MCGRATHNICOL ADVISORY
WORKING CAPITAL REPORT
2019 Sector Summary
Increase in average DWC driven by growing inventory levels. Welcome
The length of the average Welcome to the 2019 McGrathNicol Advisory Working Capital Report, prepared by our working capital cycle Cash and Working Capital Centre of Excellence. shortened in 2019. This is the seventh consecutive year that we have released our Working Capital Report. This year we have profiled the working capital performance of ASX listed companies This translated to the across the Agriculture, Building Products, Construction & Engineering, Food & equivalent of c.$1.3 billion Beverage Production, Healthcare Services, Mining & Resources, Mining Services, Retail, in additional cash released and Transport & Logistics sectors. The combined market capitalisation of the 140 companies included in the sample is $726 billion, representing close to two thirds of the from the working capital total for the selected sectors. The information is based on the most recent full-year balances of our sampled results for 2019, compared to 2018 results. companies. There was An increase in activity levels was reported across the sectors covered, with 89% of a mix of results at the sampled companies growing revenues during the year. At the same time our sampled company level with only businesses were able to reduce the average time it took to collect their debtors and reduce inventory holdings. Growing revenue and reducing DSO and DIO is a major ”win” half of the businesses in terms of cash flow. achieving a reduction in Not all businesses that achieved revenue growth were able to achieve EBITDA growth, net working capital. This with increasing competition and higher input costs impacting margins. From a working shows that a material capital perspective, there was a shortening of the average supplier payment cycle competitive advantage in 2019. Decreasing DPO is not surprising in the context of higher activity levels as participants compete to secure materials, labour and equipment to meet customer can be achieved by demand and are willing to accept shorter terms from suppliers. implementing best Overall, there was a release in cash from working capital in 2019 but results were mixed practice. across all sectors and within sectors, highlighting that achieving an improvement in working capital is not only desirable to “keep up” with competitors, it also presents an opportunity for material competitive advantage over much of the market. Across the majority of sectors covered, the gap between the “best” and ”worst” performers was in excess of 100 days. In our view, working capital performance is a primary indicator for assessing the overall health of an organisation. It provides significant insight into the way management teams operate and the strength of their relationships with customers, suppliers and other key stakeholders. It is not surprising then that the most significant improvements in 2019 were achieved by management teams who implemented focused working capital improvement programs. The following pages provide a break down by sector and highlight the stronger performers relative to the prior year. Information about our Cash and Working Capital Centre of Excellence, including contact details, is provided at the end of this report.
Jason Ireland Sean Wiles Partner, McGrathNicol Advisory Partner, McGrathNicol Advisory +61 2 9338 2694 +61 434 144 958 +61 2 9248 9986 +61 437 097 180 [email protected] [email protected] 1 Summary
With close to half of sampled companies Average DSO reduced in seven of the DSO reporting higher DSO, this is an area nine sectors covered and 51% of all that presents as a clear opportunity for sampled companies. 2018 2019 Change material competitive advantage. 40.2 38.3 (1.9)
Average DIO increased in four of the nine sectors covered. In three of these DIO Average DIO across the sample reduced (Food & Beverage Production, Retail slightly however only 46% of the sample and Agriculture), inventory balances 2018 2019 Change reported a reduction. represented more than three months 78.4 78.0 (0.4) of sales.
Average DPO decreased in seven of the nine sectors covered. In two of these In six of the seven sectors where DSO DPO (Healthcare and Mining Services), the was reduced, the benefit was passed supplier payment cycle reduced by more onto suppliers through lower DPO. 2018 2019 Change than a week. 66.4 63.5 (2.9)
In four of the sectors with lower average Average DWC decreased in five of the DWC DWC, there was an improvement in both nine sectors and 50% of all sampled collections and inventory management. companies reported lower net working In all sectors with higher average DWC, 2018 2019 Change capital. 49.8 48.9 (0.9) inventory holdings increased. Industry Sector Findings DWC
Agriculture Highest working capital load of all sectors covered with 60% reporting an increase in average DIO. For half of these companies, the increase was two weeks or more. +2.5
Building Products Largest reduction in average DWC of all sectors covered, driven by lower inventory and shorter collection cycles. Two thirds of the sampled companies that reduced average DSO also reduced average DPO. -7.9
Construction & Engineering Continued trend of higher average DSO, although longer payment cycles (influenced by increased use of “reverse factoring”) resulted in a reduction in average DWC. -5.6
Food & Beverage Production Largest increase in average DWC of all sectors covered, driven by higher inventory. Over a third of companies that increased average DIO also paid their suppliers more quickly. +6.4
Healthcare Services Increase in average DWC driven by a decrease in average DPO. Remains the lowest DWC of all sectors covered with collection cycles shorter than supplier payment cycles for the majority of sampled companies. +1.0
Mining & Resources Continued trend of reducing average DWC driven by reduction in average DIO and DSO. Some variability in both metrics across the sample with a broad range of outcomes. -5.1
Mining Services Shorter collection cycles and reduced inventory holdings used to pay suppliers materially more quickly. All of the sampled companies that reduced average DSO also reduced average DPO. -1.7
