Cash on the line. Telecommunications operators and working capital management 2014

Transcription

1 Cash on the line Telecommunications operators and working capital management 2014

2 Contents Summary Europe: improvement in net trade WC performance in North America: deterioration in net trade WC performance in Other regions and countries: diverging trends in net trade WC performance in Driving WC excellence How EY can help Methodology Glossary Contacts 2 Cash on the line

3 Cash on the line 2014 is the latest in a series of working capital (WC) management reports based on EY research. The results from our analysis of leading telecommunications operators in Europe in shows an improvement in net trade WC performance compared with 2012, following relatively little change in performance between 2012 and In contrast, North American operators saw their net trade WC performance deteriorate in relative to 2012, marking a break with the steady improvement seen in previous years. In the eight other regions and countries covered by our survey, operators reported diverging trends in net trade WC performance in relative to These overall WC results were achieved against a backdrop of intense competition, challenging economic and market conditions, regulatory pressures, increased M&A activity and rapid technological developments (with the traditional dividing lines between the formerly distinct segments of technology, media and telecommunications becoming increasingly blurred). WC management in recent years, although they largely differ in But as the industry s business models evolve, and with many of the most readily available opportunities already either fully exploited or traded off against sales growth, margin expansion or customer experience enhancement, managing WC is becoming under considerable pressure from factors that include increased complexity in billing systems management and additional investment in smartphones and infrastructure, such as the development of installment payment plans. However, the continuing wide variations in WC performance for further improvements in WC management. Our research indicates that the leading 15 European operators have up to 24 billion unnecessarily tied up in WC, equivalent to 7.5% of their combined sales. For the six main operators in North America, the combined sales. To capitalize on this opportunity, leading operators will need to focus on a number of key initiatives, including: Managing WC as a strategic initiative, including taking a balanced approach to cash, costs, customer experience and risks Improving billing and collection and enhancing dispute management More effectively managing payment terms for suppliers access to their market and product expertise More effectively managing interconnection agreements Improving demand forecasting processes Aligning executive compensation with the appropriate WC performance measures Operators may also be able to identify additional opportunities for releasing cash in non-trade WC areas. For 2014, we expect WC results to show even wider divergences failure of their efforts to adapt their business models to this new and evolving landscape. Telecommunications operators and working capital management

4 01 Europe Improved net trade WC performance in The results from our analysis of leading telecommunications operators in Europe in shows an improvement in net trade WC performance compared with 2012, following relatively little change in performance between 2012 and The net trade WC to sales ratio dropped from -4.8% in 2012 to -5.2% in. Cash-to-cash (C2C) fell by 1.6 days to a Out of 15 companies analyzed, 12 (or 80% of the total) reported better net trade WC results (11 companies saw improved C2C performance), posting a positive swing of 0.8% overall. In contrast, the worst performers saw a deterioration of 1.1%. Table 1: Change in WC metrics, Days Change from % DIO 5.5 2% DPO % C2C -3.8 down 1.6 days % sales 2012 Net trade WC -5.2% -4.8% Table 2: Number of companies showing improved WC performance, vs Days Change 13/12 DIO reduction 6 DPO enhancement 11 C2C reduction 11 out of 15 Net trade WC reduction 12 out of 15 C2C (cash-to-cash), with metrics calculated on a sales-weighted basis. 4 Cash on the line

