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How Unilever has benefited from being relatively un-levered.
David M. Katz, CFO.com | US
April 1, 2009
Unlike some of the characters in the movie of the same name, Unilever CFO Jim Lawrence finds himself cheered by a matrix.
In a speech at last month's CFO Rising conference in Orlando, Fla., Lawrence, the finance chief of the Anglo-Dutch consumer products company that owns such household-name brands as Hellmann's mayonnaise, Lipton tea, Dove lotion, and Lifebuoy soap, trotted out a simple diagram that showed his company to its best advantage. The horizontal axis represented Market Demand, while the vertical one represented Balance Sheet strength. The resulting rectangle was divided into quadrants, so that a company could be slotted as either weak or strong in terms of the demand for its wares or the strength of its assets.
During an interview after his presentation, Lawrence, who was CFO and vice chairman of General Mills before he joined Unilever on August 1, 2007, said that his matrix-in which his company fell in the strong category according to both metrics-made him feel less gloomy than a lot of his compatriots. After all, he had just read that General Motors sales were down 55%, in contrast to Unilever's 1.7% negative volume growth. "So in terms of demand, we are relatively high and cars are ultimately low," he told CFO editors Scott Leibs and David M. Katz.
In terms of the availability of credit-as good a good a measure of a company's balance sheet-strength as you can find-Lawrence says he was "struck by the fact that I was able to borrow at 3 % after tax for seven and a half years. You should be able to make some money for your shareholders if you have to beat a 3 % hurdle rate, right?" Everything's relative.
Besides enjoying the pleasures of his matrix, Lawrence was still basking in the glow of Unilever's $1.5 billion two-part U.S. bond offering (one 5-year offering of $750 million at 3.65%, and one 10-year offering of the same amount at 4.80% in February). The borrowing will help the company shake off an over-reliance on short-term debt that was making the CFO a tad edgy.
That ability to raise capital likely has something to do with the multinational's aversion to excessive leverage. Indeed, his company's ability to maintain a high credit rating has been something of a career gauge for Lawrence, who wouldn't set foot in a company whose ratings have sunk below junk status.
Still, he sees the upcoming year as one when CFOs should keep close watch on there cash. Indeed, as he said during his presentation, it's the "year of treasury." An edited version of the interview follows.
Looking back both at Unilever and General Mills, what have been your greatest leadership challenges as a CFO?
I think the challenge is to get the right balance between empowering people and giving them freedom and the chance to fail, and your responsibility for the books, performance, and similar things. Finding that golden mean between the two is a big challenge.
Do you keep somebody in a job he does very, very well but in which he may not be growing anymore? Or do you take him out and give it to some other person who won't do as well to begin with but will learn and grow in the job? Leaving the status quo is clearly better for the company in the short term, but not better in the long term because it's preventing the company from growing new people.
Under current conditions, that must be even trickier. Is there a temptation now to keep people in positions they're doing well at, even though you run the risk that they'll start to feel stagnant and bolt when things get better?
I think that nobody's focused on when times get better. I think everyone is focused on the bad times now. Whatever that golden mean is, it's probably gone to the side of you're hands on, you're doing it yourself, you're keeping people where they are. You're worried a lot more about what's happening in the today.
Your ability to resist the pressure to leverage up your balance sheet in the middle of a bubble seems to have helped you during the current downturn. How did you resist it?
There was a period of time when the view was that you should take on leverage and buy back stock and that it was good for the shareholder. And it was, considering that this notion came about during a time when everybody was taking more leverage.
Money was plentiful and it was not terribly expensive. A lot of the reason we didn't follow that advice was that it had historically been Unilever's view that we were to stay at a high-quality debt rating. That momentum prevailed. At one point the company was AAA.
Then [in 2000] it bought Best Foods in a giant $20 billion raw-cash deal deal, and it took on a lot of debt to do that. Obviously, that changed the ratios, and the company then said to the rating agencies: we aren't going back to AAA, but we will get back to A . So they focused on paying down a lot of debt, and they got back to A . And the company concluded that that was a reasonable place to be.
