Keeping it simple with Campofrio

Feature | 28 April 2017

Campofrio Food Group’s treasury and investor relations director, Luis Montesinos Ballesteros, talks to Katharine Morton about how his company has put working capital and cash management at the heart of its financial strategy, including an award-winning supply chain payables programme that has massively improved its working capital

What are Campofrio Food Group's trade and export finance needs and how do you define them?

Trade finance to me is short term. In our working capital programmes, we are dealing with payables and receivables. Export financing for me is more associated with long-term financing, generally capital projects eventually with Export Credit Agency (ECA) involvement. You can do trade finance related to exports or imports and factoring is a tool we use within trade finance. I see the trend nowadays moving more from receivables factoring to becoming more about the payables side. Supply chain finance is now the name of the game. We don't do any export finance here but trade finance, factoring and supply chain payables play now a key role for us. However, it's not so much about financing needs but more about working capital optimisation.

How's the optimisation programme gone?

We reduced our working capital by more than €300m in less than five years since 2010. That may not sound much to some but the figure is much more than what our net financial debt is today.

That's a pretty epic amount considering the financial position you came from

Yes, I was originally hired to corporate treasury with a mandate to put in place refinancing and a cash pooling programme, but then we spotted a big opportunity for balance sheet optimisation by looking at the different areas and revising all the related processes, both order to cash and the whole supply chain from order to payment.

How do trade finance products fit in with this and do you run your facility with one bank or multiple banks, and why?

Trade finance products can be rather useful. We keep several banks on purpose. Some programmes could have been run with one bank [and many companies do that] but I think it's important to diversify providers. In order to avoid excessive documentation requirements, we've requested the banks to work under the same standards. Otherwise we would have struggled with banks messing around with different system requirements.

Did you start with one bank's systems?

Yes, we chose and worked with an original one then requested each bank to adapt to those file formats. We split the trade finance business, which is appreciated by the banks. We initially started with one bank and then rotated once banks were on board, coexisting with each other so business can be shared out.

What traditional trade finance tools do you use - documentary credits (DC), letters of credit?

DCs are primarily for export/import and they are somehow old fashioned. There's been a general market evolution of volumes of DCs falling down while supply chain finance (SCF) volumes have risen. We've seen some of the old operations that were managed via DCs are now managed by SCF programmes.

Are you using any specific platforms for SCF?

We decided to manage our programmes on our enterprise resource planning (ERP) which is SAP and do it in house, rather than with third party providers although we also use the respective electronic banking systems of the involved banks. When you've done it once in house it's much easier to replicate in practice, while it is true that we may eventually work with these third-party providers in connection to some of our customers´ proposals. We are not bound to any particular scheme but the right approach is to be flexible to use different tools as long as they help you accomplish your corporate goals.

What about other platforms for SCF?

Dynamic discounting and so on is very trendy, but what we want in essence is very straightforward, even simple structures. I hate unnecessary complications - it's not project finance, it's not rocket science, it's simple trade finance. This is one of the advantages, as long
as you keep it simple.

What about alternative finance sources - perhaps the platform providers can step in ahead of banks for you?

Campofrio is a non-investment grade company at this point in time. We were able to do our SCF facility without being high grade. Obviously you need financial solvency and a certain credit profile, but you don't need to be triple-A rated to be successful in SCF for your suppliers. Furthermore, a lot of the investment grade or cash rich companies are the ones who need SCF the least. Nonetheless, I understand that balance sheet optimisation leads to positive cash flow generation, which should be corporate priorities for all types of companies on setting their corporate objectives regardless of their credit rating.

What's your cash position like now?

While we have a net financial debt position, it includes a solid cash position as well given that strong liquidity has been really a priority over the last years. Moreover, we have undertaken a deleveraging process over time and our leverage ratio stands today well below 2x.

What's your receivables management like now?