5 This stronger WC performance in was due to an increase in DPO (up 3%), partly driven by higher investment in new handsets remained unchanged. In contrast, the levels of advance billing (amounts billed in advance for line rentals and subscriptions) declined from 4.3% to 4.1% of sales. A number of factors may explain these WC variations, each with varying impacts on different companies: Accelerated fall in revenues. Compared with 2012, overall sales by the operators in our survey fell by as much as 4%, negatively affected by highly competitive market conditions, coming from data increased further, boosted by rising usage of smartphones. The number of cross-border and regional merger deals and proposals in Europe was much higher than the year before, driven by the search for new sources of growth and cost and capital spend synergies. Stable receivables performance. Contrasting with the downward. However, had one large operator been excluded from our year-on-year. Operators have continued to focus on tightening billing cycles and increasing direct-debit penetration. They have target customers based on risk and prior past performance. by a number of negative trends, including the sustained rise in the postpaid subscriber base and increased complexity in billing systems management, driven by the development of bundled services. Business customer payments have also remained erratic. with 4 of them showing a decrease of over 5%. Slightly weaker inventory results. Increased investment in smartphones and related infrastructures led to a further buildup in inventory, which more than offsets progress made in rationalizing product and service offerings and in pursuing more active collaboration strategies with equipment suppliers. Nine out of 15 operators reported weaker results. However, it is worth noting that the overall deterioration in inventory performance has remained limited in spite of the shift toward more expensive handsets. This suggests that supply chains have become more Stronger payables performance. In contrast with last year, operators payables performance improved, notably on the back of further extension in payment terms and increased use of increase in capital expenditure in relation to sales (from 15.4% in 2012 to 16.5% in ). The reported changes in payables and tactics. For example, some have been stretching their terms with suppliers or reducing their supplier base to achieve greater leverage in negotiations. Meanwhile, others have opted to pay faster in return for bigger cash discounts or have tightened their payment processes to focus on adherence to contractual terms, payment trigger points and payment-run frequency. Increased outsourcing and network-sharing agreements have also continued as 11 operators reported a higher DPO, with 6 of them showing an increase of over 5%. Note, however, that payables performance may have been affected by a revised European directive aimed at at the latest. Reduction in the levels of advance billing. Last year s drop in the levels of advance billing in relation to sales was due to the rising proportion of postpaid revenues, as customers increasingly use smartphone devices with bundled voice and data service plans. Eight operators posted lower advance billing to sales ratios. In these latest results, the net trade WC to sales ratio for telecommunications operators in Europe reached a new low at -5.2%. It has been dropping since 2000, when it stood at +1.6%. However, it is worth noting that the rate of WC improvement has in the net trade WC to sales ratio since While operators remain very focused on cash, this may indicate that many of the most readily available opportunities have been already either fully exploited or traded off against margin expansion. The positive impact on performance of changes in the industry service sales mix and payment practices including increases in the proportion of revenues generated from mobile services and in the number of customers using direct debit also seems to have been less The increasing penetration of smartphones and tablets (with a shift toward more expensive handsets, more data and larger bills) was a further negative factor. Receivables have been the main contributor to WC improvement 2008 and. Inventory performance also improved (DIO down 21% since 2000), but its impact remains small in comparison with other WC metrics given the relatively low level of inventory inherent to this business. Payables performance was also slightly better in compared with 2000, with DPO up 2%. In contrast, levels of advance billing in relation to sales declined from 4.4% to 4.1% over the same period. Telecommunications operators and working capital management

6 Figure 1: Net trade WC to sales ratio, % 1% 0% -1% -2% -3% -4% -5% -6% R 2005 Wide variations in current net trade WC performance among operators Current net trade WC performance continues to vary widely among different operators in Europe overall and for each metric. In, the average levels of net trade WC to sales and C2C for the European telecommunications operators were -5.2% and -4 days, with spreads of 5.5% and 17 days, respectively respectively, with spreads of 17 days, 3 days and 15 days, respectively. Other trade WC average was -4.1%, with a spread of 2.5%. Table 3: WC performance distribution per operator, * Top quartile Bottom quartile deviation DIO DPO C2C Other trade WC/ sales -4.1% -3.7% 2.5% Net trade WC/ sales *Weighted -5.2% -8.1% 0.1% 5.5% Opportunity for improvement The wide variations in net trade WC performance among different operators in Europe revealed by our research point to further the leading 15 operators. We have calculated this gap by comparing the performance of the WC components of each company (including other trade WC) with that of the average (low estimate) and the upper quartile (high estimate) of its regional peer group. Even at the top end of geographies shows that a dedicated focus on WC management can often realize results at or above this level. Differences in WC performance among operators may be partially due to variations in the mix of product and services, customer base (residential, small, medium-sized and large companies), suggests that operators fundamentally differ both in the degree of management focus on cash and in the effectiveness of WC processes. Our high-level benchmarking analysis indicates that the leading 15 European operators have between 12 billion and 24 billion of cash unnecessarily tied up in WC processes, equivalent to between 3.8% and 7.5% of their combined sales. The range of cash opportunity is higher than a year before (when it was between 3.7% and 7.2% of sales on the same calculation basis), mostly Note that with most operators across Europe now relying on the same limited number of global equipment suppliers, companies efforts to realize the potential opportunity in payables should not individual performance in this area. Table 4: WC cash opportunity, Value ( b) % WC scope* % sales Upper quartile Upper quartile * WC scope = sum of trade receivables, inventories, accounts payable and other trade WC Upper quartile Receivables % 14% 2.0% Inventories 0.2 4% 0.1% 0.3% Payables % 2.0% 4.2% Other trade WC % 24% 1.0% Total % 20% 3.8% 7.5% except two operators (March 2014). 6 Cash on the line

