European Working Capital Study

Transcription

1 European Working Capital Study January 2011

2 European Working Capital Study January 2011

3 Introduction As we are seeing positive signs indicating the end of the crisis, liquidity and cash management are still very high on the agenda for most corporates. Over the course of the last year, many CFOs and finance executives have confirmed us that initiatives have been launched to address challenges. So, what impact did these have? As our annual European working capital survey, this study, has tried to confirm this commitment with year-end figures. For this purpose, we have analysed working capital performances across 12 European countries, compiling annual reports from over 1200 publicly listed companies. The sample included a balanced portfolio of corporates coming from 10 different sectors. Furthermore, we have also analysed the link between working capital levels and profitability, as measured by return on net assets (RONA). The main results of the study show deteriorations in working capital across many sectors over the last year. Particularly in inventory, where we would have expected reductions in our last year s study, we have again seen deteriorating performances. Thomas Doll Partner System & Process Assurance Services Having an insight on how peers are managing their working capital provides companies a better understanding of their current performances and what potential untapped source of liquidity still is available. European Working Capital Study 1

4 Key findings 1Much talk, little improvement For the first time since 2005, European companies show deterioration on overall working capital levels, caused by all three areas equally. Working capital rations of the sampled companies have deteriorated by 0,4% compared to last year. Despite much attention on cash and liquidity, the crisis had a negative impact on the net working capital of the largest listed companies in Europe. 2Pharmaceuticals best, Oil&Gas worst change Industries with the biggest year on year improvements have been pharmaceuticals and retail. Biggest deteriorations in working capital performance show in oil & gas and basic material producing companies. 3Potential of reducing over 30% of working capital Total excess working capital levels represent 475bn for the top European companies. Moving to the upper quartile working capital levels of their respective sector, the biggest European companies could liberate over 30% of their net working capital. 4Working capital plays its part on improving profitability Reductions in working capital still have a significant impact on the profitability of corporates. While margins have decreased over the last years, working capital optimisation still holds an untapped potential with impact on profitability. 2 European Working Capital Study

5 Year-on-year comparison Promises, promises? For the first time since 2005, European working capital levels deteriorate. European average working capital ratio 24% 23% 22% Over the course of last year, many finance executives we spoke with indicated that working capital is a strategic priority to improve liquidity levels. What has been the result? While over the last 5 years, European companies were able to improve overall working capital levels, 2009 shows a break from this trend. Companies have on average 20,8% working capital in relation to their annual turnover, which represents an average increase of 0,4% compared to This evidences that the crisis has heavily challenged the liquidity positions of many corporates, even large listed ones. 21% 20% Working capital ratio defined as net working capital/annual turnover European Working Capital Study 3

6 Year-on-year comparison Average increase by 0,4% compared to However, differences were noted in the country performances. Average working capital ratio by country Biggest improvements have been noted for corporates in Spain (-1,3%), where like France (-0,8%) government regulations on payment terms have been implemented, which have potentially increased awareness on managing cash. Despite the common belief that countries with traditionally longer payment terms carry higher levels of working capital, the data shows that this is not necessarily the case. Improvements Spain -1,3% Belgium -1,1% France -0,8% Switzerland The Netherlands -0,3% -0,4% Deteriorations UK Germany Italy Finland Sweden Poland Turkey +0,1% +0,1% +0,2% +0,6% +1,1% +2,9% +3,1% 0% 5% 10% 15% 20% 25% European Working Capital Study

7 Year-on-year comparison Overall European cash conversion cycles have increased by 1,5 days. Deteriorations have been seen in all three areas. Average evolution of C2C, DSO, DPO and DIO The average European cash-to-cash cycle for 2009 shows a clear break with the trend of improved cash conversion. For the first time since 2005, the conversion cycle increases by 1,5 days to 76,0 days on average. Surprisingly, receivables, payables, and inventory all show equally minor deteriorations: Despite promises to achieve lean inventory levels, it is surprising to see the DIO continuing its 5year trend of deterioation. Receivables have been in focus in 2008, and have made no significant change in The stagnation of the DPO is possibly due reaching the end of quick win optimisations. Days ,0 77,3 77,0 74,6 76,0 84,9 82,7 82,0 78,4 79,0 46,6 45,3 46,6 47,4 47,8-51,5-50,7-51,6-51,2-50,8 Last year s study concluded that substantial improvements would come from better managing the forecast-to-fulfil cycle, we believe this is still valid today, especially in the long-term C2C DSO DPO DIO European Working Capital Study 5

