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Two years ago, accounting fraud at Royal Ahold earned it the nickname “Europe’s Enron”. CFO Hannu Ryöppönen is still struggling to present a vision for the future.
By Jason Karaian

Every August, the World Sauna Championship is held in a small town in southern Finland called Heinola. After the preliminary rounds, six finalists sweat it out in the last event to see who can stay the longest in the heat – kept at an astounding 110 degrees Celsius by competition officials. The last person able to leave the sauna under his own power wins. The current world record is 16 minutes and 15 seconds, set by thick-skinned Timo Kaukonen in 2003. Fellow Finn Hannu Ryöppönen, CFO of Royal Ahold, would certainly impress Kaukonen. When Ryöppönen decided to join the scandal-wracked Dutch food retailer and distributor in the spring of 2003, he says a friend warned him that it would be like “going into a sauna and staying there for a year.” At the time, “I didn’t understand how right he was,” says Ryöppönen with a pained smile. It’s been nearly two years, in fact, “but now I’m being let out occasionally, and it’s a good feeling,” the CFO says. Ryöppönen has good reason to be relieved. Ever since “Black Monday” – or February 24, 2003, the day when Europe’s most spectacular accounting fraud (it was before Parmalat) was made public – the company has been in crisis mode. Within hours of announcing “significant accounting irregularities” at its US Foodservice (USF) unit, Ahold went from being a global food-retailing powerhouse to being “Europe’s Enron”, and having to bear the stigma that this carries. On that day, Ahold’s Amsterdam and New York-listed shares lost more than 60 percent of their value, its credit ratings were cut to junk, and it was forced to rely on an expensive emergency credit facility to pay its bills. CEO Cees van der Hoeven and CFO Michiel Meurs resigned, quickly followed by a raft of other senior managers and directors.

By July that year, when the forensic investigation was complete, things were worse than anyone could have imagined – 470 accounting irregularities and 278 internal control weaknesses were uncovered. As Lehman Brothers analyst Christopher Gower observed shortly after the scandal broke: “With no management, no clarity on accounts, no clarity on financing, future strategy, or disposals, it’s a long road back.”

That road back has led Ryöppönen and his team through a liquidity crisis, a cull of a global empire that once comprised more than 5,600 stores on four continents, and tough negotiations with both Dutch and American prosecutors. Also, there has been a series of run-ins with shareholders, analysts, and the Dutch public, angered by the demise of a national icon.

Having dealt with all that, Ryöppönen may be feeling the heat less, but Ahold’s increasingly impatient investors are now pressuring him and CEO Anders Moberg to reveal plans for the future. As the recovery program hatched in 2003 nears its self-imposed deadline, investors want to know how the world’s number-four supermarket operator will take on rivals like Wal-Mart, Carrefour, Metro, and Tesco. Thus far, both Moberg and Ryöppönen – a CEO/CFO team that spent 12 years together at Swedish furniture retailer Ikea – have offered only a few hints. How much longer can investors wait?

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Back at the beginning of the crisis in early 2003, Ahold’s fate wasn’t something that Ryöppönen had given much thought to. He was working in London as the finance chief of private equity house Industri Kapital and the Ahold scandal was “only something I read about in the newspapers,” he says. That changed, however, after a dinner in March with his ex-Ikea boss, who mentioned that he was mulling over an offer to take the vacant CEO post at Ahold. A few weeks later, Moberg phoned to say that he decided to take the job, but on one condition – that Ryöppönen join him as CFO. “I would’ve kicked myself for the rest of my life if I hadn’t accepted the job,” says the 53-year-old Finn.

By June, Ryöppönen was ready to roll up his sleeves, in time for three of the four testy shareholder meetings that took place that year, not to mention 16 audit committee meetings and numerous encounters with bankers, lawyers, consultants, and regulators to help unravel the far-reaching fraud while keeping the company running. “This was the sauna period; the pressure was relentless,” says Ryöppönen.

He had to work fast. According to Stefan van Steenkiste, a senior director at Alvarez & Marsal, a London-based turn-around consultancy, a CFO in Ryöppönen’s situation has three key questions to ask on his first few days on the job: “Is there enough cash? What opportunities are there to slow down the disbursements and accelerate the cash generation? Is there time to survive?”

Facing a €12 billion debt pile, and having drawn down some €1.2 billion from its emergency credit facility, Ahold needed fresh cash to get a stable footing for the 2004 launch of R2R – company shorthand for its Road to Recovery program. Here, Ryöppönen had two choices: sell USF, the company at the center of the accounting fraud, or raise cash via a rights issue. Fraud-tainted USF wouldn’t fetch as much as the CFO thought it was worth, so a 2-for-3 rights issue was announced in November 2003.

A month later, Ahold raised €3 billion in the rights issue and signed a new €300m and US$1.5 billion secured back-up credit facility with a syndicate of banks. “I was impressed that shareholders gave us the benefit of the doubt,” says Ryöppönen. (A 42 percent discount on the new rights certainly helped.) He knew even then, however, that investors’ patience was based on Ahold hitting the targets it set in the R2R plan, and some of those are yet to be met.

Year of execution

One key target for Ahold is raising €2.5 billion from disposals by the end of this year, by selling all of its interests in South America, Asia, Spain, and some businesses in Europe and the US. Others include 5 percent sales growth, 5 percent Ebita margin and 14 percent return on net operating assets in the retail operations starting in 2006. On the distribution side, Ahold hopes to boost USF’s Ebita margin to its pre-scandal 2002 level of 1.7 percent by 2006.

