European Working Capital Study - PwC · PDF fileAs our annual European working capital survey,...
Transcript of European Working Capital Study - PwC · PDF fileAs our annual European working capital survey,...
European Working Capital Study
www.pwc.com
January 2011
European Working Capital Study
January 2011
European Working Capital Study 1
Thomas Doll Partner System & Process Assurance Services
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.
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.
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.
2 European Working Capital Study
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.
Key findings
European Working Capital Study 3
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 2008.
This evidences that the crisis has heavily challenged the liquidity positions of many corporates, even large listed ones.
Year-on-year comparison
Promises, promises? For the first time since 2005, European working capital levels deteriorate.
20%
21%
22%
23%
24%
2005 2006 2007 2008 2009
European average working capital ratio
Working capital ratio defined as net working capital/annual turnover
4 European Working Capital Study
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.
Year-on-year comparison
Average increase by 0,4% compared to 2008. However, differences were noted in the country performances.
Average working capital ratio by country
0% 5% 10% 15% 20% 25%
Turkey
Poland
Sweden
Finland
Italy
Germany
UK
The Netherlands
Switzerland
France
Belgium
Spain -1,3%
-1,1%
-0,8%
-0,4%
-0,3%
+0,1%
+0,1%
+0,2%
+0,6%
+1,1%
+2,9%
+3,1%
2008 2009
Imp
ro
ve
me
nts
De
ter
ior
ati
on
s
European Working Capital Study 5
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 2009.
• The stagnation of the DPO is possibly due reaching the end of quick win optimisations.
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.
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
2005 2006 2007 2008 2009
DSO DPO DIOC2C
Da
ys
-51,5 -50,7 -51,6 -51,2 -50,8
46,6 45,3 46,6 47,4 47,8
84,9 82,7 82,0 78,4 79,0
80,0 77,3 77,0 74,6 76,0
-100
-50
0
50
100
150
200
250
6 European Working Capital Study
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 2006-2007.
Sector comparison
Pharmaceutical and retail companies have made the biggest overall improvements.
European working capital ratio per industry
5%
10%
15%
20%
25%
30%
2005 2006 2007 2008 2009
Services
Oil & Gas
Retail
Telecommunication
Utilities
Manufacturing
Consumer goods
Pharmaceuticals
Technology
Basic materials
European Working Capital Study 7
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.
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)
0
20
40
60
80
100
120
DSO DIO DPO C2C
Retail Telecom. Utilities Consumergoods
Basicmaterials
Manufacturing
PharmaceuticalsServices
Oil & Gas
Technology
Da
ys
8 European Working Capital Study
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.
Sector comparison
European companies carry over €475 bn excess cash in working capital.
Working capital ratios per industry
SectorNumber of companies
Lower quartile
MedianUpper
quartile
Difference upper to lower
quartile
Consumer goods 247 32,0% 21,0% 12,1% 19,9%
Manufacturing 375 34,0% 22,8% 14,3% 19,7%
Services 147 18,3% 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%
On average, companies could improve over 30% of their current working capital level, representing on average €389m.
European Working Capital Study 9
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%.
Working capital and profitability
Profit impact simulation by industry
Sector WC ratio-median (%)
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%
Potential impact on profitability.
10 European Working Capital Study
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:
Conclusions
How do we get this into the DNA of the organisation and make it business as usual?
How do we get from top-of-average to being best-in-class?
European Working Capital Study 11
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:
• Do you know your amounts of cash locked up in your business operation?
• Do you know how efficiently your peers managing working capital and their underlying systems & processes?
• Do you know what are the value drivers to achieve working capital excellence?
European network of system and process assurance experts
Belgium
Germany
United Kingdom
Netherlands
Finland
Norway
Denmark
France
Spain
AustriaSwitzerland
Italy
Turkey
Sweden
Dedicated Working Capital team
Your local contacts
Thomas DollTel.: +49 69 [email protected]
Timo LaborgeTel.: +49 201 [email protected]
Kai VogelerTel.: +49 40 [email protected]
12 European Working Capital Study
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
Population distribution by industry
9%
6%6%
11%
11%
9%
7%8%
7%
9%
9%
8%
Belgium
Finland
France
Germany
Italy
The Netherlands
Poland
Spain
Sweden
Switzerland
Turkey
UK
Basic materials
Consumer goods
Manufacturing
Oil & Gas
Pharmaceuticals
Retail
Services
Technology
Telecommunication
Utilities
8%
20%
31%2%
8%
5%
12%
5%5%
4%
European Working Capital Study 13
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.
Appendix – Basis of calculations & limitations
14 European Working Capital Study
Appendix – Sampled companies by industry and country
Bel
gium
Finl
and
Fran
ce
Ger
man
y
Ital
y
Net
herl
ands
Pola
nd
Spai
n
Swed
en
Swit
zerl
and
Turk
ey
UK
Tota
l
Industry description
Manufacturing 25 32 39 43 26 27 41 22 25 51 27 17 375Manufacturing of industrial goods, such as aerospace
Consumer goods 11 12 25 27 20 19 21 16 25 14 43 14 247From clothing and footwear to household and personal products
Services 11 5 20 13 17 11 9 11 11 14 8 17 147Both industrials and consumer services
Pharmaceuticals 8 2 12 12 8 4 4 9 13 15 3 7 97All pharmaceutical products
Technology 5 8 5 6 7 4 9 1 8 1 1 3 58
Manufacturing of electronics, creation of software and computers or products relating to information technology
Basic materials 4 5 6 12 6 6 6 6 7 4 21 11 94
Includes the mining and refining of metals, chemical producers and forestry products
Telecommunications 6 5 7 5 4 1 5 6 6 6 5 5 61Telecommunications and media
Retail 4 2 11 8 4 6 6 8 4 4 9 66Primarily food retailers, excluding apparel
Utilities 4 1 6 7 13 1 7 1 4 2 5 51Mainly electric and water firms
Oil & Gas 1 3 1 4 2 2 3 2 2 2 5 27 Oil & gas companies
Total 78 73 134 134 109 80 104 81 106 115 116 93 1.223
European Working Capital Study 15
Bel
gium
Finl
and
Fran
ce
Ger
man
y
Ital
y
Net
herl
ands
Pola
nd
Spai
n
Swed
en
Swit
zerl
and
Turk
ey
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
DSO - average per sector and country
Bel
gium
Finl
and
Fran
ce
Ger
man
y
Ital
y
Net
herl
ands
Pola
nd
Spai
n
Swed
en
Swit
zerl
and
Turk
ey
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
DPO - average per sector and country
16 European Working Capital Study
Bel
gium
Finl
and
Fran
ce
Ger
man
y
Ital
y
Net
herl
ands
Pola
nd
Spai
n
Swed
en
Swit
zerl
and
Turk
ey
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
DIO - average per sector and country
© PricewaterhouseCoopers, January 2011
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Your local contacts
Thomas DollOlof-Palme-Straße 3560439 Frankfurt am MainTel.: +49 69 9585-1343Mobil: +49 [email protected]
Timo LaborgeFriedrich-List-Straße 2045128 EssenTel.: +49 201 438-1265Mobil: +49 [email protected]
Kai VogelerNew-York-Ring 1322297 HamburgTel.: +49 40 6378-1835Mobil: +49 [email protected]