covid crisis corporate finance lifeline · 2020. 5. 3. · the coronavirus is a major shock to the...

March 2020

Covid Crisis

Corporate Finance Lifeline

Chapter 2:

Beyond short-term cash shortfalls

Confidential – All rights reserved – EY 2020

Situation overviewContaSituationoverviewct

Where we are on the crisis timeline & contents of this material

Employees and

security of operations

Short-term cash-flow management

Beyond short-term cash shortfalls

Restructuring & Preserving value

Divestures & Acquisitions

□ Enable remote work

□ Flexible / shortened working hours

□ Security and safety of personnel

□ Assess liquidity situation

□ Establish cash forecasts and identify potential liquidity requirements

□ Implementation of short-term cash-flow-improvement measures

CONTENTS OF THIS DECK:

❑ Situation overview

❑ Markets & company value development

❑ Scenarios of Future and business plan considerations

❑ Financial reporting implications

❑ Cost-optimization measures

❑ Data & Analytics Solutions to Find the Way Out

❑ Retain and Support your customers through crisis

Crisis

Management

Plan

AdaptationMonitoring

Stakeholder

Management

□ To follow…

□ To follow…

Chapter 0

Chapter 2

Chapter 3

Chapter 4

Chapter 1


Situation overviewContaSituationoverviewct

Situation overview


Macroeconomic development and outlook

GDP outlook in selected countries

Country 2020 2021

Eurozone -4.5% 3.5%

USA -3.0% 3.2%

Germany 0.7% 0.7%

UK -4.1% 3.0%

China 2.4% 6.5%Zdroj: Refinitiv, 12. April 2020

GDP growth outlook in Czech republic

Institution 2020 2021 Issue date

Ministry of finance CR -5,6% 3,1% 6 April 2020

UniCredit Bank 11,0% 8,4% 7 April 2020

PPF Banka -4.8% 3,0% 5 April 2020

Raiffeisenbank -5,2% 3,4% 24 March 2020

Česká spořitelna (rebound in 6M) -9,9% 0,4% 27 March 2020

Česká spořitelna (rebound in less than 3M) -4,2% 3,8% 27 March 2020

40

50

60

70

80

90

100

110

120

130

140

07/2008 09/2008 12/2008 03/2009 06/2009 08/2009 11/2009 02/2010 05/2010 07/2010 10/2010 01/2011 04/2011 07/2011 09/2011 12/2011 03/2012 06/2012

S&

P 5

00

S&P 500 COVID-19

S&P 500 Finanční krize2008

Pre-crisis growth trend

“V”-shaped

shock

“U”-shaped

shock

“L”-shaped

shock

Global GDP growth outlook

Comparing 2008 stock market performance with COVID-19 and possible future developments


The coronavirus is a major shock to the global economy, governments

have announced various state supports

Government

measures in

Czech

Republic

Government

measures

abroad

National budget and spending

▪ 2020 budget deficit increased from CZK 40

bn to CZK 200 bn.

▪ Czech National Bank lowered the two-week

repo rate by 75 bp to 1.0% and agreed to

buy government bonds.

Business support

▪ Up to CZK 30 bn of interest-free

government backed loans (COVID II

program).

▪ EGAP guarantees program for Companies

with over 250 employees, insurance

capacity up to CZK 330 bn.

Employment support - Antivirus

▪ The program shall pay a contribution

towards the reimbursement of eligible

employers' costs incurred after 1 March

2020.

▪ Compensation between 60% - 100% of

employee‘s salary depending on incurred

working barrier related to COVID-19.

Tax

▪ June income tax deposit remission

▪ Remission of fees and fines in case of

exceeding tax filling deadline.

Government measures

▪ ECB announced EUR 750 bn in bond purchases.

▪ Germany authorized EUR 350 bn in new debt (ca 10% of its

GDP).

▪ USA: FED announced unlimited buying of U.S. Treasuries and

mortgage-backed securities and $2.3 trillion round of loans that

include support for small businesses and consumers.

Existing

economic

studies of

pandemics

▪ Mild pandemic scenario

▪ Temporary slowdown and possible GDP loss of 1%, split

equally between supply and demand side.

▪ Assume 25% of population infected and fatality rate of 0.1%

(like seasonal flu).

▪ Severe pandemic scenario

▪ A global recession of similar magnitude to the Great

Recession, possible GDP loss up to 5%, equivalent of to the

global economy shut down for 2-3 weeks.

▪ Assume 30% of population infected and fatality rate of 2.5%.

▪ Relevance for the coronavirus

▪ Highest infection rate of COVID-19 is ca 0,1% in Italy so far,

way below the study scenarios.

▪ However, the efforts to avoid becoming infected can be

highly disruptive to the economy even if the outbreak turns

out to be very mild.

