Fast Moving Consumer Goods Spotlight on Evolution of the Trade Cycle

November 2019

Financing Solutions & Advisory | FS&A

Working Capital is high on the agenda for corporate CFOs ● Prevailing trade uncertainties, including an escalation in geo-political tensions, Brexit and an evolving regulatory

environment are challenging corporates to deliver ambitious growth plans and meet financial targets

● Capital allocation frameworks are harder to define as CFOs try to balance up-scaling digital investment to deliver sustainable growth, investor demand for higher shareholder returns and rating agency focus on financial prudence

● Impact on cash conversion has been softened through managing capex. As corporates transition from being digital ready to digitally-enabled, many find themselves under-invested for growth

● As funding requirements ramp up and despite the prevailing low cost of debt, Working Capital efficiencies provide CFOs with a cheap source of funding. The question is whether there are further efficiencies that can be extracted from already stretched trade cycles?

● Our analysis reveals that since 2013, only 8 out of our sample of 22 industries have shown improving cash cycles and, for a majority, the improvement has been driven by better management of asset days

● The FMCG sector also achieved substantial improvements but this was almost exclusively on the back of leveraging payables. No other sector was able to stretch payable days to this extent

● Best performers include Pharma & Life Sciences (-13.5 days) and Construction, Engineering & Building Products (-11.6 days) but significant opportunity exists to achieve further efficiencies as they belong to the ten most capital intensive sectors. Aerospace & Defence (+15.6 days) and Telecoms (+7.7 days) have struggled the most

Payables Days & Asset Days – 2013 vs. 2018

Impr

ovin

g R

ecei

vabl

es &

Inve

ntor

y D

ays

Improving Payables Days

FMCG

Media & Entertainment Autos

Energy

Capital Goods

Hospitality & Leisure

Technology – Semiconductors

Transportation

Telecom

Healthcare – Services

Business Services Retail – Other

Technology – Hardware Aerospace & Defence

Construction, Engineering &

Building Products Technology – Software

Technology – Services

Size of bubbles represent number of corporates Improving Cash Cycle Worsening Cash Cycle

Retail – Staples Materials

Healthcare – Equipments

Pharma & Life Sciences

Deteriorating Payables Days

Deteriorating R

eceivables & Inventory Days

Utilities

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Financing Solutions & Advisory | FS&A

Protecting payables and improving asset days will be key for FMCG corporates

Payables Days & Asset Days – 2013 vs. 2018 Change in Cash Cycle – 2013 vs. 2018

Improving Payables Days

Deteriorating R

eceivables &Inventory D

ays

Det

erio

ratin

g R

ecei

vabl

es &

Inve

ntor

y D

ays

Household & Personal Care

Alcoholic Beverages

Tobacco

Packaged Food & Drinks

Size of bubbles represent number of corporates

(10) (5) 5 10 15

(11) Alcoholic Beverages

(9) Packaged Food & Drinks

(7) Household & Personal Care

(7)Tobacco

Deteriorating Payables Days Days

Improving Cash Cycle Worsening Cash Cycle

● DSO have remained broadly stable over the last five years for FMCG corporates. Many maintain significant exposure to EMs where payment terms are considerably longer. Whilst growth in these regions remains on strategy, solutions like distribution financing or debt factoring may help mitigate upward pressure on Working Capital

● Marginal deterioration of DIO has been driven by structural limitations around inventory management for spirits or tobacco manufacturers. For the broader sector, adjusting order frequency with smaller batch runs or relocating production closer to more active markets can unlock value. Big Data can also help corporates by improving agility, particularly as enabling technologies become more widely available

● DPO improvement has been central to Working Capital optimisation as FMCG corporates exert buying power over suppliers. Aside from extending payment terms, increasing use of supply chain finance has been cash flow accretive

● However, over reliance on stretching payables may prove unsustainable as slowing market activity can push suppliers into a liquidity crunch placing pressure on the supply chain. This aspect will likely be exacerbated by tightening regulation, heightening government focus and an evolution of the social agenda for most FMCG corporates

