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Raising Capital

As Seen in CFO Studio Magazine Q1/Q2 2016 Issue

IMMUNOMEDICS CFO PETER PFREUNDSCHUH HAS A KNACK FOR FINDING FUNDING IN ANY MARKET

BY MARTIN DAKS

Peter Pfreundschuh, 46, is the Chief Financial Officer of Immunomedics, a Morris Plains, NJ–based clinical-stage biopharmaceutical company that develops antibody-based products for the targeted treatment of cancer, autoimmune diseases (including Lupus and Rheumatoid Arthritis), and other serious diseases. He’s the kind of CFO who can juggle multiple responsibilities while maintaining a laser-like focus on lifeblood targets of any emerging growth biotech business, like raising and managing cash to achieve the target end goals.

Pfreundschuh is not a one-hit wonder. At Immunomedics and other companies across a string of industries, he has successfully closed more than $500 million of corporate financings, initial public offerings, debt refinancing, and other private placements.

“My primary focus is financing and business development, but a significant part of my job involves building relationships,” says Pfreundschuh, who joined Immunomedics in September 2013. This kind of duality has played a big role in the company’s growth, and has also been a significant component in his own professional development.

Immunomedics, for example, started out strictly as a diagnostic company many years ago — developing imaging and other products — but about 10 years ago the company revised its focus to concentrate primarily on antibody-based therapeutics.

“It can be a long path to develop and commercialize therapeutics, and you need a tremendous amount of capital,” Pfreundschuh notes, adding that the process of moving products from research and development through clinical trial is a winding path that can eat up funds at a staggering pace.

So it’s no surprise that Pfreundschuh has spent a considerable amount of his time helping Immunomedics to tap the capital markets, an effort that involves a lot of due diligence, a sharp eye on regulatory compliance, and a lot of face-to-face communication to help build trust.

“In May 2014, we had a successful capital offering that raised about $35 million,” he explains. “In that same year, at the annual meeting, shareholders approved a new shelf offering that gave us the ability to float a $100 million convertible debt to equity offering, which was completed in February 2015. This kind of funding enables Immunomedics to continue the drug discovery and commercialization activities that are vital to the company’s long-term future and success.”

Pfreundschuh says the 2015 debt offering was underpinned by relationships with two well-known investment banks: Goldman Sachs and Jefferies. “We had a preexisting relationship with Jefferies that was reinforced by this second financing, but we also had to help build the initial relationship with Goldman Sachs.”

He started the “getting to know you” dance right after joining Immunomedics; meeting with Goldman Sachs’ investment bankers and giving them an in-depth look at the company and its prospects.

To Capture Attention

In order for Immunomedics to float these kinds of offerings, “You have to know a great deal about your own business and its relationship to the capital markets,” he says. “But at the same time, you have to be a bit of a generalist, since you want to cast a wide net for investors, beyond specific biotech investors. You want to be able to capture the attention and interest of funds and other sources as well.”

During a career that has spanned about two decades since earning an MBA with a concentration in finance from Rider University and a BS in accounting from Rutgers University School of Business, Pfreundschuh has developed a lot of experience through his involvement in multiple capital-market financings.

Still, the September 28, 2008 stock market crash, which knocked out approximately $1.2 trillion in market value, also knocked the wind out of the sails of biotech and other financing for a long time, Pfreundschuh notes. It meant that CFOs like Pfreundschuh had to be even more aware of their company’s strengths and weaknesses, and the market in which they operate. So, before he made the rounds of potential funding sources, Pfreundschuh worked with management and the Board of Directors of Immunomedics to develop a long-term plan that reflected “a range of scenarios, and then we built our financing pitch around those bookends.”

It’s all about establishing credibility with the capital market, he explains. As part of the pitch, he helped to create a schedule of realistic milestones, or guideposts — including drug development milestones — that demonstrated awareness of the market, of his company’s own cash flow, and of the business’ development abilities. “Then we had to meet those milestones,” he says. “I was deeply involved in the road show, and had to understand the fundamentals of the business.”