8 Sector comparison Pharmaceutical and retail companies have made the biggest overall improvements. European working capital ratio per industry 30% 25% 20% 15% 10% A sector comparison shows the two distinct extremes: those with relatively very little stock-holding and/or cash receivables, such as Services or Retail; and those with more significant inventory and/or longer and more complex supply chains, such as Pharmaceuticals or Manufacturing. With an increasing focus on cash and cost reduction, European pharmaceutical companies were able to make the biggest relative improvements, with 1,2%, but only back to their 2006 levels. Biggest relative deteriorations have been noted for Oil & Gas and for Basic Material companies, with 3,6% and 2,2%, respectively. This is largely due to the price volatility in 2008 leading to high levels of sales during 2008, and due to the prices decreases towards the year-end. In 2009, working capital levels have come back to their levels of % Pharmaceuticals Manufacturing Basic materials Consumer goods Technology Utilities Oil&Gas Telecommunication Services Retail 6 European Working Capital Study

9 Sector comparison Oil & Gas and Basic material companies show biggest deteriorations with 13 days and 8 days of their C2C cycle. Cash-to-cash cycles by sector (2009) Comparing the overall cash-to-cash cycle across sectors evidences the differences in underlying business models. Pharmaceutical companies have with 93 days the longest cash conversion cycle. Historically, research-based pharmaceutical companies have not focused rigorously on cash management, as the industry enjoyed high operating margins and strong balance sheets. As a result, a cash culture has been far from prevalent. Biggest changes compared to last year have been Oil & gas and basic material companies with longer cash conversion cycles by 13 days and 8 days respectively. Days Retail Telecom. Utilities Consumer Basic goods materials Oil&Gas Manufacturing Services Technology Pharmaceuticals DSO DIO DPO C2C European Working Capital Study 7

10 Sector comparison European companies carry over 475 bn excess cash in working capital. Working capital ratios per industry Sector Number of companies Lower quartile Median On average, companies could improve over 30% of their current working capital level, representing on average 389m. Upper quartile Difference upper to lower quartile Consumer goods ,0% 21,0% 12,1% 19,9% Manufacturing ,0% 22,8% 14,3% 19,7% Services ,3% 9,1% 0,8% 17,5% Pharmaceuticals 97 32,4% 24,0% 14,9% 17,5% Utilities 51 24,0% 12,7% 6,6% 17,4% Telecommunication 61 19,4% 10,8% 3,0% 16,4% Technology 58 25,8% 19,1% 12,3% 13,5% Basic materials 94 30,9% 22,9% 17,4% 13,5% Retail 66 14,8% 9,0% 2,7% 12,1% Oil & Gas 27 20,2% 11,5% 8,4% 11,8% Although in some sectors the management of working capital is improving, we can see within industry sectors significant improvement potentials. For example, well-performing consumer goods companies require nearly three times less working capital as their lower performing peers. Our analysis showed that the top 1200 European listed companies have over 475 billion Euros unnecessarily tied up in working capital. The basis for this calculation are actual 2009 figures compared to the upper quartile of their respective peer group. 8 European Working Capital Study

11 Working capital and profitability Potential impact on profitability. Profit impact simulation by industry Sector WC ratiomedian (%) WC ratio upper quartile WC improvement ( m) Impact on RONA (%) Equivalent NOPAT improvement (%) Retail 9,0% 2,7% 548,9 1,6% 14,1% Technology 19,1% 12,3% 36,7 1,6% 10,0% Services 9,1% 0,8% 195,8 1,7% 9,5% Manufacturing 22,8% 14,3% 180,2 1,3% 9,4% Consumer goods 21,0% 12,1% 440,7 1,3% 9,2% Pharmaceuticals 24,0% 14,9% 261,3 1,6% 7,1% Telecommunication 10,8% 3,0% 661,4 1,1% 5,7% Basic materials 22,9% 17,4% 169,1 0,5% 4,1% Oil & Gas 11,5% 8,4% 668,4 0,6% 3,6% Utilities 12,7% 6,6% 737,6 0,6% 3,5% The crisis has increased the pressure on margins in all sectors, and has forced companies to make sustained efforts on efficiency and operational excellence. Therefore, companies should maintain an emphasis on working capital optimisation, to also capture an important upside potential through this factor. For example, by moving to the upper quartile, Technology companies can improve their RONA by 1,6%, which would require an equivalent improvement in NOPAT of 10%. European Working Capital Study 9

12 Conclusions Main conclusions Whilst we would have expected that the continued attention on working capital management would have translated into further improvements of the financial results of 2009, the figures actually show the opposite. The potential reasons are threefold: 1. For one, against the backdrop of a crisis, these findings must be put into the context of scarce liquidity, where many companies have felt the pressure from suppliers, and the need to chase and tighten their grip on customers. 2. Secondly, improvements from initiatives might not have materialised yet in the year-end figures. 3. Thirdly, some companies might have not tried hard enough to realise improvements. Nevertheless, funding through internal sources still remains one of the cheapest sources of financing for any corporate. The results indicate that there is clearly still some room for improvement left on the table. Even companies that have made initial progress, once management was able to realise the quick fixes, it will need to consider the following questions: How do we get this into the DNA of the organisation and make it business as usual? How do we get from top-ofaverage to being best-in-class? 10 European Working Capital Study

