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Supply Chain Finance at Procter & Gamble

Harvard Business School Case 9-216-039
Courseware 9-216-713

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1
Table A P&G Supply Chain Finance Example

Before A/P After A/P Extension

Notes Extension without SCF with SCF

Amount invoiced by supplier ($) $1,000.00 $1,000.00 $1,000.00

Minimum days to payment [A] 15 15 15

P&G pays invoice on day [B] 45 75 75
Supplier receives funds on day [C] 45 75 15

Additional days financed by supplie[D] = [C] - [A] 30 60

Supplier financing cost ($) [E] $2.92 $5.83

Days financed by SCF bank [F] = [B] - [A] 60

SCF invoice discount (%) [G] 0.22%

Net amount to supplier ($) [H] $997.08 $994.17 $997.83

Source: Calculated by casewriter from company documents.

Notes:
[E] Supplier financing cost assumes a 3.50% borrowing rate. The cost to finance the
invoice is calculated as $1000 x 3.50% x [D] / 360.
[G] Calculated in Table B.
[H] Without the SCF program, the net amount to supplier is calculated as $1000 - [E].
With the SCF program, the net amount to supplier is calculated as $1000 x (1-[G]).

Table B Calculation of SCF Invoice Discount

Notes Calculation

Days financed by SCF ban [A] (from Table A) 60

LIBOR, 60 day rate [B] 0.30%

SCF bank spread [C] 1.00%
SCF financing rate [D] = [B]+[C] 1.30%

SCF invoice discount (%) [E] = [D] x [A] / 360 0.22%

Source: Calculated by casewriter from company documents.
Exhibit 1: Procter & Gamble, Income Statement, FY2011-FY2015 (in US # millions)

Fiscal Year Ending June 30

Income Statement 2011 2012 2013 2014 2015

Revenue $81,104 $82,006 $80,116 $80,510 $76,279

Cost of Products Sold $39,859 $41,411 $39,991 $40,611 $38,248
Gross Profit $41,245 $40,595 $40,125 $39,899 $38,031
SG&A Expense $25,750 $25,984 $26,000 $24,402 $23,158
Operating Income $15,495 $14,611 $14,125 $15,497 $14,873
Net Interest Expense ($769) ($692) ($579) ($609) ($475)
Other Income & Unusual Items* $271 ($1,391) $633 ($551) ($2,552)
Profit before Tax $14,997 $12,528 $14,179 $14,337 $11,846
Income Tax Expense $3,299 $3,378 $3,226 $3,019 $2,916
Minority Interest ($130) ($148) ($90) ($142) ($108)
Earnings from Discont. Ops. $229 $1,754 $449 $467 ($1,786)
Net Income $11,797 $10,756 $11,312 $11,643 $7,036

Per Share Items

Basic Earnings per Share (EPS) 4.12 3.82 4.04 4.19 2.50
Avg. # Basic Shares Outstanding 2,804 2,751 2,743 2,720 2,712
Dividend per Share $1.97 $2.14 $2.29 $2.45 $2.59
Payout Ratio 48% 56% 57% 59% 104%
Stock Price ($/share) $63.57 61.25 $76.99 $78.59 $78.24

Other Cash Flow Items

Depreciation & Amortization $2,838 $3,204 $2,982 $3,141 $3,134
Capital Expenditures $3,306 $3,964 $4,008 $3,848 $3,736
Advertising Expense $9,210 $9,222 $9,364 $8,979 $8,290

Financial Ratios & Information

Revenue Growth 4.6% 1.1% -2.3% 0.5% -5.3%
Gross Margin 50.9% 49.5% 50.1% 49.6% 49.9%
Operating Margin 19.1% 17.8% 17.6% 19.2% 19.5%
Net Margin (ROS) 14.5% 13.1% 14.1% 14.5% 9.2%
Return on Assets (ROA) 8.5% 8.1% 8.1% 8.1% 5.4%
Return on Equity (ROE, ending) 17.3% 16.8% 16.5% 16.6% 11.2%
Effective Tax Rate 22.0% 27.0% 22.8% 21.1% 24.6%

Number of Employees 129,000 126,000 121,000 118,000 110,000

Source: Adapted from data obtained from Capital IQ, a division of Standard & Poor’s, accessed December 2015.
Some data are from Procter & Gamble, June 30, 2015, Form 10-K (Cincinnati: Procter & Gamble, 2015).

