Wolseley PLC is the world’s leading supplier of construction materials Headquartered in Zug, Switzerland, the company has outlets in 25 countries and employs 47,000 people. In 2009, the group reported a trading profit of £450m.
Mike Verrier has been the Group Treasurer of Wolseley PLC since 2000. He studied Natural Sciences at the University of Cambridge; possesses an MBA from Cass Business School, London and is a fellow of both the Association of Corporate Treasurers and Chartered Institute of Management Accountants. He has 20 years of treasury experience working for major corporations including Deloitte and Touche, Chemical Bank and Dunlop.
Founded at the end of the 19th century by an Australian, Frederick York Wolseley, in Sydney, Wolseley began life as a small engineering firm whose most notable creation was a mechanical device for shearing sheep.
Inauspicious beginnings perhaps, but the company grew into a bicycle and then car manufacturer. The Wolseley Tool and Motor Car Company Limited was sold in 1905 to Vickers, but the core engineering business was retained and expanded. In the 1980s, Wolseley shifted its focus from engineering to the distribution of plumbing and building materials. It established bases and brands in the UK, the US, and continental Europe at this time and from 2002 operated out of its headquarters in Theale, Berkshire.
Prompted by what Mike describes as the ‘uncertainty’ surrounding the UK legislation on overseas profits, in 2010 the company announced that it was relocating its headquarters to Zug, Switzerland – a move, Mike says, that has enabled the Group to have much greater “clarity and stability on tax issues”.
Accordingly, the treasury department is now split between the two countries. It comprises six treasurers, one accountant, four tax specialists and one assistant. Each of the operating units in the 25 countries in which the firm operates is responsible for their day-to-day cash management and so has some treasury expertise. This allows the units to manage their day-to-day cash flows and local bank accounts effectively.
The Group treasury department headed by Mike manages the company’s funding requirements and handles the various Wolseley companies’ surplus cash. It does this via two cash pools – one in North America, the other in Europe.
As the world’s largest supplier of plumbing and building materials and a leading building materials distributor, its fortunes are inevitably linked to peaks and troughs of the housing market – a position that has tested the resources and ingenuity of Mike’s team to the limit over the past three years.
As the consequences of the sub-prime crisis began to take effect, the company found itself in the eye of the financial storm. Revenues dropped precipitously, and management had to make bold far reaching decisions on the operation of the company and its capital structure.
Wolseley wasn’t the only company with a distinguished past to face an uncertain future during the credit crisis, but it was one of the few to leave the crisis behind with a better understanding of itself and clearer view of the way forward.
In this interview, Mike discusses Wolseley’s past, its future and the issues surrounding the move to Switzerland.
“The phrase at the time was that forecasting was like ‘trying to catch a falling knife’.”
During the financial crisis you adopted a novel approach to cash flow forecasting. Can you explain what that involved?
Markets were falling so rapidly that we couldn’t really apply normal forecasting techniques. The operating units were doing their forecasts, as usual, and every month their forecasts were getting worse because housing markets were collapsing all over the world. The operating units were forecasting what they were seeing on the ground.
The challenge was that markets were falling so rapidly, the risk was that there would not be enough time to react to an increasingly worsening situation. So Group Finance took a more macro view and on top of the amended forecasts, we were then overlaying that with a “what if things deteriorate even more rapidly?” scenario.
The phrase at the time was that forecasting was like ‘trying to catch a falling knife’. We therefore put in a very heavy downside on top of that and tracked it.
We were preparing for an unpleasant scenario and at the same time laying the ground-work to react to the worst case scenario. It was a case of trying to keep ahead of a collapsing market, which no-one had ever seen, which wasn’t easy.
Was it a case of survival?
Survival is a very strong word. From an operating perspective, we never fell into loss. We have generated operating profits, although we’ve had a few quite exceptional losses. And we generated strong cash flow throughout the period. So I don’t think it was ever a question of survival.
It was more a case of the size and scale of the business at the time that needed to be addressed, and how to get it back into the right size and shape quickly.
This was still a good business but the rapidity of the economic downturn had significantly heightened the risk that banking covenants could be breached.
You also negotiated a €1 billion debt facility during the credit crisis. How did you do that?
We could see that there might be a problem in that we could raise the equity, but some people could ask, “Yes, but what about the liquidity?” We would have to refinance in two years’ time and though two years seems like a long way away, when you are at the bottom of that crisis, it is risk which could disturb analysts and investors.
We approached five core banks which we thought were able to support us and requested that they participate in a forward start facility – ie they would extend and amend part of the main credit facility by two years.
At the time, it was quite a bold move. Nobody thought you could do a forward start for more than three years and we were starting out 30 months from the maturity and then extending it another two years. So we were taking it out for 18 months longer than anyone had ever done a forward start before.
