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Best practice treasury delivers payback to DCC Back  
DCC's strategy of investing in best practice initiatives such as implementing treasury management software and standardising banking documentation delivers a substantial payback in terms of leveraging treasury resources to support Group initiatives, organic growth and acquisition integration writes Niall Kelly, in this profile of DCC's treasury department.
DCC’s focus on sales, marketing and distribution across a number of market sectors, principally energy, IT, healthcare and food, has delivered broadly based growth consistently over time. In addition to the value- added marketing and distribution services that DCC provides for major third party brands, readers in Ireland will be familiar with DCC’s ownn brands, including Emo, Flogas, Fannin Healthcare and Robt. Roberts.

Since DCC’s public listing in 1994 through to 31 March 2002, sales have increased from €426.1 million to €2.05 billion while profit attributable to shareholders has increased from €16.8 million to €76.3 million.

While organic growth is DCC’s first priority, the Group has been successful in making and quickly integrating bolt-on acquisitions.

From a geographic perspective, Ireland accounted for 35 per cent of turnover in 2002, the United Kingdom for 56 per cent while continental Europe mainly accounted for the balance.

DCC successfully focuses on cash generation and return on capital employed. The Group had a cash flow of e117 million from operating activities for the year ended 31 March 2002. DCC’s return of capital employed at 46.3 per cent on tangible assets and 23.1 per cent on assets inclusive of goodwill was significantly in excess of the Group’s cost of capital.

Treasury structure
The Group treasury function operates as a centralised value added service centre, reflecting a strategy of optimising treasury operations across the Group while ensuring a sense of continued ownership at local subsidiary level. Treasury activities are governed by the Group’s treasury policy which is reviewed and approved by the Board of DCC plc on an annual basis.

The Group treasury function at head office level comprises myself and my colleague, Daphne Tease (deputy group treasurer) - we interface with other members of the head office Finance function in relation to overall financial management activities, with Group risk management in relation to treasury controls across the Group, and with divisional management in relation to intra-divisional treasury matters.

Group treasury focuses on key treasury parameters, information systems and controls which, in addition to meeting the principal treasury requirements of the Group and its subsidiaries enable certain activities such as volume payments/collections and FX transactional hedging to be managed locally. As a Group treasury function, we also work closely with the management teams in the Group’s subsidiaries to meet their ongoing treasury requirements.

Key treasury parameters
The following key treasury parameters are managed centrally:
• Funding, liquidity and related interest rate risk: The Group’s net cash balance of e63 million at 31 March 2002, reflecting a mix of cash and short and long term debt, reflects DCC’s focus on cash generation referred to above. Short-term borrowings comprise draw downs of term facilities with DCC’s relationship banks. Long term funding is provided by a fixed rate, unsecured private placement denominated in US dollars, which has been swapped into floating sterling, together with a floating rate lease. Deposit duration is managed in line with floating debt rollover duration to minimise interest rate exposure.
• Sterling operating assets: Given that the DCC’s reporting currency is the euro, a proportion of its sterling operating assets are hedged with sterling debt to protect against adverse exchange rate movements. The cost of the hedge is effectively the sterling Libor/Euribor interest rate differential.
• Sterling operating profit: Similarly, given that approximately half the Group’s operating profits are sterling denominated, translation risk is managed centrally taking into account a degree of natural hedging due to sterling purchases in the Irish Group as well as sterling interest expense.
• Commodity price risk: Commodity forwards and swaps are the principal instruments used to hedge the aggregated LPG and oil products exposures across the Group’s energy businesses. Commodity hedges, which are generally dollar denominated, and related currency hedges to transactional currency usually do not exceed three months.
• Counterparty credit risk: Credit exposure to financial institutions in relation to deposits and derivatives is actively monitored within guidelines approved by the Board.
• Allocation of treasury limits to subsidiaries: Subsidiaries are funded on both an inter-company basis and through cash pools with appropriate, centrally allocated overdraft limits. FX trading limits with the Group’s relationship banks are also centrally allocated to subsidiaries.

Foreign exchange transaction exposures, other than those in the energy businesses, are managed at local level within the centrally allocated limits referred to above. Guidelines are agreed with the relevant subsidiary and divisional management which, while consistent with Group policy, provide further support in relation to managing the differing exposure profiles across these businesses. Transaction exposures tend to be covered for two to three months with forward contracts.

Information systems and controls
Group treasury utilises treasury management software to manage transactions at Group treasury level in addition to collating daily net bank balances across the Group’s subsidiaries - most balances are uploaded from the banks’ electronic banking systems. Euro and sterling cash pool balances are centrally monitored with net positions regularly cleared against DCC’s money market positions.

Subsidiaries report FX exposures and offsetting forward cover to Group treasury. These positions are summarised across the Group and natural hedge opportunities are monitored. Individual transactions are recorded in the treasury system and marked to market. Open positions for all subsidiaries are independently confirmed to Group treasury by the banks at month-end.
Critical emphasis is placed on bank mandates with standardised mandates agreed across the Group’s relationship banks. Procedures for independent confirmation of individual treasury transactions are in place. Electronic banking also receives close attention with particular emphasis on dual system administrators and segregation of duties. The Group subscribes to a real-time market information source which is helpful in monitoring market movements and ensuring competitive transaction pricing.

It goes without saying that Group treasury functions must focus on key risks and value drivers across their businesses.

As most corporate treasurers will attest, converting treasury best practice into reality is an ongoing iterative process involving significant interaction both internally and with relationship banks and other service providers.

Our experience is that time invested in best practice initiatives such as implementing treasury management software and standardising banking documentation delivers a substantial payback in terms of leveraging treasury resources to support Group initiatives, organic growth and acquisition integration.

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