Credit Management, Economic Trends and Technology

Mike Thelen:

Before we start with a few of the questions, we have the icebreaker going, I do want to mention that it may not be obvious to everybody that we have a rather diverse geographical group of people here. So I’m the boring one from the United States, and have Moustapha from Canada, Saurabh from India. Tony is also from Canada. Ron is from Amsterdam, right? And Paul, while he’s from Wisconsin, as it’s come from, via Australia, so we’ve covered many parts of the globe today. So we’re hoping we can provide some input that is more than just US-specific. All right. The other thing that’s unique about this group, is we have three people from the same company on this panel. So I’m not sure how that’s going to work, but I am hoping they can show us that even within one organization, there are different trains of thought and what’s going on with world economics.

Anthony Satriano:

We gave him a quantity discount.

Mike Thelen:

You gave him a quantity discount. All right. I wasn’t sure if I was that or you’re just so soiled with your organization yet had different people answer different things. But anyway so much for giving you a bad time we’ll get started. I’m going to read the first question, make sure I get it right. Some of the challenges and today’s macroeconomic environment include signs of inflation, corporate tax reform, rising interest rates, and historically low unemployment in the United States. On top of that, you have industry-specific district disruption to bricks and mortar retailers. How are these challenges impacting your credit operations and plans for 2019? That’s a lot to say. So basically, what do you think is going on with the economy? And I’m going to start with my staff and move down for the first time. Okay.

Moustapha Ould Ibn Mogdad:

Thank you very much. It’s a very good question specifically affecting our neighbor – the United States and Canada. We feel the heat when people are sneezing in the USA. So we get the fever? Yeah, we have to work out, I want to talk first in pharma and after just a little bit regarding the other businesses in pharma, there is not a big impact because as you know, in Canada, we have a social system, in which the government is responsible for healthcare. However, in the private sector, we start to feel that some of the clients have tremendously reduced their demand, which obliged us to review the credit limit accordingly to make sure that we mitigate any risk or losses that could be affecting the business. So we take into consideration at a very high level, anything related to the neighboring country, and also to the Canadian business, and we review according to the situation depending on the market.

Saurabh Chopra:

So I think like we use various sources, so we have credit agencies like, you know, CRM, D&B, we leverage them a lot. Right? And I think one of the things that like, you know, which makes Honeywell as a unique account is like we have a different type of industries within the same business of Honeywell. So when you do credit reviews for your customers, then you have to be very cautious. Like, you know, what are the trends? What are the, you know, certain things you’re looking at, you know, there, there are times when, you know, you don’t have visibility to you know, the financial model for a customer, you know, depending upon the name and the size of the company. So, those are the time when we also have some kind of mechanism with some of these credit agencies, where we kind of have some alerts, right, looking into the free scores and looking into like, you know, what are various risk associated to you know, any particular country and how’s that going to impact like, you know, Honeywell as a business. And there are times when we have gone with the business leaders’ business CFOs to take their view of their thoughts, like, when we are dealing with any company where we see there’s going to be a big impact coming through.

Anthony Satriano:

Good. Thank you. Maybe just to piggyback a little bit more on what Saurabh had added. One of the things that we’re doing in Honeywell is we’re putting a bigger emphasis on letters of credit. So we’re going out, we’re training our salespeople on the advantages of letters of credit, we’ve expanded our LC team, particularly in the Middle East. And we’re targeting our LC specialist to do more letters of credit. So that’s one of their KPIs from a performance standpoint, is to add more letters of credit with our customers.

Ron Snelders:

I think the thing is, of course, because I’m number three of the only people it’s gonna be hard to add to it. But I think what, what we see at the moment, of course, Michael, if we look at the question like you said, This is a question with a lot of waiting, it’s, I think at the moment, it’s just difficult with the times we’ve got from my perspective, from a European perspective, we’ve got the Brexit going on which will most likely have an impact, that is very close at the moment, in happening, and we just need to see what the knock-on effect is on everything that is happening out there in Europe. And I think like what has been said, we’ve got a lot of people at the moment, we’ve got a pretty strict policy around that to make sure that people follow the top-down rules, pushed also. So we are pretty sure that people are following these rules also. And that is working out pretty well. But I mean, it’s always going to be something that you need to be very on top of all the time. You know, it’s not something that you can let go and it’s not specific to this day and age, but it’s always like that.

Mike Thelen:

That’s a good point, isn’t it? The economics are changing all the time. Now, you do adjust to so I like the idea that you’re bringing in letters of credit as an option to evaluate or have improved the risk situation, Paul.

