All tied up MENA. Working capital management report 2017

Transcription

1 All tied up MENA Working capital management report 2017

2 Foreword All tied up MENA: working capital report 2017 is part of a series of working capital (WC) management reports based on EY research, reviewing the WC performance of the world s largest companies. WC involves Account receivables Account payables + inventory All tied up MENA: working capital report 2017 is the first of the reports in the series, focusing on the Middle East and North Africa (MENA) region. The survey focuses on the top 326 companies in the MENA region, examining their WC performance at the company, regional, 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 with 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. Key findings Total sales decreased by 4.1% in FY16 compared with FY15 Total net working capital (NWC) increased by 2.0% 8 in FY16 compared with FY15 Cash-to-cash (C2C) cycle increased by days in FY16 compared with FY15 Cash opportunity of US$29.8b was identified in FY16. 2 All tied up MENA

3 Contents Executive summary 4 MENA companies overview 6 WC performance by industry 10 WC performance by size 12 Top vs. bottom WC performers 14 WC performance by geography 15 WC self-diagnostic 16 How EY can help 17 Methodology and glossary 19

4 Executive summary Themes Key questions to think about There was an increase in WC metrics compared with 2013 The WC Cash to Cash (C2C) increased by 15 days to 116 days in 2016 from 101 days in The increase was primarily due to an increase in days sales outstanding (DSO) in 2016 by 13 days compared with What influences WC? Middle East (MENA) companies have not been proactive in managing WC in The following economic situations resulted in WC deterioration in 2016: Sales decrease Volatile oil prices Rising interest rates Decrease in banks lending appetite Very large companies (by size) manage WC more efficiently than mid- and small-sized companies Overall, the larger companies have managed to improve their WC in 2015 compared with small- and mid-sized companies. The average NWC by sales percentage for very large companies decreased to 7% in 2016 from 10% in The average NWC by sales percentage for small companies was 35% in Is it more than just negotiating power? The common misconception is that improvements are related only to payment terms. However, in reality, there are many different levers to pull in trade and non-trade WC, such as order processing time, invoice processing timeline, invoice trigger date, invoice delivery timeline and dispute management. The key aspect that drives WC reduction for very large companies is their investment in people, policies, processes and infrastructure. Discipline in creating and adhering to smart WC processes helps release cash trapped in the business because of process inefficiencies. 4 All tied up MENA

5 Themes Key questions to think about WC top performers operate better across all the metrics On the basis of the study, top WC performers, on average, show better financial metrics, such as earnings before interest, taxes, depreciation and amortization (EBITDA), return on equity (ROE), and return on capital employed (ROCE), compared with WC performers at the bottom of the scale. They also have more spare cash toward capital expenditure (capex) compared with poor performers. What is the link? There are multiple strategic advantages of WC improvements, such as: Creating investment capacity De-leveraging the business or improving shareholder yield Dividend payments Lower interest income There are good performers in every industry On the basis of the study, every industry has exeptional WC improvement. Out of the top 15 industries, four have seen improvement in WC metrics for 50% or more of the companies. What can be learnt from them? There are a number of companies improving their WC performance in every industry. The sectors with the largest variance are building materials, chemicals, food producers and distributors, among others. All tied up MENA 5

6 MENA companies overview In a tough economic environment, it is important to focus on efficiencies and maintain an optimal capital structure. WC optimization can help support the capital structure by releasing excess cash, which can be effectively utilized elsewhere. Hani Bishara EY MENA Debt Advisory, Working Capital and Restructuring Leader Reduced sales growth and cash on hand In FY16, the sales for MENA companies declined by 4.1% compared with FY15. This was primarily because of subdued industrial activity, weak investment environment and low oil prices. The key sectors with maximum sales drop are household durable products, entertainment industry, oil and gas, and industrial and packing material. Cash on hand for the MENA companies went down by 2.7% in FY16. This may be because of increased WC metrics; and thereby, excess cash unnecessarily being tied up in the business. Chart 1: Overall trend of sales over historical period Chart 2: Cash balances over historical period US$m 2,75,000 2,70,000 2,65,000 2,60,000 2,55,000 2,50,000 2,45,000 2,40,000 2,35,000 2,55,787 2,69,975 2,57,111 2,46,638 US$m 60,000 58,000 56,000 54,000 52,000 50,000 48,000 53,653 59,208 52,164 50,776 2,30,000 FY13 FY14 FY15 FY16 46,000 FY13 FY14 FY15 FY16 6 All tied up MENA