He also had to understand the point of view of the potential investors, so he could anticipate their questions and ensure he had answers.

“It’s a bit like dating,” Pfreundschuh relates. “Each time you see each other you share a little more.”

If capital financing is like dating, Immunomedics is likely to be invited to a lot of dances. The company’s focus, oncology, continues to be a hot area, especially as traditional chemotherapy treatments are increasingly being replaced by targeted therapeutic agents that deliver drug treatment in an efficient, less painful manner.

“Large pharmaceutical companies need smaller, nimble ones like Immunomedics,” says Pfreundschuh. “Large pharmaceutical companies are good at developing and commercializing products, but need innovative growth companies like ours to develop the next new therapy from basic research, and investment money follows innovation.” Since 2013, for example, Immunomedics has been collaborating with giant multinational Bayer AG on oncology research in a business relationship that Pfreundschuh manages.

Immunomedics’ next big project involves expanding the company’s oncology portfolio. As CFO, Pfreundschuh will be tasked with securing funds to advance the company’s R&D efforts, and to find additional partners that can help to commercialize its products.

“We want to have more of a hand in the commercialization process,” he explains. “It’s the next logical step.”

The process also means that Pfreundschuh will be adding another hat, business development, to his portfolio of responsibilities. But that doesn’t bother him.

“It’s good that CFOs continue to get even more involved in the business,” he says. “At the end of the day I can go home and say I made a difference in people’s lives.”

Retail Strategy

As Seen in CFO Studio Magazine Q1/Q2 2016 Issue

CREATING A STRATEGIC PLAN AND SELLING IT TO STAKEHOLDERS CAN BE A COMPLEX YET REWARDING PROCESS

BY JULIE BARKER

In 2012, Ulta Beauty, a retail business carrying everything beauty-related— from mass cosmetics to high-end anti-aging creams and services for hair, brows, and skin—had come to a fork in the road, according to CFO Scott Settersten. “We were executing well in areas to drive revenue growth, such as building new stores and adding exciting new products, but we had not taken a holistic view of what investments in people, process, and systems would sustain those revenue-driving tactics and a healthy business over the long term.”

Settersten, who had been with the company since 2005, was appointed Acting Chief Financial Officer in October 2012, when the CFO resigned. Settersten got the CFO job permanently in March 2013. The CEO’s office was also in transition that year; current CEO Mary Dillon came aboard that July. So, late that year, the new leadership team undertook to create a long-term strategic plan.

Investor expectations did not necessarily align with “how the business was actually operating,” nor with “what we thought we really needed to do to support the long-term health of the company,” says Settersten.

The Process

Rather than bring in a consultant like McKinsey or Bain to direct, develop, and craft a strategy, Bolingbrook, IL–based Ulta Beauty developed its own hybrid model with a small internal strategy group that reports up through Finance. They brought in a third party to help facilitate the strategy development with the senior team at various touch points throughout the process. “Senior management was going to own the strategy-development process, because at the end of the day, we were the ones who would have to implement it,” says Settersten. “As a leadership team, we needed to better define What is Ulta Beauty? What do we stand for? What are the strengths and weaknesses of our business model? Then we needed some external subject-matter experts to help us think about competition, our positioning in the marketplace, what the future of retail and beauty might look like from a guest [Ulta Beauty’s term for customer] perspective, and how consumer expectations might also change.”

Brand partners spoke to the group about the beauty category and the competition and where they saw future growth levers. Other subject-matter experts helped the group think through real estate strategies and how to meet guest expectations on the e-commerce side.

The company had been growing rapidly for many years, both through opening new stores and e-commerce growth of 40 to 50 percent each year. “You’re so focused on managing the day-to-day business to support the high growth that you don’t often have time to sit back and think about the future. At the same time, we had made certain assumptions about business drivers that had never been formally tested,” says Settersten.

