Post on 23-Mar-2018
Eurofinance Miami
Alfredo Elespuru
VP Global Treasury
May 2016
ORIFLAME HOLDING AG
Agenda
• About Oriflame
• Background • Strategic objectives
• Key actions
• Local currency invoicing (LCI)
• Framework
• Objective
• Characteristics
• How does it work?
• Results
• Latam
• Special considerations
• Q&A
2
• Beauty company selling direct
• Around 3 million beauty consultants
• €1.2 billion in sales annually
• 95% of orders online
• 1,000 cosmetic products, of which 1/3 are new each year
• New catalogues every third week in 40 languages
• Manufacturing in Poland, Russia, China & India
• Around 6,500 full-time equivalent employees
• Listed on Stockholm Nasdaq exchange and domiciled in Switzerland
Oriflame in brief
5/12/2016 3 Copyright ©2016 by Oriflame Holding AG
2008
2015
4
1968 1988 1998 2008 2015
1960s -1970s 1980s 1990s 2000s
HOME PARTIES + PERSON TO PERSON
SELLING
+ NETWORK
MARKETING
+ ONLINE ORDERING
+ BUSINESS TOOLS
2010s
+ ONLINE SELLING
& RECRUITING
Offline orders Online orders
0 Facebook fans
>7 million Facebook fans
38% of all orders online
95% of all orders online
1.5 billion page views
3.3 billion page views
45 million site visits
175 million site visits
21 million visitors
60 million visitors
Copyright ©2016 by Oriflame Holding AG
48 years of history and transformation
5
Cash Flow
Q4’15 Q4’14 YE’15 YE ’14
Net profit before income tax, €m 24.7 21.0 67.3 74.2
Op. profit before changes in wc,
€m 34.3 7.0 116.4 92.9
Change in working cap. and
provisions, €m 47.0 73.5 46.7 44.8
Operating CF, €m 68.8 66.0 122.2 90.0
CF Investing Activities, €m (2.3) 21.1 (15.5) (6.0)
Q4 operating cash flow €68.8m (€66.0m)
• Net profit before tax €3.7m
• Non-cash items in net profit before tax €23.6m
• Impact from changes in working capital and
provisions €-26.5m
– Inventories €-16.7m
– Receivables, prepaid exp., asset derivatives €+13.0m
– Payables, accrued exp., liability derivatives €-28.8m
– Provisions €+6.0m
• Interest, charges, taxes €+2.0m
Copyright ©2016 by Oriflame Holding AG
0
50
100
150
200
250
Q4 13 Q1 14 Q2 14Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15
Total inventory€m
0
25
50
75
100
125
150
Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15
Operating cash flow Capex€m
Regions
Turkey,
Africa
& Asia
Europe
Latin America
CIS
2015 YTD Regional Split
6 Sales Active consultants Adj. Operating profit
11% (10%)
21% (21%)
32% (44%)
36% (25%)
10% (9%)
23% (21%)
23% (43%)
44% (27%)
8% (7%)
17% (16%)
39% (47%)
36% (30%)
Background
• Oriflame exposed to 40+ currencies: emerging
markets
• Changing geographical footprint
• Euro as reporting/functional currency
• Increasing volatility of its key currencies
• Business “too” concerned with exchange rates
• Operating profit unprotected in the short term
• Balance sheet hedging in 2010
7
8
Group currency sales impact since 2010
Sensitivity analysis showing the effect on group operating
profit from a 1% change of the EUR against the currencies in
five of the largest sales markets
• Russia RUB
• Indonesia IDR
• India INR
• China CNY
• Mexico MXN
Copyright ©2016 by Oriflame Holding AG 30%
10% 9% 4% 8%
Strategic Objective
• Reduce Profit &
Loss and cash
flow volatility
caused by f/x • Cost of sales
• IC payables in Local
Currency
• Approach to cash
Copyright ©2016 by Oriflame Holding AG
What did we decide to do?
• Risk management
• New hedging policy
• Local Currency Invoicing (LCI): 15 currencies active
• Natural hedging
• Cash
• Re-defined financing of local entities: policies
• Implement two notional pools
• Intercompany loans in Local Currency
• Re-launch the cash flow reporting process
• Swift net
• Shared services as an extended arm of Global Treasury
• Balance sheet • Convert all liabilities to local currency
Copyright ©2016 by Oriflame Holding AG
10
Framework for LCI
• New hedging policy
• Approved and applied without hesitation
• Clear guidelines (85%,5%...)
