6. The 3G Model
6.3. Accounts Payable Management
6.3.2. Accounts Payable Management - Industry Benchmarking
The industry leader in terms of the length of time taken to pay its suppliers at 242 days is AB InBev according to the DPO graph below. Since the 2008 merger that form the current AB InBev the company steadily increased its DPO showing therefore that it has been action taken by 3G with a specific purpose:
paying suppliers later will free up the cash needed for strategic expenses that increase either the top or bottom line such as such as investment in CAPEX, expenditures on marketing and sales, etc Fifer (1995).
-1,101 -1,130 -1,338 -1,202 -1,310 -1,651
-4,168 -3,996
1,238 1,249 1,452 1,329 1,333 1,184
2,618 2,684
1,067 795
1,265
994 1,074 1,234
871 769
1,204
914 1,379
1,120 1,097 768
-679 -543
2009 2010 2011 2012 2013 2014 2015 2016
Kraft Heinz: Net Working Capital
Accounts Receivable (A/R)
Inventories
Accounts Payables (A/P)
Net Working Capital
Exhibit 24: Kraft Heinz Net Working Capital. Source: Bloomberg, Kraft Heinz 10-K reports
41 One adverse effect of delaying payments to the suppliers it’s the deteriorating relationship with them. The question that arises after observing AB InBev pays its suppliers so late is why the suppliers want to still work with AB InBev. Some of them have to continue to work with AB InBev. Due to the size of their business, it is hard for suppliers to find another customer as a replacement for AB InBev. Other vendors choose to cut business ties with AB while others protest against their requirements. The cases of an advertising agency and a small manufacturing company are real examples of this category49. Both of them received papers to accept a payment period longer than 120 days. By accepting it, AB will not incur any future penalties for paying them back so late.
The practice of delaying the payments to suppliers often appears in the food and beverage industry50 as it is also confirmed by the above graph that shows that all of the big brewing companies have slowly but
steadily increased the period for paying their suppliers. SAB Miller has also followed the trend of increasing its DPO but at a much lower rate. There remain improvements to be done which will be exploited by 3G.
However, in order to make a better forecast on the adjustments that will happen to SAB Miller regarding A/P, we have to look at the overall picture. We will consider how fast the industry is converting resources into cash and benchmark AB and SAB Miller. Since companies have different business terms with suppliers and customers, the way they convert cash differs from one another.
49 (Strom, 2015)
50 (Strom, 2015) 0
100 200 300 400
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Industry Days Payable Outstanding
AB InBev SAB Miller Carlsberg Molson Coors Industry average
Exhibit 25: Industry Days Payable Outstanding. Source: Bloomberg
42 The CCC industry average has been decreasing in the last ten years by approximately 20%, from 70 days in 2006 to 57 days in 2015. However, the big players presented above have declined their CCC even more.
This shows that big breweries have an advantage over small ones when it comes to negotiating terms with partners both up and down the supply chain. AB InBev had 12 days in 2006 while in 2015 it has -151 days.
At the current level, AB is paid for its products approximately half a year before it has to pay for its inventory and suppliers. Essentially is an interest-free way to finance operations by borrowing from their suppliers.
The same statement is valid also for SAB, although they had not been that efficient at optimising their working capital resources. SAB had a CCC of -2 days in 2006, which means the time it takes for cash inflows to happen is just slightly lower than the time of cash outflows. In 2015 SAB had a CCC of -57 days,
approximately two months of upside between the time inflows and outflows occur. The next step is to investigate how the two companies managed to improve their CCC by looking at the CCC components.
-300 -200 -100 0 100
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Industry Cash Conversion Cycle
AB InBev SAB Miller Carlsberg Molson Coors Industry average
Exhibit 26: Industry Cash Conversion Cycle. Source: Bloomberg and Annual Reports
43 The DIO across both companies had a minor improvement of 2-3 days in a period of 10 years. CAGR. AB was able to manage its inventory while experiencing a tremendous growth by quickly integrating the new acquisitions and keeping their inventories in line with the growth. SAB Miller, on the other hand,
experienced a slow growth period and kept the inventory at a stable level without managing to improve it.
