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

Despite challenging conditions, the three-man team driving an Audi R10 sports car won the Le Mans 24-hour motor race in June, giving the German carmaker its seventh title in eight years. Even without the crash helmets, Europe’s finance chiefs have a similar victory to celebrate when it comes to a task that can be as gruelling as the legendary French endurance race.

Last year, the 1,000 largest listed companies headquartered in Europe achieved their best working capital performance in some time, as the average number of working capital days reached a five-year low. Excluding carmakers, whose large financing arms skew the data, European days working capital (DWC) fell to 45.2 in 2006, 6.6% lower than the previous year, according to REL, a research and consulting firm which compiles the data for CFO Europe‘s annual scorecard.

Deftly controlling the components of working capital, Europe’s CFOs trimmed days sales outstanding (DSO) by 6.1% and days inventory outstanding (DIO) by 4.6% on the previous year. These improvements were more than enough to offset a deterioration in days payables outstanding (DPO), which fell 4.4%. (See “The Payables Conundrum” at the end of the article.) All told, European companies “liberated” some €46 billion in cash from working capital last year, says REL president Stephen Payne.

Also encouraging is the rise in the share of companies that improved last year — 60% of the 1,000 firms in the sample reduced DWC in 2006, compared with 44% in 2005. What’s more, 53% of the companies that released cash from working capital in 2005 went on to record a further improvement in 2006. “The best always want to get better,” notes Payne. However, improvements are getting harder to come by, with the 11% average DWC reduction among those that improved in 2006 falling short of the 38% average reduction in 2005.

As ever, it’s much easier to get worse. Although the proportion of companies that saw DWC worsen was smaller, the average deterioration among this group rose, from 17% in 2005 to 22% last year. Given that total revenues in REL’s sample increased some 11% in both 2005 and 2006, says Payne, “The laggards often don’t care. They’re cash rich, with good margins, and the focus is elsewhere.”

Good Chemistry

Regardless of business conditions, Eberhard Faller’s focus on managing working capital will never waver. Basell, the €10.5 billion privately held Dutch producer of polymers where Faller is deputy CFO, achieved record financial results in 2006. Ebitda reached above €1 billion for the first time since the company was founded in 2000 as a joint venture between BASF and Shell. At the same time, Basell’s DWC has fallen steadily, from above 70 in 2002 to 54 in 2006, well below the 77-day median for the chemicals industry.

According to Faller, credit for the improvement goes to what he calls a “big bang” philosophy. To make sure Basell’s working capital discipline gets “regular rejuvenation,” it launches big-bang initiatives every three years or so, with projects ranging from standardising the ERP platform to harmonising business processes.

This year’s initiative addresses the “loose ends” left over from earlier projects, says Faller. Receivables will get particular attention with e-billing and other collection initiatives, while new software will provide proactive payment alerts and automated payment reminders.

Faller reckons that his company has freed up €500m from working capital since 2002. As far as further improvements go, “the question is not whether we can get better, but whether we can improve our relative position compared to our peers.”

Toeing The Line

One company clearly ahead of its peers is Draka, a €2.5 billion cable manufacturer in Amsterdam. According to our scorecard, it cut DWC by a remarkable 23% last year, to 61, taking it to the top of the rankings for the electrical-equipment sector, where the median company’s DWC rose 2%, to 91. As a percentage of sales, Draka’s working capital — at just less than 17% — was the lowest ever recorded at the company, down from around 30% in the first half of 2005, when CFO Frank Dorjee convened a working capital taskforce.

The taskforce was one of Dorjee’s first projects after joining Draka in early 2005, when “working capital was clearly too high compared to our peers,” he recalls. This was a key factor explaining a string of losses and a languishing share price. “When I started as CFO, there was not much focus on cash,” Dorjee says. The taskforce, which he chaired, comprised around 50 managers, from both operations and finance.

“I always say that receivables must finance payables, which leaves you to manage inventory down as much as possible,” says Dorjee, stressing how important strict inventory control became as copper prices, a key raw material for Draka, soared. Scrapping a country-focused structure in favour of nine product- and market-focused divisions drew attention to the relative efficiency of the company’s 45 factories. This set the stage for the “Triple-S” programme — “Stop, Swap and Share” — which resulted in some factory closures, dedicating other factories to single product lines, and more widespread sharing of best practices.

