Finance for Demand managers

Feb 17 & 18 th, 2020 Jaap van Mourik

Objectives
Get a high level understanding of:

Income
statement
(P&L) Link our cost
into
AkzoNobel’s

15 by 20
Balance Sheet
- (OWC) and
Cash

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A few examples of financial statements
AkzoNobel’s annual and Internal reports
quarterly reports

3
Income Statement or P&L

income and cost

over a period of time

4
Income Statement items in AkzoNobel
Income Statement items
Revenue
Gross
invoice Variable Manufacturing Cost
value Contribution Margin
3d party Fixed Manufacturing Cost CoGS
sales Gross Margin
S&D cost
Commercial Result
Inter- OPEX
R&D Cost
company
G&A cost
sales
Adjusted Operating Income
Identified items
Operating Income (EBIT)
Interest & Taxes
Net Income
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 The top line: Revenue

AkzoNobel’s Sales of core products to

invoices to customers
Income Statement Items customers
Sales of supporting products to
Revenue customers

+ Sales Service contracts for tinting

machines
+ Services
+ Royalties

Income related to the use of

AkzoNobel’s brands

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 The top line: Revenue – more details
Revenue:
Invoice @ list prices AkzoNobel’s invoices
to customers
- On-invoice discounts
= Gross Invoice Value
- Rebates / Allowances / Cash discounts
= Sales (net sales to 3d)
+ Services (to 3d)
+ Royalties (to 3d)
AkzoNobel internal only
+ Intercompany sales Zero on Company-total level

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Contribution Margin & Gross Margin
Impact of raw material price
inflation!
Income Statement Items
Revenue Raw material and
packaging material cost
- Variable Manufacturing Cost(VMC)
for the products sold
Contribution Margin
- Fixed Manufacturing Cost (FMC) Production cost
Gross Margin *) for the products sold

*) No variable selling cost deducted 8

You use:
Cost of Goods Sold & Gross Margin

Income Statement Items Covers VMC

Revenue (Sales to 3d) and FMC
- Cost of Goods Sold (CoGS): in one total
for the products sold
Gross Margin *)

*) No variable selling cost deducted 9

From Gross Margin to Commercial Result
Distribution centers / LSP
Outbound freight cost *)
Income Statement Items
Gross Margin

S - Warehousing & Distribution cost Promotion (= not discounts)

& - Advertising & Promotion
D - Fixed selling expenses Business leads,
Commercial Result Sales teams,
Marketing teams,
Sales commissions / sales taxes *)

*) Previously variable selling cost 10

Summary: Revenue –> Commercial Result
Income Statement Items
Revenue:
Sales to 3d parties
- Cost of goods sold
= Gross Margin

S - Warehousing & Distribution cost

& - Advertising & Promotion
D - Fixed selling expenses
Commercial Result

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BU only: Commercial result to
Adjusted Operating Income

Income Statement Items

Commercial Result
- Research & Development (R&D)
- General & Administration (G&A
Adjusted Operating Income
Research departments
HR, Finance and IM
Legal, General management,
Communications,
GBS management,

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Akzo Nobel level only:
Adj.Operating Income to Net Income
Income Statement Items
Restructuring cost
Adjusted Operating Income
Identified Items
Interest cost related with bank
Operating Income loans
(EBIT = Earnings Before Interest & Tax)
- Interest Company income taxes
- Income Tax
Net Income (profit/loss for the period) This is the number you read in
the news paper

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 New P&L: P&L lines based on Controllability
● Controllable
X Allocated on BU level Global
P&L items BU BU-1 ISC
Functions
Price ● ●
Sales – third party
Volume ● ●
Sales – intercompany ●
VMC ●
Contribution margin ●
FMC ●
COGS ●

Gross margin ● ●

Distribution & Warehousing ●

A&P ● ●
Fixed Selling Expenses ● ●
Commercial result ● ●
BU S&D ●
BU R&D (incl. regional / local) ●
Global R&D X ●
Global Functions X ●
Adjusted OPI ● Audit Committee
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Profit Entitlement
 From as-is  to be for BU-1 / MSU
Income Statement Items Income Statement Items

Revenue: Revenue

Sales to 3d parties Sales to 3d parties

- Varibale selling cost

- Variable Manufacturing Cost(VMC) - Cost of Goods Sold (CoGS)

Contribution Margin

- Fixed Manufacturing Cost (FMC)

Gross Margin Gross Margin

S&D S&D new: W&D, A&P, Fixed selling

Commercial Result

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The Income Statement for AkzoNobel

EUR mln

Revenue Convention:
+ = Income
Total cost of sales - = Cost
Gross Margin
Sales & Distribution Cost
Research & Development Cost
General & Administration Cost
Operating Income (EBIT) Earnings Before Interest &Taxes
Financing Income & Expenses
Income Taxes
Other Results
Net Income
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The Income Statement for AkzoNobel
2019 2018

Revenue 9.276 9.256

Total cost of sales -5.309 -5.329
Gross Margin 3.967 3.927
Sales & Distribution Cost -2.976 -3.318
Adj. Operating income 991 798
Identified items -150 -193
Operating Income (EBIT) 841 605
Financing Income & Expenses -76 -52
Income Taxes -230 -118
Other Results 20 6.294
Net Income 555 6.729
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One more thing ….