Paul Watters:

Yes so across the business, but particularly in the US. We see demand in our industry is being fairly solid at this point. Nobody needs it, we sell boats and engines and there aren’t too many people in the US who need a boat or an engine. So we’re very much a discretionary item and we tend to feel any downturns perhaps at the leading edge of when they are occurring. From an unemployment point of view within the question. Unemployment is at fairly low levels in the area where we operate. A major operation in Wisconsin, the unemployment rate in that region directly around us is less than 2%. So our ability to retain and attract particularly factory talent and hourly workers to continue to be difficult. So we’re seeing, from our point of view inflation coming through, we use a lot of commodities in our products. And the nature of our business from a credit standpoint is that we feel downturns harder than most others as a side because we’re in that discretionary as opposed to staying on top of an industry. So at the moment, we say demand continues to be solid, but from a credit point of view, we are being cautious about who we’re extending credit to, particularly new players. We lost a lot of dealers, a lot of customers in the 2009-2010 period. And so our focus is, you know, we feel that for most of those customers who survived that downturn, they will probably survive the next one, but it’s the customers we brought on. In the meantime, particularly the newer ones who are perhaps less capitalized is where effort is at the moment.

Mike Thelen:

Paul when you said that boats and motors aren’t a need. I thought maybe you talked to my wife recently and I lost track of everything else. He said after that, that it’s got to rethink their position. That’s with her that I need a new boat. So I have not spoken to your wife, but I think some would disagree with me, particularly when you’re in Minnesota, correct? Yes. So I have 10,000 likes, perhaps engineers and they go with that idea. We need to use those 10,000 likes. Thank you. That’s a point open for debate.

Mike Thelen:

All right. I’m gonna read this next question. We’ll start at Paul’s at this time. So it says, How is the imposition of tariffs by the US administration impacting your businesses? And what adjustments have you made in your credit policy to adjust these changes? So needless to say, we can argue whether those tariffs have started with the US or we’re just the ones reacting or talking about them and others reacting to them, but let’s hear your perspective on tariffs.

Paul Watters:

So our businesses are notwithstanding, its current fair trade debate is a business that firmly believes in free trade. We’ve been impacted very heavily by tariffs in various markets. One example of that is we sell many boats into Canada very cheap. Part of the tariff was 10% on products coming into Canada. So we’re facing not only commodity inflation for the products, we use steel and aluminum, in particular, but we’re also facing the issue that we now have tariffs on the product that is coming into Canada and that is making us less competitive in that marketplace, and it’s pulling us to the disadvantage to our Canadian competitors, so that makes our life difficult. So recently, you know, we might have had a 10% price increase on various products due to commodities, we’ve had an additional 10% due to tariffs that have come in. And what that means for us is it means less trade internationally, that means that we’re selling less product and within that market, and it means ultimately over the longer term that we will employ fewer people. So, you know, we can debate whether the current system has its flaws or not, I have no doubt that it does. I’m just not sure the tariffs are going to be the way to have to impact that because at the end of the day, the tariffs on our products that are coming in from other countries, this is another tax on us. So we shouldn’t kid ourselves that the other countries are paying these amounts to you and me who are paying for the increased process. So concerning what we’re doing from a credit standpoint, what we’re finding on the tariffs side of things, again, particularly in Canada is that our customers are delaying their purchases, because they’re not sure whether tomorrow or next week, the tariffs will disappear. And there will be a 10% price disadvantage to their competitors who bought them the engine or the boat yesterday. So we’re finding it’s holding back demand for our products and the customers are making just in time decisions for both shows and other types of things because they don’t want to be sitting on inventory, that normally a consumer would be able to come into their dealership and buy fairly quickly. So it is impacting us. And finally, from a credit standpoint, we’re concerned about the impact that’s having on some of our dealers, particularly in regions that are exposed to oil in Canada as well. They’re being heated about the head twice with what’s going on with tariffs and the uncertainty around.

Mike Thelen:

Very interesting. Thank you.

Ron Snelders:

Yeah, I think I mean, it’s more or less all set. I think it cuts on both sides, right. I mean that is the important thing, and I think the other thing is that what we have seen also, we’ve got a whole department that has been busy with it only well for quite a period. And I think the most important, or the most difficult piece out of all of this is, is the fact that it’s very unclear, you know, when what is happening right now, I mean, so I know we have been in meetings, you know, where we got the explanation around it, and the difficulty is still like, okay, does it happen now? Is it going to change tomorrow? And I think that’s about the old administration that is in the US at the moment that you are not sure what will hit you tomorrow, right? And I think that’s the most difficult thing for a business to plan on it while you don’t know what is gonna happen next September.

