitions and development

15 October : ABX Logistics Sales The ABX LOGISTICS Matrix in figures : Product & Sales by Region Spread by Country/Region Spread by Product

15 October : Balance Sheet Issues Balance Sheet Issues - Conceptual Introduction is essential to financial stability. working capital decisionscapital decisionsworking capital Within ABX LOGISTICS, the ability to effectively manage capital, while remaining within the constraints of a realistic balance sheet structure, is essential to financial stability. This ability grows ever more important are our industry constrains, where increasing limits on revenue growth are accompanied by steady expense growth. ABX LOGISTICS treasury actions focuses on asset/liability management, and the challenges that arise in capitalizing an endowed institution. Although content addresses the entire balance sheet, information will be concentrated on working capital decisions, and the effects that capital decisions have on working capital.

15 October : Balance Sheet Issues Management of Balance Sheet is bounded to Working Capital Management of Balance Sheet is bounded to Working Capital Balance Sheet Management should ensure that ABX LOGISTICS is strongly capitalized and that capital is structured in the most effective manner. It also manages capital in our operational entities. Activities include recommending and implementing of participation re- grouping programs, capital issuance. The critically important balance sheet and capital resource allocation process resides here Aggressively managing the balance sheet continues to be an integral part of the ABX LOGISTICS strategy. As part of this strategy, Cash Management, Balance Sheet & Risk Management, actively manages our different businesses by ensuring that the allocation of risk and balance sheet resources is directed to higher-return and/or strategic growth activities.

15 October : Balance Sheet Issues Balance Sheet Issues Balance Sheet Issues - Treasury Conceptual approach The ABX LOGISTICS Corporate Treasury “infrastructure” provides valuable advanced technical assistance for entities seeking to optimize growth, lower expenses, or manage risk. Which of the following tools could help improve our all-in performance? Core-Investment Follow-up Core-Investment Follow-up Evaluate the rate-sensitivity of your core investments. Five-Year Capital Strategy Five-Year Capital Strategy Examine the relationship between ROA, ROE, and leverage. Funding-Strategy Models Funding-Strategy Models Do our affiliates prefer long-term fixed-rate loans? How do we measure the profitability of funding these assets using advances. Marginal Cost of Funds Analysis Marginal Cost of Funds Analysis Determine the impact of paying up for non-rate-sensitive deposits to retain rate-sensitive investment. Strategies for Success Strategies for Success Work with industry experts and banks to craft concrete business strategies based on your own balance sheet.

15 October : ABX LOGISTICS Worldwide The Corporate Treasury Philosophy The Corporate Treasury Philosophy Develop strategy for cash and debt management (short and long term) Provide infrastructure for cash, risk and balance sheet management, for the entire organisation (profit centre > < Service Centre) Corporate Treasury is a leading Sovereign Function within the Group Service Provider & Support Benchmarking No Back-Office, No payment factory Think global, act Local Maximising the respect for the global ABX LOGISTICS philosophy : Think global, act Local

15 October : Corporate Treasury Global Treasury Infrastructure Concept CASHPOOLCASHPOOLCASHPOOLCASHPOOL CORPORATE TREASURY Risk Management Cash Mangement Balance Sheet Mgt. Securitisation Assets Mgt FX Mgt Netting GCS Corporate strategy

15 October : Balance Sheet Management Tools : Cash Pooling MAIN FEATURES Notional Pool : pool does not even exist at balance sheet level Cross border with central location (but not off-shore respecting corporate governance Multi currency : no swaps needed, no exchange risk, no IAS39 impact Administration of intercompany loans facilitated or avoided of desirable Obtain rapid control over new subsidiaries in key financial aspects

15 October : Balance Sheet Management Tools : Cash Pooling Balance Sheet Management Tools : Cash Pooling IMPACT OF CHOSEN SOLUTIONS Legal : Thin Capitalisation rules Tax : Withholding Tax Accounting : Treated as local bank accounts Gain rapid control over the different new acquisitions in key financial aspects Cost benefit aspects

15 October : Balance Sheet Management Tools : Cash Pooling Global Cross-Border and Multi-Currency Liquidity Management Integration Model How does it work ? Cross Border Multi-Currency Notional Pool INTRADAY REPORTING MT 942 FX Management INTERCOMPANY LOANS INTRO-PAY MT (SWEEPS) Regional Pool Americas Regional Pool ASIA PACIFIC Domestic Pool Germany CROSS BORDER TFT MULTIBANK REPORTING MT 940 INTERCOMPANY NETTING

