INDUSTRY CHANGE

DSO 5.5 ⇑

DIO 5.6 ⇑

DPO 1.2 ⇑

DWC 7.4 ⇑

A lengthening of the net working capital cycle by over a week in 2020, driven by increases in DSO and DIO.

Our sample of Agriculture companies delivered on average a 6.5% increase in revenue during 2020 as better weather conditions and higher primary production was supported by strong demand for essential food products. Within this overall positive result, sub-sectors more reliant on food services (such as pubs and restaurants) and air freight felt the impact of COVID-19 in H2. This was evidenced by 60% of our sampled companies experiencing a decline in both revenue and earnings during H2 (relative to H1). Seafood exporters and viticulture businesses were amongst those participants hardest hit.

From a working capital perspective, the average DWC of the sampled companies increased by 7.4 days (to 72.2 days) in 2020, absorbing $173 million in cash, primarily driven by a 5.5 day increase in DSO and a 5.6 day increase in DIO.

Inventory is by far the key element in working capital performance in the sector. In fact, the Agriculture sector reported the highest DIO of all sampled sectors in 2020 (139.4 days) and 83% of sampled companies that increased DIO also reported higher DWC. Half of the sample also held more inventory during H2, highlighting the challenges faced by management teams handling a combination of uncertain demand, difficulties transporting perishable goods due to closed borders, and larger customers pushing the burden of holding inventory up the supply chain during the COVID-19 period.

To help manage the increased cash held in inventory, more than two thirds of sampled companies that held more inventory in 2020 also lengthened their supplier payment cycles (higher DPO). Across the sample, average DPO increased by 1.2 days to 87.9 days.

The Agriculture sector produced the largest DWC spread of all sectors covered in 2020, with the difference between the “best” and “worst” performers in excess of 250 days (or eight months). There was also a broad spread in the metrics of international peers, where the average net working capital cycle for Australian Agriculture companies was close to three weeks longer than in the US but close to three weeks shorter than in Asia.

In terms of the sector outlook, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) has forecast further growth in production due to higher crop volumes and above average rainfall between February and April 2020. Reported lower seasonal labour availability due to COVID-19 travel restrictions will however present challenges in some sub-sectors.

“Working capital increased…over last year largely due to an increase in inventory holding levels, which have been temporarily raised to ensure continuity of raw material supply in the current environment of uncertainty.”

Alan Boyd
CFO & Company Secretary
Ridley Corporation Limited
FY20 Annual Report

COVID-19 IMPACT

COVID-19 Impact

Net working capital performance

2019
2020
Cash Impact*

*A positive cash impact is a “release” of cash from working capital (improvement). A negative cash impact is additional cash invested or “locked up” in working capital (deterioration).

Agriculture - Financial Year
Days 2019 2020 Change
DSO 34.6 40.1 5.5
DIO 133.8 139.4 5.6
DPO 86.7 87.9 1.2
DWC 64.8 72.2 7.4
Agriculture - Half Year
Days H1 2020 H2 2020 Change
DSO 45.7 44.9 (0.8)
DIO 132.4 137.1 4.7
DPO 87.9 95.8 7.9
DWC 53.5 58.6 5.1
Best & Worst
Days Best Worst Spread
DSO 14.0 70.6 56.6
DIO 37.4 299.1 261.7
DPO 165.2 30.7 (134.5)
DWC (32.2) 230.1 262.3
International Benchmarking
Days Asia EU US
DSO 75.6 45.3 34.0
DIO 67.8 84.3 70.0
DPO 52.0 64.2 48.0
DWC 90.8 58.8 52.0