Headquartered in Italy, Geox distributes breathable shoes and apparel in 68 countries worldwide, through over 10,000 multi-brand points of sale and over 800 Geox shops. The company began trading in the 1990s and has been listed on the Milan Stock Exchange since 2004. Estimated group turnover for 2008 currently stands at over €900m. This month we talk to Federica Vello, Group Treasury Manager, and Livio Libralesso, Group Director of Finance, about risk management and international cash management at Geox.

She co-ordinates the payment factory involving 26 companies, the sales audit of about 200 directly operated stores, the financial relations with Far East vendors and collections from customers. Her main job is to optimise the financial cycle of the Group, maintaining a high level of centralisation and efficiency in financial operations.

Federica is a cash management professional of many years’ experience in the international arena, having implemented several cross border cash pooling projects. She is also in charge of new projects such as the transition to SEPA and the adoption of the new SWIFTNet platform.

He is very involved in the management and organisation of the Group, having full responsibility for the tax planning, administration and control departments.

He has extensive experience of cash and working capital management and ERP and Finance software implementations.

Prior to Geox, Livio worked in a senior position in international listed Groups headquartered in Italy, such as Safilo and Benetton. Livio originally trained as auditor in PricewaterhouseCoopers and is a chartered accountant.

Could you tell me about Geox and the company’s global strategy?

Livio Libralesso: We use revolutionary patented technology and currently have more than 40 patents in operation worldwide. In terms of cost, our products are in the mid to high end of the market, at around €100, and we are working on enlarging the company’s product range at the moment. There is a large market out there but it is very fragmented and regional. There is a definite absence of direct competitors matching our technology, style and brand awareness.

This is obviously a strong advantage for us in the ‘brown shoe’ market, meaning casual, formal and fashion shoes as opposed to sports shoes, or ‘white shoes’. We are the second biggest player worldwide in the brown shoe market. One reason for our strong growth is that our brand is a family brand and consequently we have a wide target demographic. We also have the Italian know-how and shoe design on our side.

We invest a lot in advertising and promotion – at least 8% of our turnover, compared to a sector average of around 3%. As a result, we have a very powerful brand and an international group composed of 26 companies. The main part of the group is in Europe but we also have subsidiaries in Japan, Canada, America and Hong Kong.

Our supply chain model is based on outsourcing so as to be lean and flexible but we strictly control each stage of the supply chain. In order to do this, we have invested a lot in information technology. We have a direct link to all our suppliers all over the world – we produce in more than 30 countries, including Brazil, China, Vietnam and India. The key factor is that we have all the necessary information to reduce the time to market from our third-party suppliers.

At Geox there are three main distribution channels: wholesale, franchising and directly operated stores. It is necessary to have the Geox shops network in order to have a strong brand image, to promote product launches and to have real-time consumer feedback. Meanwhile, wholesale distribution is useful for broadening the Geox market reach.

How is the treasury department structured?

Federica Vello: Geox is extremely concentrated and very structured. In treasury, we have invested significantly in information technology, so that all 26 companies use the same software: SAP and Piteco, which is one of the leading treasury management software packages available in Italy.

For us it is very important to improve the efficiency and management of treasury and accounting. Consequently, we are linked electronically to all our banks all over the world. We deal with 50 banks and we receive electronic information every day, which we then book in our finance software.

The treasury department is highly centralised and from Italy we manage the entire group’s banking relationships. We operate a payment factory, so that the local accounting people process invoices, make any necessary authorisation checks and then send an electronic file, produced by the ERP, to the treasury department in Italy for payment. We make extensive use of our software so we have a high degree of efficiency in the payment factory.

Including myself, there are eight people in the treasury department. The treasury staff do additional jobs such as the sales audit of more than 200 shops all over the world and also we have a strong emphasis on vendor relationships. We manage payments to more than 70 vendors in the Far East region and look at the day-to-day cash cycle. This is crucial as on the one hand we need to ensure the company is not exposed to too much risk but on the other hand, we need to finance the vendors in order to obtain the product we need immediately.

How important is risk management at Geox?

LL: We are a listed company, so from both an internal control point of view and a management point of view, the control of risk is very important for us. The company has a very prudential attitude to the markets and consequently, we perform hedging operations for financial risk and currency risk.

In addition, vendor selection is very critical for us. Before forming a relationship with, say, a Far East vendor, it is necessary to analyse the vendor’s financial statements in order to understand if they will be able to produce and deliver the goods in time and according to the Geox quality standard.

There is an internal control committee which organises the internal audit and the board of directors has issued some guidance outlining different ways to manage risk.

How does Geox insure its trade receivables?