A comparison of DSO for both companies illustrates some interesting results. AB InBev made significant improvements in DSO compared to SAB during the 10 -year period. In 2006 DSO showed 49 days while in
-102 -119 -127 -115
-139
-158
-180 -185 -202
-242
65 66 82 55 54 53 55 57 58 62
49 45 57
26 26 25 25 24 25 28
12 -9 13
-33 -59
-79 -100 -104 -119
-151
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
AB InBev: Cash Conversion Cycle
Days Sales Oustanding (DSO) Days Inventory Outstanding (DIO) Days Payable Outstanding (DPO) Cash Conversion Cycle (CCC)
Exhibit 27: AB InBev Cash Conversion Cycle. Source: Bloomberg, AB InBev Annual Reports
-60 -55 -62 -74 -86 -86 -93 -99
-115 -128
38 48 50 56 51 45 39 41 37 40
20 27 30 30 30 29 31 32 29 32
-2
20 18 12 -5
-12 -23 -26
-49 -57
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
SAB Miller: Cash Conversion Cycle
Days Sales Oustanding (DSO) Days Inventory Outstanding (DIO) Days Payable Outstanding (DPO) Cash Conversion Cycle (CCC)
Exhibit 28: SAB Miller Cash Conversion Cycle. Source: Bloomberg, SAB Miller Annual Reports
44 2015 the DSO period decreased to almost half at 28 days. SAB Miller in 2006 had a DSO of 20 days and in the 10- year period, it increased the DSO by 12 days reaching 32 days in 2015. This shows poor
management of the Account Receivables, even more so in a period with very little growth.
The DPO the last component of the CC and the focus point of this analysis. First, both companies made a significant improvement to their A/P, as the DPO in both cases has more than doubled in a period of 10 years. This indicates that improvements in A/P are the main explanation for the overall improvement in working capital. However, when comparing the two entities, AB was more efficient than SAB in managing it.
Looking at the top line growth rates for both companies, there are two very different stories. AB InBev revenue grew at a CAGR of 10% mostly through inorganic growth while SAB Miller revenue grew at 0.66%
CAGR. It means AB assimilated the new suppliers coming from the acquired businesses and contracted them with harsh business terms in order to improve the DPO.
Looking at the AB InBev’s DPO change year-over-year is averaging 16 days during the period 2006-2015.
For our adjusted forecast we will assume the same change year-over-year happening at SAB post-merger in terms of DPO.
Due to the increase of in DPO assumed, there will be several items impacted by it. First on the Balance Sheet the A/P will increase which in turn will impact the Net Working Capital. Secondly, a change in Net Working Capital will affect Cash Flow from Operations on the Cash Flow Statement.
SAB Miller 2017 Est 2018 Est 2019 Est 2020 Est
Days Payable Outstanding 128 128 128 128
Accounts Payable 4,603 4,637 4,672 4,707
Adjusted Days Payable Outstanding
(+16 days increase YoY) 144 160 176 192
Adjusted Accounts Payables 5,011 5,460 5,915 6,376
Exhibit 29: SAB Miller Adjusted Accounts Payable. Source: Author's elaboration
Adjusted Days Payable
Outstanding
Adjusted Accounts Payable
Adjusted Net Working
Capital
Adjusted Cash Flow from
Operations
45 The calculation behind the table above assumes Cost of Goods Sold remains as forecasted in the pro forma statements and the increase in Accounts Payable is driven by an increase of 16 days in DPO.
SAB Miller 2017 Est 2018 Est 2019 Est 2020 Est
(+) Inventories 1,035 1,043 1,051 1,059
(+) Accounts Receivable 1,270 1,279 1,289 1,299
(-) Accounts Payables 4,603 4,637 4,672 4,707
(=) Net Working Capital -2,298 -2,315 -2,332 -2,349
(+) Inventories 1,035 1,043 1,051 1,059
(+) Accounts Receivable 1,270 1,279 1,289 1,299
(-) Adjusted Accounts Payables 5,011 5,460 5,915 6,376 (=) Adjusted Net Working Capital -2,706 -3,137 -3,575 -4,019 Exhibit 30: SAB Miller Adjusted Net Working Capital. Source: Author's elaboration
After increasing the A/P, the Net Working Capital becomes even more negative which represents an improvement. Traditionally, a negative NWC is a disaster as it means companies cannot cover the bills and their short-term liquidity is in danger. When negative net working capital is done on purpose through efficient management, then it becomes a source of funding. Usually, long-term liabilities fund long-term assets and short-term liabilities fund short-term assets. Negative net working capital means short-term liabilities exceed short-term assets and the difference between them funds long-term or fixed assets such as investments in CAPEX.
SAB Miller 2017 Est 2018 Est 2019 Est 2020 Est Cash Flow from Operating Activities 4,744 5,090 5,956 7,037 Adjusted Cash Flow from Operating Activities 5,421 5,318 6,009 6,827
Change 408 583 802 1,079
Accumulative change 408 991 1,793 2,872
Exhibit 31: SAB Miller Cash Flow from Operating Activities. Source: Author's elaboration
Due to the positive adjustment in A/P the Cash Flow from Operating Activities is also impacted positively.
Over the period of 4 years forecasted in the financial model, the overall cash position improves by $2.8B.
The company can use the extra funds from Operating Activities towards Financing Activities as they can pay back more of the debt contracted for financing the deal. As a conclusion, by increasing the period they take to pay their Accounts Payable, the company can release cash flow stream of $2.8B over a period of 4 years.
46 The company can use the extra cash towards paying back the huge amount of debt sitting on their balance sheet. By de-leveraging the company and bring it to a more suitable financial structure,