THE FINANCIAL DIRECTOR INTERVIEW - Something for the new millennium,

Durex-maker London International Group’s FD has perhaps the greatest scope for making bad double entendres of any financial executive in the country. The condom business may not be quite so under-the-counter as it was pre-AIDS, but there is always room for a cheap joke or accidental pun. “We were having a meeting about the Northern Europe monthly report last week,” says incumbent FD David Davies, “and I mentioned that the sales levels were moving in the UK as we prepare for the traditional summer hump.” But it’s not so long ago that the FD’s office at LIG was anything but a stage for a comedian. Last November, Financial Director interviewed James Tyrrell, Davies’s predecessor and the man who staged a dramatic turnaround in the company’s finances after taking over the job and finding that he couldn’t even pay a dividend to shareholders. That was 1993, and LIG is now firmly back on solid ground. Davies was brought in last year as Tyrrell headed for retirement – although he wanders past Davies’s office during the interview, and still plays a role at the company he saved. Having worked in his shadow for the past nine months, Davies is all too aware of his forerunner’s pedigree. “James is a much respected – loved – individual in this company,” he says, “and I wouldn’t do anything which might make people think I was going to brush the past aside. I’ve inherited a damned sight cleaner ship than James inherited five years ago, and I’m enormously grateful for that.” But in some respects, Davies has the tougher job. While “Squirrel” Tyrrell had to find cash – and fast – to placate shareholders and creditors, then rebuild what was a basket case of a company back into the international force it had been, Davies needs to prove the double-digit growth can be sustained. The worst excesses having been trimmed, the new FD has to push even harder to prove the company was worth saving. Davies had a similar disaster recovery job himself, when as a divisional FD at Grand Metropolitan he had to cope with the headquarters of Burger King being wiped out – literally – by a hurricane in Florida. But he also learned that a degree of adversity can be a good thing. “That kind of single focus” – be it hurricanes or financial disaster – “really helps an organisation deliver the undeliverable, and what I would like to do is go in and say, ‘Here’s how we generate maximum returns: we take the company back down the toilet.’ If you focus with the same zeal and passion that was clearly necessary five years ago, when the alternative was oblivion, then we can really take this company places.” Davies speaks with a quiet intensity which is somewhat tempered by his soft scouse accent. (He refers to Tyrrell affectionately as a “bit of a toff”.) After training as an accountant with Touche Ross in Liverpool, he was worried about starting out on a treadmill career than might lead to extreme dullness and intellectual flab. So after three years with firm on Merseyside, he embarked on the first of his “stretching” exercises – a job at Price Waterhouse’s Milan office. After Milan, Davies took up his first FD role, at a subsidiary of BOC. But the move into business wasn’t quite enough on its own, and he studied for an MBA at the same time. That’s not to suggest he had a grand plan – anything but. “I know there are people out there who have plotted out steps of their career with a breathtaking degree of meticulousness, but I’ve never done that.” Take his move out of Grand Met, for example. Rather than being a planned career move, Davies felt he had to change jobs when his youngest child failed to recognise him after long months of business travel to the US and Far East. Following Grand Met was a spell as chief financial officer at Disney Stores Europe, the company which runs all the Mickey Mouse operations this side of the pond – shops, theme parks, everything except Disney films. Disney helped Davies expand his vision far beyond the finance function. Amazingly for the type and size of company that Disney is, he also had charge of marketing and customer relations at the entertainment giant. For example, he recalls having to deal with an irate woman whose daughter had almost choked to death thanks to a faulty clasp on a Disney necklace. “She left me feeling as if I was a child offender, that I had deliberately contrived to slaughter her seven year old daughter,” he says. “Shareholders are a lot more straightforward than an irate Disney customer.” But Disney certainly provided challenges for Davies’s skills as an FD as well. “They have ‘three 20s’ as the core financial objectives: they want a 20% operating margin in any business they’re in; they want its top lines to grow by 20% a year; and they want a minimum return on assets of 20% – all of which are very stretching,” he says. “And they’re particularly stretching in the retail market, because it’s very capital-intensive,” Davies continues. But even the shops look easy compared to the huge capital investment that Davies was routinely handling at the theme park operations, where a single, make-or-break ride like Space Mountain (which was designed to save the whole Euro Disney project) will cost $100m. Unfortunately for the finance function at Disney, given the stringent