Note *: Procter and Gamble took a one-time charge of $2.1 billion in 2015 to reflect a change in the method of
accounting for its Venezuelan operations. Due to an inability to convert currency or pay dividends, P&G decided to
stop consolidating its Venezuelan subsidiaries and begin accounting for those investments using the cost method.
Exhibit 2: Procter & Gamble, Balance Sheet, FY2011-FY2015 (in US # millions)

Fiscal Year Ending June 30

Balance Sheet 2011 2012 2013 2014 2015

Assets
Cash & ST Investments $2,768 $4,436 $5,947 $10,686 $11,612
Accounts Receivable $6,275 $6,068 $6,508 $6,386 $4,861
Inventory $7,379 $6,721 $6,909 $6,759 $5,454
Prepaid Expenses $4,408 $3,684 $3,678 $3,845 $2,853
Other Current Assets $1,140 $1,001 $948 $3,941 $4,866
Current Assets $21,970 $21,910 $23,990 $31,617 $29,646
Net PP&E $21,293 $20,377 $21,666 $22,304 $20,268
Goodwill & Intangibles $90,182 $84,761 $86,760 $84,547 $74,145
Other LT Assets $4,909 $5,196 $6,847 $5,798 $5,436
Total Assets $138,354 $132,244 $139,263 $144,266 $129,495

Liabilities & Net Worth

Accounts Payable $8,022 $7,920 $8,777 $8,461 $8,257
Accrued Expenses $5,696 $4,804 $5,161 $5,336 $4,564
Short-term Borrowings $6,987 $4,615 $7,926 $11,299 $9,249
Current Portion of LT Debt $2,994 $4,083 $4,506 $4,307 $2,752
Other Current Liabilities $3,594 $3,485 $3,667 $4,323 $4,968
Current Liabilities $27,293 $24,907 $30,037 $33,726 $29,790
Long Term Debt $22,033 $21,080 $19,111 $19,811 $18,297
Pension Liabilities $6,275 $8,954 $7,740 $7,890 $6,997
Other LT Liabilities $14,752 $13,268 $13,666 $12,863 $11,361
Total Liabilties $70,353 $68,209 $70,554 $74,290 $66,445
Preferred Stock $1,234 $1,195 $1,137 $1,111 $1,077
Common Equity $66,406 $62,244 $66,927 $68,103 $61,342
Minority Interest $361 $596 $645 $762 $631
Total Equity $68,001 $64,035 $68,709 $69,976 $63,050
Total Liab. & Equity $138,354 $132,244 $139,263 $144,266 $129,495

Financial Ratios & Information

Current Ratio (CA/CL) 0.80 0.88 0.80 0.94 1.00
Total Debt $32,014 $29,778 $31,543 $35,417 $30,298
Debt-to-Total Capital (D/TC) 32.0% 31.7% 31.5% 33.6% 32.5%
Fin. Leverage (Assets/Equity) 2.03 2.07 2.03 2.06 2.05
S&P Long-Term Debt Rating AA- AA- AA- AA- AA-
 Working Capital
Asset Turnover (Sales/Assets) 0.59 0.62 0.58 0.56 0.59
Inventory Turns (COGS/Inventory 5.40 6.16 5.79 6.01 7.01

Source: Adapted from data obtained from Capital IQ, a division of Standard & Poor’s, accessed December 2015.
Exhibit 3: Procter & Gamble Working Capital Management, 2000-2015 (in days)

Days of Days of Cash Adjusted

Days of Sales Inventory Payables Conversion Days of
Outstanding Outstanding Outstanding Cycle Payables Out.
(DSO) (DIO) (DPO) (CCC) (DPO) *
Year A B C D=A+B-C E

