Companies actively reduced inventory and customer collection cycles with the benefits passed onto suppliers through shorter payment cycles, resulting in a small net decrease in DWC.
According to the Producer Price Index (PPI) for the Construction sector, input prices to house construction increased by 7.4% in FY23. This was driven by energy-intensive materials, including plaster, concrete, and plumbing products. Interestingly, the rate of increase for these input costs eased each quarter during FY23 as supply chains improved and the demand for new construction fell. For our sample of Building Products companies, 75% recorded an increase in revenue but only two of those operators were able to improve margins by passing the increased costs on to customers. Across the sector, the average gross margin decreased by 1%.
From a working capital perspective, there was an unwinding of the large increase in inventory seen in FY22. On average, DIO decreased by 13.1 days in FY23 (to 97.1 days). Customers paid 3 days more quickly (lower DSO) and suppliers were paid 13.6 days more quickly (lower DPO), which resulted in a small net decrease in DWC of 1.3 days (to 80.8 days).
The decrease in average DSO in FY23 (to 50.7 days) was driven by three quarters of the sampled companies improving collections. This was an important action to help maintain cash flow in the face of falling demand. Whilst DIO decreased in FY23, inventory management remains crucial for Building Products companies, with the average DIO of 97.1 days for FY23 representing over three months of inventory holdings. Interestingly, all but one of our sampled companies lowered DPO in FY23 and average DPO was the lowest it has been in the 11 years the McGrathNicol Advisory Working Capital Report has been prepared. Whilst this is partly explained by the stabilising material costs and lower levels of activity in the second half of FY23, it also shows the increased attention applied by management teams to ensure suppliers are paid on reasonable terms, to reduce and manage counterparty risk.
A decrease in DPO was seen across all international markets sampled and was a key driver in Asia and Europe experiencing an increase in average DWC in FY23. Looking ahead for the sector, a further easing in demand is expected to intensify the attention on working capital and cash flow management, with a focus on the continued reduction of inventory holdings to longer-term averages.
Net working capital performance
Best & Worst