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All tied up MENAWorking capital management report 2018

Contents

2 All tied up MENA 2018

ForewordAll tied up MENA 2018 is part of a series of WC management reports based on EY research, reviewing the WC performance of the world’s largest companies. WC equals accounts receivables (AR) plus inventory minus accounts payables (AP).

All tied up MENA: WC report 2018 is the second of the reports in the series focusing on the MENA Region. The survey focuses on the top 306 listed companies in the Middle East, examining their WC performance at the company, industry and country levels. In addition, this report sets out the findings of a review, comparing the WC performance of small, medium and large companies, with that of very large companies.

The analysis in this report can be useful to benchmark your performance against the industry averages and the upper quartiles.

The analysis also provides insights into the trends of various companies and their WC behavior over a period.


• Our latest report on WC management for MENA companies shows a net cash opportunity of US$32.7b trapped across the three major areas of WC (AR, inventory and AP).

• Our study shows that MENA companies saw revenues decrease by 0.6% in 2017, while total WC investment increased by 4.8%.

• MENA companies’ cash balances rose by 8.2% in 2017, while debt levels increased by 15.5%.

• Capital expenditure (capex) was at the lowest level over the five years of the study.

Key findings compared with 2016, unless specified otherwise

5 yearsLowest capex in the past

US$32.7bNet cash opportunity worth

0.6%Decrease in sales by

8.2%Increase in cash balance by

Increase in total WC by 4.8%Increase in debt level by

15.5%

Executive summary

- the highest in 5 years


Chart 1: WC performance over the last five years (US$m)

Chart 2: WC performance over the last five years

43,016 43,093 43,044 50,732 56,734

-27,477 -31,347 -32,706 -34,987 -36,782

48,715 46,223 42,645 46,366 51,049

27.4% 27.7%29.3%

32.7% 33.7%

2013 2014 2015 2016 2017

TWC

per

sal

es p

erce

ntag

e

US

$m

–60,000

–40,000

–20,000

0

20,000

40,000

60,000

80,000

1,00,000

0%

5%

10%

15%

20%

25%

30%

35%

40%

AR AP Inventory TWC TWC%

33,176 34,477 32,30730,620

31,097

72 7277

88 92

37 38 3844 4866 66 67

76 78

100 101107

119 123

2013 2014 2015 2016 2017

Day

s

0

20

40

60

80

100

120

140

DSO DPO DIO CCC

Overall five-year WC movement

Our study shows that the total working capital (TWC) per sales percentage for MENA companies increased to 33.7% in 2017 from 27.4% in 2013. The principal reason for this was the increase in AR from US$43b to US$56.7b which was partly offset by an increase in payables from US$35m in 2016 to US$36.8m in 2017. Even though inventory declined in 2017 compared with 2013, inventory increased in 2017 compared with 2016 by US$476m.

The study suggests that MENA companies have not been efficient in managing their receivables and inventory, and are using an extended payable cycle to manage the WC.

The total value of the opportunity for all the companies to reach their respective sector average cash conversion cycle (CCC) amounts to US$32.7b.

Source: EY analysis, based on publicly available annual financial statements



Industry-wise WC movement

Click on the below boxes for charts.Click on the below boxes for charts.


Our study shows that very large companies lost their WC competitiveness in 2017 compared with 2016.

• All, except large companies have seen a deterioration in DSO in 2017.

• Very large, large and medium companies improved their DIO in 2017; however, small companies’ DIO increased by 5.4%.

• Large, medium and small companies have been stretching their DPO in order to manage their WC in 2017. This technique, a tactical method to reduce year-end WC, is not a sustainable long-term strategy as it can put pressure and strain on vendor relationships. Very large companies managed to reduce their DPO from 90 days in 2016 to 79 days in 2017.

• Large and medium companies managed to reduce their CCC days compared with very large and small companies.

• It is important to note that there may be multiple practical factors that may require very large companies to have a higher WC. These may include global reach and operations, complex supply chains and greater diversity of products.

Size-wise WC movementClick on the below boxes for charts.



Bottom quartile

performers

DPO41

CCC

226

DSO139DIO128

Revenue–0.4%

growth

RO

E %4.7%

ROCE %3.2%

Cape

x or

11%

sale

s%

NWC or

62%sales %

Performance metrics for top-quartile performers vs. bottom-quartile performers

Our study indicated that companies that excel in their WC management also have strong balance sheets, and deliver high margins and return on capital employed (ROCE). The top quartile WC performers reported a CCC of 26 days, achieved an return on equity (ROE) of 18%, had revenue growth of 6.6% in 2017 and spent around 25.8% of revenue on capex. In contrast, the bottom quartile performers reported a CCC of 226 days, achieved an ROE of 5%, experienced a revenue decrease of 0.4% and managed to spend only 11% of their revenue on capex.

Performance-wise WC movement

Top quartile

performers

DPO

60

CCC

26

DSO 52 DIO

34

Revenue6. 6%

growth

RO

E%

17.6% ROCE%

5.2%

Cape

x or

25.8

%

sale

s%

NWC or

7%

sales%



Geography-wise WC movementClick on the below boxes for charts. Click on the below boxes for charts.