The coronavirus is a major shock to the global economy. The duration of the shock, the ultimate infection rates and fatality rates are all unknown.

Confidential – All rights reserved – EY 2020Confidential – All rights reserved – EY 2020

Markets & company

value development


Capital markets and market multiples development over recent period,

can we compare it to the 2008 financial crisis?S&P 500 P/E multiple development during COVID-19 crisis S&P EUROPE 350 P/E multiple development during COVID-19 crisis

S&P 500 P/E multiple development during 2008 crisis

-

5x

10x

15x

20x

25x

P/E

mul

tiple

S&P 500 Consumer Discretionary

Consumer Staples Energy

Financials Industrials

Utilities

Lehman Brothers default • P/E market multiples decreased significantly after 31 January 2020

• All depicted sectors were affected negatively, the biggest drop was observed in

financial, energy and industrial sectors.

• There are currently not significant differences between the development of P/E

multiples in Europe and in the US (S&P EUROPE 350 P/E multiple decreased

from 9.6x to 7.5x and S&P 500 P/E multiple decreased from 14.0x to 10.4x).

S&P 500 and S&P EUROPE 350 during COVID-19 crisis

• COVID-19 crisis caused much more rapid fall of stock market while earnings in

general did not drop as abruptly. This led to a downturn of current P/E multiples,

which was not observed in 2008 as prices and earnings declined simultaneously.

• The 2008 financial crisis came more gradually (started in July 2007 and

culminated by Lehman Brothers default on 15 September 2008). That means

prices did not fall faster than earnings keeping the multiples more stable.

S&P 500 during COVID-19 crisis and during 2008 crisis

-

5x

10x

15x

20x

25x

30x

35x

P/E

mul

tiple

S&P 500 Consumer Discretionary



Utilities -

5x

10x

15x

20x

25x

30x

P/E

mul

tiple

S&P EUROPE 350 Consumer Discretionary



Utilities


COVID-19 directly impacts running businesses. How the company

value drops under current circumstances?

Factors

leading to

lower value

Model

company

▪ Drop in cash flow

▪ Lower demand

▪ Possible difficulties in supply chain

▪ Increase in discounting rate

▪ Higher uncertainty

▪ Increase in financing costs

▪ Possibly long recovery period

We illustrate the value drop on a simplified example

▪ Our model company has yearly net cash flow of 100 monetary units.

▪ Its discount rate is 10 %.

▪ Company value: 1000.

Impacts of COVID crisis

▪ Net cash flow suddenly falls.

▪ Higher uncertainty connected to the business leads to higher discount rates.

▪ Net cash flow will be recovering over a certain period until it reaches the pre-crisis figures.

Scenarios of cash flow decrease

1) CF drops to 0 in 2020; the recovery period will be 2 years.

• Company value: 730 – 840, based on premium to the discount rate in range of 0 – 10%.

2) CF drops to (50) in 2020; the recovery period will be 2 years.


3) CF drops to (50) in 2020; the recovery period will be 5 years.


Value

aspects to

consider

▪ Uncertainty may differ by regions and industries

▪ Various short, medium and long-term impacts on

company’s performance

▪ Impacts on customers, supply chain, employees

and growth

▪ Difficult subjective judgements will be required in

assessing the timing and impact of crisis on

future performance


How long it might take to catch up with pre-COVID-19 cash-flow

projections. Two years, five years…?Drop of CF to 0/50; 2 years of recovery

Drop of CF to (50)/0; 2 years of recovery

Drop of CF to (50)/0; 5 years of recovery

-

5%

10%

15%

20%

25%

-

20

40

60

80

100

120

2019 2020 2021 2022 2023 2024 2025

Discounted rate used

CF

CF with loan

-

5%

10%

15%

20%

25%

(60)

(40)

(20)

-

20

40

60

80

100

120

2019 2020 2021 2022 2023 2024 2025 2026


CF

CF with loan

-

5%

10%

15%

20%

25%

(60)

(40)

(20)

-

20

40

60

80

100

120

2019 2020 2021 2022 2023 2024 2025 2026


CF

CF with loan

400

670

729

579

772

837

- 200 400 600 800 1 000 1 200

Drop of CF to0/50; 2 years

recovery

Drop of CF to(50)/0; 2 years

recovery

Drop of CF to(50)/0; 5 years

recovery

Monetary units* Sensitivity based on the discount premium

Valuation rangeNo COVID-

19 crisis:

1,000


Scenarios of Future and

business plan

considerations


The coronavirus is both a supply shock and a demand shock to the

global economy. Who are potential hitters and potential winners?