2000 26.6 60.6 38.4 48.8 32.5

2002 27.3 58.9 36.1 50.1 30.8
2002 28.0 61.6 39.3 50.3 33.2
2003 25.6 60.0 46.1 39.5 38.5
2004 28.8 63.9 52.5 40.2 43.1
2005 26.9 65.6 49.8 42.7 41.1
2006 30.6 69.3 54.1 45.8 44.5
2007 32.3 69.8 58.4 43.7 47.9
2008 31.1 78.2 63.0 46.4 51.8
2009 27.8 64.9 56.4 36.3 47.2
2010 25.1 62.9 71.4 16.6 58.1
2011 28.2 67.6 73.5 22.4 59.7
2012 27.0 59.2 69.8 16.4 57.1
2013 29.6 63.1 80.1 12.6 64.9
2014 29.0 60.7 76.0 13.7 62.3
2015 23.3 52.0 78.8 -3.5 64.8

Source: Adapted from data obtained from Capital IQ, a division of Standard & Poor’s,
accessed December 2015.
Note *: Adjusted Days of Payables Outstanding (DPO) = [AP / (COGS + Advertising Expense) /
365]. This adjustment recognizes the importance of major suppliers such as advertising firms
not counted in costs of goods sold.
Exhibit 5: Fibria Celulose, Income Statement 2012-2015 (in millions of Reais and US Dollars)

Fiscal Year Ending December 31 Last 12 months to 6/30/15

Income Statement 2012 2013 2014 In Reais In USD

Revenue R$ 6,174 R$ 6,917 R$ 7,084 R$ 8,054 $3,099

Cost of Products Sold R$ 5,237 R$ 5,383 R$ 5,546 R$ 5,560 $2,139
Gross Profit R$ 937 R$ 1,535 R$ 1,538 R$ 2,494 $960
SG&A Expense R$ 579 R$ 642 R$ 644 R$ 703 $270
Other Oper. Expense (Income) R$ 13 -R$ 21 -R$ 766 R$ 94 $36
Operating Income R$ 345 R$ 914 R$ 1,660 R$ 1,698 $653
Net Interest Expense R$ 530 R$ 479 R$ 385 R$ 356 $137
Currency Exchange Gains (Loss) -R$ 735 -R$ 933 -R$ 722 -R$ 1,926 ($741)
Other Non-Oper. Income (Loss) -R$ 70 R$ 154 -R$ 531 -R$ 617 ($237)
Profit before Tax -R$ 990 -R$ 344 R$ 22 -R$ 1,201 ($462)
Income Tax Expense (Credit) -R$ 292 R$ 354 -R$ 141 -R$ 762 ($293)
Minority Interest -R$ 7 -R$ 9 -R$ 7 -R$ 9 ($4)
Net Income -R$ 705 -R$ 706 R$ 156 -R$ 449 ($173)

Per Share Items

Basic Earnings per Share (EPS -R$ 1.34 -R$ 1.28 R$ 0.28 R$ 0.81 $0.31
Avg. # Basic Shares Out. 525 554 554 554
Dividends per Share R$ 0.00 R$ 0.00 R$ 0.07 R$ 0.27
Stock Price R$ 22.57 R$ 27.86 R$ 32.26 R$ 44.15

Other Cash Flow Items

Depreciation & Amortization R$ 1,720 R$ 1,752 R$ 1,791 R$ 1,818 $700
Capital Expenditures R$ 1,078 R$ 1,287 R$ 1,591 R$ 1,657 $638

Financial Ratios
Revenue Growth 5.5% 12.0% 2.4% 13.7%
Gross Margin 15.2% 22.2% 21.7% 31.0%
Operating Margin 5.6% 13.2% 23.4% 21.1%
Net Margin (ROS) -11.4% -10.2% 2.2% -5.6%
Return on Assets (ROA) -2.5% -2.6% 0.6% -1.7%
Return on Equity (ROE, endin -4.6% -4.9% 1.1% -3.1%

Pulp Sales (000 metric tons) 5,357 5,198 5,305 5,370

Pulp Price-Europe (USD/ton) $780 $770 $741 $793
Number of Employees 4,136 4,192 4,294 4,200
Average Exchange Rate (Reais/US 1.9550 2.1605 2.3547 2.5989
Source: Fibria Celulose S.A., SEC Form 20-F for the year ended 12/31/15, Capital IQ, a division of Standard & Poor’s,
accessed February 2016.