For example, Ulta Beauty’s now roughly 875 stores include full-service salons, and provide brow and skin services as well. “We had theorized that guests using our service offerings were our most valuable, because of the repeat nature of the service business and the retail product attachment. But we didn’t fully understand how much each guest spent at Ulta Beauty on an annual basis or exactly what types of products they purchased. We also wanted to determine what percentage of our guests used our services and what we could do to get more of our loyalty members to try our services —a huge opportunity.”

The strategy group led the leadership team through a fact-finding exercise, which included a review of historical operating metrics and a deep dive into Ulta Beauty’s data-rich loyalty program. Then Ulta Beauty’s financial planning and analysis (FP&A) team, which also reports to Settersten, got involved, gathering future-looking data from the business units. “We believe it works best for us to have the linkage between strategy and FP&A under the Finance umbrella,” he says. “You eliminate confusion and inefficiencies when everyone is using the same numbers and metrics, and it makes it much easier to link past performance with future financial targets.”

Finally, with the strategy group facilitating, senior leadership created six “strategic imperatives.” These spelled out what future growth would depend upon, from acquiring new guests and deepening loyalty with existing ones, to investing in infrastructure to support growth. And then the team agreed to a timeline to communicate the strategy to its stakeholders.

Countdown to Investor Day

“During the one-year-plus window, job No. 1 for me, the CEO, and our Vice President of Investor Relations, was to manage investor expectations,” says Settersten. “Oftentimes the word ‘investment’ carries a negative connotation to investors, especially when the company’s share price is based on a high earnings multiple.”

In each of the quarterly earnings calls and in meetings with investors during this period, the company fielded questions about the type of investments needed, how much they would cost, and what the implications were to the long-term financial guidance. “We can’t share that with you until we complete the strategy work,” Settersten told them. He promised that the leadership team would announce the complete financial picture at an Investor Day in the Fall of 2014— the company’s first such event.

Some of the investments would be large, such as the cost to reengineer Ulta Beauty’s supply chain, including several new distribution centers with IT systems to help the company better forecast and more rapidly replenish the more than 20,000 products it stocks in each of its stores. These investments would involve, too, large down payments, so there would be short-term deleverage in the profit-and-loss statement in order to capture long-term operating efficiencies.

“We were concerned with how investors would react,” says Settersten. “Of course, we believed the good news was that these investments would improve the guest experience and make us a stronger and more profitable business over the long term.”

Ulta Beauty’s Board of Directors was uneasy too. (See sidebar at right to learn how Settersten worked to calm their fears.) With management and the Board aligned, the investor communications were finalized. The Investor Day was held in Chicago in October 2014, and management’s presentations, including Settersten’s summary of investments, benefits, and long-term financial outlook, were well received. Wall Street’s response was very positive. The verdict? Ulta Beauty’s growth story was strong and clearly communicated.

Ulta Beauty’s stock price soon reached all-time highs. Recently the company’s stock price was in the $185 range, which Settersten attributes to the team’s successful execution against a well-constructed and -communicated long-term strategic plan.

Meanwhile, he and his team have quickly refocused on ensuring the strategy process becomes part of the company’s day-to-day operating activities and now are engaged in a long-term strategy refresh. Ulta Beauty, thanks to the exercise of creating a long-term strategic plan, has a good sense of what it takes to be effective in 21st century retailing.

Efficiency Defined

As Seen in CFO Studio Magazine Q1/Q2 2016 Issue

HOW SCHINDLER ELEVATOR’S CFO HELPS THE ENTIRE ENTERPRISE MOVE FORWARD

BY MARTIN DAKS

As CFO of Morristown, NJ–based Schindler Elevator Corporation— the largest legal entity of the Schindler Group, a 54,000-employee, Swiss-based global mobility provider with about $9 billion ($US) in annual sales — Michael Bickel has responsibility for U.S. strategy and other initiatives, in addition to budgeting and financing. But Bickel sees himself as a weatherman.