The coronavirus is both a supply shock and a demand shock to the global economy. Supply is mainly hit by unavailable workforce and disrupted imports

Demand is hit due to restrictive quarantine measures

Retail

Short-term supply impact

Sh

ort

-te

rm d

em

an

d i

mp

act

Supply and demand conflict

Supply and demand-side hit

NeutralNegative

Ne

ga

tiv

e

Banking

E-commerce

Passengers & freight transportation

Food retail

Power & Utilities

Pharmaceuticals

Delivery services

Construction & Real Estate

Travelling & Tourism

Manufacturing

Automation equipment

Cloud hardware & computers

Software designers

Potential growth

Demand-side hit

Po

siti

ve

Automotive

The COVID-19 is a major shock to the global economy

The duration of the shock and degree of disruption are all unknown

1) V-shaped rebound/recovery 2) Volatility & uncertanity 3) L-shaped scenario

• Might occur at capital markets, other

areas/industries currently unlikely.• Changes between growth and depression of

economy depending on emerge of COVID-19.

Different development across different industries.

• Long-term decline of the

economy caused by failure to

prevent the pandemic.

HDPHDP

HDP

Most probable scenario:

Possible economic scenarios

• Combination of 2) and 3)

depending on industry.

• Significant recovery in 12-

18M depending on vaccine

development.


Certain sectors in the global hub are taking a big hit. Short-term liquidity

is the king.

• After stabilization of the situation, new market shares will be established.

Those who optimized its’ operations, considered adjustments to its strategy

and fitted into customers’ demand trends will recover or even benefit.

What should be hitters prepared for

Recession

Recovery

Sustainable growth

Split forecasted revenues to three phases covering the phase of recession, market recovery and sustainable market development.

• Some sectors in the global hub will take a hard hit. To minimize the

damage, those companies shall initiate several steps covering assurance

of liquidity and stabilization of operations.

• Companies from the bottom sectors are experiencing steep decrease in

demand. Most of the companies will likely experience supply chain

disruption.

• Primary task during the period is detaining of the short-term liquidity and

optimization of the operations.

• As the spike of the crisis will be passed by, recovering demand will create a

gap on the market due to insufficient competition.

• The gap will provide a space for new investments, mergers & acquisitions.

The most affected industries

Retail

Power & Utilities

Travelling & Tourism

Automotive

Especially restaurants and bars.Other discretionary spendingwill also fall as people avoidpublic places

The knock-on effects fromreduced travel mean lessdemand for fuel

China and South Korea areimportant not just for traditionalauto parts, but also forelectronics for vehicles

Demand reacts quickly andsharply to unfavorable shocks.The example of 9/11 isinstructive. In this episode, airtravel fell because of fear ofterrorism


Detailed business considerations and pro-active management steps

now, will bring the fruits and value later.

Revenues

• Follow up the latest macroeconomical updates on your industry.

• Divide revenues to more explanatory variables – price & quantity;

• Bound the quantity variable to industry development forecast;

• Analyze price-elasticity changes;

• Analyze retainable customer base, optimize limited production capacity;

• Define potential demand floor and stress-test your supply capacity to estimate

attainable revenue bottom.

• Explore upcoming customers’ demand trends;

• Analyze competition. Future market recovery might be steep and steady, however

market shares might be redistributed.

Business plan considerations

Costs• Take into account partial state support for unutilized employees’ capacities;

• Consider any potential layoffs or/and revenues cuts;

• Consider divesture of non-core assets;

• Analyze substitutional materials;

• Take into account operating leverage;

• Understand potential increase of suppliers’ prices.

• Consider adjustments to overall strategy;

• Judiciously invest to gain market share.

• In reaction to short-term cash shortage, companies shall consider expedience of

receivables settlement as well as prolongation of payables’ clearing;

• Analyze covenants of your credit positions. Some of the creditors might trigger early

repayments;

• Prioritize capital expenditures;

• “Just-in-time” inventory management technique might fail due to supply chain

disruption. Prepare for slow down of stock turnover.

Working capital

How business plan considerations may affect value drivers:

Recession Recovery Sustainable growth

Sustainable growth

Recession Recovery

DivestituresInvestments

Sustainable growth

Recession Recovery

Receivables andpayablesstabilization

Divestitures

Loanrepayment

Receivablesincrease

Costs and capital expenditures

Cash development

Revenues


While some sectors are taking a hard hit, others could find a room for

potential growth

• After stabilization of the situation, new market shares will be established.

Those who considered adjustments to its strategy and fitted into

customers’ demand trends will benefit substantially.

Correction

Sustainable growth

Split forecasted revenues to three phases covering the phase of steep growth, market stabilization and sustainable market development.

• While some sectors in the global hub will take a hard hit, others could find

a room for potential growth;

• Companies from the upper sectors are experiencing steep increase in

demand. While “IT-oriented” companies will probably utilize the raising

interest in a nearly full extent, some of the retail and delivery companies

will likely fail to fully leverage the increasing demand due to supply chain

disruption.

