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| Press release - Nordic/Baltic - Treasury Profile - Lego |
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Nordic/Baltic Treasury Profile - Lego
Current priorities at LEGO Group underline the ambition and scope of Nordic/Baltic corporate treasury operations these days. The world-famous Danish toy company – a participant in EuroFinance’s recent conference in Riga, ‘Managing New Connections, Mastering New Challenges’: Cash and Treasury Management in the Nordic and Baltic Regions – is making capital management its key focus. In addition, it is preparing for a strategic shift following a major restructuring, as well as investigating commodity risk management.
“We have a lot of tasks now that didn’t belong in treasury departments 10 years ago,” judges Jesper Moerup, Deputy Treasurer at the Billund-headquartered group.
“Compared to the specialised treasury function of former days, which primarily concentrated on FX and liquidity, we are nowadays much more integrated in the various functions of a modern business like LEGO Group. Today optimizing the capital structure and adapting the tax policy - both for each single LEGO entity worldwide and at a group level - are important for value creation,” he adds.
Weighing capital costs
LEGO’s capital management project is particularly aimed at controlling and minimising risk in new business areas. Treasury determines weighted average cost of capital (WACC) and develops financial models for major projects and new business activities. Moreover, the department is the main driver of a constant effort to achieve the best mixture of debt and equity for each entity in the group. This includes deciding the dividend level.
This new focus on the cost of capital reflects a broader shift in emphasis at LEGO. Treasury is central to implementing a new ‘Manage for Value’ effort across the group.
Last year LEGO accumulated considerable net cash. This positive balance reflected a period of consolidation after the group’s major restructuring. An effort to manage working capital better and the success of its Euro cash pool in extracting excess cash from its sales companies in the region also contributed.
Now treasury is preparing to operate with far less cash. The group will soon make a substantial dividend payment to its owners. Going forward, it will be “more or less balanced”, according to Moerup.
This makes cash forecasting capabilities essential. LEGO operates a uniform SAP platform, which is a considerable advantage when creating cash forecast reports, Moerup observes.
He expects LEGO to have no more than DKK500 million in net cash at any time. The group can also draw on short-term credit lines with most of its banks and/or its committed 5-year club deal loan facility if it needs additional funding, though.
LEGO’s restructuring followed major losses in 2003 and 2004 (“a critical period”). The group’s response was to slash its costs by closing all plants outside Denmark and outsource much of its production. While net sales remained stable during this period, the group is now seeking to return to a growth path.
Managing raw materials risk
Another important project is in the area of raw material purchasing. Despite the group’s outsourcing initiative, it remains a manufacturing company domestically. As such, it is exposed to price shifts in electricity and raw materials – particularly the oil-based plastic from which the LEGO ‘bricks’ are made.
Accordingly, treasury is co-operating closely with Group Procurement in minimizing the risk of price volatility. The growing array of financial instruments listed on stock exchanges enables hedging of more input materials, Moerup notes, leaving treasury with the key role of limiting the risk.
LEGO has committed itself to complying with IFRS, with treasury the main driver in achieving compliance in respect of financial instruments. The group wants to use hedge accounting and has given treasury the task of creating the documentation and procedures that will enable it to be in compliance with IAS 39.
Anticipating SEPA
The Single European Payment Area (SEPA) will bring clear benefits by reducing the group’s bank accounts and unifying standards such as Edifact, Moerup argues. Currently, LEGO calculates that it employs 20 different versions of Edifact.
However, he is sceptical whether all Eurozone countries will be ready to implement SEPA next year. Southern European countries are the likeliest to fall short, he believes.
Even ahead of SEPA, LEGO is enthusiastic about its Euro cash pool. Managed by SEB and ING Bank, it superseded an earlier structure with another bank. “We’re very fond of it,” comments Moerup.
“Equally important is that Nordea Bank is managing another cash pool containing Scandinavian currencies and sterling for the LEGO Group. The system of cash pools provides an efficient and labour-saving solution, as all balances are posted and reconciled automatically in the group's system of internal deposits and loans,” he continues.
Besides its European arrangements, the group operates a North American pool in the US and Canada. However, this is not a cash concentration account. Rather, treasury operates an interest netting agreement in these markets through Nordea.
LEGO uses SAP’s Corporate Finance Management System to handle its internal deposits and loans, and its cross-currency and interest rate netting. CFM is an additional module to the classic SAP ERP system.
Together with tax
At LEGO treasury forms part of a combined treasury and tax department headed by Knud Hjorth. Moerup and fellow Deputy Treasurer Lars Thulstrup Bruhn have day-to-day responsibility for the broad range of treasury and related issues noted above, supported by three back-office professionals; the tax team comprises two colleagues in Denmark and another in the US.
Naturally, the department works closely with LEGO’s rather larger accounting department. It also draws on the group’s shared service centres (SSCs) around the world in areas like trade finance and general cash management.
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