13 European network of system and process assurance experts Most companies can set free significant amounts of cash locked up in their business operation and sustainably increase their profitability and company value by managing more actively their working capital. To support our clients in this venture we have set up an network of working capital excellence experts in the System & Process Assurcance (SPA) service line. In SPA we combine a holistic end-to-end process understanding with a comprehensive in depth IT-system knowlegde to deliver high quality Business Process Assurance & Optimisation Services (BPA&O). Integrated part of our methodology is a benchmarking suite to answer e.g. the following questions: Your local contacts Thomas Doll Tel.: thomas.doll@de.pwc.com Timo Laborge Tel.: timo.laborge@de.pwc.com Kai Vogeler Tel.: kai.vogeler@de.pwc.com Do you know your amounts of cash locked up in your business operation? Norway Sweden Finland Do you know how efficiently your peers managing working capital and their underlying systems & processes? Denmark Do you know what are the value drivers to achieve working capital excellence? United Kingdom Netherlands Germany Belgium France Switzerland Austria Italy Spain Turkey European Working Capital Study 11

14 Appendix Survey scope The purpose of this study is to show drivers and barriers as well as keys to success in the management of working capital performance across a number of European countries. The survey is compiled of annual reports from over 1200 publicly listed companies in twelve countries. Population distribution by country 9% 9% 9% 7% 8% 8% 6% 6% 11% 11% 9% 7% Belgium Finland France Germany Italy The Netherlands Poland Spain Sweden Switzerland Turkey UK Population distribution by industry 12% 5% 8% 5% 5%4% 8% 2% 31% 20% Basic materials Consumer goods Manufacturing Oil & Gas Pharmaceuticals Retail Services Technology Telecommunication Utilities 12 European Working Capital Study

15 Appendix Basis of calculations & limitations Basis of calculations For this study, we have excluded out of the sample of listed companies financial institutions, insurance companies and real estate companies, as these have different working capital requirements. For our calculations, we have used the key ratios based on annual turnover, mainly for consistency reasons to exclude differences in reporting. DSO (days sales outstanding) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO value means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company takes longer to collect money. It is calculated as follows: (total receivables/revenue * 365). DPO (days payables outstanding) is an indicator of how long a company takes to pay its trade creditors. It is calculated as follows: (total payables/cost of goods sold * 365). DIO (days inventories outstanding) gives an idea of how long it takes for a company to convert its inventory into sales. Generally, the lower (shorter) the DIO, the better. It is calculated as follows: (total inventories/cost of goods sold) * 365. Cash-to-cash cycle = DSO + DIO - DPO RONA (return on net assets) is equal to asset turnover (revenue/ net assets) multiplied by return on sales (NOPAT/Revenue). A strong virtue of using RONA compared to traditional methods for measuring company performance is that RONA also includes the assets used by a company to achieve its output. Working capital ratio = net working capital/revenue. Limitations of this study Companies have been assigned to countries based on the location of their headquarters. Although a significant part of sales and purchases might be realised in that country, it does not necessarily reflect typical payment terms or behaviour in that country. As the analysis has only used public information, all figures are financial year-end figures. As such, typical management efforts at year-end known as window dressing bias real working capital requirements within reporting periods. Other off-balance-sheet financing, or the effects of asset securitisation, such as receivables securitisation of similar effect, have not been taken into account. There can be a significant time-lag between the implementation of improvements in working capital and their full realisation and visibility in the financial statements. European Working Capital Study 13

16 Appendix Sampled companies by industry and country Belgium Finland France Germany Italy Manufacturing Consumer goods Services Pharmaceuticals Technology Basic materials Telecommunications Retail Utilities Netherlands Poland Spain Sweden Switzerland Turkey UK Total Industry description Manufacturing of industrial goods, such as aerospace From clothing and footwear to household and personal products Both industrials and consumer services All pharmaceutical products Manufacturing of electronics, creation of software and computers or products relating to information technology Includes the mining and refining of metals, chemical producers and forestry products Telecommunications and media Primarily food retailers, excluding apparel Mainly electric and water firms Oil & Gas Oil & gas companies Total European Working Capital Study