LL: We insure receivables 100% using one of the leading insurance companies. We ask the insurance company to provide a credit line for every single customer. Once we have obtained the credit line, we can then deliver the goods to the customer. If there is no credit line, the only way to sell goods to that customer is to obtain a bank warranty or an advance payment. This is due to the fact that we manage more than 10,000 customers all over the world so it’s not possible for us to properly evaluate each single customer. We took the decision therefore to outsource this kind of evaluation and the insurance company now gives us the information regarding every customer.

Has this insurance been affected by the financial turmoil?

LL: Historically the arrangement has worked very well but now insurance companies in general are facing a lot of problems so there is a sort of reduction planned in the credit line. I think that if the crisis lasts for a very long time, we could face some problems in obtaining or increasing credit lines from the insurance company.

Elsewhere, we are responding to the crisis with a very strong attitude toward cost reduction. The focus is on internal organisation in order to improve efficiency so as to better invest resources.

How do you manage the company’s currency exposure with operating units worldwide?

FV: This is very important for us. We have four centralised warehouses: the main one is in Italy and the others are in America, Japan and Hong Kong. In order to manage our currency exposure, companies selling goods in USD buy goods directly from suppliers in USD so there is no exposure there at least.

In Italy however, we buy 60% of what we need in USD and we sell in EUR. In the US they buy in USD and sell in CAD, and Hong Kong buys in USD and sells mainly in USD but also some in EUR, so there are risks there.

In response to these risks, we decide the price lists twice a year because they are very seasonal. We decide the margin and consequently we fix the standard exchange rate for each currency. From that, the treasury department starts to hedge the currency according to the amount of FX the company will need in the foreseeable future. Usually we hedge 80% on a budget basis and then once the orders have been collected, we start to cover the remaining 20%.

We have a very short-term view for hedges – six months. This means that we can reflect the changes in exchange rate in the price list sooner. Now that the USD is becoming stronger again we must be very careful in fixing the standard exchange rate and hedging the volumes.

How does seasonality impact on liquidity risk?

FV: Seasonality can bring great challenges in terms of liquidity. The normal situation is that the company pays the suppliers, sells the goods and then waits for the customers’ payments. In the months of April and October we have the minimum cash/maximum debt periods and in the end of June and December we have the maximum cash/minimum debt periods. For us, it is very important to have enough credit lines in order to face the liquidity shortage during February and March, September and October.

Fortunately, we are in a cash positive position. Last year, we had €100m cash due to the strong control over working capital and the high profitability of the company. Our EBITDA margin is around 24%.

Geox has recently entered into a strategic partnership with Belle International in China. How will that work?

LL: China is one of the most interesting and new markets for us. Recently, Chinese law regarding foreign direct investment was relaxed, so we decided to establish a representative office in China. We decided to enter a license and distribution agreement with Belle, which is one of the leading companies in the shoe market in China. Although there is no direct investment in China from the group, we chose a partnership with Belle to assist in creating a Geox market in China.

The group has a significant number of operations in Central and Eastern Europe. How is cash managed across the region?

LL: Geox sells directly in Italy and in each single country in Europe. As such, the group needs to have a relationship with the leading bank in each country in order to deposit cash from the shops. In addition, we need a bank with an international presence because we like to centralise the cash in Italy every day, so as to improve efficiency. We therefore divided Europe into four zones and tried to identify an Italian bank in each zone that had relations with the leading local bank in order to permit cross-border cash pooling.

In Central and Eastern Europe, we use UniCredit because they have a leading position in these core markets and they understand Geox’s needs very well. UniCredit has a very efficient, single point of contact approach, which has worked well for us in the region, particularly with our contact Mr Cirelli. Through that relationship, we have been able to set up a cash pooling agreement including Germany, Austria, Switzerland, Hungary, Slovakia and Romania, which is quite a new project for us.

What projects will treasury be working on over the next 12 months?

LL: One of our priorities is to further improve cash concentration and cash sweeping. The only country which is yet to join the system is Japan. There were some language and technology system challenges but hopefully we are nearly there now and the integration should go ahead in mid 2009.

The second big project is to join SWIFTNet via SCORE in order to improve the way we deal with banks electronically. At the moment we receive SWIFT MT940 messages, the end of day messages, and we upload these different files into our systems. From the input side it works well. Unfortunately, on the output side, ie the way in which Geox deals with the banks, we have several different internet banking setups, all with different layers of security, so it is quite complicated to deal with all these relationships in a centralised way. We want to have just one point of access via SWIFT and to be able to communicate with each bank in a single way. Hopefully the project will be completed by September 2009.

From an internal point of view, we are also implementing a new model, based on business intelligence software, which is designed to derive a financial budget and financial projections to help with the group’s business plan.