By the time I came to the company in 2007, people were asking, why stop at A ? Why not go to A or go to BBB ? By the end of 2007 there was no more pressure. But for the first couple of months I was here people were asking me that since I had come from a company that was BBB [General Mills], why wouldn't I be comfortable with that here. It's certainly a reasonable question to ask. Part of the questions may have stemmed from the fact that Unilever went from triple A to A , whereas General Mills went from A to BBB .
At the time, remember, Unilever was doing a lot of its financing with short-term money, commercial paper. If you use commercial paper there's really not a lot of difference between the cost of capital for a BBB rated company which has long debt versus an A rated company which has commercial paper.
The big difference is that from A , you have room to go down several notches, whereas at BBB you can't go very far down without moving out of investment grade. My own attitude is that I don't want to be a CFO of any business which is not investment grade. I've been on the boards of companies which are not investment grade, and I know that it's not fun.
You really get smacked around. You want to have a little safety measure, and BBB is at the bottom of it. When you're up at AA or AAA you probably are incurring a high cost of capital. So we're really talking about a pretty narrow window: BBB , A-, A, A , and if you're prepared to flex the use of commercial paper the actual difference in the cost of capital is very, very low.
The one advantage to A is that you are fortified. We've been through the black swan event of last fall where we were close to a financial meltdown, and we made it through. We not only made it through-we actually signed up our line of credit right in the middle of that, which was really something.
You said in your talk that "treasury has moved to the top of the agenda in a way it hasn't in many years." How will that affect your role at finance?
Well, there's no question that access to credit is vital now and that the financial markets have been dislocated. As a consequence, you can't assume things are just going to proceed steadily as they have in the past. People aren't used to needing to worry about, do I get paid? Or, how fast could I pay you?
So now you think about it: that's what I mean by the year of the treasury. It's being sure that we have access to funds. So in September and October, I spent a lot of my time with the banks getting them to agree to sign up to our credit facility. In a normal year I wouldn't do that at all. I wouldn't spend any time with it. But I just spent the time working with our treasurer on that.
Even with our line of credit we've become a little squeamish about being so reliant on commercial paper. So we've done this five and ten year U.S. dollar issue and we're going to do another issue probably before the end of the year which is long in nature and take out some of that commercial paper. All of that is activity which, in a normal year, would not really be done by the CFO.
How many hours a week do you spend on treasury today that you wouldn't have been spending a year ago and what specifically are you doing in that extra time? I'm probably spending between a half a day and a day extra versus the past.
I'm talking with the treasurer on what his funding plans are. I'm reviewing and meeting with banks to work on a relationship with them. Just last week, I went over to J.P. Morgan and we had Morgan Stanley come in. I probably had four or five meetings last week with banks and providers of financing that I wouldn't have been involved with in normal times, hearing new ideas from them and getting their views on whether we should or shouldn't issue in pounds, issue in euros, issue in dollars.
How involved do you get in advertising, marketing, or budget discussions-discussions that move beyond approval of the overall spending number?
I get involved at the level of what and how much, but not where and for what. I can speak with some authority about the level of spend and the effectiveness relative to the cost of media. But those are made country by country, and they're made by specialists.
Do you think that as a consumer-products company you're in the best position to know when the economy may be turning around? Your products are less discretionary items than autos are, for example.
In the food business you may not see much impact at all, because people have to eat. They may trade down on price points, and you may see private labels doing better. There's a little more discretion in personal care items: you don't have to buy the more expensive personal care stuff.
But once they've decided to use a deodorant, people are going to stay with it. Now there are two other phenomena that can affect this. One is shelf de-stocking, which means that retailers decide that they're not going to buy as much stuff and let the inventory they have in the warehouse run down. You see this with retailers at the end of the fiscal year every year. We think we may have seen it last fall.
Then there's pantry de-stocking. If you look in my shower, which I share with my wife, you will see maybe ten or fifteen different shampoo bottles. We don't necessarily need to replace a bottle of shampoo when it runs out. I could de-stock the pantry by using my wife's shampoo. That kind of de-stocking makes it harder to know whether our sales are reflecting the general economy.