GCC Working Capital Outlook

[Music] oh that was fast good afternoon everyone name is Dan geores director in the uh restructuring Services PWC Middle East and I lead the working capital and liquidity management uh service offering uh across the region as it was well introduced we'll talk about working capital in the capital of capitals as we've been uh we've been told today I'm going to try and keep it brief and suin as we've only got 10 minutes uh to cover quite a bit of ground so in terms of the study we publish the study every year it's an annual study we analyze the public and private businesses across the Middle East where public information is available across the the private businesses this year's study we have 450 companies with Revenue above $10 million including in the study some of the key findings that we've seen in the study as mentioned earlier this is $50 billion of Trapped liquidity on the balance sheets of corporates across the Middle East that inefficiency is costing Circa 5 million 5 billion dollar in terms of an estimated weight average cost of capital of 10 10% we've also seen last year working Capital Performance has deteriorated by half a day on on an overall basis that's the equivalent of $922 million of added working capital onto the balance sheets of the corporates across the Middle East the other key Trend that we've noticed is for a second year in a row the profitability has declined and in 2023 alone that dropped by 130 basis points we've seen that and that that is actually imp in the cash flows of businesses right and which ultimately leads to the financial distress and the other the other situations that we've seen across the region 130 basis points is the equivalent of $8.7 billion of profitability that was missed out in 2023 that trend has predominantly been one led by the cost of good sold increase that's continued on the back of the covid pandemic and the global inflation the other bit oops sorry wrong button the other bit that I want to cover here is the debt right total debt this is going up consistently over the last 5 years so in 2023 total debt went up by 4% the underlying driver there is long-term debt so we've seen a mixture of actual new new loans onto the market but we've also seen quite a number of restructurings and refinancing of short-term liabilities on to longer term to align with the cash flow generations of uh of various businesses just to Deep dive a little bit into the various cycles of working capital as I've mentioned earlier the deterioration of half a day we went from 107.6 days in 2022 to 108.1 day in 2023 2022 and 2023 are actually the first two years where the Middle East working Capital Performance has dropped below the 110 kind of uh threshold if you'd like and we've been doing this study since 2017 so the last couple of years this is the first time when that happened what that means in terms of the various cycles of working capital if we look at the Day sales outstanding that measures on average how many days it takes to collect your cash from your customers that's improved slightly to 85.1 days in terms of the inventory management and the days inventory outstanding that's actually deteriorated slightly to 93.

2 days and finally in terms of the days payables outstanding that's dropped by a day to 65.5 so that shows a bit of a trend there as you'd notice from the covid times when everybody stopped paying their suppliers or delayed the payments there is a correction that's happening in terms of the payments to suppliers across the the majority of the region coming to the 50 billion and how that's spread across across the region I think it's important just to understand how the number is calculated how we arrive to that to that estimation so that's a company by company analysis of their individual performance against the media and performance in their respective sector or industry so in other way in other words if all the companies in our study would improve to the medion in that particular sector that would release $50 billion of of working capital into the into the GCC uh economies on the other side looking at the networking Capital day Trends across the region you'll notice quite varied Trends from 44 days in Bahrain all the way to 141 days in in KSA you've got to you got to look at it as also mix of Industries and various sectors but also the sample of companies right most of the companies in the study are in UAE and KSA and more than 50% of them are UA and KSA companies so some of the other geographies have a smaller pull off you know companies with publicly available information that are present there but if I just focus for a second on KSA got 141 days it's the largest working capital cycle across the region and it's been like that for the Last 5 Years right from 2019 until now every single year KSA has had a longest cycle what's driving that well they do have the longest inventory cycle in the region and they do have one of the largest cash collection Cycles in the region but on on the flip side from 2019 until now KSA has consistently improved his working Capital Performance so it is coming down but there's definitely more value that can be extracted from the companies uh in the Kingdom another another cut that we typically Al do in the study is just looking at a sector by by sector analysis and if we leave if you if you leave the sectors aside agnostic of any sector we had 54% of companies uh improve working Capital Performance year on year uh from 2022 to 2023 if you take that and you look over threeyear period which how many companies have actually improved working capital for three consecutive years that drops down to 9% only that's so from 54% only to 9% so there's a lot of companies that are focusing on a oneoff exercise job done that's it move on if I if I look at some of the sectors and I'll probably pick on the uh on the engineering and construction as most people in the room have been involved in that sector one way or another over the last couple of years we do continue to see financial distress right in the uh in the construction sector across the region and then the cash flow per performance hasn't been great over the last year there's 24.5 days deterioration only in one year in 2023 alone that's about 12 12% bring it up to about 222 days of the full working capital cycle in the construction sector which is putting more pressure onto uh onto the corporates just to wrap it up as I can see I have under 2 minutes 2 minutes left um a couple of points I've touched upon we see an increase interest in working capital a lot more corporates a lot more Executives do take the topic seriously they want to address it there's an increase also demand in the market however most of the times these are tactical improvements and what do I mean by tactical let's throw in some people let's go harder after the collections let's increase the number of calls let's liquidate some inventories or let's just delay the payments to the suppliers there's very few companies that go about in a more systematic manner to say do we need to change our operating model do we need to change the processes the systems to actually drive that sustainable change that will keep the liquidity going as I mentioned earlier you do a tactical change take your foood off your gas six months later the working Capital Performance will come back to what it used to be before because your systems and your your operating model are designed to operate at that at that level so what do we recommend in terms of kind of the next 12 months and where do we see see that there's a need for companies to focus a bit more of their efforts number one work in capital analytics there's a lot of data now there's a lot of information available it's not used it's not harnessed and then analyzed and presented in such a way that can enable decision making for individuals you always have to kind of scatter around and look at too many reports and it takes two three weeks to to actually get some information number two enhancing billing and collection processes making sure you can get invoices out which are accurate on time and then you can collect that money in a in a reasonable manner optimizing the credit risk management this where it comes to your credit policy you taking too much risk are you enforcing your credit policy properly and you don't end up writing off too much bad dat at the end of the year is there a focus on inventory the inventory replenishment and planning are they ordering how much they supposed to order and when they supposed to order and we don't end up with multiple cells in Du buy Mall every every other two weeks and then implementing working capital governance structure what I mean by the governance structure is that that brings everything together where you have your kpis you have your metrics you'd have the awareness that's within your your own company and then you have incentives that drive everything so that brings kind of the cash culture and uh brings it all together I'm actually bang on time but I would be happy to take any questions after the uh event so thank you all [Music]