Financial focus Loc Jenouvrier, Executive VP, Finance and Legal - - PowerPoint PPT Presentation

Financial focus

Loïc Jenouvrier, Executive VP, Finance and Legal Affairs

Financial focus

Business model Use of Free Cash Flow

Basics Developments Sensitivity

Issue Volume is key in the business model

3

Issue Volume (IV) Revenue and Profits Cash and Float

1 2 3 4

Operating revenue without IV Operating revenue with IV

Revenue generation

4

1

Generated through client fees (~1.0% of IV) and merchant fees (~3.5% of IV), defined contract by contract + Non-spent vouchers (~0.5%)

Based on 2012 figures. (1) Ratio between operating revenue with issue volume and issue volume.

Fixed fees generated by corporate marketing and incentive consulting services and solutions for which Edenred does not manage the float Interest generated by the investment of the float in money market and in local currency

• Mix effects, related to products,

countries, contract size, and type of merchants

• Pressure on large client fees, mostly
• ffset by an increase in penetration

in SMEs

• Non-recurring
• Low margins
• Reflects the growth of the float in

value (which is a function of issue volume growth and holding period), as well as interest rates

Financial revenue Mec Mechanism hanism Sensitiv Sensitivit ity

Take-up rate(1)

Focus on operating revenue with IV- Mix effects

5

1

Higher growth of expense management solutions, with a lower take-up (~4%)

Product mix

Take-up rates vary by country, depending on the market’s level of development and size

Country mix

Lower take-up rates for large contracts

Contract mix

Merchant fees vary depending

• n the type of network

(example: supermarkets vs. restaurants)

Network mix

Changes in the take-up rate reflect different mix effects

Profit generation – EBIT bridge

6

2

2011 EBIT €355m

€36m €(8)m €(19)m

2012 EBIT €367m

100% flow-

through of L/L ∆ in financial revenue

50% flow-

through of L/L ∆ in operating revenue Digital extra- costs Currency effect and changes in scope Flow-through ratio(1)

50%

Operating revenue

+7.7% 72

Operating EBIT

+10.6% 36

L/L change in % L/L change in value

€3m

The operating flow-through ratio reflects the operating leverage of the business

(1) Ratio between the like-for-like change in operating EBIT and the like for like change in operating revenue.

Operating revenue 808 +51 859 +81 940 +72 1,012

Operating flow-through ratio (1) 49% 47% 50%

Operating EBIT 233 +25 258 +38 296 +36 332

Profit generation – Operating leverage

7

2

A business with strong operating leverage

(1) Operating flow-through ratio: ratio between the like-for-like change in operating EBIT and the like-for-like change in operating revenue.

2010 L/L 2011 L/L 2012 L/L 2009

Excluding digital extra-costs Operating EBIT/ Operating Revenue

• Excl. digital

extra-costs

• Incl. digital

extra-costs

28.8% 28.8% 30.0% 29.6% 31.5% 29.7% 32.8% 30.3% +1.2 pts +1.5 pts +1.3 pts

FFO generation

8

3

Issue volume and margin improvement are key for FFO generation Annual L/L growth target(1) > 10%

EBIT EBIT to to FFO FFO

(1) Normalized targets (normalized growth means the level of growth that the Group believes it can achieve in an economic environment in which there is no increase in unemployment).

30 80 130 180 230 280 5 7 9 11 13 15 17

2003 2004 2005 2006 2007 2008 2009 2010 2012 2011

FFO (€m) Issue Volume (€bn)

Cor Correla elation bet tion between een FFO and IV FFO and IV

2010 2011 2012

EBIT 328 355 367

Net financial expense (62) (40) (36) Income tax (91) (97) (102) Depreciation and

• ther non-cash

items 38 39 53

FFO 213 257 282

In € millions

+10.0% +16.4%

Average L/L growth

FCF generation

9

3

FCF structurally higher than FFO due to negative WCR and low recurring capex

FFO 213 257 282 (Increase)/decrease in float 100 112 67 (Increase)/decrease in restricted cash (42) (56) (19) (Increase)/decrease in working capital (excl. float) 42 28 40 Recurring capex (32) (35) (40) Free Cash Flow 281 306 330

High cash flo High cash flow w con conver ersion sion ratio tio FFO to FC FFO to FCF

50 Impact in €m % of IV

Operating revenue Operating costs

(25)