Note: For simplicity, the dollar denominated income statement for the 12 months ending June 30, 2015 was created
using the average exchange rate for those 12 months.
Exhibit 6: Fibria Celulose, Balance Sheet 2012-2015 (in millions of Reais and US Dollars)

Fiscal Year Ending December 31 June 30, 2015

Balance Sheet 2012 2013 2014 In Reais In USD

Assets
Cash & ST Investments R$ 3,296 R$ 2,099 R$ 745 R$ 1,386 $515
Accounts Receivable R$ 964 R$ 1,477 R$ 695 R$ 875 $325
Inventory R$ 1,183 R$ 1,266 R$ 1,239 R$ 1,455 $541
Other Current Assets R$ 803 R$ 966 R$ 583 R$ 147 $55
Current Assets R$ 6,246 R$ 5,807 R$ 3,261 R$ 3,862 $1,435
Net PP&E R$ 14,291 R$ 13,224 R$ 12,959 R$ 12,810 $4,760
Goodwill & Intangibles R$ 4,717 R$ 4,634 R$ 4,552 R$ 4,521 $1,680
Other LT Assets R$ 2,890 R$ 3,085 R$ 4,822 R$ 5,308 $1,972
Total Assets R$ 28,145 R$ 26,750 R$ 25,594 R$ 26,501 $9,847

Liabilities & Net Worth

Accounts Payable R$ 436 R$ 587 R$ 593 R$ 637 $237
Accrued Expenses R$ 139 R$ 129 R$ 135 R$ 111 $41
Short-term Borrowings R$ 0 R$ 196 R$ 263 R$ 153 $57
Current Portion of LT Debt R$ 1,138 R$ 2,777 R$ 703 R$ 741 $275
Other Current Liabilities R$ 762 R$ 760 R$ 405 R$ 445 $165
Current Liabilities R$ 2,475 R$ 4,448 R$ 2,099 R$ 2,086 $775
Long Term Debt R$ 9,630 R$ 6,801 R$ 7,361 R$ 8,121 $3,018
Other LT Liabilities R$ 869 R$ 1,010 R$ 1,518 R$ 1,730 $643
Total Liabilities R$ 12,974 R$ 12,259 R$ 10,978 R$ 11,937 $4,436
Total Equity R$ 15,171 R$ 14,491 R$ 14,616 R$ 14,563 $5,411
Total Liab. & Equity R$ 28,145 R$ 26,750 R$ 25,594 R$ 26,501 $9,847

Financial Ratios
Current Ratio (CA/CL) 2.52 1.31 1.55 1.85
Total Debt R$ 10,768 R$ 9,773 R$ 8,327 R$ 9,015
Debt-to-Total Capital (D/TC) 41.5% 40.3% 36.3% 38.2%
Fin. Leverage (Assets/Equity) 1.86 1.85 1.75 1.82
S&P LT Debt Rating BB BB+ BB+ BBB-

Working Capital
Asset Turnover (Sales/Assets 0.22 0.26 0.28 0.34
Inventory Turns (COGS/Inv.) 4.43 4.25 4.48 3.87

Average Exchange Rate (Reais/U 1.9550 2.1605 2.3547 2.6913

Source: Fibria Celulose S.A., SEC Form 20-F for the year ended 12/31/15, Capital IQ, a division of Standard & Poor’s,
accessed February 2016.

Note: For simplicity, the dollar denominated income statement for the 12 months ending June 30, 2015 was created
using the average exchange rate for those 12 months.
Exhibit 8: Current Market Rates, August 7, 2015

Corporate Bond
US Treasury Yields Yields
(constant maturity) (1-year maturity) Short-Term Rates (a)
Maturity Credit
Yield Yield Maturity Yield
Rating

1-month 0.05% AAA 0.48% 1-month LIBOR 0.19%

3-months 0.12% AA 0.63% 3-month LIBOR 0.30%
6-months 0.17% A 0.74% 6-month LIBOR 0.49%
1 year 0.33% BBB 1.13%
5 years 1.52% BB 2.80% 30-Day AA CP 0.18%
10 years 2.16% B 3.74% 60-Day AA CP 0.23%
30 years 2.86% CCC 4.58% 90-Day AA CP 0.30%

Sources: Federal Reserve Selected Interest Rates (Daily)-H.15; BondsOnline Group

Thompson Reuters, and casewriter estimates.
Note (a): Short-term rates are the London Interbank Offered Rate (LIBOR) for U.S.
Dollars and the rate on AA-rated asset-backed commercial paper.