Both the sale of non-core businesses and Draka’s working capital initiative freed up some €300m, allowing the firm to cut its net debt-to-Ebitda ratio by two-thirds over the past two years. In 2006, Draka beat its profit target a year earlier than expected, leading it to upgrade its outlook. Since Dorjee joined the company, its share price has risen from around €10 to €33.

This year, Dorjee expects working capital as a percentage of sales to rise to between 18% and 20%. Given where the company started, this doesn’t worry the CFO, who marvels at the power of vigilant working capital management to transform Draka’s fortunes. “As a CFO, it’s nice to see that you can manage these sorts of things,” Dorjee says. “With the right focus, you can extract a lot of cash out of this company.”

Another CFO with cash on his mind is Jan van den Belt of Océ, a €3 billion Dutch manufacturer of printers and document-management systems. “We were a fairly cash-rich company, but a big acquisition in 2005 changed our financing structure considerably,” he says. “The discipline of stricter financing focused us much more on cash than before.” Océ reduced DWC in 2006 by 21%, to 80 days, the best result in the office electronics sector. “On the board, I’m Mr Working Capital,” van den Belt says. As the company seeks to source more material from low-cost countries, it is currently grappling with the trade-offs between DIO and DPO when it comes to vendor-managed inventory. Van den Belt is also leading a project that will benchmark the company’s DSO and DPO performance by country, improving processes where necessary.

Despite last year’s achievements, the company is not resting on its laurels. Although Océ is the sector leader in Europe, the CFO notes that American rivals such as Xerox, with a 2006 DWC of 51, and HP, with 26, are better still. “We’re not there yet,” he says.

This persistence should inspire others. If every company in REL’s sample managed working capital with the same discipline as top-quartile companies such as Basell, Draka and Océ, they would collectively release €611 billion in “excess” cash, says Payne of REL. He reckons that last year’s improvement wasn’t a one-off, not least because of the heightened interest in balance-sheet and cash-flow metrics driven by private equity firms. Payne predicts that European working capital will drop even more, to 36.5 days by 2011 (excluding the auto sector), an average annual improvement of 4% over the next five years.

Getting there won’t be easy. “Working capital management requires continuous effort,” says Faller of Basell. “It’s not a quick hit, but a long journey.” For many companies, last year’s triumph was just one stage of a long-running competition. Now it’s time to get back behind the wheel.

Jason Karaian is a senior editor at CFO Europe.

The Payables Conundrum

Blighting an otherwise stellar working capital performance, days payables outstanding (DPO) deteriorated for the second consecutive year in Europe. But many CFOs say that paying suppliers faster is either an unavoidable annoyance or an acceptable sacrifice.

Draka, a Dutch cable manufacturer, relies heavily on copper as a raw material, a commodity whose price rose by nearly 80% in 2006. “Mines deliver copper on a cash basis, suppliers have to finance that, and it shifts through the entire value chain,” says Frank Dorjee, Draka’s CFO, by way of explaining the shorter payment terms the firm has faced in recent years.

Basell, a petrochemicals group also based in the Netherlands, is dealing with a similar situation with one of its key inputs: crude oil. What’s more, after the company was bought out in 2005 by Access Industries, an American investment firm, suppliers grew wary of the firm’s increased leverage and tightened payment terms, something that’s increasingly familiar in these private equity-fuelled times. Against these headwinds, concerted efforts to improve DPO is “tilting at windmills,” says deputy CFO Eberhard Faller.

But a decline in DPO needn’t be a major cause for alarm, notes Stephen Payne, president of research and consultancy firm REL. After all, by slashing inventories and receivables, both Draka and Basell still made meaningful cuts in overall working capital last year.

Falling DPO can also be explained by companies sourcing more from low-cost countries, where they simply pay less for materials, Payne adds. Taking advantage of early-payment discounts, meanwhile, is another DPO concession that benefits companies via the income statement.

Marc Deloof, a professor at the University of Antwerp, studied the working capital practices of more than 1,000 Belgian firms over five years in the 1990s. He found a statistically significant, inverse relationship between profits and payables, suggesting that successful companies don’t squeeze suppliers by delaying payments or fiddling with terms to win free financing. Put simply, “Less profitable firms wait longer to pay their bills,” he notes.

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