performance targets, it isn’t the beancounters who have power over budgets. Instead, the creative talent, the so-called “Imagineers”, are in the driving seat. “They are renowned at Disney for being outside budgetary control, quite frankly,” Davies admits. Perhaps the best example of this isn’t with the huge capital investments on rides – after all, the theme parks actually do make a good return on assets despite this enormous outlays – but a case Davies remembers from the Animal Kingdom safari park near Orlando. “In Florida it gets very hot,” he points out. “You’re not going to see lions out in the open because they’ll be getting cool under a tree somewhere. So Disney actually built underground air-conditioning pods which spew out cold air right in the middle of the grassland, so the lions will congregate there.” Result: happy tourists able to gaze on “chilled out” basking lions. Nowadays, Davies has very different problems to cope with. The Space Mountain ride, at $100m, is worth about as much as the entire fixed asset base of London International Group. But there are similarities in the finance function. “Our business is different to the extent that although new products are the key to our forward strategy, this isn’t a one-a-day type environment,” he says, referring to Disney’s high output of creative and merchandising products. “But the question is fundamentally the same: you’re taking a risk on something that you inherently think makes sense, but you don’t fundamentally know will make sense until the sales start coming in.” Davies’s personal agenda of stretching himself and his role seems to have continued at LIG. It’s actually quite hard to keep him talking about the financial aspects of the company, and at times he seems far happier and far more enthusiastic talking about marketing, sales and manufacturing issues. In this respect, he’s fairly typical of many modern FDs whose vision stretches beyond the numbers and into more general company strategy. For Davies, this process probably took shape when he studied for his MBA at BOC. “It was working in a multifunctional environment that made me want to do the MBA,” he recalls. “I was able to get myself into a much broader context, so that whenever I talked numbers it was legions away from ‘Do you comply with SSAP 9 and section 183 of the Companies Act’ and far more towards ‘Why do we want to allocate our capital to this business which shows no prospect of returning anything to us for eight years – and by the way, what are the marketing and operational realities behind it.'” This attitude was something of a change from his feelings when he took his first finance director role at BOC. “I’d had no formal tutoring or training,” he says. “At the first multifunctional management meeting, I saw it as my role to go round and bite people.” But there is a balancing act in Davies’s view. “There’s a danger that you lose sight of the beans,” he warns. “You can be a great partner to the chief executive in terms of challenging the strategy and developing together … but if your business goes out of financial control, you get fired.” Davies feels he learnt a lot about this from his predecessor, Tyrrell. At the first analysts’ meeting he attended alongside the then incumbent, Tyrrell was so relaxed – despite the company’s chequered past – that Davies was immediately put at his ease. “‘It’s perfectly straightforward, isn’t it David, I don’t know why people get excited about it,’ he said. But if you ever, as a finance person, put up a slide with a number on it that doesn’t agree with a number you had on a previous slide, your whole credibility is shot. If people can’t rely on the numbers they’re looking at, then everything else is bullshit.” Tyrrell may have re-established City confidence in LIG, but the job of keeping it remains difficult. LIG has been careful not to fritter away City bullishness with overly rash moves into unstable markets. This is typified by the company’s approach to the biggest condom market on earth – Japan – and the biggest potential market, China. In the latter case, LIG sought out a joint venture partner to keep the investment at an acceptable level – a mere £2m – and to help negotiate the political and cultural minefields. “The City certainly reacted positively,” says Davies. “If it had been an £80m investment, I think it would have been a different story.” The old story about LIG is that its condom business really benefited from AIDS – although in fact this is less true than people would like to believe. The share price did rise in the mid-1980s, but sales soon plateaued. Davies still recognises the value of sex to the company – “The official company line is that anything that increases the level of sexual activity is good for our business,” he says, referring to the Viagra hype – but the real long term benefit of the AIDS scare has actually been in the sales of examination gloves. This now high-volume business is matched by the higher margins in a new market for powder-free surgical gloves. Again, LIG has helped drive this safer form of prophylactic with healthy R&D and marketing spend, a point Davies stresses in the company’s annual report. Avanti, a new thinner condom made from polyurethane, is a classic case. Unlike a Disney film and the highly speculative associated marketing and