Next year promises to be an exciting (and, possibly, very critical) year for many companies. Interest rates may finally head higher, workers may be tougher to find, valuations pricier, and consumer spending more robust. Or, as CFOs know all too well, none of that may happen. Unforeseeable events and market conditions will intervene, as they always do. Excessive leverage may finally get the better of the credit markets. An asset bubble could pop. Or populist politics could cause a Western nation’s economy to seize.
But, overall, despite the risks, it is a good time to be a chief financial officer. A potential corporate tax cut in the United States could boost many companies’ bottom lines. Technology will continue to slowly enable greater productivity in the finance department. And federal regulators may loosen some of the red tape that businesses think is choking growth.
Overall, it looks like, finance chiefs will have an abundance of “levers” they can pull to influence business outcomes next year. But which ones will they use? The choice is highly dependent, of course, on the businesses they run. But it is also dependent, in part, on the swirl of macroeconomic factors mentioned above. In 2008, for example, hardly any CFO of a financial institution would have stated “market share growth through aggressive M&A” as their number one goal for that year.
What do CFOs have at the top of their to-do lists for 2018? What are their primary missions? To find out, we interviewed the finance chiefs of six mid-size to large U.S. organizations. Their choices, which are probably shared by many organizations, reflect the kind of year we are headed into: one full of promise for many sectors, but also one heavy with uncertainty.
The following stories describe the top priorities for the CFOs of companies in a diverse set of industries: retail, freight logistics, recreational equipment, computer peripherals, chemicals, and real estate. On the surface, to a layperson, their goals might sound simple, but fellow CFOs know the following six objectives are anything but easy to execute on, and achieve, in any year.
The profiles were written by deputy editors David M. Katz and David McCann, and editor-in-chief Vincent Ryan.
Asked to characterize how he sees 2018 playing out, Scott Settersten, the CFO of retailer Ulta Beauty, uses the words “dynamic” and “exciting.” But Settersten chooses more measured terms to describe the essence of his job in the forthcoming year: “It’s a question of being able to balance the growth levers of the business versus the core of keeping the lights on.”
Both descriptions are true. On the one hand, Settersten will be closely watching the dynamic and disruptive effects of Amazon’s powerful online strategy, which emphasizes ever-shrinking product delivery times, lower overhead, and tightening margins. “Retail is just going through this crazy cycle … with the Amazon effect” and Walmart’s effort to keep up by growing its online presence, he says.
Ulta, whose stores offer cosmetics, fragrances, skincare, haircare, and salon styling tools, is trying to maintain a foothold in online merchandising even as it seeks to expand its core bricks-and-mortar business. Settersten continues to focus on the company’s investment in what he calls “normal growth drivers” — building new stores, developing the company’s loyalty programs, and offering seasonal discounts. But “there are also a lot of other things that are churning in the background,” he says. Those include new investments in artificial intelligence, web applications, and digitalization.
“The question is … what [technologies] work best for our particular business model,” Settersten says. “There are a lot of [technologies] you can invest in — take chances on, place bets on — but you need to be as sure as you can be of what really might benefit your customers in the long-term.”
A more immediate focus will be maintaining the company’s sales and profit growth. During the first six months of its 2017 fiscal year, Ulta’s net sales increased about 22% and its net income surged 33%.
To keep the company growing at that pace, Ulta needs to continue expanding its number of stores and their total square footage, as well as getting customers to stroll into them. Therefore, a prime concern of Settersten’s in 2018 will be the real estate market. Adding to the 1,010 or so stores Ulta had at the end of August 2017, the company is committed to opening one hundred each year until it reaches between 1,400 and 1,700 total.
During a conference presentation in December 2016, Settersten told investors that “real estate is one of our core competencies.” Although the company hasn’t typically built many of its stores in malls — the higher per-square-foot costs can be a deterrent — the finance chief is seriously looking at “a lot of mall opportunities people are presenting to us.”
In deciding on whether to set up a store in a mall — or any other location, for that matter — the cost per space is a big part of the calculation. But the financial health and competitiveness of other tenants in the mall is also crucial, especially “how Amazon may impact them and the traffic flow in those centers over the long-term,” Settersten says.