17 DSO - average per sector and country Belgium Finland France Germany Italy Netherlands Poland Spain Sweden Switzerland Turkey UK Manufacturing 83,2 65,4 89,1 80,6 113,7 79,4 84,6 110,8 67,1 71,4 101,8 71,1 Consumer goods 55,1 64,0 77,6 59,7 101,2 55,8 65,8 69,0 62,5 59,6 101,6 48,2 Services 107,1 65,1 86,4 63,3 101,0 64,2 78,4 82,3 64,7 66,8 95,8 51,7 Pharmaceuticals 91,2 52,6 71,6 97,6 104,6 67,0 88,6 84,6 76,8 75,1 86,6 89,7 Technology 84,4 91,9 87,6 87,7 150,6 78,0 113,2 202,4 101,2 21,8 78,2 84,5 Basic materials 60,3 61,6 79,6 58,2 80,8 60,0 116,1 99,3 62,8 57,0 81,9 65,8 Telecommunications 65,5 62,3 134,5 42,8 113,6 51,9 71,9 115,2 86,1 62,6 105,5 46,6 Retail 25,7 33,6 35,8 18,5 101,3 10,3 34,2 0,0 27,2 39,1 19,8 18,8 Utilities 63,4 65,9 119,9 112,6 142,4 0,0 257,3 135,5 75,4 120,4 113,6 46,2 Oil & Gas 0,0 27,1 98,4 54,1 77,0 50,1 61,4 89,7 84,5 50,5 23,2 105,9 DPO - average per sector and country Belgium Finland France Germany Italy Netherlands Poland Spain Sweden Switzerland Turkey UK Manufacturing 58,2 33,5 60,6 41,0 78,6 55,4 50,4 91,7 42,4 31,6 59,8 39,0 Consumer goods 45,6 27,0 53,4 30,0 80,8 47,7 54,6 67,6 35,0 29,2 55,4 40,2 Services 56,4 27,2 67,1 45,7 99,4 33,8 64,6 102,5 33,7 29,7 60,2 30,9 Pharmaceuticals 63,3 60,2 49,4 33,3 61,1 20,4 22,4 53,4 27,6 19,6 48,1 32,6 Technology 68,1 53,2 42,0 21,0 91,1 17,4 50,4 147,1 24,3 18,5 89,7 12,6 Basic materials 50,0 46,2 52,3 30,5 63,1 51,2 63,2 77,4 30,8 32,5 36,9 30,4 Telecommunications 63,1 45,5 140,1 49,5 116,5 108,7 56,5 90,0 32,5 41,2 69,8 32,3 Retail 35,0 25,9 46,6 40,5 90,1 30,4 48,1 0,0 28,9 29,8 69,1 34,8 Utilities 62,6 21,2 93,5 60,0 91,4 0,0 51,0 107,6 32,3 48,8 42,6 27,7 Oil & Gas 0,0 21,8 62,8 28,4 54,9 33,0 52,9 106,9 41,1 29,6 29,0 36,9 European Working Capital Study 15

18 DIO - average per sector and country Belgium Finland France Germany Italy Netherlands Poland Spain Sweden Switzerland Turkey UK Manufacturing 51,6 59,6 57,1 67,4 75,0 62,2 54,2 67,7 57,9 57,3 58,6 45,5 Consumer goods 51,6 55,3 61,3 51,7 70,0 53,0 59,2 72,5 62,1 70,7 63,0 50,9 Services 28,4 13,7 9,4 31,0 15,3 11,8 16,1 16,3 26,3 21,6 37,7 11,0 Pharmaceuticals 49,5 59,8 27,8 49,8 42,2 43,9 45,9 62,0 48,6 52,9 50,7 54,5 Technology 47,4 19,5 8,5 5,6 33,1 3,2 25,8 28,7 17,7 20,3 47,0 1,2 Basic materials 64,5 55,8 58,1 54,5 65,1 62,0 53,2 64,4 67,8 84,8 57,7 50,2 Telecommunications 26,8 23,6 52,1 20,0 14,5 2,5 20,8 32,5 33,5 34,8 64,4 10,3 Retail 23,0 24,7 43,2 58,1 60,0 40,0 54,9 0,0 51,5 47,5 51,4 33,0 Utilities 30,3 30,0 56,9 16,5 13,6 0,0 132,3 25,9 67,1 9,1 15,3 4,4 Oil & Gas 0,0 43,5 21,3 46,4 33,7 19,0 53,4 21,2 8,8 27,3 18,1 28,9 16 European Working Capital Study

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20 Your local contacts Thomas Doll Olof-Palme-Straße Frankfurt am Main Tel.: Mobil: Timo Laborge Friedrich-List-Straße Essen Tel.: Mobil: Kai Vogeler New-York-Ring Hamburg Tel.: Mobil: PricewaterhouseCoopers, January 2011 PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See for more information. PwC is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.