• Some of the companies are expected to increase its’ margins as a reaction

to the increasing demand.

• As the spike of the crisis will be passed by, the market will be

supersaturated by competition and the demand will be cooling correcting

the market shares.

The most affected industries

Pharmaceuticals

Delivery services

China dominates the “activepharmaceutical ingredient” (API)sector. Many medicines (e.g.some popular blood pressuremedications) rely on keyingredients manufactured inChina

Demand for necessities, foodand cleaning products willsurge, straining supply chains.

Unexpected steep increase ofdemand for delivery services willshow weak processes of thecompanies. Insufficient work-force and unprepared level offacilities and technologies willtrigger supply failures

What awaits for potential winners

Steep growth

Food Retail


Analysis of recent demand changes and visibility on market and legal

outlooks will help to predict future development better

Revenues

• Follow up the latest macroeconomical updates on your industry.

• Divide revenues to more explanatory variables – price & quantity;

• Bound the quantity variable to industry development forecast;

• Analyze price-elasticity changes;

• Analyze recent demand changes, market and legal outlooks in order to forecast its’

future development;

• Define potential demand peek and stress-test your supply capacity to estimate

attainable revenue spike.

• Analyze customer base to estimate potential churn and retainable customers;

• Adjust average revenue per user to take cooling demand into account.

Steep growthCorrection

Sustainable

growth

Costs

• Consider any potential recruitment cost or/and revenues increases;

• Take into account future one-off bonuses;

• Analyze production / operating facilities to understand potential increase in fix costs,

take into account operating leverage;

• Understand potential increase of suppliers’ prices.

• In the period of cooling demand, future costs might be expected to variate in COGS

only;

Steep growthCorrection

Sustainable

growth

• Growing demand might trigger unexpected capital expenditures;

• Increasing margins might accelerate working capital growth;

• Review your client / suppliers segments for liquidity and repayment risks;

• “Just-in-time” inventory management technique might fail due to supply chain

disruption. Prepare for accelerating growth of stock turnover. Investments

Increase of

margins

Working capital

Price war

Business plan considerations

Steep growth CorrectionSustainable

growth

How business plan considerations may affect value drivers:

Costs and capital expenditures

Cash development

Revenues


General overview of key steps in business plan modelling during

COVID-19

Analysis of macroeconomic scenarios

Modelling demand for products at the company level

Internal optimization processes and planning

Analysis of industry scenarios

Expected GDP development

Development of product demand

Price elasticity analysis

Revenue planning considering product demand and pricing strategy

Variable costs

Marketing costs

Optimization of fixed revenues, transformation to variable costs

Costs related to production downturn/boosting

Personal costs optimization

CapEx postponement and future planning

Liquidity and solvency management

Working capital management

Individual sectors might experience different development depending on their characteristics. The key in COVID-19 times is to plan in scenarios and perform sensitivity testing of crucial parameters.


Focus on internal and external value drivers and their proper

management is the key to sustain value in these tough times

Internal drivers

Revenue

growth/decreaseAssets

efficiency

Volume Expenses Revenue Assets Price per

unit

Operating

margin

Company value

External drivers

Discount rate

Exchange rates

Inflation

Marketing

and

advertising

Sales Logistics

Production

and product

development

Premises

(lease)

Admin +

IT + HRCash

Receivables

and

payables

Inventory

Key areas to be considered:

• Volume of products/services sold

• Receivables and payables

• Fixed costs (logistics, lease, personnel)

• Cash management

Property,

plant and

equipment

Key areas to be considered:

• Governmental directives

• Macroeconomic situation

• Discount rate


Financial reporting

implications


COVID crisis impacts financial reporting related valuations and

impairment testing with focus on value in use / fair value calculations

Discount rate Subsequent events

➔ Auditor might challenge due to

exceptional occurrences

Actions to take:

▪ Going concern principle check

▪ Critical self-assessment of assumptions

▪ All forecasts duly prepared

▪ Consideration of potential breaches to

debt covenants

▪ Alternative business activities

▪ Current situation within the whole

group/parent company

Cash flow projections

COVID crisis’s effects still evolving ➔

importance of subsequent events:

▪ Impact on actuals and their development

▪ Going concern principle

▪ Financial condition & refinancing

▪ Proper documentation needed

Triggering events in most industries

Different risk profiles in projections:

➔Short/mid-term

▪ Increase of discount rate

▪ Specific premium to apply

▪ D/E ratio adjusted to the actual financing

➔Long-term

▪ Stabilization of the input parameters to the

sustainable levels

Relationship between value drivers must be

considered ➔ adjusted cash flow ➔ proper

discount rate

Specific topics within impairment testing

▪ Capital expenditures’ plan review

▪ FX rate consideration

▪ RE specific – tenancy schedule,

vacancy rate

What about year-on-year

consistency in valuation approach?Real estate

PPE

Company & goodwill

Intangible assets Main assumptions to challenge:

