Agriculture

DSO 0.8 ⇓

DIO 2.8 ⇑

DPO 0.3 ⇑

DWC 2.5 ⇑

The longest average working capital cycle of all sectors in 2019 driven by higher inventory loads.

Our sample of Agriculture companies comprises a mix of viticulture, aquaculture, livestock and grains farming and processing, and agricultural chemicals businesses. Despite some difficult trading conditions tied to weather related events, there was an uplift in activity in 2019 with 70% of the sampled companies reporting higher revenue. However, only half of the sample was able to achieve EBITDA growth as rising feed and transport costs and inventory write-downs impacted margins.

From a working capital perspective, the average DWC of the sampled companies increased by 2.5 days to 83.6 days in 2019, primarily driven by a 2.8 day increase in DIO (inventory). The sector reported the highest DWC of all sampled sectors in 2019.

As inventory is the main driver of working capital performance for Agriculture companies, it presents as the area with the greatest opportunity for companies to release cash. However, it also brings challenges as the external factors that primary producers and other operators face including production yields, seasonality and environmental issues, can be difficult to manage.

Of the sample, 60% reported an increase in DIO and for half of these companies, the increase was two weeks or more. All companies that reported a higher DIO also reported an increase in DWC. However, two thirds of these companies lengthened their supplier payment cycles (higher DPO) to help manage the increased cash held in inventory. There were mixed results in the management of debtor collections, with 60% of sampled companies reducing DSO.

Huon Aquaculture Group, Treasury Wine Estates and Tassal Group achieved the largest DWC improvements in 2019. All three were able to do so by bucking the sector trend and reducing DIO. For Treasury Wine Estates, the 16.3 day decrease in DWC was driven by lower DIO, contributing to a notional cash release of $128.7 million from working capital.