7 Increase in short-term borrowings and reduction in total debt compared with 2015 A review of the total debt and short-term borrowings indicate that total debt and short-term borrowings increased by 2.5% and 12.0% respectively in This indicates the need for increased WC Chart 3: Overall trend in total debt US$m 2,00,000 1,95,000 1,90,000 1,85,000 1,80,000 1,75,000 1,70,000 1,65,000 1,60,000 1,55,000 1,50,000 1,64,919 1,81,595 1,84,928 1,92,949 FY13 FY14 FY15 FY16 investment required by companies. The total debt increased by 17.0% between 2013 and Chart 4: Overall trend in short-term borrowings US$m 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,640 12,955 13,036 14,733 FY13 FY14 FY15 FY16 Chart 5: Overall C2C trend over historical period Days US$m 116 The cash to cash cycle for the region increased by eight days to 116 days in 2016 (2013: 101 days). This was primarily because of a significant increase in DSO. Chart 6: Overall DSO trend over historical period Days Our study shows that MENA companies are collecting their dues seven days slower in 2016 compared to There may be multiple drivers, such as increase in credit period, weaker collections process and liquidity issues for a few customers. However, an interesting aspect is the percentage overdue of total receivables and its movement across years. The health of receivables can be ascertained by analyzing the movement of overdue percentage over the period. All tied up MENA 7

8 Chart 7: Overall DPO trend over historical period Days The overall days payable outstanding (DPO) improved by five days in 2016 compared with However, this shows that MENA companies have not been successful in passing over the increase in DSO down to their suppliers through an increase in payment terms. It is important to understand if this increase is due to improved credit terms or delay in payments. Chart 8: Overall DIO trend over historical period Days The days inventory outstanding (DIO) deteriorated by five days in 2016 compared with Around 50% of the companies showed a deterioration in DIO in 2016 compared with Around 30% of the companies showed a deterioration in DIO of more than 20%. Key sectors include industrials, food retailers and wholesalers. Note: DSO, DIO, DPO and C2C metrics are calculated on a sales-weighted basis. 8 All tied up MENA

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10 WC performance by industry Many industries have an intrinsic requirement for high WC levels. However, there may be companies that manage to reduce the cash unnecessarily trapped in the business. Those are the companies that manage to stay ahead of the curve. Simon A Moore EY MENA Transactions COO and Merger Integration Leader Chart 1: Industry-wise C2C cycle performance C2C days % 40% 00% 40% 80% 120% 160% Pharmaceuticals Electrical components and equipment Industrial diversified Metals Oil Building materials Heavy construction Containers and packaging Health care providers Chemicals Average Consumer and household services Oil equipment and services Food retailers and wholesalers Air freight couriers Transportation services Electric utilities Restaurants Telecoms FY16 C2C days Percentage change (Year-over-year FY16 and FY15) 10 All tied up MENA

11 Our study shows that the top industries with the highest WC days (C2C) are the pharmaceuticals, electrical components and equipment, and other diversified industrials sectors. The C2C days for pharmaceuticals, and electrical components and equipment decreased by 4.9% and 6.2%, respectively, in FY16. The main reason for the increase in C2C days was decline in inventory days. At the other end of the spectrum, telecoms, food and beverage, utilities, and transportation services enjoy a low C2C cycle. However, the sectors saw an increase in the C2C cycle in FY16 compared with FY15. The main reasons for the low C2C cycle for telecoms and restaurants were the high payable days coupled with medium receivable days and extremely low inventory days. Average NWC by industry in FY16 shows wide variance in WC performance between industries. The differences primarily arise because of differences in operating models, supplier and customer mix, procurement strategies, and overall industry drivers. Chart 2: Industry-wise improvers and non-improvers Metals Oil Transportation services Building materials Industrial diversified Consumer and household services Containers and packaging Food retailers and wholesalers Heavy construction Telecoms Health care providers 7 8 Electric utilities Chemicals Restaurants 8 6 Electrical components And equipment 8 2 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Improved Worsened Source : EY analysis, based on publicly available annual financial statements All tied up MENA 11

12 WC performance by size WC management appears to be a key area of concern for many companies in the region. It is important for MENA companies across sizes to move from an only P&Lfocused organization to P&L and cash-focused organization. Phil Gandier EY MENA TAS Leader Chart 1: Size-wise C2C cycle performance C2C days FY13 FY14 FY15 FY16 Small Medium Large Very large The gap in WC performance between small, medium, large and very large companies increased in FY16, continuing from previous years. Table 2: Movement between FY16 and FY15 Company size DSO DPO DIO C2C Small 6% 16% 8% 4% Medium 12% 4% 7% 11% Large 9% 8% 16% 15% Very large 29% 7% -8% 19% Small Revenue less than US$250m Medium Revenue US$251m to US$750m Large Revenue US$750m to US$2b Very large Revenue more than US$2b 12 All tied up MENA