With the changes triggered by online commerce that are sweeping through retail, “we don’t want to be left [in a mall] by ourselves” the finance chief adds. “Even though we do a good job driving our own traffic, we need to have the combined strength of multiple retailers in one.” — David M. Katz
Freight logistics provider YRC Worldwide has experienced increased volume for its 14,000-truck fleet over the past few quarters and is expecting more of the same for 2018. And after some paydowns, the company’s outstanding debt is below $1 billion. Welcome trends? Sure, considering that the company is six years into an epic turnaround effort and has been at the brink of bankruptcy several times. But they’re not the needle-movers YRC is looking for.
From a financial standpoint, what the $4.7 billion shipper wants most in 2018 is to continue boosting its yield through price increases. It also aims to achieve a satisfactory resolution to collective bargaining negotiations with its union, says CFO Stephanie Fisher. And the outlook is good for both of those outcomes, she adds.
The company’s yield was up in 2017, and capacity constraints throughout the trucking industry indicate that 2018 may be even more fruitful. A years-long driver shortage is forecast to get worse, although that’s not a bad thing if a trucking company wants to raise prices, because it essentially functions as a limit on supply. Also, new safety devices that record truckers’ hours of service, mandated by Congress to be installed in commercial trucks by December 18, 2017, may force out smaller shippers that rely on drivers working long shifts.
“Our focus in 2018 is going to be on price, which always outweighs volume, because price goes straight to the bottom line, whereas with volume you have to add labor to make it work,” says Fisher. As part of the effort, YRC will look to cull volume from unprofitable shipping lines. “It doesn’t make sense to deliver freight we’re not making money on, especially when there’s a driver shortage,” she notes. Fisher adds that “customers will have no choice but to accept price increases, because our competitors are doing the same thing.”
On the collective bargaining front, YRC is in a holding pattern. The company’s agreement with the International Brotherhood of Teamsters expires in March 2019, but for all practical purposes there’s little Fisher can do to prepare until she’s able to assess the results of labor negotiations by key competitors.
“The good news for us is that we have a better relationship with the IBT leadership than we’ve had in a long time,” Fisher says. “The union’s new freight director came into the position earlier this year, and we’ve had more meetings with him than we’d had in the previous three or four years.”
The IBT freight director worked with YRC to establish, for the first time, wage differentials for union members based on regional costs of living, the CFO notes. He also cooperated with YRC to address operational changes related to December’s opening of eight new distribution centers, which YRC expects will dramatically reduce shipment bottlenecks.
Crucial to the company in 2018 are the investments it’s making in “revenue equipment” — tractors and trailers — and software that optimizes the routes drivers take to pick up and deliver freight. They offer greater bang for the buck than debt paydowns, despite heavy interest payments on the loans. “Someone at our investor conference asked us, ‘If someone gave you $500 million, what would you do with it?’ We immediately said we’d invest in revenue equipment,” says Fisher. — David McCann
Drive a ‘Culture of Data’
Consider a large, global company that allows its business units to run their own affairs without an eye toward consistency in operations or branding. There is no long-term strategy in place and e-commerce is an afterthought. Little effort is expended on capturing data, let alone analyzing and making decisions based on it. Unsurprisingly, this company isn’t growing.
That’s a snapshot of Specialized Bicycle Components, a maker and distributor of bikes and related products, as it existed roughly three years ago. That was around the time Nik Rupp joined the company as global controller, following 11 years in various divisional finance roles at Nike. Things have changed at Specialized in the interim, especially in the structure of the 43-year-old company, which currently has about 1,600 employees and $1.2 billion in annual sales.
“We’ve put in place true regions, true regional leadership, new functional leadership, and within the last 12 months, for the first time, a long-term strategic plan,” says Rupp, who moved up to the CFO chair in March 2016. “This year, we’re finally back on track with growth.”
The strategic plan, largely focused on leveraging data to build a robust e-commerce operation, will dominate the finance chief’s agenda for 2018. In November, the company launched an e-commerce platform, including a new website. Rupp will be aiming to maximize the platform’s value. However, a number of elements, like the ability to order a bike online and pick it up at a Specialized dealer location, are not yet built.
Concurrently, Rupp is overseeing the creation of a dedicated data team that will be looking not just at financial data, but point-of-sale data, data from website visits, retailer inventory data, and other information. But the goal is not data analysis per se.
“What I’m trying to put in place is not just a tier of folks embedded within financial planning to do additional reporting on what’s going on with e-commerce,” says Rupp. “I’m building a separate structure that sits outside financial planning, so as to drive a culture of data and an understanding of that throughout the organization.”
That, he says, is “subtly different even from what we had at Nike, which looked at a lot of data within traditional planning functions. That, I think, limited the scope of the [analyses]. Financial planning looks at certain fixed elements and by its nature doesn’t think bigger about all that can really be done with data.”