▪ Business plan & forecasts

▪ Working capital (issues with

collectability, payment terms)

▪ Idle capacity, low utilization

▪ Useful life

▪ Activity on the market

▪ Appropriate discount rate

Structural break prevents direct comparison with previous years


How EY can assist and/or help with valuation & business modelling

related analyses (not only for financial reporting purposes)

Business/impairment model preparation

Support with impairment

testing

Business model review

Discount rate calculation

ESOP and related analysis

Value assessment of intangible assets

Value assessment of tangible assets*

Semi-automated tools,

analyses & activities

▪ Impairment model template

▪ Macroeconomic analysis and possible

future development

▪ Industry insights and analysis

▪ Review of main business’ assumptions

▪ Challenging forecasts, benchmarking

▪ Assessment of the capital structure

▪ Working capital planning

▪ Mid to long-term cash flow planning

▪ Sensitivities in order to simulate various

scenarios & stress testing

▪ Support in discussions with company’s

auditor

Tailored outputs

Financial model in excel format with main

assumptions and output charts

Presentation or report summarizing the

valuation analysis

Ongoing support (internal and audit

discussions)

Real estate valuation support

Other specific valuation/advisory support

* Other services related to the tangible assets are presented further.


Insolvency

► Negative current events

in global economy and

long-term outlooks for

certain industries can

cause onslaught of

insolvencies and

following plants’

shutdowns and layoffs.

Capital expenditures

► With declining revenues

and cutting production

companies will continue

to reduce short to mid-

term capital spending.

Investments

► Uncertainty in demand

can trigger cancellations

and/or delays of

investment projects.

► Limited availability of

resources combined with

challenges with

transportation and

logistics can stimulate

import substitution via

localization of

production.

► Certain industries might

experience upturn

resulting from increase

in demand for their

products on the market

and therefore will be

stimulated to invest in

additional production

capacities.

Impairment of assets

► Extremely volatile

demand and supply

resulting in lower

unstable revenues

makes liquidity and

profitability of assets a

newly increased focus

for companies,

especially those

operating in capital

intensive industries (oil &

gas, power and utilities,

railways, etc.).

Regulated businesses

► Government and public

bodies will be

experiencing pressure

from both households

and businesses urging

regulators to decrease

tariffs.

► TSO and DSO, railways

and other regulated

companies with aged

assets are facing the

problem of lack of

resources to renew the

asset base.

COVID-19 crisis impacts value of Property, Plant & Equipment of

companies in multiple ways providing both issues and opportunities

Key dimensions of the COVID-19 crisis impact

Insolvency

support

Types of support companies may require

Accounting

support

Insurance

valuation support

RAB valuation

support

Valuation support

to raise capital

Most affected:

► Industrial

companies

Most affected:

► Industrial

companies

► Real estate /

Hotel

business

Most affected:

► Regulated

companies

Most affected:

► Industrial

companies

► Real estate /

Hotel

business


Lower

interest

rates

Workforce

augment-

tation

Safety

requirements

The majority of companies experience lack of

flexibility of production caused by insufficient

level of in robotics and automation combined

with COVID-19 induced safety concerns (e.g.

minimum-distance rules, etc.) as well as lack of

resources to organize remote work and

communication.

Rais

ing c

apital to

support

investm

ents Shift of priorities in CapEx will help to promote

investments in robotics and automation and will drive

introduction of advanced security & safety systems

and technologies.

EY can support your negotiations with banks on

obtaining borrowed financing, including valuation

of assets to be pledged as collaterals under loan

agreement.

PPAImpair-

ment

IAS 16

Decrease in cash flows will affect recoverability

of assets measured at fair values causing

impairment of non-current assets, potential

decrease of NRV of inventory and turnover

slowdown.

Accounting s

upport

EY can perform impairment exercises for

accounting purposes and support reconciliation of

results with you external auditor.

EY can provide assistance with revaluation of

assets under IAS 16 for accounting purposes.

Risk

mitiga-

tion

Cost

optimi-

sation

Public

sustainability

Extremely volatile demand and supply resulting

in lower unstable revenues makes liquidity and

profitability of assets a newly increased focus for

companies, especially those operating in capital

intensive industries (oil & gas, power and utilities,

railways, etc.).

Insura

nce

valu

ations

EY can support your negotiations with insurance

companies aimed at optimization of related

insurance costs, assessment of insured values for

real estate and capital equipment to balance the

cost / risk balance.

Current volatility can also trigger M&A activities

for companies seeking portfolio diversification.

EY can provide valuation assistance with pre-deal

and post-deal purchase price allocation in

connection with acquisitions.