The company calls 2003 a “lost year” and 2004 its “year of transition”. In 2004, the company recorded a net loss of €443 million on sales of €52 billion, compared with a net loss of €1 million on sales of €56 billion in 2003. Last year’s results were heavily impacted by exceptional charges, including a €495 million loss related to divestments, mainly in Latin America. (Those divestments, however, helped reduce net debt to €6.3 billion at the end of 2004 compared with €7.8 billion at the end of 2003.)

But it’s this year that clearly holds the key to Ahold’s turnaround. After plumbing the depths in early 2003, its share price has doubled since, outperforming the Dow Jones Stoxx Retail Index, which rose by 50 percent over the same period. Expectations are high for 2005, which the company calls a “year of execution”, and Ahold will surely be punished if it falters. Analysts are now expecting Ahold’s net income to reach €582 million in 2005, according to Factset, which gathers forecasts from brokers.

For Ryöppönen, a key component of meeting this year’s targets involves a major transformation of Ahold’s finance function. Given that the root of many of Ahold’s woes leads back to finance, in the form of either shoddy accounting or ineffective controls, the importance of Ryöppönen’s vision for his finance team can’t be underestimated.

“The old structure was an ‘us and them’ situation between CFOs of the units and the center,” he explains. Under ex-CFO Meurs, each operating company ran finance on its own, with unit-level CEOs the sole point of contact for group CEO van der Hoeven. At headquarters, Meurs’s group finance function concerned itself only with their role in helping the company meet the CEO’s longstanding pledge of 15 percent annual earnings per share growth, having little to no contact with finance staff out in the units.

Last year, Ryöppönen began plotting a new matrix structure for finance based on the model that worked at Ikea. An important change is splitting finance at Ahold into two functions – accounting/reporting and business controlling – with staff getting dual reporting lines. Having hammered out how the model will work in practice with the 20 top finance executives at a meeting in December, he’ll be leading a big seminar introducing the matrix structure later this month.

The structure means that the accounting/reporting division has authority over rules and deadlines, says Ryöppönen, pointing out that the solid-line reporting relationship with headquarters provides stronger oversight. Business controlling, on the other hand, focuses on “what makes the business move,” the CFO says. It focuses on developing qualitative analysis and acts as strategic advisor to operational managers.

Meantime, in the business units, finance managers report up to their unit-level CFOs as before, but at the same time belong to and collaborate with a group-wide function. Retail-savvy finance managers with knowledge of local markets, notes Ryöppönen, are critical to the task of meeting Ahold’s goal of increasing sales of low price/high volume “own label” products, a key factor in the meteoric rise of Wal-Mart and Tesco in recent years.

But this alone is not the sort of work that investors and analysts are focused on.

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Having retrenched to mature markets where it holds the leading or second-place position, namely the Netherlands and the northeastern US, Ahold has lost ground to rivals who’ve been building businesses in less saturated, faster growing markets. And while Ahold has been putting its cash into restructuring costs and paying down debt, rivals such as Wal-Mart and Metro have been making forward-looking investments in things like radio frequency identification tags, a technology that promises to revolutionize supply chain management. These are just two examples of several trends in the fast-moving retail industry that Ahold is late in addressing. “While we were in crisis mode, the world was changing dramatically,” sighs Ryöppönen.

So now he and Moberg are coming under heavy fire for skirting questions about Ahold’s plan of attack. Like other analysts, Lukas Daalder, head of research at Amsterdam brokerage Oyens & Van Eeghen, grants that with a looming US class-action lawsuit and American and Dutch investigators hovering, Ahold has every right to be cautious about how it communicates. But, he quips, “it’s like the lawyers are talking instead of the businessmen. You can’t pin them down on anything.”

That was clearly evident during a November conference call with analysts. After batting off several questions about guidance, Moberg curtly assured listeners with, “we confirm our targets. We still believe that we can reach them, and from now until then, there will be a step-by-step improvement.” Nothing more, nothing less.

Gradually, details of Ahold’s progress on its recovery program and some sketches of forward-looking plans have emerged. By the end of last year, Ahold says it saved more than €200 million by rationalizing administrative headcount, consolidating systems, and pooling procurement. It expects these savings to rise to €650 million by 2006. To date, the company also says it has signed divestment deals worth €2.6 billion, beating its target several months ahead of schedule.

What it will do with the cash saved and raised in the R2R program, however, is anyone’s guess: reinvesting it in “strengthening Ahold’s value and service proposition” is the company line. At a press conference announcing 2004’s results in April, Moberg again avoided answering several questions about the future. “When we make a decision, we will communicate it to you,” was his standard reply.

Ryöppönen is aware of the growing uncertainty, but the finance chief remains cool under pressure. Upcoming milestones at the top of his mind include wrapping up projects for both IFRS and Sarbanes-Oxley compliance. He’s also still basking in the favorable settlement of charges with the SEC, which carried no fine and gave “financial clarity for our banks”. This allowed Ahold to shed another vestige of its crisis-riddled past in February by terminating the credit facility put in place in late 2003 as emergency financing. Ryöppönen is now in discussions with banks for a new facility with more favorable terms. “We were running after the banks. Now they are running after us,” he says. “I think people are starting to understand that we are back.”