7 European telecoms: WC performance comparisons Figure 2: Net trade working capital in relation to sales per operator, Figure 5: DIO per operator, 6% 4.1% 4% 2% 1.5% 1.3% 1.2% 0% -2% -1.0% -1.1% -1.9% -2.2% -4% -6% -8% -10% -12% -14% -16% Sales -5.2% -7.0% -7.7% -7.9% -8.4% -8.6% -11.9% -14.6% Days Figure 3: C2C per operator, Figure 6: DPO per operator, Days Days Source: annual accounts in December, except two operators (March 2014). Figure 4: DSO per operator, Days Telecommunications operators and working capital management

8 02 North America Deterioration in net trade WC performance in Net trade WC performance in deteriorated for North American operators relative to 2012, in sharp contrast with the steady progress made in previous years. The net trade WC to sales ratio increased from -0.6% to -0.4%. However, C2C was marginally better. There were identical numbers of operators showing improved or worse net trade WC results (and four operators out of six showing improved C2C performance). Table 5: Change in WC metrics, Days Change from % DIO 4.6 0% DPO % C2C % % sales 2012 Net trade WC -0.4% -0.6% Table 6: Number of companies showing improved WC performance, vs Change 13/12 4 DIO reduction 4 DPO enhancement 3 C2C reduction 4 out of 6 Net trade WC reduction 3 out of 6 (cash-to-cash), with metrics calculated on a sales-weighted basis. 8 Cash on the line

9 This weaker net trade WC performance in was due to the combination of a further decrease in levels of advance billing in relation to sales (from 3.4% to 3.2%) and a fall in DPO (down 2%). unchanged. In contrast with Europe, overall sales by the operators in our survey continued to grow, up 2% in compared with As in Europe, North American operators are seeing a shift of revenues toward data. Consolidation also continued apace, with the traditional dividing lines between the formerly distinct areas of technology, media and telecommunications becoming increasingly blurred, resulting in increased complexity and risk in managing businesses. Another feature for the North American industry last year was the decision of another large operator to offer installment payments plans for smartphones (through which new phones are no longer subsidized by the operator, but either fully paid up front or paid off in installments tacked on to the monthly bills by the phone subscriber). For those operators, these value plans have and will customer base grows and migrates from the old plans into the new ones. In these latest results for, the net trade WC to sales ratio for telecommunications operators in North America rebounded from a low in 2012 to a level (-0.4%) that remained well below that seen DIO was up marginally while levels of advance billing decreased from 3.6% to 3.2% of sales. Over the period under review, four out of six operators in North America reported improved performance in net trade WC and C2C. Compared to their counterparts in Europe, North American operators continue to carry higher levels of net trade WC in (six days versus a negative nine days). Part of this performance and postpay, with North America exhibiting a much lower ratio of prepaid subscribers than Europe (albeit with sharp differences in rates across countries). In addition, direct-debit penetration rates the extent of the disparity in performance suggests that North cash conversion cycles, notably on the payables cycle. Interestingly, the level of bad debt on North American operators balance sheets in relation to sales remains well below that seen in Europe (2.7%). Having fallen steadily since 2006, it reached a new and customer provisioning policies. However, keeping bad debt at of customers deciding to upgrade to smartphones and paying for their handsets over time continues to grow. Wide variations in current net trade WC performance among operators Current net trade WC performance continues to vary widely among different operators in North America overall and for each metric. In, average levels of net trade WC to sales and C2C among North American telecommunications operators were -0.4% and 10 days, with spreads of 2.2% and 7 days, respectively (using DPO averages were 38 days, 5 days and 33 days, respectively, trade WC average was -3.2%, with a spread of 1.3%. Table 7: WC performance distribution per operator, *Weighted * Top quartile Bottom quartile Standard deviation DIO DPO C2C Other trade WC/sales -3.2% -4.0% -3.3% 1.3% Net trade WC/ sales -0.4% -2.5% 1.1% 2.2% Telecommunications operators and working capital management