Revenue

decline

Pressure

of

debtors

Limited

resources

Companies whose operating activities were

undermined by COVID-19 aftermath will be

facing insolvency risks.

Insolv

ency

support

EY can support your negotiations with financial

institutions on debt restructuring, by providing

supportive LTV recovery analysis under various

insolvency scenarios

We can help our industrial clients identify key issues and navigate

through counteracting solutions developed by EY


Crisis-

induced

revenues

decline

Asset base

requires

renewal

Government is

urged to decrease

tariffs

In order to support existing asset base

and facing revenue declines,

companies need to accumulate funds

to replace the assets. A revaluation of

RAB and hence increased

depreciation charges included in the

tariff would help you to sustain

operations

RA

B r

eva

lua

tio

n

EY can support your negotiations with

regulating bodies regarding the following:

► Overall regulatory framework and potential

changes in methodology

► Promoting of the idea of RAB revaluation

► Supporting materials and analyses

supporting company’s CapEx estimates

► WACC negotiation

We can further assist you with executing

changes/revaluations.

Regulated companies can eliminate consequences of the crisis by

promoting changes in local regulatory practice to authorities


Hotel industry shows extreme sensitivity

to situation development

EY can support providing the following solutions

Short-term impact Mid-term impact

► Travel restrictions, introduction of quarantines in

certain areas.

► Rapid decline in current and future occupancy

caused by cancellation of stays and lack of new

reservations

► Uncertainty caused by the stroke of crisis may affect

priorities of household in terms of spending. Tourist

travel will become secondary for individuals hit by

crisis.

► The industry slow down is very difficult to counteract

considering that the recovery of Tourist sector is

expected to be progressing slower than the rest of the

economy.

Decision

- makingIAS 40

Impairment

► Decrease in cash flows will affect

recoverability of assets measured

at fair values.

► At the same time potential

investors can be interested in

acquisitions aimed at eventual

economic recovery in the long

run.

Accounting

support

Decision-making

support

Transaction

activity support

► EY can perform impairment exercises for

accounting purposes and support

reconciliation of results with you external

auditor.

► EY can provide assistance with revaluation

of assets under IAS 40 for accounting

purposes.

► EY can provide valuation assistance for

the purpose of decision-making.

Long-term

perspective

Short-term

perspective

Divestiture activities Investment activities

Mid-term opportunity Long-term opportunity

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

Hotel market in EuropeOccupancy % change, Y-o-Y

Week 17 Feb Week 24 Feb

Source: CoStar Realty Information, Inc.

COVID-19 crisis significantly impacts value of tangible assets operated

in hotel industry. Delayed and long-running recovery is expected


Cost-optimization

measures


Organizations increasingly facing challenges to bear their cost structures

in a sustainable manner, EY can support in overcoming these obstacles

Our Crisis Cost Optimization Framework enables our clients to rapidly reduce their costs by 20-50%, depending on the category, allowing them to set the base for sustainable operations in future.

Agile and resilient organization with lean

process flow

Minimized operations / shut-down non-

essential operations

Cancelled non-critical contracts and

streamlined external spend

Minimum viable business operations in

place

Cost Optimization Framework Value add for our clientsEY Approach

Proven experience with companies during COVID-19

crisis

Industry benchmarking with

peers

Strategic optimization levers

Sustainable implementation

Cost-base analysis

Criticality assessment

(critical vs non-critical spend)

Cost minimization assessment

Assessment of saving potential

Prioritization of initiatives

Development of implementation plans

Roadmap implementation

Implementation support

Phase 1

Asses cost

minimization

potential

Phase 2

Develop cost

reduction

program

Phase 3

Deliver cost

reduction

program


Cost to Serve Supply chain optimization: EY’s approach brings together

trade term and cost drivers analysis across the end-to-end supply chain

Delivery Chain Customer Trade Terms`

Service Contracts

Pricing

Promotions & Discounts

Duties

Delivery Chain Trade Terms


The approach is staged to ensure a detailed view of all issues and that

quick wins were realized early

Gaining insights into key

cost drivers across the

customer base

Understanding the true

costs and benefits of

trade terms

Developing change that

minimizes true Cost to

Serve

3. Cost to Serve

Scenario

Optimization

2. Trade Terms

Efficiency

Analytics

1. Cost To

Serve Analytics

Identify supply chain

inefficiencies and cost

reduction opportunities

Identify trade term

inefficiencies and realign

trade investment to

conditional and

defendable criteria

Optimized supply strategy

based on best available

data and information

OutcomeObjective


Cost to Serve enables benefit quantification for cost reduction - we

typically see opportunities identified in the region of 8-10%

Customer Delivery (CD) efficiency

improvements:

► Increase vehicle fill

► Increase direct flows for high volume

routes

Retailer Network (RN) efficiency

improvements:

► Increase efficiencies in how deliveries are

made to customers through flexibility in

the network e.g. peak vs. off peak

Retailer Supply Chain

PlantRetailer Store

ShelvesRetailer

(RDCs*)

Plant

Warehouse

CP Co Supply Chain

Supplier

(SDC*)

Order Assembly efficiency improvements:

► Increased number of full pallet ordered

► More efficient order demands (e.g. de-topping)

► Renegotiated 3PL contract

OTC Processing efficiency

improvements:

► Electronic order placement and

efficient behaviors

► Increase average order sizes

► Restructure teams to focus on

priority customers

Trade terms effectiveness:► Put in place Logistics Efficiency

► Make efficiency investments conditional and

based on true Cost to Serve

* Note: SDC = Supplier DC

RDC = Retailer DC

65% of in-scope costs

Reduction of CD in-scope costs: 6-12%, $3-6m

40% of in-scope costs

Reduction of OA in-scope costs: 10-20%, i.e. $3-6m

Internal Supply Chain

Changes

Joint Collaboration Supply

Chain ChangesCommercial Changes

Middle size indicative Retailer Revenue: $150m

Efficient spend of List Price: 1-2%, $1.5-3m

5% of in-scope costs: 5%

Reduction of OTC in-scope costs:15-30%,

$500K-$1m

Indicative in-scope costs: $3.8m

Reduction of RN in-scope costs: 5-7%, $190-270k

For an indicative CP client with a Cost to Serve budget of $75m, potential savings are indicated in the tables

below.

NB: It should be noted that these cost buckets are dependent on network structure and not all of these cost reductions may be realized


EY would help to

assess the damages

caused

Regular monitoring, predictive modelling, planning and analytics can

help to survive now and become even stronger after crisis

KPIs Crisis Monitoring

Predictive Models Validation

and Challenging

Workforce Capacity Planning and

Analytics

Impact Scenario Modelling

on Products/Services

Factors to Rely on

► Ensure the essential business KPIs are monitored even during the crisis and prepare for after-crisis actions

Workforce Health Modelling

► Validate the reliability of decision support that is currently running and prepare alternative solution

► Prepare for the near future by predicting possible scenarios of impact on the business as a whole

► Develop reaction plans and stress tests to keep operations running in various circumstances

► Utilize data analytics to support you in more efficient and transparent decision-making in technical processes

► Estimate the impact COVID-19 could have on your teams by predicting likely contagions


Proper numbers and data processing are helpful within mitigation

measures launch

KPIs Crisis Monitoring

► Analyze of COVID-19 impact on

essential business KPIs, for example:

► Customer churn rate

► Acquisition rate, X-sell rates

► ARPU

► Produce interactive dashboards to

speed-up the process of identifying the

main pain points

► Monitor selected KPIs convergence to

“new normal” after the initial shock

wears off, in order to prepare for next

steps

Outputs

Predictive Models Validationand Challenging

Impact Scenario Modellingon Products/Services

Mitigation measures

► Interactive dashboards for visual

analysis and situation monitoring, with

regular/live updates

► Monitor current in-production

predictive models’ power, as they will

be negatively affected to a significant

extend

► Analyze their reliability in current

volatile circumstances and suitability of

usage in decision-making process

► Develop challenger models specifically

suited for unstable and volatile

environment in a speeded-up mode for

fast implementation

Outputs

Mitigation measures

► Report of suitability of currently used

predictive model and its impact into

decisions

► Challenger model trained on recent

history

► Model scenarios of COVID-19

impact into business performance

► Model likely developments of

demand for products/services,

based on combination of macro data

and company performance data

► Take into account possible

legislative shocks and their duration

(e.g. ban on non-urgent medical

procedures for insurance providers)

Outputs

Mitigation measures

► Report with modelled scenarios of

future demand, based on macro

indicators’ development outlook



measures launch

Workforce Capacity Planning and Analytics

Factors to Rely on Workforce Health Modelling

► Identify and analyze bottlenecks in

operations capacity (mainly

personnel) for flexible planning

► Analyze different regions

separately, taking into account

asymmetric development of the

disease

► Perform stress tests based on

variety of possible scenarios to

prepare a set of reaction plans,

ready to use in case

Outputs

Mitigation measures

► Set of ready-to-use reaction plans,

based on capacity bottlenecks and

prioritization

► Focus on business areas/factors

that are not directly affected by

volatile economic situation

► Modernize your data

infrastructure with ML in

mind

► Create cost-per-item

models that adapt to

economic factors

► Optimize logistics

Outputs

Mitigation measures

► Models supporting more efficient

and transparent decision-making

in technical processes

► Predict the probability a certain

department/team’s performance

will be significantly affected by

COVID-19 infection

► Account for the main risk factors,

such as age, exposure to the

virus, available employee data

► Identify bottlenecks and critical

points in your organization which

are susceptible to infection

Outputs

Mitigation measures

► Predictive model for COVID-19

impact on workforce identifying

risk areas


Working Capital Analytics

► Develop a set of interactive dashboards to identify potential for improvement in receivables, payables or inventory(e.g. payment terms, DSOs, payment profiles,

inventory levels,…)