13 Our study shows that the very large companies appear to be better at managing their WC than smaller companies. The gap in WC performance between very large and small companies widened in FY16. However, WC performance for very large companies in FY16 has deteriorated. Factors typically influencing differences such as these include: Practical factors For large companies (large and very large), scale provides greater opportunities to negotiate favourable payment terms with customers and suppliers. Large companies are also more likely than smaller (small and medium) companies to have more SKUs and complex supply chain including selling outside their home regions, potentially giving rise to longer lead times and excess safety stocks. Large companies tend to be more diversified out of the region resulting in lesser impact from the long payment terms in the region. Approach and outlook towards WC management Large companies tend to have a holistic view on working capital therefore monitoring more levers closely compared to smaller companies. Large companies tend to hire management with specialist experience (eg: Treasurer for better cash and liquidity management) as they have greater access to resources. Lean practices and vendor managed inventory arrangements are more widespread among large companies compared with smaller companies. Larger companies tend have better systems (ERP systems) and reporting tools compared to smaller companies. While these results confirm that size matters in WC, it remains unclear how much of the WC performance gap between small- and medium-sized enterprises (SMEs) and large companies is due to the SMEs reluctance to engage more openly with other participants in the value chain. Overall, the C2C for very large companies was at 24 days in FY16 compared with 129 days for small companies and 131 days for medium-sized companies in FY16. Chart 1: Historical DSO movement DSO days FY13 FY14 FY15 FY16 Small Medium Large Very large Chart 2: Historical DIO movement DIO days Small Revenue less than US$250m Medium Revenue US$251m to US$750m The important thing to note is that the very large companies use many more WC levers apart from negotiations terms in order to optimize cash. A few key levers are: Streamlined WC processes Cash flow forecasting and monitoring Focus on operational metrics as well as financial metrics Optimum inventory modeling Enablement of efficient systems Demand forecast accuracy mapping Large Revenue US$750m to US$2b Very large Revenue more than US$2b Therefore, it is important for smaller companies to adopt leading WC practices in order to stay ahead of the curve FY13 FY14 FY15 FY16 Small Medium Large Very large Chart 3: Historical DPO movement DPO days FY13 FY14 FY15 FY16 Small Medium Large Very large All tied up MENA 13

14 Top vs. bottom WC performers Top WC performers demonstrate better financial indicators than bottom performing ones. WC is a key element to consider when contemplating undertaking a transaction; sellers need to avoid leaving value on the table, and corporate investors often prefer to invest in tightly managed companies with optimized WC, so as not to dilute their own performance metrics. Matthew Benson EY Partner EMEIA Transaction Services 14% 24 percentage Capex by sales C2C 6% TWC by sales percentage 39 DSO Top WC performers 38 DIO 6% ROCE DPO 54 EBITDA by sales percentage 19% 12% 222 percentage Capex by sales C2C 61% TWC by sales percentage 146 DSO Bottom WC performers 119 DIO 3% ROCE DPO 43 EBITDA by sales percentage 17% Our analysis indicates that companies that excel in their WC management also have strong balance sheets, and deliver high margins and ROCE. The top WC performers report a C2C of 24 days and achieve an EBITDA margin of 19%, ROCE of 6% and ROE of 4%. In contrast, the bottom WC performers report a higher C2C of 222 days, while achieving a lower EBITDA margin of 17%, ROCE of 3% and ROE of 26%. 14 All tied up MENA

15 WC performance by geography Liquidity and working capital management have been an important focus area for many global companies over the past few years. There is an opportunity for MENA companies to align their WC performance with that of their global peers. Jon Morris EY EMEIA Working Capital Leader Kingdom of Saudi Arabia Oman Kuwait Egypt United Arab Emirates Jordan Qatar Bahrain Total Number of companies DSO DIO DPO C2C Chart 1: Country-wise percentage of improvers vs. non-improvers Egypt Kuwait KSA UAE Oman Qatar Jordan Bahrain 65% 35% 45% 55% 39% 61% 36% 64% 35% 65% 31% 69% 27% 73% 20% 80% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of improvers Percentage of non-improvers All tied up MENA 15

16 WC self-diagnostic Plot the WC health (C2C days) of your company on the WC meter below: Sectors Upper quartile C2C (latest annual) Median C2C (latest annual) Lower quartile C2C (latest annual) Air freight couriers Building materials Chemicals Consumer and household services Containers and packaging Electric utilities Electrical components and equipment Food retailers and wholesalers Health care providers Heavy construction Industrial diversified Metals Oil Oil equipment and services Pharmaceuticals Restaurants Telecoms Transportation services All tied up MENA

