Building Products

Shorter supplier payment cycles drove higher average DWC, although companies actively reduced inventory during H2 in response to COVID-19.

The Building Products sector experienced lower activity levels in 2020 due to a fall in building approvals for new apartments, townhouses and semi-detached homes. The economic contraction in H2 saw new building approvals fall to levels in June 2020 that were close to 23% lower than February 2020. Of the companies in our sample, 90% reported tighter margins and 80% reported lower EBITDA in 2020.

In terms of working capital performance, the average DWC of our sampled companies increased by 1.9 days to 74.3 days in 2020, absorbing $189 million in cash. This was driven by shorter supplier payment cycles (DPO down 7.4 days). Decreasing DPO is not surprising for this sector as participants often compete to secure sufficient raw materials (even more so during COVID-impacted H2), and are willing to accept shorter terms from their suppliers.

To counter this, average customer collection and inventory management cycles were shortened in 2020 (DSO down 1.3 days and DIO down 3.4 days), with some significant variances in performance noted at the individual company level. Building Products companies hold the highest working capital of all sectors we reviewed and effective inventory management is the key differentiator in the sector. This was further highlighted during COVID-19 as management teams looked to destock as a way of managing cash flow. After increasing slightly in H1, average DIO fell by 7 days during H2, with 50% of sampled companies reducing DIO by 10 days or more.

Our international analysis shows that, like Australian businesses, international Building Products companies carry a high working capital load. Interestingly, inventory levels of c.3 months were relatively consistent across all regions covered, however supplier payment times were the shortest in Australia.

The outlook for the sector is mixed with less large scale commercial and residential development activity expected to be offset in part by an increase in discretionary expenditure on DIY and home improvements. Government stimulus initiatives will also help the sector. Notably, there was an increase in the value of renovation approvals in June 2020, up 11.4% from the previous month.

Net working capital performance

*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).