Income Statement items Income Statement items

Revenue Revenue
Variable Manuf. Cost Take out Variable Manuf. Cost
Restructuring
Contribution Margin Contribution Margin
cost ….
Fixed Manuf. cost Fixed Manuf. Cost
Gross Margin Gross Margin
SG&A cost SG&A cost
Adjusted Oper. Income
… into Identified Items
Operating Income one total. Operating Income
Net Income Net Income
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Special subjects: RoS and OPEX
Where are my cost in AkzoNobel’s P&L?
Cost triggered by you &
me:
Posted on a Cost
Pay roll / salaries center:
Invoices from vendors (services) - Personnel cost
Concur expense claims - Services
- Depreciation
Depreciation office furniture

Production, Supply planning

HSE, Purchasing,ISC management
Each cost center has a definition: Warehousing / Sales / Marketing
> number or code R&D
> description
HR, Finance and IM
> functional cost area
Legal, General management,
Facilities, Communications,
GBS management
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 From Cost Centers to P&L:
functional cost area
Income Statement items All cost
centers in
Revenue functional
Variable Manuf. Cost cost area:
Contribution Margin
Production, Supply planning
Fixed Manuf. Cost HSE, Purchasing,
Gross Margin
Warehousing / Sales / Marketing
S&D cost OpEx =
R&D Operating
R&D Cost
Expenditures
G&A cost HR, Finance and IM
Legal, General management,
Operating Income (EBIT)
Facilities, Communications,
Net Income GBS management
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RoS – Return on Sales
Income Statement items
Revenue
Variable Manuf. Cost
Contribution Margin
Return on Sales
Fixed Manuf. Cost
Adj. Operating Income
Gross Margin RoS % =

S&D cost
Revenue Annual
report
R&D Cost
Paints & Coatings RoS% Compare
G&A cost 2016: 9.8%
2017: 9.4%
with PPG
Adj. Operating Income
2018: 8.6%
Identified Items 2019: 10.7%
15 by 20 !?

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RoS – Return on Sales
Income Statement items
15 by 20
Revenue
Variable Manuf. Cost Return on Sales *
Contribution Margin Adj. Operating Income – Corp cost
RoS %* =
Fixed Manuf. Cost
Revenue
Gross Margin
S&D cost
AkzoNobel’s RoS%*
R&D Cost Business
G&A cost
2017: 10.4% RoS
2018: 10.6%
Adj. Operating Income 2019: 12.0%
2020 target: 15%
Identified Items

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How to drive RoS*%?
Income Statement items Pricing
Revenue
Margins Production, Supply planning
Variable Manuf. Cost HSE, Purchasing,
Contribution Margin Warehousing / Sales / Marketing
Fixed Manuf. Cost Horizon R&D
3F
Gross Margin HR, Finance and IM
SG&A cost Legal, General management,
Facilities, Communications,
Adjusted Oper. Income

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25
“Business RoS”
Controllability

Global
BU BU-1 / MSU ISC
Functions

 RoS%
 Commercial  FMC%
 Commercial  FCA%
Result%  OLC%
Result%

No RoS%
We eat from
euros; not from %

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Balance Sheet
wealth of the company
at one moment in time

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Balance sheet AkzoNobel per 31 Dec 2019
Assets Equity & liabilities EUR mln

Fixed assets 8,240 Equity 6,568

Intangible assets 3,625 Fixed liabilities 3,414
Property, plant & equipment 1,700 Provisions 1,372
Leased PPE 374 LT borrowings 2,042
Other financial fixed assets 2,541

1 year 1 year
Current assets 4,744 Current liabilities 3,002
Inventories 1,139 ST borrowings 169
Trade & other receivables 2,133 Trade & other payables 2,406
Other 201 Other short term liabilities 427
Cash & Banks 1,271

Total Assets 12,984 Total Equity and liabilities 12,984

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 OWC - Operating working capital (Trade)

Inventories Trade Receivables Trade Payables

1,139 1,812 1,883

Operating Working
OWC = EUR 1,068 mln
Capital (OWC)

OWC: The oil that makes the machine run smoothly

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Slow moving & Obsolete inventories (SLOB)
Overstock items (inventory > expected sales in coming year)

Delisted items (end of life cycle)

Rule based provision

Expert review (e.g. overstock due to planned market launch)

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Cash Flow Statement
usage and sources of cash
over a period of time

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 Cash Flow – a few items

Cash
Opening Net income (profit)

Change in working capital

Investments in plants / equipment

Acquisitions & Divestments

Financing & Dividends paid

= Cash Flow Cash

Closing

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Summary
What do you want to know about a
Company?
Income
Statement
What’s the profit of the company
Revenue
Expenses
Balance
Profit
Sheet
How wealthy / healthy
on Dec 31st
is the company now?
Assets
Liabilities
Equity Cash Flow
Statement
What happened with the
company’s cash Sources of Cash
Usage of cash
How to drive RoS*%?
Income Statement items Pricing
Revenue
Margins Production, Supply planning
Variable Manuf. Cost HSE, Purchasing,
Contribution Margin Warehousing / Sales / Marketing
Fixed Manuf. Cost Horizon R&D
3F
Gross Margin HR, Finance and IM
SG&A cost Legal, General management,
Facilities, Communications,
Adjusted Oper. Income

15 by 20

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Your take aways :

P&L MSU / BU-1:

Revenue 3d parties
Cost of goods Sold
Gross margin OWC:
S&D new Inventories,
Commercial Result + Accounts receivable,
No ROS% - Accounts payable
15 by 20: a business
ROS* % on BU / AN
level and how to
drive it.

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Objectives
Get a high level understanding of:

Income Link our cost

statement into
(P&L) AkzoNobel’s

Balance Sheet
15 by 20
- (OWC) and
Cash

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That’s all folks