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Cash on the table 2012 - Significant variation in the industry’s WC performance in 2011 - EY - Global

Cash on the table 2012

Significant variation in the industry’s WC performance in 2011

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A high proportion of CP companies continue to devote substantial efforts to drive cash and cost out of WC management and processes.

A review of the CP industry’s WC performance during 2011 reveals diverging results between the industry’s segments. Relative to 2010, brewing and HPC showed further progress, while F&B reported a deterioration.

These variations in WC performance may be explained by a number of factors:

A challenging year: 2011 was a particularly challenging year for the CP industry, marked by economic and financial instability in Europe, sluggish consumer demand in North America, robust but softening growth in emerging countries, and high commodity prices. CP markets continued to grow in value, but at a much lower rate than the year before, and mostly on the back of price increases.

Focus on WC management: A high proportion of CP companies continue to devote substantial efforts to drive cash and cost out of WC management and processes. Many reported ongoing initiatives in this area, especially with regard to billing and cash collection, spend consolidation, global sourcing, extension of payment terms (particularly among brewers) and supply chain efficiency.

However, some also chose to trade off WC improvements against sales growth (by, for example, building up inventory and improving service levels) or margin expansion.

Mixed receivables performance: HPC and F&B reported a slight deterioration in receivables performance, with DSO rising by 2% and 1%, respectively. In contrast, brewing showed further progress, with DSO down 3%. Twelve CP companies reported a weaker performance. One of the primary causes of the variations in DSO arose from changing payment practices with retailers.

Inventory and payables performance affected by high commodity prices: Changes in input costs exerted a material impact on the CP industry’s WC performance, affecting inventory and payables in particular. Commodity cost inflation returned in the second half of 2010, peaking in the summer of 2011 before falling back in the final months of that year. On average for the year, the food price index rose by 23% in 2011 compared with 2010.

Currency movements effect: Currency movements had a significant impact on WC performance in 2011. For companies reporting in US dollars, the sudden appreciation of the dollar against other main currencies at the end of 2011 compared with its average during the year (up 7% against the euro, for example) had a beneficial impact on reported WC performance.

Strong showing for brewing: In a year of rising input costs (barley prices were 30% and 60% higher on average in 2011 vs. 2010 and 2009, respectively) and changes in excise duties regimes (which regularly affect buying patterns from distributors, as seen for example in Russia at the end of last year), brewing reported a solid improvement in WC performance.

Much weaker performance for F&B: F&B saw a significant deterioration in WC performance in 2011. C2C increased by 4%, affected by poor results in DIO (up 6%) and, to a lesser extent, in DSO (up 1%). By contrast, DPO was up 3%. Six out of nine F&B companies reported worse WC performance in 2011 compared with 2010, with one in particular having a disproportionate impact on the overall segment performance.

Improved results for HPC: There was a further improvement in WC performance for HPC in 2011, with C2C down 3% from its levels of 2010. Five companies out of seven reported better results. Progress was entirely driven by DPO (up 3%, bringing the total increase to 21% in the last two years), benefiting from better terms, greater efficiency in procurement operations and continuing increase in levels of advertising. By contrast, receivables performance deteriorated (DSO was up 2%), with two companies in particular scoring poorly.

Change in WC metrics across the CP industry, 2010–11

  Brewing FB HPC
  2011 Change 11/10 2011 Change 11/10 2011 Change 11/10
DSO 30.9 -3% 37.4 1% 34.2 2%
DIO 25.7 0% 31.8 6% 34.4 0%
DPO 58.1 10% 31.6 3% 41.5 3%
C2C -1.5 down 6.0 days 37.6 4% (up 1.5 days) 27.1 -3% (down 0.8 days)

Source: EY analysis, based on publicly available financial statements
Note: DSO (days sales outstanding), DIO (days inventory outstanding), DPO (days payableoutstanding) and C2C (cash-to-cash), with metrics calculated on a s ales-weighted basis



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