Retail Only sector covered that reported an increase in both average DIO and DSO. A third of the sample increased average DIO by more than a week. +3.5
Transport & Logistics Largest reduction in average DSO of all sectors drove lower average DWC. “Funding gap” for more than half of the sample (DSO higher than DPO). -6.0
DSO = Days sales outstanding (debtors) DPO = Days purchases outstanding (creditors) DIO = Days inventory outstanding (inventory held) DWC = Days working capital (net working capital) 3 Sector Summary
The longest average working capital cycle of all sectors in 2019 driven by higher inventory loads. Agriculture
Our sample of Agriculture companies primary producers and other operators comprises a mix of viticulture, face including production yields, aquaculture, livestock and grains seasonality and environmental issues, “The continued farming and processing, and agricultural can be difficult to manage. strength in chemicals businesses. Despite some Of the sample, 60% reported an operating cashflow difficult trading conditions tied to increase in DIO and for half of these weather related events, there was an companies, the increase was two weeks generation supports uplift in activity in 2019 with 70% of the or more. All companies that reported Tassal’s strategic sampled companies reporting higher a higher DIO also reported an increase investment in salmon revenue. However, only half of the in DWC. However, two thirds of these sample was able to achieve EBITDA companies lengthened their supplier biomass and capital growth as rising feed and transport payment cycles (higher DPO) to help infrastructure.” costs and inventory write-downs manage the increased cash held in impacted margins. inventory. There were mixed results in A. D. McCallum, Chairman From a working capital perspective, the management of debtor collections, and M. A. Ryan, Managing the average DWC of the sampled with 60% of sampled companies Director and Chief Executive companies increased by 2.5 days to reducing DSO. Officer 83.6 days in 2019, primarily driven by a Huon Aquaculture Group, Treasury Wine Tassal Group Limited Annual Report 2.8 day increase in DIO (inventory). The Estates and Tassal Group achieved the sector reported the highest DWC of all largest DWC improvements in 2019. sampled sectors in 2019. All three were able to do so by bucking As inventory is the main driver of working the sector trend and reducing DIO. For capital performance for Agriculture Treasury Wine Estates, the 16.3 day companies, it presents as the area with decrease in DWC was driven by lower the greatest opportunity for companies DIO, contributing to a notional cash to release cash. However, it also brings release of $128.7 million from working challenges as the external factors that capital.
Agriculture Top 5 DWC improvements - Agriculture Days 2018 2019 Change DSO 56.1 55.3 (0.8)
180 16.3 DIO 119.8 122.6 2.8 172.5 165 157.5 DPO 86.6 86.9 0.3 150 153.9 142.5 1.2 DWC 81.1 83.6 2.5 135 127.5 120 128.1 112.5 105 97.5 90 2.5 82.5 Best & Worst 75 83.6 67.5 s y Days Best Worst Spread 60 0.2 52.5 D a 45 DSO 6.3 116.4 110.1 37.5 43.6 30 22.5 DIO 24.2 293.7 269.5 15 28.0 BUILDING 13.5 7.5 0 DPO 147.4 26.0 (121.4) 7.5 15 22.5 160 (15.6) 13.3 DWC (33.1) 216.2 249.3 30 140 37.5 33.1 120 128.8 (13.5) 45 s 100 52.5 y (4.0) 60 80 94.9 (7.7) (3.4) D a 60 73.6 40 56.9 62.5 Huon Aquaculture Group Limited 20 Huon Aquaculture Treasury- Tassal Group(9.6) Ruralco Nufarm Peer group Days 2018 2019 Change Group Wine Estates(20) Limited(29.3) Holdings Limited average Limited Limited(40) Limited rou o m te e try r c m te or c tec m te ame u tr e ot a m te r c e rou a eere r a e rou DSO 36.3 37.4 1.1 DWC at 30 June (or latest available) DIO 27.1 24.2 (2.9) 2018 2019 DPO 105.8 127.0 21.2 DWC (5.1) (33.1) (28.0)
5 Sector Summary
A material reduction in DWC driven by shorter collection cycles (lower DSO) and better inventory management (lower DIO). Building Products
Despite a softening in residential progress and finished goods held means construction activity, continued that there is no single “sector answer” to government funded infrastructure improvement. Instead, a combination of “Cash flow from investment drove growth in the Building direct initiatives to improve supply chain operations increased Products sector, with 80% of our sample efficiencies and better align product reporting an increase in revenue and development with market demands by $20.5 million EBITDA in 2019. The majority of our is required. In 2019, 60% of sampled … supported by sample also reported new acquisitions, companies were able to reduce DIO. improvements to divestments, or both. Half of these companies did so by 20 working capital In terms of working capital performance, days or more which helps to create a average DWC fell by 7.9 days to 75.1 significant competitive advantage for management.” days in 2019. This was driven by a 5.6 day those operators. reduction in DSO coupled with a 7.5 day Of the sample, 60% reduced DSO. Zlatko Todorcevski decrease in DIO. Within that group, two thirds of Chairman the companies also reduced DPO, Adelaide Brighton Limited The sector had the second highest Annual Report working capital load (DWC) of all suggesting that the benefit of faster sampled sectors, driven by large collections was passed on (at least in inventory holdings that reflect the part) to suppliers. This follows a similar nature of activities undertaken trend to the prior year. by market participants (including Reliance Worldwide Corporation, CSR wholesale, retail and project work). and Fletcher Building achieved the most Customers also typically require quick material improvements of the sampled access to product. That said, those companies in terms of DWC reduction. participants supplying into projects do Fletcher Building delivered a 10.4 day have some leverage by requiring prompt reduction in DWC driven by the improved payment for continuity of supply. collection of its debtors. It reported Effective inventory management is the lower DSO in four of its five materials and distribution divisions in 2019 (relative to key differentiator in the Building Products Building Products sector. The mix of raw materials, work in the prior year). Days 2018 2019 Change DSO 57.4 51.8 (5.6) Top 5 DWC improvements - Building Products DIO 99.3 91.8 (7.5)