10 North American telecoms: WC performance comparisons Figure 7: Net trade working capital in relation to sales per operator, Figure 10: DIO per operator, Sales 2% 1% 0% -1% -2% 1.4% 1.3% 1.2% 0.8% -0.4% Days % -2.8% 2-4% -3.7% 0 Figure 8: C2C per operator, Figure 11: DPO per operator, Days Days Figure 9: DSO per operator, Days Cash on the line

11 Opportunity for improvement The variations in net trade WC performance among North American operators revealed by our research suggest some potential for improvement. A high-level benchmarking analysis indicates that the six leading range of cash opportunity is wider than a year before (when it was between 1.8% and 2.8% of sales on the same calculation basis). America are much lower than in Europe. This is partly due to the fact that the number of surveyed operators is much lower, but also because of the homogeneity in payment practices as opposed to the wide variations seen in many European countries. Table 8: WC cash opportunity, Cash opportunity Value ( b) % WC scope* % sales Upper quartile Upper quartile Upper quartile Receivables % 5% 0.2% 0.5% Inventories % 33% 0.2% 0.4% Payables % 16% 0.7% 1.1% Other trade WC % 0.8% Total % 12% 1.9% 3.0% * WC scope = sum of trade receivables, inventories, accounts payable and other trade WC Telecommunications operators and working capital management

12 03 Other regions and countries Diverging trends in net trade WC performance in In the eight other regions and countries covered by our survey (namely Africa and and Eastern Europe, India, Latin America, and Russia), operators reported diverging trends in net trade WC performance in compared to There were a similar number of regions and countries showing an improvement in net trade WC performance (Africa and Middle East, China, Japan and Russia) to those that showed a deterioration (Asia- and Latin America). However, out of a total of 34 operators, as much as two-thirds reported a higher net trade WC to sales ratio in than in Table 9: Change in WC metrics, Net trade WC/sales Africa and Middle East Asia- Central and Eastern Europe China India Japan Latin America Russia -3.1% 1.0% 2.6% -35.0% -12.6% -0.4% % -34.0% -13.7% 10.4% -0.5% -6.6% C2C Africa and Middle East Asia- Central and Eastern Europe China India Japan Latin America Russia Cash on the line

13 Variations in net trade WC performance Performance in individual regions and countries varies postpaid on the other, as well as by local payment practices and methods and levels of capital expenditure in each marketplace. Of the other eight regions and countries, China and India exhibit the lowest levels of net trade WC in relation to sales. This can be attributed to a high DPO (on the back of large capital of mobile revenues, combined with a high proportion of prepaid subscribers). remains second-best in class, thanks to the importance of mobile revenues, combined with a high proportion of prepaid subscribers. and low levels of advance billing. With regard to other regions and countries, the net trade WC to sales ratio ranges between -2% and -3%. Overall, two-thirds of operators exhibit a negative net trade WC, as well as a negative receivables and payables cycle differential. Table 10: WC metrics by region, Africa and Middle East Central and Eastern Europe China India Japan Latin America Russia DIO DPO C2C Net trade WC/ sales -3% 1% 3% -35% -13% 10% 0% -8% Telecommunications operators and working capital management

14 Driving WC excellence Case studies As the pace and scale of industry change continue to escalate and the rate of C2C reductions slows down, leading telecommunications operators seeking to achieve further progress in WC will need to focus on a number of key initiatives. These include: Managing WC as a strategic initiative, including taking a balanced approach to cash, costs, customer experience and risks Improving billing and collection and enhancing dispute management Building cash into product design and customer acquisition strategies Increasing direct-debit penetration and changing advanced billing Enhancing customer acquisition and risk management processes Tightening up controls around terms and effective terms accelerate invoice production Consolidating and controlling spend More effectively managing payment terms for suppliers, including renegotiation of terms to ensure access to their market and product expertise Improving demand forecasting processes, working more closely with telecommunications equipment suppliers and content providers Introducing vendor-managed inventory techniques More effectively managing interconnection agreements better Aligning executive compensation with the appropriate WC performance measures a number of initiatives to improve receivables management during the past few years, but it felt that there was still scope to improve performance further. processes and design an action plan to implement leading practices. The planned steps included setting up a collection and dispute management process, designing a receivables management organizational introducing reports and metrics to monitor and assess progress, and putting in place the right incentives to motivate and change internal behaviors. telecommunications operator to implement a global supplier payments extension program. This involved segmenting the supplier base by industry and country and implementing changes to payment terms, trigger and frequency, all while ensuring compliance with the latest European payment directive (including understanding the accepted exceptions to the rules based on location and industry) and documenting the related policies and processes. Recommendations for new standard terms were based on a review of the main suppliers median and third-quartile receivables performance. 14 Cash on the line