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Financing Solutions & Advisory | FS&A

Margin protection may not be enough to sustain cash generation ● Steady margin expansion since 2013 across all sub-sectors with latest results indicating the peer universe is

at the top end of its five year EBITDA margin range. Key pillars driving improved profitability include:

i. Top line momentum: Whilst emerging market based volume growth reflects underlying demographic trends of increased urbanisation and expanding middle-class, corporates have also been pro-active in leveraging aggressive pricing strategies in geographies where premiumisation and international branding find appeal

ii. Cost efficiencies: embedding a culture of cost focus is creating leaner operating models through zero based budgeting, unlocking synergies through restructuring and optimising promotional spend thorough digital media

● Cash conversion has remained stable since 2013 due to margin progression and Working Capital efficiencies

● Capex has also remained stable suggesting corporates have slashed investment to support cash generation as sluggish organic growth from developed markets, rising costs and activist investor pressure for higher shareholder returns forces management to re-assess capital allocation priorities

● S&P forecasts capex to grow 3.2% in 2019, partly due to upward pressure from the digital transition

EBITDA Margin progression

36% 35% 36% 36% 38% 38%Tobacco

27% 27% 25% 25% 25% 25%Alcoholic Beverages

22%21% 21% Household & 20% 20%19% Personal Care

Packaged Food 17% 18% 18% 18%

16% 16%& Drinks

2013 2014 2015 2016 2017 2018

Cash Flow from Operations / EBITDA CapEx / EBITDA

72% 74% 77% 76% 71% 75% 25% 26% 25% 24% 23% 26%

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

Sources: Company Reports & Presentations, Standard Chartered Bank analysis, Capital IQ Please see ‘Dataset & Methodology’ for further details on workings, assumptions and sources

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Upward pressure on indebtedness underpins need to continue capital release

Net Acquisition Total Shareholder Returns

USDbn USDbn +7% CAGR

128.5 122.2 115.9 114.2 110.0 112.4 94.1 85.8

59.7

18.2 26.2 22.3

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

● No consistent M&A trend emerges due to the lumpy nature of acquisitions, however, disposal of non-core assets highlights the focus on rationalising portfolios (especially in Household & Personal Care) whilst supporting credit profile

● One consistent deterrent for acquisition has been high asset prices. Most corporates have been comfortable with a ‘bolt-on’ based acquisition strategy lately, but the platform is set for larger transactions over the medium term

● Amongst other things, activist investors have lobbied for increasing shareholder returns in the absence of major acquisitions and a step change over the last two years may be here to stay

● Dividends have continued to grow steadily whilst buybacks have regained lost ground for most peers since 2016. Packaged Food & Drinks is a notable exception where buybacks have been in steady decline, with Nestle being an outlier having completed c.$10bn of stock repurchases over the same period

● Surplus capital may lead to higher share repurchases by CFOs who consider the balance sheet under-leveraged. However, capital structure requirements will vary across corporates asking critical questions of management

Net Debt / EBITDA Key Considerations for CFOs

? ? How can I extract further

working capital efficiencies?

2.1x2.0x 2.0x What are my medium term 1.7x 1.7x1.6x funding and liquidity needs?

? What is my optimal level of indebtedness?

2013 2014 2015 2016 2017 2018

● Consequently, indebtedness has steadily risen. Larger scale M&A, driven by the need to acquire insurgent brands or in pursuit of long-term growth plays enhancing digital or technological portfolios, may further exacerbate the situation

● Working Capital efficiencies can provide additional headroom to meet these discretionary obligations whilst ensuring there is a buffer to de-lever the balance sheet in times of stress

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Dataset & Methodology

Based on 886 companies across 22 sectors from the S&P Global 1200 index (c.70% of global market capitalisation). Excludes Financial Services, Real Estate and Insurance sectors, as well as a few corporates with limited financial data during the period of analysis. FMCG Sector includes 58 companies (see below)

