Go with the Flow

Read the complete results of the 2007 Cash Masters survey, or review just those results that appeared in print.

Life often imitates art. Given the recent twists and turns at his company, Lothar Lanz, for example, can easily relate to the soap operas broadcast on television channels owned by ProSiebenSat.1, the German media group where he is CFO.

A string of impressive results drove the company's share price from around €5 in early 2003 to €30 this summer. The shares have since fallen nearly 20% though, after the company's controlling shareholders, private equity firms KKR and Permira, engineered the €3.3 billion takeover of Luxembourg-based SBS in June. The debt-financed deal will transform Munich-based ProSiebenSat.1, boosting revenue by 50% and dramatically altering its capital structure. For this reason, Lanz explains, "cash flow was important before, but not as much as it is now."

Cashing In
"Cash is king" is a popular, often overused, refrain among CFOs, but some take the mantra more seriously than others. To gauge which companies are most adept at generating and managing cash, REL, a research and consulting firm, ranked the 1,000 largest listed companies with headquarters in Europe by their "cash conversion efficiency" (CCE), measured as cash flow from operations divided by sales. Combing through these companies' most recent annual financial statements, the inaugural REL/CFO Europe Cash Masters Scorecard also highlights the metrics underlying CCE, including gross margins, SG&A costs and net working capital, among others. (See the rankings that appeared in print.)

At first glance, 2006 was a great year for business. Sales and profits at large European companies grew by double-digit percentages, while working capital and SG&A costs fell in relation to revenues. However, companies "weren't able to fully reap the rewards that could be expected," according to Stephen Payne, president of REL. That's because CCE declined for the second year in a row, resulting in "fewer euros, relatively speaking, completing the journey through a company's cost structure and onto the balance sheet," says Payne. In 2006, average CCE fell to 11.7%, from 12.4% in 2005. (See "Flow of Funds" at the end of this article.)

Less than half of the 1,000 companies in the sample improved CCE last year, with only a third posting improvements in both 2005 and 2006. If laggards improved their CCE in line with the top quartile of their sectors, REL reckons some €400 billion in additional cash flow could be generated, increasing the scope for capital spending, dealmaking, share buybacks and debt repayment.

It's always easier to improve "efficiency and effectiveness" when times are good, notes Payne, though complacency is difficult to overcome, as the recent deterioration in CCE shows. More often than not, as with ProSiebenSat.1, it takes an external shock to move cash management up the corporate agenda.

The German media group already generated a lot of cash, leading its sector with a CCE of 60% last year, compared with a 14% sector average. In 2006, operating cash flow rose by 9%, to €1.3 billion, as sales grew by 6%, to €2.1 billion. That sort of robust cash generation allowed the firm to cut net debt to €122m at the end of last year, down sharply from €665m three years earlier.

Last December, when KKR and Permira first acquired their majority stake in ProSiebenSat.1, the private equity firms said they would consider combining the company with SBS, which the same duo took private in 2005. The plan came to fruition this July, financed by €3.6 billion in term loans and a €600m revolving credit facility, secured just before the debt markets seized up. ("Thank God for that," says CFO Lanz.)

The German company "can learn some things" from its new acquisition, Lanz notes, given SBS's experience of operating under much higher leverage. While it wouldn't make sense to "centralise everything," the CFO adds, he is planning to exert stronger top-down control on areas such as capex at the enlarged group. This reflects the shuffling of priorities among the three "central financial control variables" that executives use to steer the company, Lanz explains. Previously at the bottom of the list, cash flow now takes precedence over Ebitda and Ebitda margin. The CFO hopes this will sharpen employees' focus amid the integration work, proving to the markets that the company can maintain its previous momentum on cash and profit generation despite markedly different financing conditions.

Hitting Turbulence
One company that owes its current cash flow success to a previous external shock is Unique Flughafen Zürich, the SFr737m (€448m) holding company that operates Zurich airport. "2001 was a really bad year for us," Beat Spalinger, the CFO, says with great understatement. That year, in the midst of a SFr2 billion expansion programme, traffic levels at the airport collapsed after the terrorist attacks on September 11th, which drove flag carrier Swissair into bankruptcy shortly after. Investments were quickly cut to the "absolute minimum," staff were laid off and salaries were slashed, Spalinger recalls.

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