ITU / BDT Workshop Cairo, Egypt, 19 – 22 December 2005 Corporate Strategic Management

1. ITU / BDT Workshop Cairo, Egypt, 19 – 22 December 2005 Corporate Strategic Management Lecture 11 The first perspective of the Balanced Scorecard Method: FINANCE ITU/BDT/ HRD Corporate Strategic Management

2. Improve Asset Utilization New Revenue Opportunities Increase Customer Value Finance perspective Sustained Shareholder Value Productivity Strategy Growth Strategy Improve Cost Structure • Manage capacity from existing assets • Incremental investments to eliminate bottlenecks • Reduce cash expenses • Eliminate defects, improve yields • New sources of revenue (new products, markets, and partners) • Improve profitability of existing customers ITU/BDT/ HRD Corporate Strategic Management

3. The financial indicatorsthey are used in the business plans, and calculated from accounting statements Revenue CAPEX OPEX Cash flow Three main accounting statements Income statement Balance sheet Cash flow statement Financial ratios asperformance indicators ROCE, EVA, …. Financial indicators asinvestment criteriaNPV, IRR, Payback ITU/BDT/ HRD Corporate Strategic Management

4. Business model structure Demand for end-customers and interconnection with other operators HumanResources Tariffs RetailCustomersRevenue WholesaleCustomersRevenue CAPEX OPEX Evaluation with Ratios and financial indicators : NPV, IRR, pay-back, EVA, ROCE ITU/BDT/ HRD Corporate Strategic Management

5. Income statement OPEX Revenues - + CAPEX EBITDAEarning before income taxes,depreciation and amortisation - Depreciation EBITEarning before interests, and income taxes, - -- Taxes Net Income ITU/BDT/ HRD Corporate Strategic Management

6. INFLOWS and OUTFLOWS Customers Shareholders Banks, lenders Sales of services Increase of equity Increase of debt (operating income) (capital increase) (credit, loans) INFLOWS cash flow OUTFLOWS Labour costs Training Network & equipment Technical & admini- strative expenses Debt repayment with interests Tax Dividends Staff Suppliers Service providers Shareholders Govern- ment Banks, lenders ITU/BDT/ HRD Corporate Strategic Management

7. PROFITABILITY RATIOS • Gross Profit Margin = gross profit / net sales • Profit margin = net income / net sales • Return on Total Assets (ROA) = net income / average total assets • Return on Equity (ROE) = net income / Shareholders’ equity • Return on capital employed (ROCE) = net income / Capital employed(capital employed = fixed assets + working capital needs) • Return on capital invested (ROCI) = net income / Capital invested(capital invested = shareholders’ equity + long term debt) • Economic Value Added (EVA) • EVA = EBIT * ( 1 - t) - KC * CE • t = income tax rate • KC = weighted average cost of capital • CE = capital employed ITU/BDT/ HRD Corporate Strategic Management

8. SOLVENCY and LEVERAGE RATIOS • Debt ratio • total liabilities/total assets • reflects the amount of money owed to creditors • Debt-to-equity ratio • total liabilities/stockholders’ equity • shows if the company is carrying a large amount of debt • Times interest earned • income before interest and taxes/ interest expense • shows how many times the company’s before tax earnings will cover interest ITU/BDT/ HRD Corporate Strategic Management

9. EVA conceptEconomic Value Added Economic value added is the net operating profit (operating profit after tax) less the cost of the capital employed to produce that profit. EVA therefore corresponds to the real earnings (after remuneration of invested capital) with the point of view of the investors. Economic value added has the advantage of taking into account the cost of employed capital rather than just the cost of debt comprised in the cost of capital. If EVA is positive, then the company generates value for shareholders; If EVA is not high enough, shareholders prefer to invest in other higher return business ITU/BDT/ HRD Corporate Strategic Management

10. Financial indicatorsused as investment criteria Revenue CAPEX OPEX Cash flow Income statement Cash flow statement Balance sheet Accounting statements NPV IRR Payback period ITU/BDT/ HRD Corporate Strategic Management

11. NPV as an investment criterion : NPV = sum of the discounted free cash flows • The higher is the NPV, the more profitable the project. • NPV < 0 : the project is absolutely not profitable ; • 0 < NPV < « threshold » : the project is doubtful; • VAN > «threshold» : the project may be validated. • The value of the profitability threshold depends on : • the size of the project • the nature of the business (market, technology) • the environment (politics, economic, currency, …) • the trust of investors in the business plan. ITU/BDT/ HRD Corporate Strategic Management

12. Internal Rate of Return (IRR) IRR is the rate that causes the NPV of a project to be zero The higher is the IRR, the more profitable is the project If IRR is greater than the discount rate (or a minimum rate of return required by investors), then the project should be accepted IRR does not depend on the size of the project (contrary to NPV); it is an advantage ITU/BDT/ HRD Corporate Strategic Management

13. æ ö C = t T ç ÷ t = å I0 ç ÷ t + (1 a) t = 1 è ø Pay-back The pay back is the number of years required for a firm to recover the initial investment required by a project from the cash inflows it generates. The shorter the pay back, the more profitable the project. Short payback periods are preferred for go / no-go decisions. Formula withdiscounted pay-back where : I0=initial investments, year 0 Ct=free cash flow, year t a =discount rate t = year number in the future ITU/BDT/ HRD Corporate Strategic Management

14. NPV Evolution of cash-flows Cash flow is the most crucial financial concept ITU/BDT/ HRD Corporate Strategic Management

15. F I N A N C I A L Selected Strategic Objectives Measure Target Initiative F1Performance of Company and its managers • Return on capital employed (ROCE) • EBITDA / Sales • Net profit as percentage of sales revenue 18% 51% 22% • Improve Cost Structure • New sources of Revenue, Yellow pages, VoIP • Improve profitability of existing customers • Increase number of customers F2Efficiency of asset usage • Inventory days • Accounts receivable collection period • Accounts payable payment period 40 days 60 days 75 days • Implementation Working Capital management program F3Financial Structure and stability of the company • Equity to assets ratio • Current ratio • Gearing 40% 1.2 60% • Long-term assets management • Cash improvement management F4Relationship of the number of ordinary shares and their price to the profits, dividends and assets of the company • Earning per share • Return on Equity • Net Assets per share 0.15 15% 0.70 • To ensure in relatively stable profits • Suitable assets for security Example of Finance perspective ITU/BDT/ HRD Corporate Strategic Management

16. Finance Perspective Examples of initiatives • To increase the fixed network capacity to meet the demand for basic services with main lines in profitable areas. • To increase the geographical coverage of mobile networks where expected traffic is profitable. • To develop the concept of community telecentres for the areas where individual fixed lines are not profitable • To develop new services and new applications conveniently used on the current main lines: • To develop partnerships with ISP • To optimize Interconnection revenues with competitors (our worst enemies are also good customers!!!) • To develop broadband networks where it is justified ITU/BDT/ HRD Corporate Strategic Management