Mike Thelen:

Yeah, just like Paul said, the customers are waiting because they’re not sure. Exactly as a business. You’re not sure whether you should push it or not because you don’t know what absolutely.

Paul Watters:

I’m sorry, if I can just add to what I said earlier, to a time 20, 30, 40 years ago, where tariffs were accepted part of what we did in business, there wasn’t this uncertainty, that the idea that it might go away next week or next month or in three months, makes business decisions and decisions for consumers and their dealers very difficult. Yes, Tony?

Anthony Satriano:

Yeah, I’ll maybe touch that one from a business standpoint. So what we’ve done, Ron had touched on it. Early on, when the whole discussion around tariffs started. We formed a team with our government relations folks down in Washington. And what we’ve done is we’ve read and we’re fortunate, we’ve renegotiated lots of our contracts with customers that have passed through agreements in there, where now we are allowed to pass through price increases on raw materials to our customers. So that’s how we’ve been able to minimize the financial impact on tariffs by just passing it through now to our customers on the contract. Good.

Saurabh Chopra:

Yeah, I think you know, I would like to touch upon one of the topics which you have mentioned here on the policy. So from a policy standpoint, like, you know, Honeywell came with a new model. So, you know, earlier it was always termed as credit policy, is what we call it, right. But when we got into the development stage of the policy, we looked at the end to end customer to cash policy, because, you know, credit being a function is always between sales and collections, right. There are certain decisions, which are, like always overridden by sales or there’s an intervention from the collection folks. So one of those elements keeping in mind, we created some kind of a model and created a list of content in the policy, which enforces no matter what, but you stay strong on your procedures. What elements are you going to look at like when you’re evaluating customers? So those elements are really important, no matter what changes in the market, I think you need to stick to the rule, what you laid out in the policy. So that was one of the things that helped us out.

Mike Thelen:

It was there for a reason and maybe even more important now. Yeah. Moustapha.

Moustapha Ould Ibn Mogdad:

In a pharma business, it’s a little bit different, as you may know, the pharma sector is regulated differently than any other sector of business. But on my level, I can say that the tariff has tremendously affected a lot of Canadian business especially the business of lumber and the other businesses related to the construction. The element of the business has been affected too. And we have a slow down on the housing business in Canada basically because of the tariff problem, so we wish that one day all these tariffs will be back in history and we don’t remember it anymore. So on another note, what I’ve seen from a different colleague during a different discussion is basically, they have to review their credit policy to mitigate the uncertainty that we all have with the economy and also with the tariff. So my advice here, that’s for all credit manager to go back and review how you provide the credit because credit is a privilege at the end of the day, and to review with your salespeople, also, the target pricing, because the tariff means that it is another tax, as Paul mentioned, the tariff, it’s another tax basically, that has been put on everybody. So that’s ultimately the goal for everybody to make sure that’s, you know, we mitigate any uncertainty by reviewing our credit policy.

Mike Thelen:

And I think the important piece that you mentioned is to discuss that with the other members of your business team, which might be sales or supply chain. Everybody will be able to hear us still. Okay. The mics are working good, aren’t they? Good job back there. Anybody have any questions for us before we continue with our seamless questions? I think they’re good ones. But I think it also is important if anybody has one, from the audience that we get those out first, and we have somebody in the third row. Thank you. Thanks for letting us go on.

Speaker 1:

Guys, I don’t know how it is in the US but in Europe, the tax authorities are driving for more transparency and more control over the invoicing process and the tax amounts during the trade. So for example, the recent case we had in Italy when the government issued the requirement to go to the SDI portal to send all the invoices back and forth through the portal, and within seven months. So the final requirements were available in March and then within the end of the year, you needed to shift to the new technology in the new process. How are you dealing with these challenges? Do you also expect the same from other countries? And I don’t know if this is also the case in the US. How is that happening here?

Mike Thelen:

Sure, that’s a lot there. So you’re saying that at least in Italy, the government is asking that you submit invoices through a portal to confirm it, your taxation is correct. Is that the purpose of it?

Moustapha Ould Ibn Mogdad:

Alright, I will give a comment and that we have a global business service and I heard about it from our counterparts in Italy. It’s not the case in Canada because medical and anything related to health care is not taxable. It’s free of tax from the parliament for a certain reason, and when we sell it we have no tax on it too. So bad I heard about it, especially in Italy. And it’s been in discussion on a senior level, our senior management level about how we will deal with this invoicing. It’s like a pre-authorization for your invoice that you need to get from the government because in the other note, the payment we have in Italy, it seems very strange we get paid after some time three years to four years from the government hospitals.