Operating EBIT

25

Float (At an average 5-8 weeks of issue volume/52)

125

Capex

(2)

Total Cash flow

143 Example based on 2012 results

Impact of a €1bn increase in issue volume

2010 2011 2012

In € millions

Financial revenue/EBIT

5

Income tax

(10) Take-up rate 5.0%

• 2.5%

2.5% 12.5% 0.2% 14% 0.5% Flow- though

• f

50% 1.0%

Float structure

10

4

By By solut solution ion

(1) Main solutions in Latin America: Food benefits and Expense management solutions. Main solutions in Europe: Meal benefits and Incentive & rewards solutions

Meal Expense management Incentive & Rewards

Nb of weeks of float

6-8 weeks Food 3-5 weeks

• >3 months

Float breakdown between Latin America and Europe reflecting product mix(1)

X% Latin America Europe RoW

26% 4% 70%

X%

X%

Float breakdown IV breakdown

53% 44% 3%

By By region gion

Float generation

11

4

A clear correlation between issue volume and float

Issue volume (€bn) Float (€bn)

2007 2008 2009 2010 2012 2011

Cor Correla elation bet tion between een Floa loat t and IV and IV Incr Increas ease in e in floa loat

2010 2011 2012

Float(1) 2,032 2,249 2,343 2,456 In nb of weeks 8.5 8.4 8.0 7.7

In € millions

2009

(1) Vouchers in circulation less trade receivables.

2006 2005 2003 2004 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5

5 7 9 11 13 15 17

A prudent float investment policy

12

4

• Strictly defined policies
• Monthly reporting by counterparty, country and structure, and internal audit

controls

Centralized cash management policy

• No bonds, no equities
• Only money market instruments in local currency (bank term deposits with no

risk on capital)

• No float transfer between currencies

Investment vehicles

• Cash concentrated at Group level via intercompany loans and/or multi-currency

Cash Pooling solution - in order to avoid FX risk and to invest in the highest rated institutions (very limited investment in local banks, only international banks)

• Diversification: limited exposure by counterparty
• Only Tier 1 counterparties: highest rated institutions in the countries we operate in

Risk management

• At end-2012, 32% of the float was invested in long-term instruments (more than
• ne year)
• Medium-term target: 50% of float invested in long-term instruments,

depending on interest rate trends in each country

Maturity management

Float average investment rate

13

1,976 2,032 2,249 2,343 2,456

129 94 80 92 91

70 80 90 100 110 120 130 140 1,250 1,450 1,650 1,850 2,050 2,250 2,450 2,650 2008 2009 2010 2011 2012

Float Financial revenue

Financial revenue at a low point due to historically low interest rates, and despite significant growth in the float

4

In € millions

91

Financial focus

Business model Use of Free Cash Flow

Basics Developments Sensitivity

Effects associated with 2016 strategic developments

15

Invent

Conquer 2012

Win

Accelerate the roll-out of Expense management solutions Shift to digital

Increased weight of Expense management in the Group (>20% of total issue volume in 2016) >75% digital issue volume by 2016 (vs. 51% at end-2012)

Shift to digital:

• verview by region

16

Digital issue volume as a % of total issue volume by geography

(end-2009) (end-2012)

Shift to digital at an advanced stage in Latin America and on its way in Europe

81% Latin America 59% 15% Europe 6% 62% Rest of World 59% 51% Total 30%

Shift to digital: effects on P&L and Float

17

New volume opportunities:

• Increase penetration in SMEs (simpler solutions and lower cost of acquisition)
• Create new solutions thanks to tighter control of fund allocation

Issue volume Revenue

• Reduce lost products (~0.25% of IV). No impact on expired.
• Diversify revenue sources by developing new services for affiliates and

beneficiaries

Costs

• Holding period: reduction of around -15% at the level of a program
• Ongoing growth in value, fuelled by issue volume growth

Float

• At the level of a country: 5% to 10% cost decrease
• At Group level: >50% operating flow-through ratio from 2014

Shift to digital: cost developments at the country level

18

5% to 10% cost reduction post digital transition, depending on volume generated by the solution

35 35 35 35 30 12 10 Paper aper cos cost s t struct tructure ure Dig Digital c ital cos

• st s

structu ructure re

Sales Support functions (marketing, finance…) Production and logistics IT costs & call centers Whatever the media, Sales remains at the heart of the business