15 October : Balance Sheet Management Tools : Receivables Securitisation Net Funding Amount Conduit transactional structure Conduit transactional structure ADDITIONAL DEPOSIT NET POOL BALANCE SUBORDONATED DEPOSIT INELIGIBLE RECEIVABLES NEW RECEIVABLES RELEVANT TRANSFERRED RECEIVABLES

15 October : Balance Sheet Management Tools : Receivables Securitisation Optimizing Receivables Management Optimizing Receivables Management TOTAL IMPACT Securitisation (Fixed program term <> Short-Term Roll-Over Funding Factoring (Complete or Selective) Total Receivables Outsourcing (Major Organizational Impact) Securitisation Outsourcing Factoring Complete Selective CashB/S Organisation. Res. Term -----

15 October : ABX Global Commerce Solutions ABX Global Commerce Solutions ABX LOGISTICS Outbound Transport Air & Sea Freight Customs Storage Logistics Distribution Client Exporter ABX Global Commerce Solutions Credit insurance Delivery goods & B/L Goods & B/L + + = Asset Backed Funding Capability

15 October : Balance Sheet Management Tools : Global Commerce Solutions Global Commerce Solutions : features and B/S impact Mgt one-stop shopping GCS is a financial product that completes the one-stop shopping for our clients Asset Backed funding Being the dedicated logistic supplier, the legal owner of the goods transported (B/L or AWB) and having set up a complete pre-approved credit insurance, we can obtain Asset Backed funding off balance sheet Through a specific minority participation in the SPV, the transaction remains off balance sheet

15 October : Balance Sheet Management Tools : Fixed Asset Management Sales & Lease/Rent back operations By definition it is the sale of property by the owner-user of the asset to an investor. The seller becomes the lessee then leases the property back from the investor who becomes the lessor. Benefits includes - Refinancing your equipment with better monthly payment - Creating working capital - Turning your long term asset to short term - Improving current ratio Benefits includes - Refinancing your equipment with better monthly payment - Creating working capital - Turning your long term asset to short term - Improving current ratio We want to gain “access” to our assets (infrastructure), not ownership and so remain flexible to fast adapt to any market change In addition we avoid any “ballast” on our balance sheet

15 October : More Corporate Treasury issues : Centralizing ? Choosing to Centralize Treasury infrastructure to steer balance sheet of the group ? DecentralisedCentralised Operating Banking relations Different bank accounts FX Management Liquidity Mgt. Decentralised Local Funding Policies Local Payment Initiation Centralised Netting Centralised Liquidity Mgt. Centralised Intra-Group Funding Centralised FX Mgt. Regional Cash Mgt. Structure Streamlined bank relationship and Bank Accounts Strategic Banking Relationship Showing the complexity of the choice facing a full centralized Treasury ?

15 October : More Corporate Treasury issues : Centralizing ? Strategy & Coordination in ABX Treasury STRATEGY & SERVICES SUPPLIER CORPORATE TREASURY OFFICE BALANCE SHEET MANAGEMENT PROJECT MANAGEMENT BENCHMARKING TREASURY CASH MANAGEMENT SCORECARD ACTIVITY BASED COSTING IT / OUTSOURCING

15 October : Balance Sheet Management Weighted Average Cost of Capital - WACC & Capital Structure The WACC is the weighted average of the cost of equity and the cost of debt based on the proportion of debt and equity within ABX capital structure. The proportion of debt is represented by D/V, a ratio comparing the company's debt to the company's total value (equity + debt). The proportion of equity is represented by E/V, a ratio comparing the company's equity to the company's total value (equity + debt). The WACC is represented by the following formula: WACC = Re x E/V + Rd x (1 - corporate tax rate) x D/V.

