December Cash for Growth Working Capital in the Consumer Goods Sector

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1 December 2014 Cash for Growth Working Capital in the Consumer Goods Sector

2 Foreword Welcome to PwC s Working Capital Survey of the Consumer goods sector. Working capital is the lifeblood of every company and a barometer for how freely cash flows. In efficiently run businesses, cash runs freely; in others, cash becomes tied up in working capital, restricting the company s ability to grow. This is particularly true for the consumer goods sector, which are typically under significant margin pressures from their customer base and are facing volatile commodity pricing in their supply chain. John Maxwell Partner Consumer Sector Market Leader In this survey, we look at the key working capital trends across the globe in the consumer goods sector. Among other findings, overall working capital performance suggest that cash is returning to the forefront of companies agendas as a source of funding for future growth. Globally, PwC is working with many companies to help optimise working capital and achieve sustainable performance improvement. As consumer goods companies seek to strengthen their balance sheets in the months and years ahead, many can likely benefit by taking a long, hard look at their working capital efficiency. Thank you for reading and we hope you enjoy this report. 2 PwC Cash for Growth

3 Executive summary Working capital can deliver cash today, for growth tomorrow Globally, the largest companies within the consumer goods sector have experienced an uncertain trading environment which has caused revenue growth to plateau, with businesses struggling to replicate the levels of growth achieved in Daniel Windaus Partner Working Capital Management Rob Kortman Director Working Capital Management As a result of the difficulties, many companies have turned their attention towards cash management and optimising their operations to release cash from working capital. This effort has been reflected in better working capital performance across the sector since 2011, with European companies improving the most. Globally, the drivers of the trend have been better receivables and payables management. However in Europe, performance has improved across all working capital cycles, with enhanced inventory management being a key factor. To return to the levels of revenue growth achieved in 2010, companies need to invest in their future, which will require significant extra cash over the next few years. Our survey shows that if companies were to move to the next performance quartile, they would generate a total of 9bn of cash, while moving to upper quartile performance would release 13bn of cash. Cash is at your finger-tips. 3

4 Revenue value billions Whilst revenue growth has stalled in recent years Number of companies in the study Total global revenue in the consumer goods sector Revenue YoY revenue growth % % 14% 12% 66 Americas Asia, Africa & Australasia Europe % 10% 8% 6% % 3.7% 4% 50 2% 0 0% Revenue distribution of companies in the study 78 billion 32 billion 257 billion Americas Asia, Africa & Australasia Europe Sales for the largest 157 companies in the consumer goods sector grew by 31% over the past four years equivalent to a Compound Annual Growth Rate (CAGR) of 7%. This was primarily achieved in 2010 and 2011 with growth rates plateauing since. 4 PwC Cash for Growth

5 Working capital billions DWC companies have focused on improving working capital performance as a source of cash Working capital performance across the sector has improved since 2011, with a 8.4% improvement in days working capital over the period which has resulted in the release of 0.5bn cash. Industrial products sector working capital trend These improvements suggest that cash is returning to the forefront of companies agendas as a source of funding for future growth Net Working Capital DWC 0.2bn decrease in working capital since % decrease in days working capital since

6 Working capital performance has improved in all regions, with Europe achieving the greatest development Europe -9.1% Americas % Asia, Africa & Australasia % Key Days of working capital Percentage change between 2012 and PwC Cash for Growth

7 All working capital cycles have improved or remain consistent Global working capital performance 0.7 day Days sales outstanding Days inventory on-hand no change improvement Days payables outstanding European working capital performance day 1.9 day Days sales outstanding Days inventory on-hand Days payables outstanding improvement improvement day improvement 0.6 day improvement Working capital performance has improved by 1.7 days globally between 2012 and The drivers of the trend are improvements within the receivables and payables cycles. European companies have achieved an even more notable improvement of 3.8 days over the past year. Enhanced receivables and inventory performance have been the key drivers, with receivables performance at a 5- year best. 7

8 Performance varies widely within the industry Working capital performance range Days Working DWC Capital Days Payables DPO Outstanding Upper Quartile Days Inventories DIO On-hand Median Min/Max Range Days Sales DSO Outstanding Working capital performance ranges widely across the consumer goods sector, with a median of 37 days. Notably, performance variance is wide across all working capital cycles, suggesting there is room for improvement across all areas. 8 PwC Cash for Growth

9 with improvements achieved across good performers and bad performers The Leaders 54% of companies with days working capital above the industry median have improved their performance over the past year. 54% 53% The Laggards 53% of those performing below the median improved. Interestingly, 18% of companies operating below the industry median deteriorated by more than 10 days, whilst this was only 8% for those operating above the industry median. 9

10 Globally, 9bn to 13bn of cash could be released from working capital across the sector Working capital 9bn to 13bn 10 PwC Cash for Growth

