T&D companies release cash to offset profit pinch

By: Sean Wiles

Focus on billing, collection and supply chain efficiencies is important as customers may look to extend pay times

T&D companies release cash to offset profit pinch
Many T&D companies are recognising the importance of working capital management and making efforts to improve processes.


Getting working capital processes right can be very challenging, especially in the transport and distribution (T&D) sector.

It’s typically an industry where cash flows come under pressure from demanding suppliers and large customers with high levels of bargaining power.

As a result, operators require a disciplined approach to ensure cash flow is optimised.

Working capital performance is increasingly being recognised as a key indicator of the financial health of a business.

More cash means more flexibility in making business decisions. It can also give businesses an advantage over competitors. 

In order to help T&D companies better understand working capital performance across their sector and broader supply chain, McGrathNicol Advisory’s Cash and Working Capital Centre of Excellence produces an annual Working Capital Report.

The latest report showed that while T&D companies experienced a decline in activity and revenues during the 2016 financial year (FY16) they were able to soften the blow through better working capital and cash flow management. 

The study looked at the working capital cycles of a sub-set of ASX-listed T&D companies, including K&S Corporation, Qube Holdings, Royal Wolf Holdings, MMA Offshore, MaxiTRANS Industries, Aurizon Holdings, Brambles, CTI Logistics and Lindsay Australia. 

When compared to eight other business sectors (including construction & engineering, mining & resources, utilities and retail), the T&D sector showed the largest percentage improvement in working capital performance in FY16. 

The results demonstrate that many T&D companies are recognising the importance of working capital management and making a concerted effort to improve processes.  

Key findings

Average T&D sector revenue contracted by close to 2 per cent during FY16, with all but two of the companies included in the McGrathNicol Advisory sample reporting a fall in year-on-year earnings. 

This result was driven in main by the flow on affect from the softer market conditions for Construction & Engineering and Mining & Resources companies - key customers for the sampled T&D businesses.

In terms of working capital performance, days working capital (DWC) across the sample reduced by 5.7 days (12 per cent) in FY16. 

DWC measures the average length of a company’s working capital cycle, and considers the length of time it takes to collect its debtors (days sales outstanding or DSO) and the holding period for its inventory before being sold (days inventory outstanding or DIO) less the length of time it takes to pay its suppliers and other creditors (days payable outstanding or DPO).

The shorter a company’s average DWC, the quicker it is taking to convert its earnings into cash.

In FY16, two in three of the sampled companies reduced their DWC.

This improvement was the result of better billing, collections and inventory management, represented by a 5.2 day reduction in DSO and a three day reduction in DIO. 

The most significant gains were achieved by management teams who implemented focused working capital improvement programs.

Notwithstanding the average DWC improvement across the T&D sector, there still appears to be room for further improvement. Of note, the sector showed a large spread in the DWC of the ‘best’ and ‘worst’ performers – 58.8 days. 

This means that the average working capital cycle of the stronger cash flow managers in the sector was close to two months shorter than some peers, resulting in a material competitive advantage. 

Importantly, the efficient conversion of earnings into cash flow can underpin a more nimble business and provide an opportunity to make capital expenditure and other strategic decisions more quickly and confidently. 

It can also help maintain or improve relationships with suppliers, which is key in a sector like T&D where payment terms for business-critical inputs (including fuel, warehousing and subcontracted labour) can often be inflexible.

McGrathNicol Advisory’s study also highlighted that participants in the T&D sector typically have a structural "funding gap" built into their working capital cycles.

This means that (on average) companies pay their suppliers more quickly than they collect from their customers – which was the case for close to 70 per cent of the McGrathNicol Advisory sample in FY16.  

Companies in focus

Whilst 67 per cent of the sampled T&D companies reduced DWC in FY16, the positive working capital metrics of two companies, Royal Wolf Holdings and MMA Offshore, heavily influenced the size of the improvement.

Shipping container specialists, Royal Wolf Holdings, achieved a 23.4 day reduction in DWC. 

This was driven by a 19.4 day fall in DIO as management implemented tighter controls around inventory and related purchases.  

Despite experiencing adverse market conditions that significantly impacted trading performance, MMA Offshore was able to reduce its DSO by 29.6 days – which contributed to a 22.8 day reduction in DWC.

Of the better performing sampled companies, MaxiTrans was able to deliver improvements across all component parts of its working capital cycle – meaning it reduced its DSO and DIO and also paid its suppliers slower (increasing DPO). This resulted in a 9.6 day reduction in DWC.

At the other end of the McGrathNicol Advisory sample, the three companies that experienced deterioration in working capital metrics (Aurizon Holdings, Qube Holdings and Brambles) all recorded an increase in DSO and a decrease in DPO – and a widening of the "funding gap".

Given the abovementioned critical nature of inputs driving DPO in the T&D sector, reversing this trend can be difficult, but not impossible.

Of the profiled companies that reduced their DWC, there was a reported focus on driving better processes which demonstrates that sustainable improvement requires management’s attention and a concerted program of change. 

For the freight operators especially, whose customers are also feeling a profit pinch and may look to soften the pain further by extending payment terms, continued focus on billing, collection and supply chain efficiencies through FY17 is critical.

Sean Wiles is a partner with McGrathNicol Advisory.

Read the full feature in this month's ATN.


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