Banking Solutions for Cross-Border Expansion
In the ten years since the implementation of the North American Free Trade Agreement, (NAFTA), annual trilateral trade has doubled from $306bn to $621bn, with $1.7bn in trilateral trade conducted daily. As companies continue to expand into Canada and Mexico, financial service providers must find innovative ways to support their customers’ growing demands for solutions that serve both cross-border and local banking needs.
MetoKote Corporation’s approach to integrating its Canadian operation into its centralized treasury structure illustrates how a company can successfully align treasury to support global expansion, while still operating within the context of its business model. The solution, provided by Wachovia Corporation, combines access to a local banking provider and a best-of-breed Internet-based banking platform. The results include global visibility of information, optimization of cash and centralized control.
Before examining MetoKote’s experience it is worthwhile to briefly review the impact of NAFTA both from a business and treasury perspective.
Since its inception a decade ago, NAFTA has aimed to reduce trade barriers and promote fair trade competition between Canada, Mexico and the US. While debate surrounding the agreement continues, today, North America stands as the world’s largest free trade zone, comprising one third of the total global Gross Domestic Product (GDP).
One legacy of NAFTA has been the adoption of a more comprehensive North American mindset by many of the companies seeking to take advantage of new growth opportunities continent-wide. This mindset is reflected by the growing number of US companies expanding into Canada and Mexico, by both investing in manufacturing facilities and broadening their markets for the distribution of goods and services. Even those companies maintaining a US focus are facing competitors who source more cheaply from Canada and Mexico, and can thereby provide wholesalers, retailers and consumers with an expanded set of competitively priced products.
From the perspective of a treasury professional, the challenges of supporting North American business expansion parallel those challenges more broadly associated with globalization. Treasurers must face the increased complexity of managing a business across multiple borders. For example, besides handling an increase in cross-border payments and collections, companies must also manage the local currency requirements associated with daily operating expenses and payroll while keeping an eye on the competitive advantage afforded by billing customers in local currency. Therefore treasury must have a solid understanding of local banking services and must determine the best way to receive additional banking support when deemed necessary.
Many treasurers require a solution that aligns global business expansion with a centralized treasury approach. Treasury seeks to centralize control and maintain global visibility of information. Further, treasurers who pursue a strategy of centralization must reconcile their efforts to standardize for global efficiency gains with the on-the-ground reality posed by variations in local banking practices.
MetoKote Corporation, headquartered in Lima, Ohio, is an industry leader in protective coating applications, serving over 1,000 customers throughout the United States and worldwide. MetoKote provides coating solutions to a wide variety of industries, including agriculture, appliance, computer, construction equipment, electrical, furniture, industrial equipment, recreational, and truck and bus. The company’s primary client focus is the automotive industry.
Several differentiators have helped to make MetoKote a leader in its industry. MetoKote centers its business strategy around locating its facilities near or on a client’s premises. The company’s unique on-premise outsourcing solution called InSite™, the integration of Metokote’s coating facility into the client’s production site, creates substantial benefits for the company’s customers. The solution speeds inventory turnaround—by eliminating the time required to batch and ship vehicles and removing scheduling delays— and reduces the related handling costs. MetoKote also designs and builds its equipment to satisfy client requirements and to fit the footprint of a client’s facility. As a result of this strategy, MetoKote has five times as many locations as the next competitor.
In the late 1990s, when automotive companies began relocating their production facilities offshore to Canada and Mexico, MetoKote expanded with its client base. Today, the company has three facilities in Canada and one in Mexico, with plans for further expansion. Whereas in the mid 1990s the US market accounted for 100% of MetoKote’s revenue, today the company’s Canadian and Mexican facilities contribute over 20% of total revenue. MetoKote’s ability to follow clients internationally and service them locally has been key to its sustained growth.
MetoKote’s follow-the-customer business model has significant cash flow implications. The approach requires large, up-front capital spending in facilities. The company later recoups cash somewhat irregularly, since revenue is seasonal following the automotive production cycle. For example, volume may ramp up based on a new model introduction or drop during the summer or Christmas periods. While payroll is weekly, customer collections lag. Cash volatility makes cash flow challenging to predict and variable by country.