● Trends were based on average of individual corporate’s ratio

● Where corporates have ‘net cash’ leverage positions, we have taken ‘zero’ for our average calculations

● Sources include:

i. Financial information: Bloomberg, Company Reports & Presentations, Capital IQ and Standard Chartered Bank analysis

ii. Research & Analysis: S&P Global Corporate Capex Survey 2019, Company Reports & Presentations

Formulae DSO (Days Sales Outstanding) = {[(Trade Receivables Beginning of Year + Trade Receivables End of Year) / 2] / sales} x 365

DIO (Days Inventories Outstanding) = {[(Inventories Beginning of Year + Inventories End of Year) / 2] / sales} x 365

DPO (Days Payables Outstanding) = {[(Trade Payables Beginning of Year + Trade Payables End of Year) / 2] / sales} x 365

CCC (Cash Conversion Cycle) = DSO + DIO – DPO

Working Capital = Trade Receivables + Inventories – Trade Payables

Cash Conversion Ratio = Cash Flow From Operations / EBITDA

Leverage = Net Debt / EBITDA

Total Shareholders Returns = Dividends + Share Buybacks

Total Liquidity = Cash & Cash Eq. + Undrawn Committed Facilities

FMCG Sector Constituents

Pack

aged

Foo

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Drin

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Church & Dwight Co., Inc. Associated British Foods plc Ajinomoto Co., Inc.

Colgate-Palmolive Company BRF S.A. Henkel AG & Co. KGaA

Kimberly-Clark CorporationCampbell Soup Company Reckitt Benckiser Group plc Chocoladefabriken Lindt & Sprüngli AG The Clorox Company Conagra Brands, Inc. The Procter & Gamble Company

Danone S.A. Unicharm CorporationGeneral Mills, Inc. Beiersdorf AktiengesellschaftHormel Foods Corporation L'Oréal S.A. Kellogg Company Shiseido Company, Limited Kerry Group plc The Estée Lauder Companies Inc. Kikkoman Corporation The Unilever Group McCormick & Company, Incorporated Altria Group, Inc. Mondelez International, Inc. British American Tobacco p.l.c. Mowi ASA Imperial Brands PLC Nestlé S.A. Japan Tobacco Inc. Nissin Foods Holdings Co., Ltd. KT&G Corporation

Philip Morris International Inc. Saputo Inc. Swedish Match AB (publ)Tate & Lyle plc

The Hershey Company The J. M. Smucker Company The Kraft Heinz Company Tyson Foods, Inc. Yakult Honsha Co.,Ltd. Fomento Económico Mexicano, S.A.B. de C.V. Monster Beverage Corporation Constellation Brands, Inc. PepsiCo, Inc. Diageo plc The Coca-Cola Company Pernod Ricard SA

Hou

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Pers

onal

Car

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ges

Toba

cco

Anheuser-Busch InBev SA/NV Asahi Group Holdings, Ltd. Carlsberg A/S Heineken Holding N.V. Kirin Holdings Company, Limited Molson Coors Brewing Company Brown-Forman Corporation

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Key Contacts

Financing Solutions & Advisory

Shoaib Yaqub Head of Financing Solutions & Advisory, Europe & Americas Tel: +44 207 885 6723 Email: Shoaib.Yaqub@sc.com

Raza Piracha Director Financing Solutions & Advisory Tel: +44 207 885 5761 Email: Raza.Piracha@sc.com

Chowdhury Khalid Farabee Associate Financing Solutions & Advisory Tel: +44 207 885 6322 Email: ChowdhuryKhalid. Farabee@sc.com

Global Banking – Europe

Robert Newell Managing Director Head of Consumer & Retail, Europe Tel: +44 207 885 2281 Email: Robert.Newell@sc.com

Matt Bullard Executive Director Corporate & Institutional Banking Tel: +44 207 885 7979 Email: Matt.Bullard@sc.com

Global Banking – Americas

James McCarthy Managing Director Head of Consumer, Healthcare & Retail, North America Tel: +1 212 667 0495 Email: James.McCarthy@sc.com

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