• 18%

+10%

Total costs decrease:

• 5% to -10%

60% decrease in production & logistics costs New recurring digital costs

Shift to digital: change in flow-through ratio

19

Considering the change in project costs and the transition effects: Objective of >50% operating flow-through ratio in the next three years

2013E 2014

Flow-through ratio, including digital extra-costs

>75%

2011 2012 2016 2010

39% <50% 49% 31%

Digital Issue volume

>50%

51%

No more digital extra-costs

35% 41% >56%

2015

Acceleration of the digital shift

…

Shift to digital: float developments at the solution level

20

Beneficiary retention Merchant retention & reimbursement

1 2 3

Order/ delivery

With cards: fewer logistics in phase and phase 1 3 Around -15% fewer days of issue volume, when a program is shifted from paper to digital

~80% of the retention period is related to beneficiary use habits, which do not change with the shift to digital

Issue volume (in €bn) 10.8 +39% 15.0 Digital IV in % 12% 46% Float (in €bn) 1.9 +30% 2.5

Nb of weeks 9.2

• 0.7

8.5

Nb of weeks on paper 9.2 9.2 Nb of weeks on digital 8.0 8.0

Shift to digital: float evolution at the Group level

21

A strong positive impact of digital on volume growth A limited mix effect on the float holding period 2007 2012 FLOAT EVOLUTION EXCLUDING EXPENSE MANAGEMENT

x4

Mix effect on float holding period ~13% difference

As a % of issue volume(1) 77% 10% 4% Average L/L issue volume growth (2010-12) +3.9% +19.8% +20.6%

• 5.8%

Take-up rate ~5.5% ~4.5% ~4% ~7% Operating EBIT /Operating revenue Similar level: ~30% Float holding period 6-8 weeks 3-5 weeks

• >3 months

Expense management: business model characteristics

22

Expense management product mix effect, impacting the take-up rate at Group level and the float holding period Expense Management Incentive & Rewards Meal Food

(1) At 2012-end.

Expense management: FCF-accretive

23

As expense management development does not require significant capex, it is FCF accretive

(1) Take-up rate: ratio between operating revenue with issue volume and issue volume (2) Operating margin: ratio between operating EBIT and operating revenue

Illustration

Standalone benefit Expense Management Benefit 1

Year 1 Year 5

Main assumptions:

• Benefits: 5% growth in IV per year; no change in take-up rate over the period.
• Expense management: >20% issue volume contribution within 5 years; 4% take-up; 30% EBIT margin.

Standalone benefit 2

Issue volume

300 365 456

Take-up (1)

5.0% 5.0% 4.8%

• Op. margin (2)

28.0% 31.9% 31.6%

FFO

3.7 4.2 4.9

Float variation

1.9 2.3 2.3

FCF (€m)

5.0 5.8 6.4

Float (in weeks)

7.0 7.0 5.6

Float

40 49 49

No impact on margins FCF-accretive Mix effect on take-up Mix effect on float holding period No impact on float

Financial focus

Business model Use of Free Cash Flow

Basics Developments Sensitivity

EBIT sensitivity to macro-economic indicators

25

Unemployment (1) Inflation (2) Interest rates (3) Exchange rates

+/- 1%

~ €5.8m

+/- 1%

~ €4.0m

+/- 5% BRL VEF MXN €7.3m €2.6m €0.9m +/- 50bp EURO LATAM OTHER €6.9m €3.3m €2.1m

(1) Unemployment rate in our existing client portfolio (2) Assuming that face value grows at the same pace as inflation (3) Impact of 50bp increase/decrease in our average investment rate on financial revenue. (4) Euro zone.

(4)

Financial focus

Business model Use of Free Cash Flow

Basics Developments Sensitivity

Free cash flow use policy

27 (1) The ratio of adjusted funds from operations to adjusted net debt, determined by the Standard & Poor’s method, must be above 30% at all times to maintain a strong investment grade rating. Estimated 2012 ratios: 40% at June 30 and 110% at December 31.

Free cash flow structurally higher than profits which allows a strong return to shareholders and financial flexibility Strong Investment Grade rating(1) Sound financial position

Reccurring net profit after tax ~90% return in dividends Additional Free cash flow Reinforced strategy of targeted acquisitions