The strategy has generated some early wins that, while relatively modest, provide a taste of what could be accomplished as the effort matures. For example, Specialized had been paying Google more than $1 million a year for search-engine-optimization services without really knowing if it was getting its money’s worth. The data team took a close look and figured out that the company could get the same reach and impact for much less.
While leaders at the company’s Morgan Hill, Calif., headquarters are on board with the need for the data initiatives, convincing some of the regional leaders has been more of a challenge, according to Rupp. “Most of those individuals have owned a traditional distribution or retail business, and they don’t necessarily see the value in it,” he says. “But I’ve been sending some of the data-team members to work with those leaders, and they’re starting to see the impact on generating new ideas and understanding not just the traditional finance data but what’s happening in the broader marketplace.” — D.M.
What more can DuPont performance chemicals spinoff Chemours accomplish in 2018? Since its spin in July 2015, the $5.9 billion revenue company has already raised capital through asset sales, cut net debt, and delivered on 60% of the cost savings it proposed to stakeholders. The company’s shares marched up steadily in 2017, reaching a price-to-earnings ratio of 34.4 in November.
For Chemours CFO Mark Newman, the priorities in 2018 will be execution and dialing up the company’s performance. Part of that will be improving the regular operating and business reviews with the company’s three unit presidents, keeping them focused on adjusted EBITDA, free cash flow, and return on invested capital.
Not that growth isn’t a priority, too — the company’s businesses are what Newman calls “highly investable,” and Chemours is forecasting greater capital expenditures in them over the next couple of years. But inside the organization, Chemours is still throwing off the shackles of the highly matrixed, bureaucratic DuPont. Instead of relying on numerous corporate staffs to interact with operations, Newman and other top management are forcing decision-making down to the business units and driving individual accountability, a keystone of the company’s transformation.
“We have moved [on] from an organization that wants to get every fact and figure before making a decision,” Newman says. “We want not only crisp execution but also timely decision-making. There has been a huge emphasis on the need for speed.”
Related to the idea of casting off the skin of the old DuPont is driving broader employee engagement in 2018. “One of the things that has surprised us is the level to which all employees can bring forth ideas,” says Newman. Chemours has established a framework to post employee ideas on a centralized platform, so they can be exposed and vetted and, if they have merit, executed quickly. “Now that we have the infrastructure in place, our next goal is getting more ideas through the pipelines,” Newman says.
Transformation is also underway in the finance department. Chemours has moved off of a legacy consolidation management reporting system. It is also changing its service delivery model to include some business process outsourcing. And Newman is trying to “refresh” the retained organization so that it is much more focused on high-value decision-support activities and less on transaction processing.
Newman has big ambitions for finance: he wants nothing less than a “top quartile” finance organization in terms of efficiency and overhead costs: “one of, if not the best” finance functions in chemicals, he says.
The finance and operations teams already have made great strides when it comes to cash flow. Chemours has cut its cash conversion cycle significantly, after, among other steps, making a concerted effort to determine what level of materials and finished goods the company really needs to stockpile in order to support customers.
“Today our business unit leaders understand that when we talk about capital invested, it’s not just the fixed assets; it’s also working capital,” Newman says.
The markets for titanium technologies, fluoroproducts, and chemical solutions are headed for growth in 2018. Chemours is also slated to take out an additional $150 million in costs. On paper, the company looks to enjoy a profitable 2018 — as long as it executes. — Vincent Ryan
There can be little doubt that the housing market has remained red hot, with September marking the 67th straight month of year-over-year price gains. Yet while people looking to sell their homes might be able to claim high prices for them, they also could find themselves in a bind. Once they sell their homes, they might have trouble buying new ones to live in. Numbers from the National Association of Retailers tell that story, too: by the end of September, total housing inventory had fallen year-over-year for 28 consecutive months.
To Kathleen Philips, the CFO of Zillow Group, a web and mobile nexus for homebuyers and renters fueled by ads sold to real estate agents, those numbers are important ones to consider as she looks for ways to fatten her company’s margins for 2018.
Commenting on what she considers the “historically low” number of houses on the market, Philips says “it’s challenging for buyers to find homes, and it’s challenging for agents because they often have to go with their clients into an offer situation [with the home they are selling] before the client can actually purchase a [new] home.”