Saurabh Chopra:

And I think Europe has a market which is very dynamic, right? You will have exceptions in each of those countries. But I think it is important that like, you know, when you have government customers, obviously like you know, there’s some bit of leeway that you give it to them like this some benefit that you give it to them. But at the same time, I think how you manage your best use of AR is something very important as well. So you continue to monitor financials and you continue to have your MOS calls with your business leaders and you know, kind of gives feedback ratings are not moving on time. But I think your market is dynamic, like in totality.

Mike Thelen:

From any perspective, you do a lot with the European Union.

Ron Snelders:

I think it’s interesting that she, you know, sees what you’re saying is like, I mean, we have got a similar situation at the moment in Mexico. You know, in Mexico, there is also a requirement to, you know, have your invoices going through a system and we had a lot of discussions around that because that it’s always just, it’s basically put on to you and then you need to figure out in your organization, who’s going to take care of that right. And I mean, that’s the difficult thing, but that happens, just as an example Mexico, but you have gotten a lot of countries, you’ve got these kinds of things in Eastern Europe, you’ve got quite a few countries where they have like, let’s call it the Honeywell ledger and you’ve got the local ledger, right? Because there are also requirements that we can’t cover with our lectures and with all legislation that is in these countries. And that’s, that’s I think that’s always a challenge to all the different countries the difficulty again here is also that these kind of decisions are not something that you can most of the time prepare for it most of the time it’s within one to three months, all of a sudden you hear that this is the change because of a new government or anything like that. And it’s just like what we talked about the tariffs, you know, you somehow need to manage that within your organization. So you need to have some sort of leverage within your departments to be able to pick this kind of thing up and that’s challenging now no doubt.

Paul Watters:

We know a similar situation that we deal with in Brazil as well around the transfer of invoices, and so on through and they’re called boletos in that region. And so, for you to exchange funds, you essentially need to put that invoice through the bank slash government for that to occur. And I think there’s a couple of things that the government does. From a VIP perspective, it ensures that people are doing the right thing and then the government’s collecting the revenues they need. And in other jurisdictions, it’s a way of the government’s victory, effectively controlling currency flows as well. So know that in a volatile currency like the Brazilian reality is they can ensure that there’s no capital flight when times are difficult by controlling that process of money and it makes it easy to put currency restrictions on but we’re not saying it in other places at this stage, anyway now.

Mike Thelen:

Very interesting question. Thanks for sharing that. I’m glad we got a few panelists that can relate to your situation. Any other questions from the audience? All right, we’ll move on to the next one. Data is the biggest obstacle to mitigating risk. How do you address data challenges in your company? Ronnie, let’s start with that.

Ron Snelders:

Sure. I mean I think we’ve got pretty heavy on the agenda. You know we have an I would say a full department created for that you know, because that is, I think definitely within Honeywell always challenging because of all the mergers acquisitions we have had and all the different systems coming together and we’re getting to a stage now that we first folded we understand that is very important. So now there is a whole department around that is built this open is making sure that that data is pulled into the different systems, but also, like big data going to be available for anything that we are doing or that, you know, other parts of the businesses are doing. Right.

Anthony Satriano:

So just some more specific specifics on that. So that the actual department that we’ve created, we’ve called it the enterprise Information Management Department. Okay. And a couple of specific initiatives of theirs are, one thing we looked at is we looked across our SAP systems. And we looked at how many customer terms we have because one thing we haven’t done a good job of, as we’ve done acquisitions, we would just carry in the terms of those customers into our existing systems. When we did our initial count, I think we ended up with well over 1000 different customer payment terms. So we have an initiative going on now to rationalize those customer payment terms and to deactivate as many as we can in our SAP systems, and we’ve given each business each of our four business units a target, to only have 25 standard customer terms. That’s one initiative. The other initiative we took on was, we found that a lot of our paid terms in our customer masters are different from what we’ve negotiated with customers. So we have another initiative where we’re doing data cleansing across all of our customer masters to align terms that we’ve negotiated on our contracts with what we now actually have in our customer Master, the whole trick here is to find that copy of that contract. That’s where we’re failing.

Mike Thelen:

Anyone else wants to add to that?