17 How EY can help 1 Do you feel that cash is inaccessible in operations and business units? 2 Did you face any inventory or receivable writeoff in the past or is it expected in the future? 3 Do you feel that the investment in WC is not proportionate to sales? 4 Do you feel the lack of visibility over cash flow in the system? 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 results in unlocking trapped cash for redeployment. How EY can help The Global EY Network of dedicated WC professionals helps clients identify, evaluate and prioritize actionable improvements to liberate significant cash from WC through sustainable changes to commercial and operational policies, processes, metrics, and procedure adherence. End-to-end WC approach 1 2 Order-to-cash (OTC) process Sales and customer management Credit and risk management Procure-to-pay (PTP) process Order processing Strategy Policy, process and practice Invoice issuance Customer terms of trade 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 in cash flow forecasting practices. We can then assist in implementing processes to improve forecasting and create the frameworks to sustain those improvements. Service design Collections management Dispute management Payment application 1 Benchmarking Historical and peer benchmarking to identify improvement opportunities 2 Diagnostic review Procurement strategy, budget and forecast process Sourcing, supplier selection and contracting Requisitioning and order fulfillment Goods and invoice receipt and evaluation Invoice processing Supplier terms of trade Disput management and control Payment issuance management Complete end-to-end review of processes and transactional data to quantify the opportunity and initiatives Forecast-to-fulfill (FTF) process Product range management Balance sheet locked cash Capex and M&A Demand planning and sales and operations planning Manufacturing, scheduling and execution Raw Material planning, purchasing and replenishment Inventory management Non-trade WC Cash tax Tax structure and indirect taxes Structure and organization Metrics and incentive structure Systems and tools Sales order processing and customer services Financing and treasury Finished goods, Warehousing and logistics Personnel costs 3 Design and support implement Detailed action plans, metrics and dashboards, and implementation support 4 Roll out and monitor Rolling out findings to other divisions and geographies All tied up MENA 17

18 Teams Hani Bishara EY MENA Debt Advisory, Working Capital and Restructuring Leader hani.bishara@ae.ey.com Hani is a partner in Dubai and has over 20 years of work experience in several areas, including WC management, turnaround management, M&A, corporate finance, banking, and corporate restructuring. He has extensive experience in refinancing corporations undergoing capital restructuring, both as an advisor and a banker. He has managed debt restructuring transactions exceeding US$10b. In his capacity as advisor, he was involved in very complex transactions, supplier and bank negotiations, and management of departments and large groups of staff in day-to-day operations. Jon Morris EY EMEIA Working Capital Leader jmorris10@uk.ey.com Jon is a partner from the EY member firms in UK Working Capital services and leads Working Capital Advisory for the Europe, Middle East, India and Africa Region. From a background in EY member firm s Restructuring Services advising stressed and distressed companies, Jon has successfully transferred these techniques to enhance business performance in a wider field. Jon s clients predominantly include both FTSE 100 and private equity houses, with a particular emphasis on manufacturing, service, telecommunications, media and technology sectors. Pearce Quinn Director Working Capital Advisory pearce.quinn@ae.ey.com Pearce is a director of EY MENA Transactions Advisory Services team. He has been with EY in the region for eight years. Pearce is the director spearheading the Working Capital projects in the MENA Region. Pearce has worked on WC projects for a leading petroleum company in the UAE. He has assisted a large multinational UAE business understand the potential cash release from implementing a WC optimization program. Karthik Venkatram Executive Working Capital Advisory karthik.venkatram@ae.ey.com Karthik is an experienced professional with the working capital team with EY MENA. Karthik completed his Executive MBA from the Indian School of Business, Hyderabad, India. Karthik has performed multiple WC cash release projects across sectors, such as services, manufacturing, and oil and gas. He has evaluated processes and policies across the WC framework, including operating strategy, accounts payable, accounts receivable, inventory, reporting structure, and monitoring metrics and incentives. He has identified multiple process inefficiencies, and re-engineered the inventory, receivables and payables processes. 18 All tied up MENA

19 Methodology and glossary Methodology The report contains the findings of a review of the WC performance of 326 companies in the MENA region. We have considered companies with a revenue of above US$10m in 2016, headquartered in MENA. 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. SMEs have been defined in this report as follows: Small less than US$250m Medium US$251m to US$750m Large US$750m to US$2b Very large more than US$2b The overall analysis draws on companies latest fiscal 2016 reports. Performance comparisons have been made with 2015, 2014 and 2013 for the companies. The report is based on the review, which 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. 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 its true WC performance, given the intertwined nature of its 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 company annual financial statements. 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 offbalance sheet arrangements. DSO: year-end trade receivables net of provisions, including valueadded tax (VAT) and adding 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) DIO: year-end inventories net of provisions, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise) DPO: year-end trade payables, including VAT and adding 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) C2C: sum of DSO and DIO less DPO (expressed as a 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 adding back securitized and current financial receivables plus year less end inventories net of provisions year-end trade payables, including VAT and adding back trade-accrued expenses Glossary All tied up MENA 19

20 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. 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. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. The MENA practice of EY has been operating in the region since For more than 90 years, we have grown to more than 6,000 people united across 20 offices and 15 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 EYGM Limited. All Rights Reserved. EYG no GBL 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. ey.com/mena