15 October : More Corporate Treasury issues : Outsourcing Operations ? ABX Treasury contains certain areas eligible for Outsourcing based on : Market perspective (Issues and Innovations) Criteria for Outsourcing (Typical Corporate Profile for Outsourcing) Criteria for Outsourcing (Typical Corporate Profile for Outsourcing) Goals & Objectives (Why outsourcing, and for which Benefits ?) Goals & Objectives (Why outsourcing, and for which Benefits ?) Implementation process (Our approach and the different steps) Implementation process (Our approach and the different steps) Conclusion Conclusion

15 October : More Corporate Treasury issues : Outsourcing Operations ? Strategies for Change : Market Perspectives Issues and Innovations - Lean treasury organizations Issues and Innovations - Lean treasury organizations Arguably, the most important and vexing challenge facing treasurers is getting the human resource equation right. Centralize, reengineer and automate Centralize, reengineer and automate Those organizations which have been successful in their human resource allocation have centralized treasury activities, reengineered their processes and implemented automation tools to enable the most effective utilization of human resource. Addressing credit and liquidity constraints Addressing credit and liquidity constraints Liquidity and credit constraints have been a primary focus of many treasurers during the economic slowdown of the past 2 years Effective cash flow forecasting Effective cash flow forecasting Companies that have implemented effective cash flow forecasting have found that they are able to manage their borrowing activities more effectively and plan liquidity needs more precisely. Improving working capital management Improving working capital management

15 October : Outsourcing Profile Typical Corporate Profile for Outsourcing Partially Centralised or Decentralised structure Partially Centralised or Decentralised structure Global operations in various countries/regions Global operations in various countries/regions Limited internal resources (Staff, Systems, procedures) Limited internal resources (Staff, Systems, procedures) Subsidiaries with funding mismatches Subsidiaries with funding mismatches Interest in outsourcing your treasury administration Interest in outsourcing your treasury administration Wide open Corporate Culture Wide open Corporate Culture Guarantee of efficient and safe alternatives Guarantee of efficient and safe alternatives

15 October : Why Outsourcing ? Why Considering Outsourcing Part of Corporate Treasury ? Increase your Productivity Minimise Administration Burden At a time of restructuring or streamlining your operations Safe time to focus on core business activities Maximise Internal Resources Headcount – Office – Systems Expenditure During any economic downturn or a bear market Optimise Internal Treasury Procedures Tried and tested Control Procedures Experienced Treasury Staff Clear Segregation of duties

15 October : Outsourcing Benefits What are the real Benefits ? Allow Treasury to Concentrate on core business Improve quality of services Reduce Technology and Operational Risks Improve the ratio Performance/Responsabilities Achieve Cost Reductions Lower Capital Investment Optimise Internal Treasury Procedures Increase flexibility Lightening of the process activity

15 October : Project Management What are the effects on Management Reporting & Internal Communication ? Who is affected by the conversion effects and what are their training needs ? Technology Improvement Human Resources Training Sub projects coordination Impact on systems and processes

15 October : Project Management Keys of Success : The planning techniques we cover provide tools for establishing a measurable business-relevant objective for each project. This approach allows us to measure success through the customer’s eyes. When complete, the it steers the entire project and, as importantly, it sets parameters for the scope of the project and tells the sponsor and project manager what NOT to do. ABX LOGISTICS approach is the foundation for developing a project plan that consists of measured achievements, not activities Effective portfolio management with control of resources

15 October : More Corporate Treasury issues Embracing New Treasury Principles Our challenges… Our challenges… Make a cash flow analysis of our agencies worldwide Set up an Optimal structure and services arrangements Set up an Optimal structure and services arrangements Integrating treasury operations to gain efficiencies Integrating treasury operations to gain efficiencies Integrating treasury information flows with business operations & ERP systems Integrating treasury information flows with business operations & ERP systems …In Order to Increase Efficiency & Control Consistent procedures, and specialist defined skills Consistent procedures, and specialist defined skills Less errors and time savings Less errors and time savings Better audit and security Better audit and security Improvement of Technology Improvement of Technology

15 October : More Corporate Treasury issues ABX Corporate Governance The essence of corporate governance (A concept paper for discussion and comment) The essential components of ABX organisation’s corporate governance arrangements are Communication Disclosure Accountability Parties Best Practice Principles Culture & Values Tools Organisation Specific Integrated Governance Framework Clear Objectives & Responsibilities Clear Direction & Control Fully informed Governing Body with Correct Focus Optimised Performance Satisfied Shareholders & Stakeholders GOOD CORPORATE PERFORMANCE

15 October : Questions Questions Questions ? Thank you very much. Yvo Vercouteren Corporate Treasurer Tel Mail :