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Food and beverage production companies have reversed a two-year trend of net working capital reductions, a report by McGrathNicol Advisory says.

Its 2019 Working Capital Report said the food and beverage sector is recognised for needing higher levels of working capital investment than others, and that a series of factors exacerbated its working capital “strain”. The sector saw an an increase in cash tied up in working capital up 6.4 days from 2018 to 64.2 days. 

The report is based on a sample of 140 ASX listed companies across nine sectors. It found that while there was an overall average reduction in days working capital (DWC), results were mixed across sectors and within each sector.

For food and beverage, the report said: “Food and beverage production companies are also typically required to manage a range of logistical functions including manufacturing, packaging and distribution. A common theme for operators in the sector in 2019 has been a focus on supply chain management through direct sourcing of inputs, and entering into longer-term supply and partnership arrangements to secure supply and reduce price volatility.”

McGrathNicol Advisory partner Jason Ireland said food and beverage was one of four sectors – along with agriculture, healthcare services and retail – that experienced a deterioration in net working capital metrics.

The report found an average increase in revenue of 11 per cent during 2019 for food and beverage production companies. All except one company achieved top-line growth, which was largely driven by higher offshore sales (particularly into the Asian market) for dairy and other products, it said.

The sector’s higher DWC in 2019 was primarily driven by a 10.1 day increase in average reducing inventory holdings (DIO), with 69 per cent of companies holding inventory for longer. Also, close to two thirds of the sample paid their suppliers more quickly in 2019, resulting in average DPO (paying suppliers more slowly) decreasing by 2.5 days.

The report found that while there was an average increase in DWC across the food and beverage sample, “many companies showed improvement in 2019 (some considerable) including Keytone Dairy, Bega Cheese and Coca-Cola Amatil. Coca-Cola Amatil reported a 10.2 day reduction in DWC, resulting in a notional cash release of over $130 million from working capital,” it said.

Ireland said improving working capital presents an opportunity for material competitive advantage over much of the market.

“The most significant improvements in 2019 were achieved by management teams who implemented focused working capital programs. The 50 per cent of companies that improved cash flow through working capital management gained an advantage over the 50 per cent that didn’t,” he said.

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