15 can help EY s global network of dedicated working capital professionals helps clients to identify, evaluate and prioritize realizable improvements to liberate changes to commercial and operational policy, process, metrics and procedure adherence. We can assist organizations in their transition to a cash-focused culture and help implement the relevant metrics. We can also identify areas for improvement implementing processes to improve forecasting and frameworks in order to sustain those improvements. WC improvement initiatives often create value. improvements, from reduced transactional and operational costs, and from lower levels of bad and doubtful debts and inventory obsolescence. Our WC professionals are there to help wherever you do business. Telecommunications operators and working capital management

16 Methodology This report is based on a review of the net trade WC performance of the largest telecommunications operators (by sales) headquartered in Europe (15 operators), North Canadian operators) and seven other regions and countries (34 operators in total across Africa and Middle East, America and Russia). off-balance-sheet arrangements. In the absence of detailed accounts, for some operators, trade accruals have been estimated. regions, countries and operators. It uses metrics to provide a clear picture of overall WC management and identify the resulting levels of cash opportunity. operators is not disclosed. The companies included in our report are as follows: Europe: Belgacom, BT, Deutsche Telekom, KPN, Orange, and Vodafone North America Telus and Verizon Other regions and countries: América Móvil, Batelco, Bharti Airtel, BTC, Cesky Telecom, China Mobile, China Telecom, Argentina, Telecom Malaysia, Telecom New Zealand, Telstra, Net trade working capital cycle = receivables cycle plus inventories cycle minus payables cycle Receivables cycle = trade receivables plus unbilled/ trade-accrued income plus work in progress minus current advance billing and customer prepayments DSO (days sales outstanding): year-end trade receivables net of provisions, including VAT, added-back unbilled/ trade-accrued income, securitized receivables and work in progress, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise) installations that have not been billed and should have been billed; unbilled receivables when reported separately have been added back to trade receivables advance for line rentals and subscriptions Payables cycle = trade payables plus trade-accrued expenses minus supplier prepayments DPO (days payable outstanding): 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 a number of days of sales, unless stated otherwise) interconnect and roaming charges and retailer commissions Inventories cycle = inventories net of provisions minus work in progress DIO (days inventory outstanding): year-end inventories net of provisions minus work in progress, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise) C2C as a number of days of sales, unless stated otherwise) Pro forma sales and disposals when this information is available 16 Cash on the line

17 Contacts Working Capital Services contacts Country Local contact Telephone/ Americas UK&I Jon Morris Matthew Evans Paul New Marc Loneux US Edward Richards Peter Kingma Mark Tennant Eric Wright Asia Alvin Tan Canada France Germany Dirk Braun dirk.braun@de.ey.com Bernard Wenders bernhard.wenders@de.ey.com Benelux danny.siemes@nl.ey.com India Ankur Bhandari ankur.bhandari@in.ey.com Finland Latin America matias.de-san-pablo@ar.ey.com Sweden peter.stenbrink@se.ey.com Telecommunications Sector contacts prashant.singhal@in.ey.com Holger Forst holger.forst@de.ey.com staffan.ekstrom@se.ey.com amit.sachdeva@in.ey.com Bart van Droogenbroek bart.van.droogenbroek@lu.ey.com Telecommunications operators and working capital management

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20 EY Assurance Tax Transactions Advisory About EY The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY s Global Telecommunications Center can help your business Telecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creating challenges network capacity are intensifying scrutiny on return on investment. Additionally, regulatory pressures and shareholder expectations require agility and cost efficiency. If you are facing these challenges, we can provide a sector-based perspective to addressing your assurance, Center is a virtual hub that brings together people, cultures and leading ideas from across the world. Whatever your need, we can help you improve the performance of your business. All Rights Reserved. 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.