October 18, 2007

Top European Companies Lose Ground in Battle for Cash, According to New REL/CFO Europe "Cash Masters" Study

Despite Sales Growth, Cash Flow Not Keeping Pace as Companies Hold Less Cash; European Companies Could Increase Annual Cash Flow by €407 Billion

ATLANTA & LONDON, October 18, 2007 - Despite a booming economy and record sales figures, the top 1,000 public companies in Europe lost ground in the battle to generate and manage cash in 2006, according to the new "Cash Masters" study performed by cash flow management consultancy REL (NASDAQ: ANSR) and CFO Europe magazine.

The annual REL/CFO Europe study examines how effectively major corporations are turning sales into free cash flow and how much cushion they have in their operations, identifying the companies that excel in this area - "Cash Masters" - as well as those who lag behind. At first glance, Europe's top 1,000 companies appear to have posted gains in almost every key metric associated with cash in 2006. Bolstered by a sales increase of 10.6%, cash flow from operations rose by 4.2%, to €662 billion.

Upon closer examination, the picture is not as encouraging. The REL/CFO Europe study results shows that European companies did not take full advantage of the increase in sales, and let every key metric deteriorate in relative terms. Cash Conversion Efficiency (CCE), a critical measure of how effective companies are at turning sales into free cash flow, fell significantly, in part because just over half of the companies in the study were unable to improve their gross margins or get greater leverage by reducing sales and marketing costs.

In addition, while European companies appear flush with cash, the reality is that the ratio of cash on-hand as a percent of sales is at its lowest level in three years. As a percentage of sales, companies had 8% cash on-hand in 2006, a drop of 10% from the previous year. This follows a 5% increase in 2005. Much of the 2006 reduction in cash was utilized on capital expenditures (CAPEX), which increased by 12.7% to €388 billion. Also worth noting is the fact that equity increased by 7.3% to €2,342 billion in 2006, and debt increased by 5.7% to €1,830 billion.

According to the REL/CFO Europe study, European companies could generate an additional €407 billion of cash flow annually if all companies matched the cash conversion performance of top performers in their industries.

The REL/CFO Europe study found that the 1,000 largest publicly-traded companies in Europe achieved a CCE of 11.7% in 2006, a 5.8% drop from the previous year. This is the second consecutive year of deterioration, as CCE dropped by 1.9% in 2005.

Looking at CCE, the three industries showing the greatest improvement were Distributors (+134%), Computers & Peripherals (+58%), and Energy Equipment & Services (+21%). Laggard sectors for CCE were Internet Software & Services (-75%), Biotechnology (-67%), and Leisure Equipment & Products (-38%).

The REL/CFO Europe study finds two reasons to explain the decrease in cash as a percentage of sales. First, companies are converting sales to free cash flow at a lower rate, which means that less cash is available on the balance sheet. In addition, companies are more comfortable with the prospects for their businesses, lowering cash on-hand "safety nets" and reinvesting cash back into their businesses.

Among the industries which have shown the most meaningful improvements in cash as a percent of sales the leaders in 2006 were Household Products Industry (-49%), Water Utilities Industry (-39%), and Diversified Telecommunications Services Industry (-29%). The laggard sectors for 2006 include IT Services Industry (+94%), Distributors (+52%), and Health Care Providers & Services Industry (+44%).

"This year's Cash Masters' study shows that most European companies are not taking advantage of the strong growth the way they might, and are not delivering the maximum free cash flow from their operations, making it harder to fund actions that could stimulate continued growth," said REL President Stephen Payne. "The time is right for companies to leverage their scale, take advantage of low cost sourcing for products. While they do this they must also improve supply chain efficiency, so they do not gain gross margin improvements but erode the benefits due to increased inventory driven by the longer lead-times associated to low cost sourcing."

Payne also states, "Europe has enjoyed strong economic growth and this provides the confidence for companies to sail closer to the wind in terms of cash on the balance sheet. But companies need to ensure they have the ability to drive increases in CCE and increase cash on-hand when less predictable times come, which they will as seen already with the credit crunch being caused by the US."

According to CFO Europe Senior Editor Jason Karaian, "Many of the most cash-conscious companies owe their position to a past crisis. When going out of business is a real option, cash flow becomes the number-one priority, as many highly leveraged, lower rated companies are now finding amid the credit crunch. When times are good, by contrast, rising sales can breed complacency when it comes to cash management. The best companies, it seems, are able to maintain a sense of urgency when it comes to generating and managing cash at all stages of the business cycle."

About REL

REL, an Answerthink company (NASDAQ: ANSR), is a world leading consulting firm dedicated to delivering sustainable cash flow improvement across business operations. REL's tailored solutions generate cash flow for strategic use while balancing client trade-offs between working capital, operating costs and service performance.

For over 30 years, REL's expertise has helped clients in over 60 countries free up billions of euros in cash, creating the financial freedom to fund acquisitions, pension liabilities, product development, debt reduction and share buy-back programs. In-depth process expertise, analytical rigour, and collaborative client relationships enable REL to deliver an exceptional return on investment in a short period.

Through its affiliation with The Hackett Group, REL leverages Hackett's empirical insights into the operations of world-class organizations. The combined client list of REL and Hackett represents 73% of the Fortune 100, 77% of the DAX 30 and 51% of the FTSE 100.

More information on REL is available: by phone at (770) 225-7300; by e-mail at info@relconsultancy.com; or on the Web at www.relconsultancy.com.

About CFO Europe

CFO Europe is owned by CFO Publishing, an Economist Group business. With a rate base of 47,000 CFO Europe is the leading business publication for "C-level" and senior financial executives across Europe. It reaches an international audience of corporate leaders as part of the global group of magazines, including CFOs in the US, CFO Asia, and CFO China. For more information, visit www.cfoeurope.com.