Asked how those challenges will affect Zillow, Philips doesn’t hesitate. “We view it as an opportunity,” she says. One facet of the opportunity is that new features on its websites will tighten “the agent-buyer partnership as they try to make a purchase in the hot market.”
By doing that, Zillow could boost agent membership in its “Premier Agent” ad sponsorship program, which brought in about 70% of the company’s $282 million in third-quarter revenue. One example of a tech innovation that the company hopes could boost ad sales is the “My Agent” feature it launched this year.
After a potential buyer makes frequent visits to a premier agent’s website, Zillow automatically replaces a list of agents with a contact box that features only that agent. “This two-way contact module,” said CEO Spencer Rascoff on the company’s third quarter earnings call in November, “will help agents convert more leads into transactions by keeping that agent in front of the consumer throughout their search.”
In her quest to widen Zillow’s 2018 margins, Philips will also be looking at R&D investments aimed at luring traffic to the company’s web and mobile platforms. “One of the things we are testing right now is an instant-access platform where a potential home seller can connect with a real estate agent and talk to that agent about listing their home,” the finance chief notes.
Another major potential outlay on the CFO’s mind is sales force growth. “During 2017, we were a little conservative with the expansion of our sales force, so as we move into 2018 we’re evaluating [spending more on it],” Philips says.
Besides focusing on possible R&D and headcount increases in 2018, Philips will contemplate ways to build upon the company’s $100 million advertising spend in 2017. But a CFO’s focus can’t only be on spending. True to form, the finance chief points out that, along with mulling future outlays, she and her colleagues will “think about how we’re going to pay for all of that.” — D.M.K.
Invest for Growth
If Vincent Pilette, CFO of Logitech, has a mantra, it is “spend less, grow faster.” But a ruthless cost-cutter Pilette is not. Along with Logitech CEO Bracken Darrell, Pilette has spent five years restoring the computer device maker’s credibility, improving its cost structure, and trimming its product portfolio. That’s all in service of delivering sustainable top-line growth in its five big markets: gaming, video collaboration, music, smart home, and creativity & productivity.
But it’s what enables that growth that is the real priority in 2018: a focus on expanding what Pilette and the leadership team call “pure margin,” the margin before reinvestment. In a company with no outstanding debt, that gross profit is continually plowed back into the business to create a virtuous circle of growth.
Logitech, a $2.2 billion revenue company, aims long-term to deliver non-GAAP gross margins in the range of 35% to 37% and raise non-GAAP operating margins toward the high-end of its target of 10% to 12%. To expand margins, Logitech has “a broad set of levers, all the way from pricing to product costs across [a] diversified portfolio,” Pilette says.
Higher margins allow Logitech to invest in its five core capabilities — engineering, design, operations, go-to-market, and marketing. Reinvestment in any year can consist of things like “expanding the sales force to capture the large growth opportunities in video collaboration [webcams, headsets, meeting room solutions], redesigning the retail presence to drive incremental growth in PC peripherals, or training point-of-sales staff to better understand the products,” says Pilette.
Of course, funds go to products that are well-positioned in growing markets and where market share can be gained. Logitech also invests to “build up adjacent categories” or acquire “where it makes sense,” says Pilette. For example, Logitech bought Jaybird (audio devices) in April 2016 and ASTRO Gaming (gaming headsets) in July 2017.
As with any tech company, margin goals are enabled by automation. Previous information technology investments enabled the company to lower costs in finance, operations, and other functions. Going into 2018, though, the investments will be about “adjusting [Logitech’s] processes and tools to continue to make better decisions and improve performance,” Pilette says.
For example, recent improvements to the channel revenue management module of the company’s Oracle12 business suite give management quick and accurate information on contribution margin by customer account. Because growth is so important to Logitech, another aim for automation is to “create flexible processes that can scale to absorb business growth without increasing the infrastructure operating costs,” according to Pilette.
Technology is also enabling research and development of software-rich Logitech devices, like the FLOW-enabled PC mice and keyboards that can be connected across multiple devices. Likewise, machine learning and data analytics capabilities are an integral part of the company’s Circle 2 home security cameras.
The growth investment formula is working for Logitech. Revenue grew 15% in constant currency in fiscal year 2017 and the company projects 10% to 12% sales growth in constant currency for the current fiscal year, which ends March 31, 2018. Investors aren’t missing out: the company’s second and third preferred uses of cash are growing the dividend and buying back stock.
But Logitech is clear about its first priority: “So long as our margins are within our targeted range, we believe the best use of our capital is to reinvest in our capabilities,” says Pilette. — V.R.