creating a resilient treasury

Creating a Resilient Treasury

Dwayne Petish, former

Treasurer, Cliffs Natural

Resources

Commodity Risk

Lynda Henry, Senior Treasury

Manager, Blackbaud, Inc.

Climate Risk

Kevin Beck, AT, The Timken

Company

Currency Risk

Winifred Pinet and Marcia Banks, Sycamore Associates, Moderators

Agenda

• Why Resilience?

• 3 Unexpected Risk Scenarios• Currency

• Climate

• Commodity

• Panel Discussion of Lessons and Actions Taken

• Q and A

Treasury, Strategy, Risk, Resiliency

At the intersection of risk management and

real life sits resilience: the ability to assess

unforeseen events, adjust strategy quickly,

and achieve successful outcomes for the

corporation.

“Out of this nettle, danger, we pluck this

flower, safety” –William Shakespeare

A Tale of Three Risks (and

managing the unexpected)

“The future has a way of arriving

unannounced” –George Will

How to prepare? And

what to prepare for??

Definition of resilient: characterized or marked by resilience: such

asa : capable of withstanding shock without

permanent deformation or ruptureb : tending to recover from or adjust easily

to misfortune or change

resilientadjectivere·sil·ient | \ ri-ˈzil-yənt \

Source: Merriam-Webster

https://www.merriam-webster.com/dictionary/resilience

https://www.merriam-webster.com/dictionary/deformation

https://www.merriam-webster.com/dictionary/rupture#h1

https://www.merriam-webster.com/dictionary/misfortune

https://www.merriam-webster.com/dictionary/adjective

Creating Resilient Treasury - CurrencyThe Timken Company• Founded in 1899 and NYSE listed since 1922 (TKR)

• Headquartered in North Canton, Ohio

• $3 billion in sales for FY2017 with 47% outside U.S.

• 15,000+ employees operating across 33 countries

• Timken engineered bearings offer a broad range of sizes,

rolling elements and proprietary designs, delivering the

strongest performance, consistency and reliability

• Timken mechanical power transmission solutions provide

a wide range of products from belts and chains to sealing

technologies, improving the reliability of industrial

equipment and machinery

• Timken industrial services portfolio offers bearing

and power system rebuild and repair services that can

return components or entire systems to like-new

specifications

Creating Resilient Treasury Risk - Currency

2014 and Prior

• Spun-off steel business into a separate publicly traded company

June 2014 with $2 billion sales and nearly all domestic

• Mix shift ~70% U.S. moved to ~50%.

• Strong U.S. Dollar is net unfavorable over 2014-2016

• Treasury FX hedging program on portion of balance sheet and cash

flow exposures

• FX analysis across business segment and geographies

• Limited scalable tools to broadly analyze and flex FX exposures


2015 and Later

• Treasury team took over FP&A for FX with variance and scenario

analysis

• Changed from forecasting FX rates broadly, maintain latest month-end

and Treasury flexes exposures for scenarios

• Leveraged SAP Business Warehouse, Hyperion Planning and many

Excel spreadsheets

• Consistent language and analysis on 3 types of impacts…

9

Exposur

e Type

Description Forward Hedge

Ability?

Exp

licit

(d

irec

tly

on

P

&L)

Transaction FX impact from cross-currency obligations to conversion to cash date (example: China entity (local CNY) invoices customer in EUR, FX rate difference at invoice vs. cash receipt date is P&L Impact)

Yes

Imp

licit

(M

ust

Co

mp

are

to

ano

ther

per

iod

) Translation Translation of local functional currency P&L’s to USD to report total TimkenCompany (example: China entity’s local operating results)

No

Cross Currency

Cross border flow activity – different currencies to manufacture vs. invoice customer (example: manufacture in US (local USD), export product and invoice customer in Europe in Euro)

Yes


▪ Brexit - Understood range of potential impacts if GBP and EUR moved

- FX Translation

• Local operating results

- FX Transaction

• USD and EUR activity in UK

• GBP and USD activity in Europe

- FX Cross Currency

• Exports to UK and Europe

• Imports from UK and Europe

10



FX Transaction

▪ June 25th – Target date for global intercompany accounts to be settled

▪ June 23rd vote in UK for Exiting European Union

- Moved payments ahead to clear as much activity as possible prior to June 20th

- Reduced global FX exposures prior to vote

▪ Balance Sheet Hedging

- GBP based customer AR in Europe (EUR to GBP risk)

- Initiated FX Balance Sheet Hedging of amounts

FX Cross Currency (Cash Flow Hedging)

▪ Monitored (1) exports from UK, (2) imports to UK and (3) customer outside UK invoiced in GBP

▪ Closure of facility in UK reduced exports

▪ Initiated cash flow hedging of 50% of net GBP exposures in Euro (sell GBP, buy Euro) to reduce volatility risk

▪ 12M Value-at-risk vs cost to hedge11

▪ FX rates are difficult/impossible to predict

▪ Monitor and understand exposures – continuous process as they change

- Scalable tools led to FiREapps

▪ Consider a range of potential impacts to consider risk

▪ Reduce exposures naturally as able

- Reduce time to convert to cash

- Hold cash balances of that offset payables

▪ Evaluate value-at-risk vs cost to hedge

- Balance Sheet – happens fast, actual FX Transaction impacts (3-month VaR)

- Cash Flow – based on forecast, projected FX Cross Currency impacts (12-month CFaR)

• Understand FX Translation as possible Natural Hedge

12


Who is Blackbaud and What is the Challenge?

