Manage capital and cash

We have not been generating sufficient free cash flow to ensure that we can sustainably invest in our growth plans. There are three options for how to change this situation – increasing our revenue stream, generating more earnings per unit of revenue and/or reducing capital requirements. Our first three strategic agenda items are aimed at increasing our revenue stream. Our performance improvement program is aimed at generating more earnings per unit of revenue. This strategic agenda item is aimed at controlling and/or reducing capital requirements.

First of all, we are managing underlying cash requirements created by pension costs, legacy payments and interest charges. To do this, we start from the perspective that we should employ conservative financial policies that safeguard a strong investment grade (BBB+/A-) credit rating profile throughout the business cycle. Within this framework, we manage cash in a manner which optimizes overall company value. Examples of how we do this are:

  • Handling legacy claims in a responsible manner while also optimizing company cash use and interest costs
  • Exploring options for how to spread pension fund top-up requirements over time while still ensuring that we deliver fully on our pension commitments
  • Building cash management structures that allow for optimal company-wide cash use
  • Endeavoring to reduce the risk profile of our liability position, for example by applying measures to improve cash impact predictability in legacy claims handling and the management of the AkzoNobel debt book through early refinancing of debt

Secondly, we are prioritizing and controlling our capital expenditures. In doing this, we examine all aspects of our investments to ensure we look at the impact of investment on our Value and Values ambitions, including growth potential, productivity impact and safety and eco-efficiency implications.

Thirdly, we are managing our operating working capital. This is particularly relevant when raw material cost fluctuations are significant and credit availability for customers can be an issue. Therefore, operating working capital management is a key component of our Integrated Supply Chain and Finance/IM functional excellence work and is helping us to make progress towards our 12 percent operating working capital as a percent of revenue ambition. Specifically:

We will continue to make progress with regard to receivables and payables hrough:

  • Harmonization of payment terms and payment runs
  • Improved banking and collection systems
  • Improved credit control procedures and analyses

We are also taking action to regain momentum on inventories going forward hrough:

  • Review of stock policies and disciplined setting of stock level targets
  • Reduction of process complexity and product line rationalization
  • Harmonizing processes and materials
  • More advanced global planning and analysis

It is worth noting that disciplined inventory management can also have important sustainability implications. For example, we have signed a contract with a process and distribution company which involves them purchasing, re-working and selling on our obsolete coatings and paints materials. These materials would otherwise be disposed of as waste. By selling them on instead, we reduce inventories, generate income and reduce waste (up to 1 percent of our total waste in 2012).

Going forward, we will further improve from a cash, costs and environmental footprint perspective by not manufacturing materials that will become obsolete and this is a clear objective in our Integrated Supply Chain work as part of functional and operational excellence efforts.

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