The five banks we chose had long standing relationships with us, had demonstrated a strong commitment to us. We provided them with a draft term sheet and gained their indicative commitment within 24 hours. They all subscribed for a facility of €200m each and agreed the pricing and signed the documents within three weeks.
Following the rights issue, we agreed with the banks that we would arrange sub-syndication of €250m. We decided to do the sub-syndication ourselves because we were keen to approach the banks which had show strong support to us during the period. In the end seven relationship banks with a total participation of €370m came into the facility. On completion we felt justifiably proud that we had developed a forward start facility to a new tenor. The many years of working closely with our banks had really paid dividends.
What prompted your move to Zug, Switzerland?
Wolseley’s tax rate has increased from 28% to 34% over recent years. Whilst we were domiciled in the UK we are subject to UK controlled foreign company (CFC) legislation and taxation. The legislation has a particularly harsh impact on an international holding company like Wolseley which was making us uncompetitive.
The CFC legislation in the UK is highly complex and far reaching. So it is difficult to finance overseas companies from the UK without it getting enmeshed in the UK tax system. Based on the previous financial year, the estimated savings from relocating are about £23m. Switzerland is easily accessible and offers a very stable and clear tax regime, and has a skilled work force so it was an ideal location.
The UK trading operations continue to pay tax in the normal way on their earnings and the relocation to Switzerland has no effect on this position.
What is the structure of the new company?
The new parent company was incorporated in Jersey, as this enables the Group to operate under essentially the same governance structure. However, the new parent operates from Zug in Switzerland. At present there is a small team in Zug which handles all the matters that the Board and the Board Committees need to deal with.
In addition, there is a small finance team in Zug which handles the inter-company financing.
Can you see other British-based companies following your example?
That is clearly a matter for them. You have to be convinced that the benefits you get from the clarity, the certainty, and the savings are worth the disruption and costs. For example we now have to make all our Board level decisions in Switzerland.
For us, that was not such an enormous issue because Wolseley is a multinational business with over 80% of our profits generated outside of the UK. I think we had a fairly international perspective anyway.
“We see Treasury as the oil in the business engine: we are there to lubricate the moving parts and make the engine as efficient as possible.”
Apart from Switzerland what has been the key focus for Treasury?
Wolseley’s recent focus has been on using cross-border cash pooling effectively. Two years ago we operated a number of local cash pools in several countries but these were not interlinked to the centre and transfers happened only monthly.
Consequently there was a large build up of cash around parts of the Group and unnecessary borrowings elsewhere. This was not an expense four years ago, but now this is very costly both in terms of funding costs and requiring precious bank facilities.
BMG was selected to provide two cash pools: one for Europe and the other for North America. They are inter-linked but given the time zone problems of operating from Austria in the East to Hawaii and Alaska in the West, it is more practical to work with two pools.
The benefits of the BMG system have greatly exceeded all our initial expectations. At the outset we were expecting that we would release £100m of cash and save in the order of £0.5m of interest per year. Although we have only been operating the system for six months, we believe that the cash release from the operating units is significantly higher than that and the interest savings are certainly over £1m per year.
Setting the system up has been complex and has required a lot of work with all the operating units, communication has been the key to its success. Once operating units realised that they can have access to funds through the pool, as well as getting a good return for their surplus cash by being a member of the pool, buy in is easily achieved.
What does the future hold for treasury at Wolseley?
It has been a very big period of transition. We have come through the biggest movement in housing markets and biggest downturn that has happened in any of our lifetimes.
We have weathered the storm reasonably well and we now have new management in place and look to the future with enthusiasm. We think this is an excellent company with great opportunities and can deliver performance. Treasury will have to adapt and move with that.
We are a much leaner organisation than we were. We are more analytic than we were and I think we will focus on our opportunities more precisely than we did. Treasury will have to be more precise going forward; identifying how to finance the operation and managing currency risks more effectively will be important.
Given the success of the cash pooling combined with the upgrading of the treasury management system, Wolseley treasury is now looking to improve efficiency by increasing its reliance on technology. Dealing systems, such as 360T and FXall, offer good opportunities to improve the dealing capabilities, and allow for straight through processes on transactions.
There is no doubt a lot of work to be done, the improvement on which we can obtain on our process being upgraded and going through straight through processing which takes away numerous and laborious steps of associated risk of error.
There is no doubt that the implementation is complex and difficult; however, the development in technology has meant they are much simpler to implement and the benefits are almost obtained immediately. While there are set-up costs for us, I firmly believe that the improvement in efficiency can more than compensate for the time and effort required to implement them.
Where does treasury go next? Quite simply, to wherever the business takes us. We see Treasury as the oil in the business engine: we are there to lubricate the moving parts and make the engine as efficient as possible.