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  • CFO Europe Magazine

Cashing In

Squeezing cash out of operations is more important than ever, yet for most companies that is easier said than done.

View the full results of the REL/CFO Europe 2008 Cash Masters Scorecard or only those results that appeared in print.

For most of the six years he has been CFO of Actelion, Andrew Oakley can’t recall ever having to field questions from analysts seeking information about how efficiently Europe’s largest biotech company generates cash. That has certainly changed in recent months. “Since Q3, a number of analysts seem to be looking more closely at the numbers, and especially the cash flow,” he says.

According to CFO Europe’s new cash scorecard, those analysts should be pleased with what they see. When it comes to cash conversion efficiency (CCE) — that is, the amount of cash flow that companies derive from operations as a percentage of sales — the SFr1.32 billion (€861m) Basel-based company is well ahead of many of its European peers, with a CCE of 30%, compared with the pharma sector’s average of 15% and an overall average of 12.7%.

“Pharmaceuticals have been a surprise,” says Gavin Swindell, managing director of Europe at REL, the research and consulting firm that compiled our scorecard after analysing the 2007 performance of 1,000 large European companies, excluding financial services, in 57 sectors. (See the end of this article for a link to the charts.) Being in a high-margin industry, he explains, means that focusing on freeing up cash might not — in theory — have the same urgency as in other sectors.

But Oakley notes that since the credit crunch began in 2007, freeing up cash from operations has been one of only a few ways companies such as Actelion can finance R&D. At nearly SFr300m, R&D at the company represents more than one-fifth of annual sales, which is higher than the sector average. But there are longer term reasons for pharma’s heightened focus on cash. Actelion’s leading drug, which generates 90% of current sales, comes off patent in 2015. “Cash on hand will be needed at every step of the way to ensure future revenue growth,” says Oakley. What’s more, he adds, “pharmaceuticals do occasionally find themselves [faced with] drug withdrawals or lawsuits.”

One Step Beyond

As for companies in other sectors, a greater focus on cash is needed, particularly in the lowest ranking sectors such as electrical equipment and computers. A slim majority (530 out of 1,000) improved their CCE in 2007 from the previous year. Meanwhile, our group of 1,000 posted a modest 0.3% decline in gross margins; flat selling, general and administrative (SG&A) expenses; and a 5.9% increase in capital spending as a percentage of sales. All this blunted the potential improvement in CCE, as did an 8.3% increase in debt.

Given that operating conditions have become even harsher since the research was undertaken, getting a grip on cash efficiency will require CFOs to focus even more on customers and suppliers, asserts Marjorie Lao, finance chief of Tandberg, a $630m (€500m) Norwegian-US provider of video-conferencing technology.

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