Ann: Half Year Results Commentary , page-18

Oriol,

Sorry about the confusion, but I think we’re all talking at cross purposes here.
Yes, Working Capital did indeed reduce by $12.2m, as you quote (from $94.2m @ June 2012 to $82.4m @ Dec 2012)

But remember that Sales Revenue in the DH ($359m) was 5% higher than the JH of 2012 ($341m).

So really, the way to assess Working Capital ebbs and flows is really as a function of Sales.

For JH12, Working Cap-to-Sales was 14%. Now this is well above the upper limits of the company’s historical performance, so I’d argue that there was an over-investment in Working Capital on the night of 30 June 2012, and the “average” Working Cap-to-Sales ratio is probably closer to 13%.

And for DH12 Working Cap-to-Sales was 11.5%

So my derivation of the “normalised” Working Capital release was to simply take 2% of DH sales (13% less 11.5% is really only 1.5%, but I thought I’d used 2% to err on the side of conservativeness)

And 2% of $359m gives a result of around $7m

Hope that clarifies things, with due acknowledgment that this sort of exercise is never a precise science.



S2096914:

You got it...TPI and PMP



alnby,

Your comments, "In the last two results presentations both the CEO and CFO have expressed just how much importance they know many investors put on dividends. So I'm thinking that part of that lovely FCF won't be so free come the JH13 report", refer.

I think we have a definitional difference of opinion as to what constitutes FCF. Dividends put dropped into my bank account I consider, definitively, to be considered as FREE CASH FLOW (in fact, there is no cash flow that is free-er than dividends!)


On your question relating to what levels of debt I believe the board would countenance as "comfortable", let me preface my answer by saying that I think that this business, given it inherently high OCF-to-capex (it’s a people-business) could run with NIBD between 1.5x and 2x EBITDA.

We’re basically at that level now, even based on the DH12’s “trough” earnings, having come down from 4x in June 2011 (although a $39m raising in the interim helped)

However, given the Road-to-Damascus experience COF’s reconstituted board and management team would have experienced when they came on board, I suspect a far more cautious regime with respect to indebtedness will prevail for some years to come (I think this is the case, not just for COF’s board and management, but corporate boards and management in general).

I reckon NIBD at parity with EBITDA will become the new norm at which the COF board feels the company has the desired level of financial flexibility that lets directors sleep easy at night.

By my reckoning, assuming a modest – say 30% dividend payout ratio is reinstituted with the FY13 full-year result - we’ll be at that level sometime in the December half of 2014, i.e., in around 24 month’s time.

In terms of your question about the step-down in the re-pricing of the debt, yes it stands to reason that as the headroom below banking covenants grows, the banks will allow some ratchet-ing down of the cost of the debt, meaning that the interest expense falls at an accelerating rate, I haven’t made an exercise of modelling the effect. Reason being is that in a financial model a chain is only as strong as its weakest link, and given I make some pretty crude assumptions elsewhere in my modelling, to delve into such a degree of granularity on the composition and/or mechanics of one P&L item like finance charges is actually futile and doesn’t add to my forecasting accuracy. I am fully aware of the dynamic, though.

Finally, as for restructuring charges, remember that the $5.1m to which refer is not a P&L expense. It is the servicing of a restructuring provision that was raised in the FY12 year. In other words, they provided before the June 2012 balance date for the restructuring exercise that they knew was coming, but only made the cash payments in respect of those provisions in DH12.

As for the scope and/or possibility of more restructuring charges being possible, I’d say yes, it is indeed possible, but the way I tend to treat these sorts of transformational costs is as one-off items (i.e., I strip them out of the P&L in order to derive “underlying “ financial performance.

[Of course, one needs to be vigilant that these “one-off” charges are not, in fact perennial, in which case the accounts shouldn’t be adjusted for them, but in a case like COF’s, where the company is undergoing a massive tectonic shift in its business, and especially when that it being presided over by re-invigorated management whom one can judge to be judicious, competent and trustworthy then I tend to give them the benefit of the doubt]


Cam