• Risk management committee
• Empowered Global Treasury
• Extreme situations even with approval of BoD
• Treasury management system
• Critical to support program
• Accounting
• Reporting
• Analyses
Copyright ©2016 by Oriflame Holding AG 11
12 12/05/2016
Objective LCI
• It is a risk management
program that aimed at:
– minimizing profit and
loss and cash flow
volatility caused by FX
• By:
– concentrating FX risk at
group level and hedging
exposures effectively
Copyright ©2016 by Oriflame Holding AG
Characteristics of program-LCI
• Fix a “price”
• 6 months
• Announced 3 months in advance
• Hedging starting up to 12 months before:
• Build up layers
• Market efficient sizes
• 5%
• Impact on P&L according to inventory turnover
Copyright ©2016 by Oriflame Holding AG 13
LCI Hedging concept*
60 days
Released to COS when goods are sold to third parties
Cash flow hedge accounting
Oct X0
FX rates
determined/agreed
(LCI rates) Sales Forecast
Sales OCGB to
Local markets
booked
Sales OCGB to
Local markets
settled
PLEXOCI/COS
FX HEDGES
Maturity of Hedges
Jan X1 Jun X1 Aug X1
FX on receivables
and related hedges
"MARGIN" RISK
"RE-MEASUREMENT" RISK
*PLEX: profit and loss on exchange impacting below the operating profit line
OCI: Other comprehensive income ( Equity account) and COS is cost of sales
14 Copyright ©2016 by Oriflame Holding AG
What makes it work?-LCI
• Convertible currency (CC) or
• Non CC can be converted by exporter in-country
• Hedging must be possible and size of exposure
• Forwards and options available
• “Cost” of hedging
• Invoice in local currency: customs clearance
• Comply with IFRS • Highly probable forecast
• 80-120 rule
• Documentation and testing
• IFRS 9 (new)
15 Copyright ©2016 by Oriflame Holding AG
Final
fwd
Points
Fwd pts in
Mar 15
Based on
spot
Based on
6m
average
Based on
worst 5y
rate
Based on
best 5y
rate
Spot 75.25 62.64 100.28 38.31
29/02/2016
31/03/2016 52,445 55,400 80.49 67.88 105.52 43.55
28/04/2016 56,873 66,300 80.94 68.33 105.97 44.00
27/05/2016 63,968 67,400 81.65 69.04 106.68 44.71
29/06/2016 69,985 76,350 82.25 69.64 107.28 45.31
29/07/2016 81,291 82,700 83.38 70.77 108.41 46.44
31/08/2016 91,065 90,650 84.36 71.75 109.39 47.42
30/09/2016
82.18 69.57 107.21 45.24 6 months forward average
Outright
60 days payment
EUR/RUB
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Pricing the LCI rate
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P&L Accounts
Copyright ©2016 by Oriflame Holding AG
• Key rates
– LCI rate
– Actual rate
– Hedging rate
• Only true if hedge is 100 % efficient:
– Done for 100% of the amount
– From forecasts that are 100% accurate (time and amount of purchases)
– With payments received from the market at the same time as the hedge matures
18 12/05/2016 Copyright ©2015 by Oriflame Cosmetics Global SA
Business Unit Rate Rate
Local market = Actuals - LCI
Trading company = LCI - Hedging
Consolidated = Actuals - Hedging
LCI Margin impact – Market, Trading & Consolidated
Local Markets
Good forecasts critical to a good hedge execution
By updating the forecast earlier if important assumptions change
Paying within payment terms (not before, not after)
Global Treasury
By aligning hedging maturity dates with sales and payment dates whenever possible
Supply chain can become critical to the success
Reporting and analyses
Group Accounting
Correct booking of A/R
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Key success factors of the LCI program
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20 12/05/2016
Forecast Accuracy (an example)
Actual Fcst
2015-01 2015-02 2015-03 2015-04 2015-05 2015-06 2015-07 2015-08
517,980 508,666 471,618 412,769 399,684 472,350 488,998 521,516
510,155 393,537 356,625 326,942 313,215 410,151 473,939
514,971 454,045 287,376 308,009 321,706 460,363
692,761 195,487 241,141 370,147 340,479
399,528 154,356 254,612 443,446
466,432 212,922 299,805
206,003 221,486
320,331
Accuracy: Forecast is … higher (lower) than actual
1 Month ahead 0% -24% -34% -51% -67% 3% -31%
2 months ahead -8% -49% -28% -48% 24% -6%
3 months ahead -40% -18% -34% 80% 38%
4 months ahead 0% -33% 56% 6%
5 months ahead 1% 99% 44%
6 months ahead 137% -32%
Copyright ©2016 by Oriflame Holding AG
Quantitative:
Program applied to 75% of sales or 17 countries*
Significant gross margin protection in 2015
Savings in bid/ask spreads
Savings in closed euro bank accounts
Cash balances reduced and more concentrated
Qualitative:
Markets can forecast better
Focus on core business
Aligned with economics of the business
Improved communication with markets and better cash control
*4 from Latin America
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Results-LCI
Copyright ©2015 by Oriflame Cosmetics Global SA
Special comments for Latin America*
Mexico
• Convertible currency
• Top 10
• 8% of the exposure
• Program fully applied
• No issues
• Improves local profitability
• Netting successfully
applied in Latam with
change
Colombia
• COP not supported by
customs clearance
• USD
• Reduced bid/ask spreads
• Increased liquidity
• Use of USD to pay USD
liabilities of Trading
company
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* Trading company in Europe
Copyright ©2016 by Oriflame Holding AG
Final considerations for company based in Latam
• Relationship between the importer and exporter (risks
and rewards)
• Deductibility of possible losses
– on hedging
– Transaction loss (A/P or A/R)
• Transfer pricing considerations
• Convertibility of currencies of importer to USD or other
currencies by exporter
• Use of free zones
5/12/2016 23 Copyright ©2016 by Oriflame Holding AG
12/05/2016 24 Copyright ©2016 by Oriflame Holding AG