“Being a weatherman involves studying the global corporate climate, from the economy to competitors to politics,” Bickel explains. “Then you relate this awareness to your company, and determine how it may impact your business and what proactive steps you can take to keep your company on top.”

He says that an effective CFO focuses on six core areas. Bickel’s Six Core Components of Effectiveness include:

1. Watching the weather

2. Fulfilling a leadership role

3. Seeking marginal profit opportunities

4. Signing on as a “front-line player” who supports front-line staff

5. Acting as “copilot” to business unit leaders

6. Embracing the role of internal ambassador.

As a leader, a CFO has to drive strategy and chart a course, even as he or she solicits and considers advice from other team members. “It’s also very important to identify, challenge, and overcome obstacles,” Bickel says. “You cannot be effective by standing behind others and simply following them.”

Instead, an effective CFO will get all the key players involved in the business processes, helping them to see how their individual contributions will help the entire enterprise to move ahead. Bickel says this copilot approach calls for a willingness to share responsibility when appropriate, a method that is 180 degrees removed from a “silo” mindset, where the CFO hordes information and hinders a company’s ability to operate effectively.

An engaged CFO also seeks out new data, and is willing and able to understand and translate it into meaningful information, he adds. “All six Components of Effectiveness should be considered as integral parts of a comprehensive approach that yields efficiency and results.”

A Solid Foundation

Before a CFO can mount that kind of six-pronged management approach, he or she needs a good foundation that includes a bottom-to-top understanding of the enterprise. In Bickel’s case, a unique background was extremely valuable.

“I literally learned about Schindler from the ground up, beginning by helping to install an elevator in my first month working for Schindler Switzerland, where I was very close to the branch, as well as factory shop floor operations, throughout my daily work as internal auditor,” he recalls. “It’s a very practical way to gain experience.”

A Swiss native, Bickel holds a Master of Economics from the University of Berne, is a Certified Financial Analyst, and graduated from the Advanced Executive Program at Northwestern University’s Kellogg School of Management. He got his first work experience in a pump engineering company, cofounded with his brother, Thomas.

“But I wanted to learn more, so in 1997 I joined the management training program at Baloise Insurance, where I got involved in strategic project management, M&A, and other activities,” he says. “Later, I went to Ernst & Young’s Swiss practice, where I learned a great deal about enterprise-wide risk management, financial advisory, audit and attestation, and sales and client relationship activities. I enjoyed working for different multinational clients abroad and gained experience and insights into critical success factors, as well as best demonstrated practices across multiple industries.”

At Ernst & Young, Schindler was one of his internal audit clients; so in 2005, Bickel hopped across the ocean to become Schindler’s Head of Internal Audit North America, managing all internal audit, risk, and compliance-related activities for Schindler North America’s U.S. and Canada operations. He also developed strategic audit plans, supervised and executed field audits, addressed critical company-wide issues, and ensured proper corrective actions were taken when needed.

“My audit responsibilities included spending a lot of time in field operations, where I got a wall-to-wall look at the business and learned about Schindler firsthand from the branch level up,” Bickel relates.

He soon rose to become Lead Area Controller for Schindler’s Americas Zone, responsible for 10 group companies with more than 10,000 employees. He also worked closely on operational and strategic activity with Schindler’s former CEO Americas Jakob Zueger, along with individual company leaders and unit-level CFOs. Bickel also directed the Americas Zone’s financial planning and budgeting activities, recommending process improvements, training key finance staff, and assisting with a variety of operations, including a key profit-enhancing project and an important cross-border M&A.

“I co-led a significant service business project (“project step”), which increased Schindler USA’s service margin by about 5 percent,” Bickel recalls. “We developed detailed benchmarking against our major market competitors with regards to issues like service model/planning, methods, tools, contracts, and metrics.”

As a result of the study, Schindler USA was able to slice $35 million of costs from 2010 to 2012 by reducing the number of service technicians from about 1,700 to about 1,500, with no productivity loss.

