March 5th, 2010
Distributors' profit outlook for 2010/2011
Distributors' profit outlook for 2010/2011: 05.03.2010. A DistriConsult analysis
After a very challenging 2009 which marked the transition between the bubble years and a new business environment, distributors are looking back over their last two years performance and simultaneously reflect on their future results sustainability.
2008 was unpredictable as it started with strong demand and increasing prices until the bubble burst during the summer. Most distributors showed record profits during the first eight months and then as end users demand collapsed, major efforts were made to reduce stocks and working capital to adapt to an environment of lower prices and demand. Many distributors were able to improve their cash flow positions since they could reduce their inventory levels, their storage and shipping costs and the cash they needed to pay their suppliers. In some instances, they were even able to reduce payment terms like in France due to a new legislation. However, several importers had to dispose at a loss of their paid in advance overseas purchases which were often delivered to them after chemical prices had fallen.
Several distributors, particularly those who have private equity owners, were enticed to make greater use of credit factoring by selling their account receivables to a financial institution. This innovative step allowed them to increase their cash position with a one time cash benefit which was often used to reduce outstanding debt levels. Factoring has a cost in the form of revenue discounts. In 2009, the cost of factoring increased due to the reduction of customer credit ceilings and higher credit insurance premiums.
The significant decrease in needed working capital, the increasing use of factoring and the reduction in resources such as manpower and non chemical purchases played a major role in 2009 to maintain distributors' EBITDA levels. While distributors are more efficient and more attentive to working capital requirements and effective cost management, they will not benefit anymore from the windfall cash flow benefits they received in 2009.
The year 2010 on the mature European and North American markets is marked by a sluggish demand for chemicals which reflects the anemic purchase levels of converters and transformers in the automotive, building and white good sectors, as well as the overall reduction of consumers' disposable income. In the course of the year 2010 and in 2011, working capital requirements could increase as a result of a better economic environment, as well as increasing chemical prices and better demand. Some distributors which drastically reduced their working capital levels might have difficulty to find again the cash to finance the increasing working capital requirements.
Countries with strong export capabilities are less affected by these negative aspects but they still feel the impact of plant closures and the off-shoring of industrial activities to Asia and Central Europe as well as the impact of the Club Med Countries which are drastically reducing their consumer demand and investments. In the current sluggish environment, it will be more difficult than in 2009 to benefit from windfall profits. This is likely to impact negatively the future performance of European distributors who may not be able to show again better or similar results to what they remarkably achieved during the last two years.