WC self-diagnostic center

Plot the WC health of your company on the WC meter below.

Sectors Upper-quartile CCC (latest annual)

Median CCC (latest annual)

Lower-quartile CCC (latest annual)

Air freight couriers 45 46 127

Building materials 139 186 259

Chemicals 67 90 117

Consumer and household services 11 37 104

Containers and packaging 118 138 173

Electric utilities 21 45 68

Electrical components and equipment 104 162 265

Food retailers and wholesalers 57 98 132

Health care providers 81 118 190

Heavy construction 0 138 225

Industrial diversified 124 176 194

Metals 85 118 206

Oil 8 26 70

Oil equipment and services 35 100 144

Pharmaceuticals 98 228 310

Restaurants 8 25 33

Telecoms -22 1 36

Transportation services 23 48 69



• If your answer is “yes” or “maybe” to any of these indicators, it may be time to think about WC optimization.• It not only provides clarity and predictability over cash flow, but also organically reduces the WC investment in the

company. • This above results in unlocking of trapped cash for redeployment.

How EY can helpClick on the below boxes.

Click on the below boxes.


Hani Bishara EY MENA Debt Advisory, Working Capital and Restructuring Leader Mobile: +971 50 114 2172 Email: [email protected]

Jon Morris EY EMEIA Working Capital Leader Mobile: +44 7771 975 933 Email: [email protected]

Pearce Quinn Associate Partner - Working Capital Advisory Mobile: +971 5063 42821 Email: [email protected]

BV Karthik Manager - Working Capital Advisory Mobile: +971 52 6120021 Email: [email protected]

Take the first stepClick on the pictures for bio.


MethodologyThe report contains the findings of a review of the WC performance of 306 companies in the MENA Region. We have considered companies, headquartered in MENA, with revenue of more than US$10m in 2017.

• This report also sets out the findings of a review comparing the WC performance of small, medium, large and very large companies, using sales as the indicator of each company’s size. They have been defined in this report as:

• Small — less than US$250m

• Medium — between US$251m and US$750m

• Large — between US$750m and US$2b

• Very large — more than US$2b

• The overall analysis draws on companies’ latest fiscal 2017 reports. Comparisons have been made with their performance in 2016, 2015, 2014 and 2013.

• The review on which the report is based is segmented by Region, country, industry and company. It uses metrics to provide a clear picture of the overall WC management and identify the resulting levels of cash opportunity.

• Each of the companies analyzed in this research has been allocated to an industry and to a Region or country. The reported global, regional and country numbers are sales-weighted.

• The overall review excludes financial institutions and real estate companies because of the difficulty of assessing their “true” WC performance. This is attributed to the intertwined nature of their industrial and financial activities.

• The performance trends at the country and industry levels need to be treated with a degree of caution. The approach is based on consolidated numbers in the absence of further local details, with each company being allocated to the location of its headquarters.

• Because of differences in industry weightings and the level of international activity within each economy, an analysis of the WC performance gap across countries in Europe would not have been useful or meaningful.

• The WC performance metrics are calculated from the latest publicly available annual financial statements of companies. In order to make the figures as comparable and consistent as possible, adjustments (see glossary) have been made to the

data to reflect the impact of acquisitions and disposals, and off-balance sheet arrangements.

GlossaryDays of sales outstanding (DSO): year-end trade receivables net of provisions, including value-added tax (VAT), and added-back securitized and current financial receivables, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)

Days of inventory outstanding (DIO): year-end inventories net of provisions, divided by full-year pro forma sales and multiplied by 365 (expressed as the number of days of sales, unless stated otherwise)

Days of payable outstanding (DPO): year-end trade payables, including VAT and added-back trade-accrued expenses, divided by full-year pro forma sales and multiplied by 365 (expressed as the number of days of sales, unless stated otherwise)

CCC: DSO + DIO – DPO (expressed as the number of days of sales, unless stated otherwise)

Pro forma sales: reported sales net of VAT, and adjusted for acquisitions and disposals where this information was available

NWC: year-end trade receivables net of provisions, including VAT, and added-back securitized and current financial receivables plus year-end inventories net of provisions minus year-end trade payables, including VAT and added-back trade-accrued expenses

MENA: Middle East and North Africa

WC: Working capital

CCC: Cash conversion cycle

NWC: Net working capital

ROE: Return on equity

ROCE: Return on capital employed

S&OP: Sales and operations planning

OTC: Order-to-cash

PTP: Procure-to-pay

FTF: Forecast-to-fulfill

Capex: Capital expenditure

AR: Receivables

AP: Payables

FTSE: Financial Times Stock Exchange

M&A: Merger and acquisition

Methodology and glossary


Click on the below box for print version.

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About EY

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The MENA practice of EY has been operating in the region since 1923. For more than 90 years, we have grown to more than 6,000 people united across 21 offices and 16 countries, sharing the same values and an unwavering commitment to quality. As an organization, we continue to develop outstanding leaders who deliver exceptional services to our clients and who contribute to our communities. We are proud of our accomplishments over the years, reaffirming our position as the largest and most established professional services organization in the region.

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EYG No. 001118-19GBl ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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