Ahold is an international group of quality supermarkets and foodservice operators based in the United States and Europe. Following a much publicised €1 billion accounting scandal in 2003, Ahold completed its Road to Recovery strategy, including a €3.1 billion divestment program of a number of its non-core and underperforming international assets. We talk to Kimberly Ross about acquisitions and divestments, centralisation, and how the control environment at Ahold has evolved from a treasury perspective.

Can you give me some background information about Ahold?

Our 2005 annual group net sales were €44.5 billion. We essentially have two types of operations – one is foodservice and the other is food retail. The food retail is 67% of our business, with foodservice being 33%. Of the retail business, 74% is in the US and the remaining 26% is in Europe. All of the foodservice business is located in the US.

Until early 2004, we also had operations in Asia and until 2005 in Latin America, but we have decided to exit those markets. So now we are very much focused on the US and Europe.

What are your main responsibilities?

I am responsible for overseeing tax and treasury operations for the company globally. I am based in Geneva, Switzerland, but I also have staff in Pennsylvania, Boston and the Netherlands. The total group is approximately 80 people in tax and treasury. In terms of treasury itself, we are a centralised function with people in Boston and Switzerland. We also have lawyers who are specifically dedicated to treasury, but report into our corporate Legal department. They do not report to me, but as a part of the treasury, they are fundamental to our operations. If you just include pure treasury staff, which includes treasury accounting and control, we have 21 people.

I have three direct reports in treasury. We are structured into International, Corporate Finance and Controlling teams:

1. International. This side is responsible for local operational activities, such as financing new trucks and trailers, negotiating credit card fees, along with the in-country cash management structure, short-term cash flow forecasting and local credit facilities.
2. Corporate Finance. This team is focused on the overall group financing issues such as our syndicated credit facility, the €1 billion bond buy-back that we executed in 2005 and launching new debt, as well as risk management.
3. The Controlling group. Unlike some other treasury departments, treasury accounting reports into group Treasury, so we also do all the derivative accounting centrally, even for the operating companies. We then push the journal entries down to the operating companies. We also have two analysts that perform strategic analysis, forecasting, long term liquidity planning, management reporting and also they work with the credit rating agencies. The back office also reports into the controlling group, so Corporate Finance does the trading and Controlling does the confirmation of trades and monitoring.

Could you summarise the fraud crisis that was uncovered in 2003?

On 24^th February 2003, we announced that our net earnings would be significantly lower then previously indicated and that we would be restating our 2001 and 2000 financial statements. The restatements were primarily related to overstatements of vendor allowance income at US Foodservice and the deconsolidation of five current and former joint ventures. We also announced forensic investigations into accounting irregularities at USF and into the legality and accounting treatment of certain questionable transactions at our Argentine operations.

Following the crisis, did you have to make changes to controls in treasury?

From a treasury perspective, we did not have any internal control issues related to the 2003 announcement. However, as a publicly traded company, we are required to become SOx 404 compliant, so clearly the control environment in treasury, as well as all the other departments, has changed. When I joined in late 2001 the treasury department was based in the Netherlands. We moved the department to Switzerland in April 2002 and were just getting staffed up when the crisis broke out. So for us, it was all hands on deck to secure liquidity in the company and manage the creditors. As for what controls have changed, we decided to go from a decentralised treasury structure to a centralised treasury structure. This obviously means that you must build in new internal controls and governance based on the new activities that you are performing in a centralised treasury organisation, which must be SOx 404 compliant.

Can you give examples of the changes?

We had to address some issues as part of the crisis. For example, as a company that is a product of multiple acquisitions – and that has never really been standardised from a legal documentation perspective – we inherited a lot of financing agreements. We needed to create a strong database of all the clauses in our debt agreements – whether those are leases related to our store real estate or other financing arrangements. We also put in a stronger back office with stronger operational controls surrounding the derivative accounting, which is quite complex and extensive, as before that we did not do this in treasury – it was part of the corporate accounting group. So those are some of the examples of significant changes.

The last piece we are working on is the centralisation of the rest of Central Europe. We still have two countries left that perform their own cash management activities and which we are working on centralising in 2006 – other than that, the whole Ahold treasury operation has now been centralised. It used to be very much done through the operating companies and in essence only the group financing was performed centrally. When I joined Ahold, there were only four people in the treasury department.

I understand that following the crisis a number of assets were sold off. What was your role in that?

We were involved in the analysis to determine the euro value of necessary divestments to return the company to sound financial footing. We were also quite busy with the €3 billion rights issue that allowed us to repay the secured emergency facility we put in place during the crisis, which allowed us to execute our divestment program at our own pace averting fire sales.

How successful have these strategies been?

We originally set out to divest €2.5 billion of gross proceeds and we ended up divesting €3.1 billion. Today we are focused on our US and European operations. With the liquidity and accounting issues behind us, we are able to focus on business issues such as driving sales and improving working capital. We’re in a very competitive environment and food retail is a low margin business, so it is important to be focused.

In 2003, during the crisis, we got downgraded four notches, but now we are one notch away from investment grade, which is what we are aiming for. We may have a lower credit rating today then we did before the crisis, but we have stronger credit metrics and liquidity position today.

What are your plans for the next twelve months?

From a treasury perspective, we are focused on ALM (Asset and Liability Management) modelling, automating our hedge accounting – we have manual processes there that we would like to automate, and cash flow forecasting – and being SOx 404 compliant by the end of the year. Hedging commodity risk is another item on the agenda.

Which commodities in particular?

Fuel is a big area for us. On the foodservice side of the business – which is over 30% of our total business – we deliver to hospitals, restaurants and government entities, so we purchase quite a bit of fuel to supply our delivery trucks.

Other commodities we purchase are coffee – and also steel for building our stores. We are re-assessing our appetite to risk in these areas and based on the outcome, we will determine the best way to manage the exposures.

Do you have any plans to start making acquisitions again?

We are not looking at major acquisitions at the moment. We are positioning ourselves to be able to have the necessary flexibility in the future and we have already started doing some small fill-in acquisitions – we recently did one in Central Europe. We are very much focused on the areas where we can be the number one or number two player and we will look forward from there.