Further, as a private equity firm, MetoKote has a highly leveraged financial structure. Following a 30-year history as a privately held company, JPMorgan Partners purchased a portion of MetoKote in late 1998. Cash-flow dynamics make it challenging to service debt requirements. MetoKote needs the ability to move the cash it generates in one country to where it is needed, as quickly as possible, whether for expansion, for servicing debt or for investing to optimize returns.
A philosophy of centralization shapes MetoKote’s objectives for establishing a banking solution that supports the company’s expansion and addresses cash-flow challenges. As a lean organization, MetoKote has historically leveraged its centralized corporate functions across the business to avoid inefficient replication of functions and expertise across multiple locations. In keeping with this vision, the entire worldwide financial staff comprises less than two-dozen people covering 32 locations in five countries. Most of the financial staff resides at their Lima, Ohio headquarters, with minimal staff located in other countries. All banking relationships are also centralized.
For MetoKote, a centralized approach to treasury and finance yields significant benefits. To address the challenge of cash-flow volatility, treasury needs global cash-flow visibility, especially the ability to monitor collections and to move excess cash on a daily basis to where it is needed most. Given the company’s centralized approach to its banking relationships, MetoKote requires one banking point of contact through which to see its cash worldwide.
The company maintains separate corporate operating entities as 100%-owned subsidiaries with a centralized financial structure that includes an intercompany lending structure. A centralized borrowing structure is more effective for minimizing interest rates and costs, optimizing the company’s worldwide tax position and investing excess cash. Centralizing borrowing in the US enables MetoKote to use excess cash to service its debt requirements, including paying off interest or drawing down its revolver.
MetoKote required a cash management structure for its Canadian operations that would support it in achieving the following interrelated objectives:
MetoKote found a solution that supports its multiple objectives through Wachovia and its Canadian partner, the Bank of Montreal, BMO Financial Group.
First, MetoKote was able to maintain simplified banking relationships by using Wachovia as a key credit relationship bank. Wachovia facilitated the implementation of the international relationship and serves as a window for managing MetoKote’s daily service requirements, including handling billing and problem resolution.
Second, MetoKote gains access to local banking capabilities. For the time-critical receivables function, a Canadian lockbox solution streamlines the process and shaves day’s sales outstanding by a day or more. The solution enhances MetoKote’s competitiveness by giving clients the option to pay by check in local currency or US dollars instead of by wire. By billing and collecting in local currency, clients avoid FX risk and MetoKote saves the cost of international check collections. Outsourcing the receivables process allows MetoKote to focus on its core competencies.
Third, MetoKote’s treasury headquarters gains visibility and control of cash by receiving account balance and transaction information daily in both currencies. More timely and automated reporting enables centralized treasury to more accurately forecast cash flow and optimize the usage of excess cash. MetoKote maintains a lean treasury structure by minimizing points of contact and avoiding replication of treasury functions in Canada.
Currently, Canada’s three facilities generate six times the revenue of Mexico’s one facility, but the business in Mexico is growing rapidly. As in Canada, MetoKote’s goal is to expand further into Mexico in strategic alignment with clients. The company also intends to integrate its Mexican operations into its lean, centralized treasury structure to gain cash flow visibility and to improve cash forecasting. Mexico is still early in its ability to generate cash, and given the life cycle for growing the business following the up-front investment, the benefits for controlling cash in Mexico have begun to surface only in the past year.
In Mexico, culturally, there is a heavy reliance on cash. Today, MetoKote must send someone to collect cash from its customers. If Metokote misses the window for collecting, payment may be delayed by as much as a week. This underscores the need for a flexible solution, which can adapt to varying cultural differences. MetoKote will look to replicate its Canadian success in Mexico.
MetoKote and other companies taking advantage of the growth opportunities afforded by NAFTA must align strategic corporate and treasury objectives. The support of a strong banking partner can pave the way to realizing the full benefits of North American expansion.
This article was co-authored by Patrick A. Osler, CPA,CMA,CFM
Pat is currently CFO at MetoKote Corporation, the leading protective coatings services company with 30+ locations and operations in five countries.