11 Our approach to sustainable working capital Working with a global FMCG on an operational working capital improvement programme The key issue The company decided to increase its focus on cash management in order to improve its position in the competitive landscape. An internal programme was initiated to start the project, but results were limited due to the crossfunctional complexity in the organisation. Management realised that a dedicated focus was required to achieve the cash objectives. How we helped Our team worked with the company to assess their working capital improvement potential and to investigate how the introduction of a cashfocused culture could be elevated on the agenda. We performed an order to cash (debtors) working capital diagnostic review. This identified c 350m of benefit potential. Our fast-paced approach was essential to raise organisational awareness of poor cash performance and raise receptiveness to change behaviours. The order to cash (OTC) workstreams focused on the standardisation of the end to end process, the implementation of a global credit policy, the development of local actions plans and the standardization of the credit collection approach and payment terms across the business units. The result: we identified and delivered net working capital cash benefits close to 360m, reducing DSO from 61 days to 52 days. A blue-print for improvement was developed and piloted in the largest operating entity. We supplement our working capital and cash management methodologies with core consulting approaches to make sure that improvements are tangible and sustainable. Establishment of a global OTC competency centre provided board-level support and commitment to roll-out across the globe leading practice policies, processes, metrics and IT enhancements. All business units and sales organizations were integrated into the end to end OTC process. 11

12 How can we support you? Complete a working capital benchmarking exercise to compare performance against peers and identify potential improvement opportunities. Perform a diagnostic review to identify quick wins and longer-term working capital improvement opportunities. Develop detailed action plans for implementation to generate cash and make sustainable improvements. Assist the realisation of sustainable working capital reduction by implementing robust, efficient and collaborative processes. Addressing the key levers: Identification, harmonisation and improvement of commercial terms. Process optimisation throughout the end-to-end working capital cycles. Process compliance and monitoring. Creating and embedding a cash culture within the organisation, optimising the trade-offs between cash, cost and service. 12 PwC Cash for Growth

13 Examples of areas where PwC could help you to release cash from working capital Cash culture & visibility - The aim is to create a culture whereby cash is important & performance is clearly visible Key cash driver focus areas: Cash related management incentives Top management sponsorship Clear roles & accountability's Corporate Working capital framework Defined targets per division / country Working capital reporting dashboards by division / country Accounts receivable Credit risk policies Aligned and optimised customer terms Optimised Customer marketing agreements and processes Billing timeliness and quality Contract and milestone management Prioritised and proactive collection procedures Systems-based dispute resolution Dispute root cause elimination Accounts payable Centre Led procurement Consolidated spending Aligned and optimised supplier terms Supply Chain Finance Purchasing channels (to avoid contract leakage) Payment method and frequency Early payment prevention Inventory Lean and agile supply chain strategies Global coordination Forecasting techniques Production planning Accurate tracking of inventory quantities Differentiated inventory levels for different goods Balanced cash, cost and service 13

14 PwC s Working Capital Management Group brings together experienced practitioners from across the world. Our people have many years of experience at delivering world class working capital performance both as consultants and from time spent in industry. To find out more, please go to capital 14 PwC Cash for Growth

15 For more information about working capital in the consumer industry, please contact: Daniel Windaus Partner, Working Capital T: +44 (0) E: Rob Kortman Director, Working Capital T: +44 (0) E: John Maxwell Consumer Sector Market Leader T: +1 (973) E: Neil Sutton Global Retail and Consumer Deals Leader T: +44 (0) E: Mike Jervis UK Retail and Consumer Deals Leader T: +44 (0) Our global network Asia Tze Wee Wee T: E: Austria Christine Catasta T: christine.catasta@at.pwc.com Australia David Pratt T: +61 (2) E: david.pratt@au.pwc.com Belgium Damien McMahon T: E: damien.mcmahon@be.pwc.com CEE Petr Smutny T: E: petr.smutny@cz.pwc.com Denmark Bent Jorgensen T: E: bent.jorgensen@dk.pwc.com Finland Michael Hardy T: E: michael.hardy@fi.pwc.com France Francois Guilbaud T: E: francois.guilbaud@fr.pwc.com Germany Joachim Englert T: E: joachim.englert@de.pwc.com Italy Riccardo Bua Odetti T: E: riccardo.bua.odetti@it.pwc.com Middle East Matt Wilde T: E: matthew.wilde@ae.pwc.com The Netherlands Rick van Dommelen T: E: rick.van.dommelen@nl.pwc.com Norway Jonathan Pycroft T: E: jonathan.pycroft@no.pwc.com Spain Josu Echeverria T: E: josu.echeverria.larranga@ es.pwc.com Sweden Jesper Lindbom T: E: jesper.lindbom@se.pwc.com Switzerland Reto Brunner T: E: reto.brunner@ch.pwc.com Turkey Husnu Dincsoy T: E: husnu.dincsowwy@tr.pwc.com USA Paul Gaynor T: E: paul.m.gaynor@us.pwc.com 15

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