UNDERSTANDING EBITDA & FREE CASH FLOW CORPORATE HUMAN RESOURCE March 2008

What is EBITDA? EBITDA is an acronym that stands for E arnings B efore I nterest T ax D epreciation and A mortization EBITDA is also known as operating cash flow

EBITDA = REVENUE - OPERATING EXPENSES Why use EBITDA? EBITDA = REVENUE - OPERATING EXPENSES Revenue Revenue is the amount of money that is brought into a company by its business activities Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold Cash operating expenses - The essential things that a company must pay for in order to maintain business, e.g. payment of employees' wages and funds allocated toward R&D EBITDA EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. =

EBITDA = REVENUE - OPERATING EXPENSES Why use EBITDA? EBITDA = REVENUE - OPERATING EXPENSES Revenue Revenue Cash operating expenses Cash operating expenses - - - Interest Expense - Non Operating Income & Expenses Tax Provision - Depreciation expense EBITDA = = NET INCOME

Some shortcomings of EBITDA Does not truly represent operating cash flow as it is based on accrual accounting. (Revenue and expense are recognised when they occur, not when cash is actually spent or received) EBITDA does not take into account Capital costs, as depreciation is excluded. Does not take into account cash for working capital Does not take into account debt repayment and other fixed expenses

Free Cash Flow (FCF) FCF = Operating Cash Flow - Capital Expenditures. Free Cash Flow is a measure of financial performance calculated as : FCF = Operating Cash Flow - Capital Expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.  Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:

Free Cash Flow FCF = Operating Cash Flow - Capital Expenditures. EBITDA – Taxes – Increase in Net working capital - Capital Expenses - Other Operating Investments = Free Cash Flow FCF represents the cash that we are able to generate after laying out the money required to maintain or expand its asset base.

Differences between EBITDA & FCF NET INCOME FREE CASH FLOW Revenue Revenue Revenue = EBITDA Cash operating expenses Cash operating expenses Cash operating expenses - - - - - Interest Expense Taxes - - Tax Provision Capital Expenses - Depreciation expense - Increase in net Working capital = EBITDA - Other operating Investments = Net Income = Free Cash Flow

- Drivers of EBITDA EBITDA Price Revenue Volume Raw Materials Cost of Goods Sold SG&A Price Operating Expenses Revenue - Raw Materials Labor Other Salaries of, non sales personnel Direct selling expenses Indirect Selling EBITDA

Drivers of Free Cash Flow Raw Materials Labor Other Operating Expenses Volume COGS SG&A Price Revenue Salaries Direct expenses Indirect expenses Taxes Capital Expenses Increase in net Working Capital Other operating Investment EBITDA - Free Cash Flow Inventory Plant & Equipment Receivables Good Will Intangibles Payables Property

How you can Increase EBITDA & Free Cash Flow & FCF Increase Revenue Reduce Costs Improve Capital Efficiency

How you can increase EBITDA & Free Cash Flow Improve Strategic Planning and Demand Management Improve Product Quality and Consistency Innovation & Faster Time-To-Market Improve Manufacturing Responsiveness Improve Customer Responsiveness Increase Throughput and Reduce Downtime Increase Volume Increase Market Share Increase Average Sales Price Increase Revenue Increase EBITDA & FCF Reduce Costs Improve Capital Efficiency

How to you can increase EBITDA & Free Cash Flow Reduce Raw Material Costs Reduce Distribution Costs Reduce SG&A Costs Reduce Inventory Carrying Cost Reduce Energy Cost Reduce Capital Cost Reduce Variable Cost Reduce Fixed Cost Increase Revenue Increase EBITDA & FCF Reduce Costs Improve Capital Efficiency

How you can increase EBITDA & Free Cash Flow Increase Revenue Increase EBITDA & FCF Reduce Costs Rationalize Manufacturing Optimize Fixed Asset Utilization Optimize Inventory Improve Capital Efficiency Reduce Capital Cost Reduce Cash Operating Cycle Reduce Cycle Time

How you can increase EBITDA & Free Cash Flow Improve Strategic Planning and Demand Management Improve Product Quality and Consistency Innovation & Faster Time-To-Market Improve Manufacturing Responsiveness Improve Customer Responsiveness Increase Throughput and Reduce Downtime Increase Volume Increase Revenue Increase Market Share Increase Average Sales Price Increase EBITDA & FCF Reduce Raw Material Costs Reduce Distribution Costs Reduce SG&A Costs Reduce Inventory Carrying Cost Reduce Energy Cost Reduce Capital Cost Reduce Variable Cost Reduce Costs Reduce Fixed Cost Reduce Capital Cost Optimize Fixed Asset Utilization Rationalize Manufacturing Improve Capital Efficiency Optimize Inventory Reduce Capital Cost Reduce Cash Operating Cycle Reduce Cycle Time