He was also co-leader of due diligence in the 2010 acquisition of Compania de Servicios S.A., a dominant Colombian company that designed, manufactured, installed, and maintained elevators and related products. “The acquisition of Compania de Servicios S.A. gave Schindler E&E [elevator and escalator] market leadership in Colombia,” Bickel notes.

In 2011, Bickel officially moved into his first CFO appointment, serving a three-year tour of duty in Shanghai as CFO of Schindler China, the Group’s second-largest business, with more than 5,000 employees.

The promotion made him responsible for all of the financial operational activities in that unit, from accounting and reporting to IT and finance projects. “I was a member of the Board of Directors of Schindler China, and I had oversight of the Finance department along with an IT team of more than 80 persons across multiple locations in China,” Bickel says.

During his time there, Bickel was instrumental in doubling the unit’s operating revenue. He started by establishing a three-year growth and profit plan with specific target numbers that let everyone know their goal, and followed up by instituting reforms with a focus on improving new-installation sales and cost reductions.

“We took steps to gain market share by launching new products designed and built in China for China, and increased the geographical coverage through accelerated branch expansion and by setting up a professional key account management,” he says.

Bickel also bolstered the bottom line with a strong focus on reducing product costs by implementing a fully dedicated cross-functional cost leadership team that pays particular attention to supplier negotiation, product design changes, and state-of-the-art production processes. The team also optimizes subcontractor costs with new installation methods and drives bad-debt management and accounts receivables collection, Bickel says. “My experience is that net cash must always support the profit trend; otherwise there is an issue. For example, ‘figure play’ [a reference to accounting methods that may boost reported profits even though cash flow is actually decreasing]: I was driving this area very hard in China. We also introduced improved finance and controlling tools to identify key profit drivers in each product line, so we always knew where we were and what we had to drive.”

Bickel also facilitated, without business interruptions, one of China’s first cross-district mergers, between Schindler China and Suzhou Schindler Elevator Co.

All of which helped to prepare Bickel for his move to Morristown, as CFO of the North American division.

Setting and Reaching Goals

“Finance guys are typically risk averse, but if you want to move ahead, you’ve got to take some reasonable chances,” he says. “Instead of being defensive all the time, and just looking for ways to shield the company from the downside, you must be able to identify upside opportunities and ask yourself how we can take advantage of them.”

He’s currently working on a key project that is designed to increase Schindler USA’s earnings before interest and taxes by 5 percent within two years.

The strategy includes pricing initiatives, enhancements to Schindler’s supply-chain performance, the reduction of profit variability among branches with customized business priorities, and 80 percent benchmarking. The initiative also features improved new-installation and modernization execution approaches, and increased service margins through disciplined cost management, details Bickel. As he executes, Bickel continuously draws on his six Components of Effectiveness management paradigm (page 13).

But he’s also looking at de-risking the tax-qualified employee pension plan, and improving front-end-related processes and controls, while driving product liability exposure and implanting cost efficiencies across the enterprise. That will involve eliminating redundant or non-value-added roles, replacing underperforming individuals, and centralizing some roles that are currently held by field operations (and vice versa), he adds.

“Other areas I’ll be working on include revising our accounts receivable processes and policies to more fully align sales representatives with A/R and to automate upfront client payments prior to dispatching service technicians to callbacks not explicitly covered by contracts; and implementing the global SAP platform in Schindler USA,” Bickel reports. “To successfully implement these and other projects, I engage very actively with other departments, and together we support the entire business, from the front lines on through. It’s a constant evolution.”

Bickel says it is his “mission” to make the business more profitable. “To do this, regardless of which company you work for, a CFO has to understand challenges from the business unit point of view, and has to be able to integrate those needs and goals into the overall corporate strategy. It’s good to know what’s going on at the ocean level, as you can’t be steering the wheel all the time.”

It’s all part of the CFO-as-weatherman approach, figuring out which way the winds of the marketplace are blowing.