Working hard or hardly working? Capital and cash conversion in a post-covid era (Part three)
Energy, Gaming and single names
Our final installment looking into Q3 working capital across European HY, taken from an abridged report of our analysis. See here for Part One (Introduction and Headline Stats) and Part Two (Retailers and Automotive Manufacturers)
Energy, Oil & Gas, and Oilfield Services
+11.3 day ∆ CCC; +9.7 day ∆ inventory days; +8.6 day ∆ receivables days; +7 day ∆ payables days
Energy credits saw a slowdown in all areas on average.
The most improved CCC in this space (first from left) posted YTD operating cash flow of €136m, 56% of which was thanks to an increase in payables, which have now swelled to 5x the amount of receivables and inventories combined on the balance sheet. Management also noted in Q1 Q&A that lower crude prices translate “into a lower Euro value for trade receivables, which in turn means a lower Euro value utilization of the receivable financing facility”. The facility was renewed in October 2020.
Trade receivables were flat YoY at Neptune as sales tanked by ~30% (pumping up receivables days), potentially pointing towards a deterioration in customer credit quality or other internal problems as a drag on liquidity. McKinsey highlights growing issues of overdue payments and bad debt exacerbated by the pandemic, leading to overburdened collection desks, particularly those relying on manual processes. Neptune, however, does have ~$180m of income tax receivables, helped by temporary changes to the petroleum tax regime in Norway.
CGG is anticipating a -$245 net cash outflow for FY20, possibly reversing the hard yards put in by receivables YTD (providing $70.6m cash inflow), which currently sits well below typical year-end values on the balance sheet.
Puma Energy told investors they expect a working capital inflow in Q4, as the account begins to “normalise” after a challenging year. Management relayed their commitment to good payment discipline to suppliers (causing a $63m outflow in Q3), as well as a $17m inventory build-up due to the timing of cargo deliveries.
-30 day ∆ CCC; -10 day ∆ inventory days (+2.5 ex Codere); +19 day ∆ receivables days; +38.9 day ∆ payables days)
Gaming also made for interesting reading, with some large swings, particularly in payables days. It’s worth noting inventory days are largely irrelevant for the sector, with payables and receivables days being the main focus.
For Codere, the headline stat isn’t particularly meaningful, with the 27-day payables days increase only equating to a 1% rise due to tiny COGS relative to payables. However, liquidity remains weak, even after an A&E completed in October last year. Moody’s forecasts free cash flow remaining in the range of -€25m to -€50m in 2021 and 2020, primarily due to €70-80m of deferred payables accumulated since the beginning of lockdown, with accounts and taxes payable amounting to ~€255m at Q3 2020. With this in mind, Moody’s estimates the company could breach its minimum liquidity covenant in 2022.
Similar to Neptune, Intralot - out with a restructuring proposal last month (14 January) - saw sales nearly half for Q3 (-45%) as receivables rose 14% at the same time. We’ll be keeping an eye on impairment on investments and doubtful accounts/receivables, which recorded a combined uptick of ~€66m in the EU YTD.
Finally, we take a quick look at a few other areas that caught our attention.
Of the two companies in the Hotel & Resort industry we looked at, both saw a significant increase in payables days drive down their cash conversion cycles. Management of one of these explained to investors that trade payables largely unwound during Q3, but liquidity was boosted via deferrals to landlords and a key shareholder, with the latter expected to reverse over the next 6 months.
Samsonite experienced baggage in its inventory days, with capital tied up in stock for nearly 156 days longer than the previous year. Other noticeable mentions going to Bombardier (+210) and Heidelberg (+68), with both attributing the slowdown to lower order volumes.
Matalan’s CCC dropped 11.6 days, but with inventory and receivables days flat this was driven by higher payables days. Trade payables in August were at £210.9m, or 75% of total current assets. Payables were up 11% on last year, with COGS down 8%. Q2 2021 (end August 2020) also benefited from a £66.5 cash inflow from inventory reduction, which is now ~70% of historical levels. After the publication of this report, Matalan’s Q321 (end-November) numbers were released, with inventories recovering resulting in a £43m cash outflow, offset by a further £71m increase in payables for the quarter.
In a period where it’s difficult striking the right balance between liquidity management and maintaining relationships with suppliers and customers, working capital will be a key theme throughout 2021. Add to that the difficulty of managing inventory during a time where Europe jumps in and out of lockdowns, with demand forecasts often relying on a finger in the air, this year will likely bring similar headaches for CFOs as they experienced in 2020. We will be keeping a close eye on movements in the current accounts as we move into FY earnings season, to see how these developments work out.
*Redacted company names where login credentials are required to view financials