► Improve cash flow forecasts by predicting likely

payment date for receivables and providing insights into main risk factors

► Analyze inventory level of service to find space for releasing cash from over-stocked products, balancing potentially lost sales/margin and cost of holding inventory

► Use available data with state of the art machine learning methods to improve forecasting accuracy in order to optimise inventory levels

Outputs

Mitigation measures

► Interactive dashboards identifying key areas for cash flow improvement

► Prediction model for receivables at risk► Inventory level of service analysis► Demand prediction model for inventory management

Example dashboards

Improve cash flow

by accurate receivables,

payables and inventory

analytics


measures launch


Retain & Support your

customers through the

crisis


Support to distribution partners to sustain through the coronavirus crisis

is crucial to manage key outlets' cash flow

Producers are heavily reliant on the distribution network developed and should now more than ever scrutinize the key distributors and support

them in order to overcome the ongoing crisis. At this situation, it is crucial to manage key outlets’ cash flows on weekly or daily basis to identify

possible cash gaps, measure its own solvency and liquidity impacts vs. effectivity of the outlets’ support and to identify suitable mid-term solutions.

Car dealers

Restaurants & Pubs

Cafeterias & Cafes

Hotels & Accommodation

facilities

Covid-19 impact

Outlets closure Drop in revenues

Fixed costs Cash-flow problems

Producers & Funding

providers

Distribution

points

Now, the uncertainty dominates

How long will the Covid-19 crisis last?Will the distributors survive and re-

open again?

Full or partial salaries to be paid

Extensive inventory stocks

Fixed payments from external funding

Cash is what decides

Minimum or zero revenues generated

Fixed rental payments

Purchase commitments to suppliers

Like in 2008 financial crisis when financially well

positioned car producers directly supported

their dealers

Liquidity help is needed

Casinos & Clubs


EY would help you to

develop a solution

supported by a tool

▪ We would support you in:▪ Identifying right candidates for the support by assessing the outlets’

potential and contributions to the Company’s margin

▪ Monitor cash needs and various liquidity measures of the key distributors

for the upcoming short / mid-term period

▪ Automated reasonableness checks as to the requests

▪ Identify weak and strong areas in the short / mid-term cash flow horizon

▪ Examines the impact of mitigating measures taken, individually and as a

whole

▪ Measure the development of the key value drivers and overall effectivity

▪ Flexibly compare the forecasted vs actual figures on a frequent basis

▪ Perform certain stress tests to see the cash position sensitivity

ULTIMATE GOAL

▪ To provide a

targeted

downstream cash

support in order to

maintain the

distribution network,

while managing own

cash resources

EY would help to

assess the damages

caused

▪ Model that would:▪ Calculate the financial damage caused due to the forced closure of the

outlets

▪ Enable to support the negotiations with either insurers or state

▪ Damages claim

support

What rescue measures can the producer take to support its distribution network?

Steps to be taken

Analysis of the key distributors Help key distributors to take the mitigating measures

Providing extended payment

terms

Delay payments to other

suppliers

Buyback of excessive stocksDrawdown of credit lines

Provision of guarantees Support with insurance /

damage claims

Who contributes by the highest

margin / volumes?

Who operates in the strategic

locations?Who is impacted the most?

Which distributors generate the

highest RoI?

Other strategic considerations,

e.g. logistics

Sample rescue measures to be taken by producers to support their

distribution networks


Contacts

Contacts

Vladislav Severa

Transaction Advisory Services

Partner, Czech Republic

Mobil +420 603 577 812

Email [email protected]

Marek Jindra

Valuation, Modelling & Economics


Mobil +420 603 577 949


Peter Wells



Mobil +420 603 577 898


David Zlámal

Corporate Finance & Debt Advisory


Mobile +420 731 627 100


Petr Kováč

Head of Corporate Finance


Mobil +420 602 231 594


Josef Dobrichovsky



Mobil +420 603 577 843


Pavel Riegger

Advisory and Transactions


Mobil +420 603 577 914


Get our latest thinking and advice on the COVID-19. Visit https://bit.ly/CZ_COVID19

Martin Fiala

Transactions Integration

Associate Partner, Czech Republic

Mobil +420 774 161 982


https://bit.ly/CZ_COVID19

covid crisis corporate finance lifeline · 2020. 5. 3. · the coronavirus is a major shock to the...

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