Climate risk:

Over the past 3 years, a hurricane trajectory has caused mandatory evacuation in Charleston, SC –Home to Blackbaud, Inc.’s world headquarters and customer operations center

Charleston in the Evacuation Zone

2016, 2017, 2018 trajectories

Source: The Weather Channel

June to November Climate Risk

Hurricane Heading to CharlestonBlackbaud (NASDAQ: BLKB) is the world’s leading cloud software company powering social good with

approximately 3,200 employees in 5 countries

– ~ 1,400 employees based in Charleston where our 2 office buildings are located in a flood zone –

high potential for 1st floor to flood (12’ estimated height)

– Location is an island with high bridges over two rivers providing main access

• Bridge closures due to high wind or damage

• Local road closed due to bridge over creek damaged

• No power – networks down

– No supply chain issues as human capital is our main resource

– We are ready to support our customers when fundraising increases for any disaster

Preparation for Evacuation and Disaster

RecoveryChanges over the years:

– Charleston no longer primary hub for internal use servers (network, software, etc.)

– Global placement of key functions (e.g., customer service and IT helpdesk)

– Development of BCDR policy and procedures plus risk committee formed• Global master agreement in place with global remote workplace provider

– Ensure functions and employees can work remotely or at other Blackbaud office

Named storm heading to Charleston– Risk committee gathers with additional team leads engaged to review plans

– Offsite location (within 5 hour drive) and hotel rooms are booked

– Critical staff is deployed to offsite location

– Sites are prepped for flooding and insurance broker notified

Disaster Recovery– Local offsite location rented if building remains closed

Knowing Your Risk in Advance is Resilience

• Annual renewal of insurance policies includes ensuring business interruption and extra expense coverage level is enough for potential disaster

Knowing where the risks are year to year: the locations of people, physical assets

(e.g. servers) and data: these change so the plan needs continual updating

Knowing your Risk in Advance is Resilience

• Diversifying risk when company is overexposed to perils (Charleston also high earthquake risk)– Geographic: Other office hubs in Austin, TX, Bedford, NH and

Indianapolis, IN

– Exposures: Moving smaller office leases to using remote workplace provider, data to the Cloud both for internal and customer-facing server needs

– Leases/Contracts: Understand your risk if disaster hits your location or major supplier/customer

Lessons Learned

• Must determine plan ahead of any potential disaster and communicate to organization – limits panic and teams “doing own thing”

• Critical staff list updated annually and includes information on family size and pets for hotel booking plus need of pre-paid card vs. has corporate card

• Annual renewal of insurance policies includes ensuring business interruption and extra expense coverage level is enough for potential disaster

• Diversifying risk when company is overexposed to perils (Charleston also high earthquake risk)

2015 - 2016

Commodity Crash in Iron Ore

Cliffs Natural Resources

Founded in 1847, Cleveland-Cliffs Inc. (“Cliffs”) is the largest and oldest independent iron ore mining company in the United States. Cliffs is a major supplier of iron ore pellets to the North American steel industry from their mines and pellet plants located in Michigan and Minnesota. By 2020, Cliffs expects to be the sole producer of Hot-Briquetted Iron (HBI) in the Great Lakes region.

Key Statistics

Revenue (ttm) 2.47 billion

Ticker CLF (NYSE)

Headquarters Cleveland

Sector/Industry Basic Materials

Full Time Employees ~3,000

2000’s Cliffs embarks upon strategy to expand globally and to diversify into other minerals, leading to

the acquisitions of iron ore properties in Brazil, Canada and Australia plus coal properties in

Australia and the United States.

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

1/3/2007 1/3/2009 1/3/2011 1/3/2013 1/3/2015 1/3/2017

Historical Pricing: CLF v. Iron Ore Fines 62% FE Spot

CLF (per share) Iron Ore (per ton)




$0

$20

$40

$60

$80

$100

$120

$140

1/2/2014 4/2/2014 7/2/2014 10/2/2014 1/2/2015 4/2/2015 7/2/2015 10/2/2015

Historical Pricing: CLF v. Iron Ore Fines 62% FE Spot

CLF (per share) Iron Ore (per ton)




2014 A year marked with a significant shift in Cliffs’ strategy and executive leadership with a new

Chairman, CEO and President and a newly formed Board of Directors installed after a

contested proxy contest.




2014 A year marked with a significant shift in Cliffs’ strategy and executive leadership with a new

Chairman, CEO and President and a newly formed Board of Directors installed after a

contested proxy contest.

2015 Fully exits the North American Coal business. Initiates formal restructuring proceedings in

Canada for the Bloom Lake and Wabush mines. Completes the sale of the Chromite assets in

Northern Ontario as part of the restructuring process. Finalizes the sale of a nickel project in

British Columbia and the remaining portfolio of exploration projects.