merchandising spend – a concept like Pochahontas might bomb with the public, even though budgets are allocated to all the peripheral activities many months before the first screenings – the thin film of Avanti has demonstrable benefits which should pay dividends. “It’s thinner, has no odour, you can use oil-based lubricants, it transfers heat more effectively than the latex products and these actually translate into a better sexual experience,” he explains. “Certainly better than any three-minute ride in Space Mountain!” But despite such new products and moves into new markets, Davies is keenly aware that driving down cost is one of his key concerns. He also realised the value of rationalisation when he was given a big bar of Toblerone with 19 different languages on the packaging. “There you have a worldwide Toblerone block. We do £135m revenue in the condom business, but with over 1,000 lines, you have to ask whether we’re maximising the effectiveness of our manufacturing capacity. That’s an initiative we have to look at.” At the heart of these considerations is the usual drive for shareholder value, vital if LIG is not to squander its restored status in the City. But Davies sees additional benefits derived through the company’s employee share ownership scheme. Unlike many companies, LIG has successfully rolled out a scheme for its overseas workers. “The proportion of the Malaysian workforce which actually bought into the scheme was extremely encouraging,” he enthuses. “Honestly what we’re trying to achieve when we talk about shareholder value and driving up investor returns is to say to staff that we’re talking about them as well. You can never put off the message that you’re increasing shareholder value; that’s what you’re put on the planet to do if you’re a director of a public company.” Davies has been toying with value-based management metrics as a means of making the company perform better (although he fights shy of using tools such as EVA at the moment – “That’s certainly something we’d look at in the future, but we’re just not ready for it yet”). But there have been more fundamental tasks for the finance function at LIG. For example, the company used to report by geographic region, a process Davies found difficult to understand. “We’re moving from asking about profitablility in northern Europe or southern Europe towards asking, ‘What is our investment base in the condom business, what is our cost base in condoms, what is the revenue potential in condoms?'” he explains. “The geographical dimension is almost meaningless, because we’re not in the northern European business, we’re in the condom business or the glove business.” Adding up the various dimensions of Davies’s career and his drive to be stretched, it’s not hard to see that he wants to run a company. Often, purely through enthusiasm, he talks as if he already is running LIG. And in that sense, Davies is a good example of the modern FD. “It was only when I joined industry that I realised that companies prepare financial statements other than to have them audited and distributed to shareholders,” he says. “They’re prepared for companies to understand what’s going on.” Ever since then, he seems to have been looking for a way to influence the parts of business which generate those figures in the first place. CURRICULUM VITAE Name: David Davies FCA Age: 43 Salary: £122,638 (Nov 1997 – March 1998 inc. £21,450 bonus) Career: 1978-81 – Touche Ross & Co, articled clerk 1982-83 – Price Waterhouse (Milan), audit senior 1983-88 – BOC Group plc 1983 – Assistant manager, Internal Audit 1984 – Finance manager, UK Speciality Gases 1986 – Finance director, Viggo Health Care 1988-94 – Grand Metropolitan plc 1988 – Commercial director, The Retail Enterprises Group 1989 – Finance director, European Restaurants 1991 – Vice president/corporate controller, Burger King Miami 1994 – Finance director, IDV Asia Pacific region 1994-97 – The Disney Store Europe Vice president finance and market development; chief financial officer 1997 – London International Grp, finance director Davies on PwC: “I don’t know what it achieved quite frankly. I don’t buy the ‘It broadens our global representation’ argument, because if they (PW) weren’t globally represented, I don’t know who was. I mean, they’ve been in every city that I’ve ever been to.” Davies on Disney: “There’s big egos, big political networks. Their HQ was in Burbank, California, my operation was in Watford – there’s a bit of a cultural mis-match there. When I worked five years overseas for Grand Met, I was Our Man in Munich, Our Man in Miami. I always had a network at HQ. Suddenly, I was back in my own country, and I’m not Our Man anywhere.” Davies on condoms: “The condom has been around for centuries. If there was a cure for AIDS – which we’d all applaud – or a male contraceptive (pill), it would be churlish to say we wouldn’t consider that in determining how we marketed our products. (But) sad to say, the world offers us a whole raft of reasons to wear (them).”

                               1998 (£m)          1997 (£m) Turnover                          344.8              339.2 Operating profit                   46.7               31.2 Pre-tax profit                     28.8               29.5 Dividends                          11.1                9.6