Saurabh Chopra:

So I think one of the initiatives that we have also taken as a legacy definitely like from a credit review perspective, we give a lot of weight to the financials of the company, right, but there are times when you don’t have financials available for certain customers. So in that case, like what we do is to look into their historical trends in terms of the past, use the AR, and we even go to an extent, I’ll give you examples specific for the arrow as a business? Because what happened as a business like aerospace, the probability of you know, some of the customers when they are performing gold is pretty good. But like, you know, let’s say when they go bankrupt, or when they have cash flow issues, then there’s a risk for bankruptcy. So how do you anticipate, like, you know, the risk associated with such kinds of customers where you don’t have financial information available? So we also have kind of a search engine within the credit risk organization who have you know, developed a kind of a template, where we track like, you know, information coming from Google Bloomberg, you know, and just kind of, you know, keep a track on what are the latest news and information available, so that we kind of gather that and like, you know, continue to provide to the business leaders so that they can take some kind of, you know, action If needed, and, like, as I said, like, you know, you must keep looking at your credit utilization versus your credit limits. And like, you know, how the customer pay habits have been based on that, like, you know, take decisions considering, like, you know, if there is some news coming to you, like, you know, they could be a cash flow issue with the customer or something. So those kinds of elements we use in parallel, you know, just to mitigate those risks.

Mike Thelen:

There, if you want to add more, should we move to the next question?

Paul Watters:

I think you know, we’ve, we’ve always, our IT infrastructure is fairly antiquated. One of the good things about that is that those older systems tend to be fairly easy to extract data from that. There’s no question now that we’re awash with more data than we’ve ever had. The question is really, I think, how do we distill the information we get in a wash of an overwhelming wash of data? How do we distill all that information to make decisions, both in credit and more broadly for the business about what the future holds? I think that’s the real key piece. How do we bring that together to identify trends, and other things that are important to us as we move forward?

Mike Thelen:

Thank you, Paul. I’m gonna go to the next question. We hit a little bit on this already, it says for global operations, especially in high-risk territories, what risk-mitigating measures Do you take while extending credit? One of the things brought up was we’re looking at more letters of credit. And Tony mentioned any other thoughts around that? What are some other people done?

Saurabh Chopra:

Yes. So I think one of the things that we also do is we have a country baseline term, right? So we also look into specific countries, like what is the best possible term that you can give it to a customer? That’s one thing, and, like, you know, a letter of credit is one of the processes which are helping us out, you know, to mitigate those risks like, you know, secure your revenue with those customers. But I think the country baseline term helps us drive some kind of behavior. And in addition to that, we also have an ETR process where we have, you know, extended-term requests. So what we do with that is like, let’s say if there’s you know, a request which is coming from sales or anybody like you know, that they want to extend that customer with additional terms or something, we keep a track on that. And this initiative, what Tony’s involved in where there is a lot of pressure, like not many ETR needs to be approved, you know, the number of ideas need to go down, we need to stick to the standardized payment terms that we have for our evil. So I think that model has helped us a lot.

One other thing we’ve done is to mitigate risk, we want to always cover our economy what we call our economic cost. We have both products, businesses. But you also have project-based businesses. And what we’ve done there is we’ve required our project-based businesses to get advances from our customers, and we’ve targeted certain businesses to get a 20% advance or a 30% advance just so we’re covering we’re always covering our economic costs as a way to protect ourselves you know, it’s like a milestone in yet we’re doing from an invoicing perspective.

Mike Thelen:

Moustapha, do you have something to add to this?

Moustapha Ould Ibn Mogdad:

Not really, I mean, we don’t sell outside of Canada because of the regulations regarding the medication. Okay. In my previous experience with the coffee service, the food industry, we have the same rules. But there is a huge risk in different countries. Like for example, when we offer the credit in Mexico as an example, we always use a local company to provide us with the best information about the client because of whatever coffees I’m sure you’re familiar with coffees, which is one, the biggest one we have outside of Canada. That’s how coffee is most of the time, they don’t have a local partner there to tell us exactly who’s the client. Also, we do what we called La, in between the personal guarantee and the business. That’s helped us a lot and some of the small businesses that we were going through. To review the whole credit process with a team with our internal risk management team and with a solid sales team and with third-party provider service, help us a lot to mitigate any risk with certain days or certain countries.

Mike Thelen:

All you want is everything from the recipes to this and different markets.

Paul Watters:

Yeah, I think we typically use the traditional instruments that most other people do letters of credit and so on. And if you think about how we treat customers you know, differently, the same customer types, whether they be distributors and so on, different In Europe to what we might do in Asia and parts of South America. And I think typically you’ll find where there is not a strong rule of law and we have creditors’ rights enforced. They’re the areas that are also a higher risk for us. So, we use letters of credit, and other instruments, traditional instruments that probably everybody uses to mitigate the risk.

Mike Thelen:

Thank you. We’re just about at a time. Is there one last question from the audience? All right, well, why don’t we thank our esteemed panel, it’s helped us get a better view of the world.