Resiliency of Treasury and Lessons Learned

• Scenario Planning - Base, High, Low Cases - Sensitivity to Commodity Pricing

• State of Preparedness

- Collaboration of internal and external teams

• Bank Relationships and Other Key Partnerships- Strategic long-term counterparties through all cycles … the highs and lows

• Reduced Global Treasury staff by nearly 70%

• Tear up the “Plan” and improvise … sometimes on the spot!

• High performance and results in a state of constant chaos and flux

Resilience is Leadership

6 M

on

ths

(OC

T 2

01

4

-M

AR

20

15

)

Treasury’s Deliverables – Returning Cliffs to a U.S. Iron Ore Business

• Fully secured existing $1.8 billion multicurrency revolving credit facility.

• Executed numerous bank amendments to remain in 100% compliance while attempting

various recapitalization initiatives.

• Supported restructuring proceedings in Canada and all other asset dispositions.

• Successfully issued $540 million in first lien secured notes, $544 million in second lien

secured notes, and a $550 million asset backed multicurrency revolving credit facility.

• Discharged $400 million in net debt resulting in $156 million of discount capture and

$154 million of interest expense savings via formal cash tender offers and open market

repurchases.

Panel Discussion: Marcia Banks, moderator

What are the key drivers for building resilience?

Q and A

Summary

Thank You!

Additional Materials and Takeaways

AFP Topic: The Train We See Coming, and the One We Don’tCreating Resilient Treasury Risk Management

▪ At the intersection of risk management and real life sits resilience: the ability to assess

unforeseen events, adjust strategy quickly, and achieve successful outcomes for the

corporation. This panel discussion features 3 experienced Treasury professionals, who will

describe the challenge faced in preparing for one risk, and then experiencing the

unexpected. Kevin Beck, Assistant Treasurer at the Timken Company, will describe

preparation for FX exposure risks posed by the Brexit vote, as expected, and how they

managed the highly unexpected vote results. Lynda Henry, Treasury Manager at Blackbaud,

will describe their climate change preparations and how they worked, or didn’t, in Hurricane

Irma. Dwayne Petish will discuss how as Treasurer at Cliffs Natural Resources the entire

strategic and financing plan had to change when commodity prices plunged unexpectedly.

These seasoned practitioners will talk to the Treasury preparation that helped, what did not,

and decisions taken as a result. We will end with audience Q and A. Winifred Pinet and

Marcia Banks, Sycamore Associates, will moderate the session.

32

FX Risk – Kevin Beck

▪ Kevin Beck is Assistant Treasurer for The Timken Company. Named to

this position in 2012, Kevin is responsible for global capital management

(cash, debt and equity), shareholder services, foreign exchange

management and other related activity. Kevin joined Timken as a senior

financial analyst in 1998. He has held positions of increasing

responsibility across Finance including manager – investor relations,

assistant corporate controller and business segment controller. He

previously worked for Cooper Tire & Rubber Company and Dial Corp.

Kevin earned a bachelor’s degree in business administration from The

University of Akron and a master’s degree in accounting from The

University of Toledo. He is a certified public accountant in the state of

Ohio.

33

Climate Risk– Lynda Henry

▪ Lynda Henry, CTP, CPA, is Senior Treasury Manager for Blackbaud, Inc.

Lynda started her career in the audit division of Ernst &Young and moved

into the Corporate Finance arena with roles in Internal Audit, Treasury

and FP&A for Praxair, Inc. Since joining Blackbaud in 2004, Lynda has had

progressive responsibilities in FP&A and Treasury. She manages

Blackbaud’s Global Treasury Operations including cash, debt, foreign

exchange and Property & Casualty Insurance. Lynda earned a bachelor’s

degree in accounting from Bentley University and a master’s degree in

finance from New York University’s Stern School of Business.

34

Commodity Risk– Dwayne Petish

▪ Dwayne Petish’s career covering domestic and international

Treasury spans nearly 20 years at major public companies

such as Cliffs Natural Resources Inc., The Lincoln Electric

Company, and Eaton Corporation. Dwayne has extensive

experience in the areas of Global Treasury and Capital

Structure. He has established and actively managed global

banking relationships, oversaw significant capital market

transactions, and hedging programs. Dwayne was responsible

for managing a team of over 50 financial professionals based

throughout the world. He played a key leadership role

supporting numerous tax and legal reorganizations that

focused on M&A transactions and other restructuring

initiatives.

35

36

Exposur

e Type

Description Forward Hedge

Ability?

Exp

licit

(d

irec

tly

on

P

&L)

Transaction FX impact from cross-currency obligations to conversion to cash date (example: China entity (local CNY) invoices customer in EUR, FX rate difference at invoice vs. cash receipt date is P&L Impact)

Yes

Imp

licit

(M

ust

Co

mp

are

to

ano

ther

per

iod

) Translation Translation of local functional currency P&L’s to USD to report total TimkenCompany (example: China entity’s local operating results)

No

Cross Currency

Cross border flow activity – different currencies to manufacture vs. invoice customer (example: manufacture in US (local USD), export product and invoice customer in Europe in Euro)

Yes


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