We do factoring over a significant part of our receivables at group level and it is more to do with working capital management and improving our cash flow certainty than for financing purposes. New factoring programmes can be much more effective than traditional securitisation. For me, securitisation is an unnecessarily complicated process for
receivables finance.

I know it's case by case for every company, but in general I prefer simple factoring contract(s) for receivables with banks rather than undertaking large complex securitisations that typically need special purpose vehicles (SPVs) and more complex legal documentation that drive transaction costs and lead-times up. I'm talking about pure discounting of receivables. We always do non-recourse, which allows you, if properly articulated, to fully deconsolidate the receivables while recourse factoring is pure financing - a security you use to obtain financing, and I'm not interested in that.

How has your SCF programme helped through what has been a fiery period?

Yes, besides the very tough years during the last global financial crisis that particularly hit Spain-based companies in the aftermath of the sovereign risks trouble and when financial markets were starting to settle, we were poised to announce a transaction to refinance our debt and majorly improve our cost of capital in November 2014 when our main factory in Spain burnt down. It was awful. And the financing opportunity turned into a refinancing risk overnight.

Nonetheless, we manage to weather the storm and finally reactivated the refinancing transaction through a bonds issue beating our original objectives and more than halving our debt cost. To do so, balance sheet optimisation throughout has been a major contributor. SCF programmes can also be used for CAPEX investments, as we have done with the new factory project (completed in November 2016) out of turn-key contracts and SCF with the involved suppliers resulting in a mutually satisfactory outcome, which has internally required a really efficient collaboration with legal/sourcing/operations and finance teams.

In terms of imports we use SCF tools with domestic and foreign suppliers. It's a universal language for domestic and foreign suppliers. These tools are certainly more popular in Europe but they are starting quickly to catch on in Asia, the US and Latin America. It makes sense because it is efficient and I love the win-win type of approach and when you use it correctly it is win-win.

Do you actually call it a SCF programme?

It's a matter of semantics, call it reverse factoring or here in Spain it's mainly confirming. But leaving aside the terminology, it's about what you do. What you basically do is to provide your suppliers with a facility to improve working capital - both theirs and yours, that's why it's win-win. Providing they are convinced to come on board. For example, if reference payment terms are 60 days and you convince your suppliers that by using your facility they can collect, say at 10 days, by the time it takes you to process the invoice and send the payment to the bank, they will improve their working capital, say, by collecting on day 10 instead of day 60 and by being successful you extend the terms from 60 to 90 days. If you do it at volume you can be talking millions of euros, as in our case.

Do you have problems convincing suppliers to on board?

Suppliers always have the right to say no, but for us it's a payment means. I am entitled to change the means as long as I don't change payment terms. If suppliers are cash rich they may not be interested, but at least you enter into a discussion. In my experience in 90% of cases it works - you cannot impose and you have to be reasonable with the costs. We've proven that it works with relative participation from the involved banks, with whom we agree on the different on-boarding strategies to be used.

Are you foreseeing regulatory difficulties and what are your desires to make things easier?

This is important. Documentation is key. We need to make an effort to keep it simple. I would love to have a standardised contract - like the LMA has for syndicated loans. It's important for us and for the industry as a whole to be able to have documentation of reference and for that to be related to the accounting treatment. You can do recourse or non-recourse, different types of deals, but you should be able to be certain in terms of the accounting treatment of that product. We tend to replicate the contract that has already been validated by our auditors. Sometimes it's unnecessarily complex.

In our case, it is key (even a "conditio sine qua non") that all these instruments are not considered to be financial debt - because they are not. They are trading operations and payment means. This is why I get disturbed by people using the phrase supply chain finance as such because it is a pure working capital tool. We have got to be very clear, these are trade tools that do not imply financial debt because otherwise we would lose interest in using them.

Campofrio Food Group's treasury
and investor relations director,
Luis Montesinos Ballesteros, talks to Katharine Morton about how his company has put working capital and cash management at the heart of its financial strategy, including an award-winning supply chain payables programme that has massively
improved its working capital


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