A Perfect Treasury Fit
About Ferguson plc:
Ferguson plc (formerly known as Wolseley) is a globally active distributor of plumbing and heating products. Founded in 1887, what started off small has grown into a major business. Today, Ferguson supplies tradesmen, wholesalers and large construction sites with both third party and their own plumbing and heating products. The Company invests heavily in close customer relationships and in high product availability. Supplying some 1.1 million customers worldwide with specialist products requires efficiency. The right product needs to be available at the right time in the right place. This requires a reliable distribution network, but also efficient procurement and production processes. Ferguson generates most of its turnover in the USA, employs around 39,000 people across 2,800 branches.
No two treasury departments are alike – and this is particularly obvious with Ferguson. Despite the “lion’s share” of their revenue being generated in the US, they are listed on the London Stock Exchange with an established Group Treasury in London, and the Ferguson Group itself is headquartered in Switzerland. This “triangle” not only influences Ferguson’s core business but also the day-to-day operations in the finance department.
With a delivery and service volume of GBP 14 billion, daily cash and liquidity management are obviously of prime importance for Ferguson’s treasury department. Short-term cash must be made available at short notice in order to quickly meet global demands. At the same time, the business is characterized by sharp fluctuations in working capital and the resulting impact on cash balances. The ebb and flow of liquid funds characterizes Ferguson’s cash situation, requiring a corridor system (with a corridor of up to GBP 400 million). In particular during times of “low tide,” it is up to the treasury department to make sure the group has sufficient liquidity and funds. With a volume of approx. GBP 1.5 to 2 billion, Ferguson’s financial investment strategy plays a key role in this context.
Two “revolvers” to complement financing
Group liquidity comprises both cash funds and two revolving credit facilities (RCFs or revolvers) of GBP 800 million and USD 600 million. These committed lines of credit are regularly extended before maturity. Moreover, Ferguson issues private placements, i.e. non-public securities sold exclusively to select investors. These amount to USD 1.25 billion with an average term of five years. Both these select securities and USD 600 million of the revolving credit facilities are USD-denominated and make up a substantial part of the overall debt finance. They also reflect Ferguson’s geographical focus: around 70% of the group’s turnover is achieved in North America. With revenue of GBP 10 billion, the North American business alone amounts to more than the total turnover of many other global players.
Ferguson’s group companies have a high degree of autonomy, making liquidity forecasts all the more important for the treasury team. They have a bottom-up approach to treasury planning which includes consolidating the business plans of their subsidiaries every six months, creating one overall plan. Once the cash position has been established, the treasury team defines the general FX strategy and hedges accordingly. In between the six-monthly planning intervals, there are weekly updates on the transaction currency forecast for the next four weeks. This allows treasury to confirm the FX positions and to apply any necessary adjustments. The treasury department not only hedges currency risks in connection with the core business, they also hedge dividends and any agreed acquisitions.
Ferguson’s business structure is relatively localized, translating to limited FX risks. To a large extent, products destined for the US market are also produced in the US or in other countries using USD as currency. The same applies to the euro zone and other regions where Ferguson is active: local production for local products and services, although this model is beginning to change as product sourcing from the Far East gains traction.
Phil Scott, Group Treasurer at Ferguson, considers this structural framework the main influencing factor for the treasury team:
Investing in a US or a British company? – Both!
Since most procurement and revenue is concentrated in the US, Ferguson primarily deals with USD exposures. For potential investors, the situation is comparable to investing in a US company. At the same time, the company is listed on the London Stock Exchange, meaning people officially invest in a British company. This represents a big advantage for some investors – they can benefit from booming business in the US whilst still keeping their investments in the UK.Treasury at Ferguson also includes other important topics next to liquidity planning.
Ferguson’s treasury team considers itself a collaborative service provider within the group and aims to implement processes and systems that not only provide added value to the central treasury function but also – and even more importantly – to subsidiaries around the world. In addition to North America, this mainly concerns the Nordic countries, Switzerland, the Netherlands, and of course the UK – the place that many people associate as Ferguson’s “home.”
Control by visibility
Ferguson started making use of system support in the “traditional” treasury disciplines years ago. Next to a traditional treasury system, they also established cash pools, for example with Bank Mendes Gans (a wholly owned subsidiary of ING Bank in the Netherlands). The 360T platform is used for FX trading with banks. SEPA has brought a number of adjustments to the payments process, and EMIR requirements were also accommodated. Despite this, Ferguson was struggling to find a satisfactory solution for the most important issue: simplifying and centralizing the data required for reporting to management and the implementation of operating treasury tasks from group companies in a timely and automated manner.
It took time and effort to overcome initial resistance and to gain the support and trust of the group companies. They needed to keep reiterating that changes will not lead to more pressure or a higher workload – but that they’re intended to do the very opposite and will also achieve that. Ferguson’s treasury also needed to create awareness for the fact that the focus is on the best possible collaboration and not on simply controlling activities.
Step by step, central treasury replaced existing system components with a web-based platform to achieve this aim. This ensured a straightforward, group-wide rollout with all companies having access to the platform to capture their local business operations.
“There were two main driving factors for these changes to the system landscape: for one, we wanted to become more independent of internal IT support, needed in connection with the various platforms previously used, by introducing one central, standardized cloud-based system. Moreover, we wanted to provide a system that can be used by everyone and that benefits everyone,” points out Royston Da Costa, Assistant Group Treasurer, at Ferguson.
The first milestone: integrating Accounting
Few systems were standardized in the past. With the exception of Microsoft products, the treasury platform is one of the only group-wide system tools in this decentralized organization. When the system was implemented, the accounting department was integrated – a critical milestone and a sort of test that needed to be passed. This was proof that the necessary automation required in accounting was possible and provided the promised benefits – and therefore a green light for the rest of the rollout was given. Fully automated creation and forwarding of booking information from treasury to accounting paved the way for a group-wide, holistic standardization of treasury processes.
“When we started, we were initially uncertain as to how exactly we were going to achieve the required visibility and control within the group,” Phil Scott and Royston Da Costa agree. Now they’ve taken the first step and have a clear roadmap, the direction is clear: this is a step-by-step journey that has enabled a degree of visibility in connection with data and processes no one would have expected to be achievable in such a short period of time.
Small steps – big results
What advice would Ferguson’s treasurers give other treasurers? Take the small steps first, and you will realize that they have actually taken you much further than you expected! More often than not, it is not complex strategies that help advance treasury but the “simple” consolidation of key information. This is just as true for Ferguson as it is for any other business. However, there are a few important prerequisites that Phil Scott and Royston Da Costa would like to stress: management needs to back the project; you need the right technology; and you should concentrate on those things that are actually feasible under the specific conditions. Once you’ve created this framework, you have all the information and all the time you need to actually manage group-wide risks in a qualified and precise fashion. With this goal in mind, the treasury department prepares new projects – such as group-wide intercompany netting – carefully. Accounting will once again benefit from these changes and the degree of automation, in turn boosting the treasury function.
At Ferguson, treasury routine is something virtually unheard of in light of the many and diverse daily responsibilities in such a complex and large group. Not one day is like the other, and systems and processes need to be set up in a most flexible manner to enable the treasury department to react quickly to external requirements. This is the only way group-wide collaboration can ultimately provide added value to the whole group – reflecting the aim of Ferguson’s treasury team. Phil Scott can only encourage others to champion flexibility:
Let’s get in touch!
Interested in learning more about our solutions? That’s great.
Because we’d like to learn more about you. So give us a shout.