One of the walls in its Amsterdam headquarters shows the evolution of the Philips business. Philips’ roots lie in Eindhoven, where, in 1891 Gerard Philips started producing light bulbs in an empty factory building. When he was later joined by his research-oriented brother Anton, the firm enjoyed its first major business stimulus. Through vertical operation, with their own factories and dependent suppliers, they took their first big steps towards success.

Continuing to develop through the production of radios and TVs, followed by Philishave electrical razors and inventions such as the Compact Cassette and the Compact Disc as new audio media, the company then expanded into professional products, such as medical equipment, studio mixers and computers. Today, Royal Philips is a diversified technology company that focuses on innovation in the healthcare sector.

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Currency risks

The internal structure of this multinational comprises two axes, the business groups and the markets. The business groups are organized into product types: medical equipment, lighting and domestic appliances – along with variations on these themes. The business groups develop and produce the products and distribute them to their international markets where the products are sold. Together, in a matrix, these two form what’s known as the business-markets combination. Commercial employees (‘the business’) and financial managers (‘finance business partners’) are active in both axes and it’s their joint responsibility to ensure that a healthy and successful business can develop and thrive.

We are active in over 100 countries and we process EUR 100 billion in internal payments every year, so, clearly, we are highly exposed to currency risks.

Gabriel van de Luitgaarden, Senior VP, Head of Financial Risk & Pensions Management at Philips.

In the logistics, financial stream from factories to markets, all manner of invoices are sent back and forth and, eventually, money from customers flows through the market to the Treasury. Hedging currency risks is expensive and prevention is always better than cure, he muses: “If you don’t properly understand what the risk is and what effect it will have, there’s not a lot you can effectively do about it. But by quantifying risks you can get a handle on them and decide whether you want to take any action. You have to consider aspects such as what will happen to EBITA if you do nothing, how much lower will it be if you hedge, and how much will it all cost? It’s all about how much risk you are prepared to accept.”

Currencies fluctuate in relation to one another and this strongly influences a multinational’s earnings and financial reporting. “We deal with risk management every day,” says Van de Luitgaarden. “But the people who work in the business very rarely do so. They see it as a specialism, but that’s not really the case. People in the business should be much more involved with it, asking themselves what is acceptable and what should I do about it?”

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Argentinian toothbrushes

Philips initiated a project to define a new FX policy and hedging strategy for currency risks. Above all, it had to give the people in the business much more insight into the impact that fluctuations in exchange rates have on their performance, and show them how important it is for them to understand and manage currency risks.

“In many multinationals the business part thinks that the Treasury will just hedge currency risks, despite the fact that these currency fluctuations cannot simply be neutralized,” says Zanders consultant Lisette Overmars, who was involved in the project. “You can manage it all, but eventually you’ll need to come up with other solutions.”

Van de Luitgaarden adds: “That’s why we explained to the business that we can provide more insight into the risks and buy them time through hedging, but we cannot completely protect them. There’s no magic formula that can shield you from the effects of currency fluctuations.”

This bespoke form of hedging is primarily directed at countries whose currencies typically lose value, sometimes suddenly performing really well, but eventually losing value relative to harder currencies like the euro and the dollar. “That’s because emerging market economies are less solid,” says Van de Luitgaarden. “There is often high inflation and less political stability. If you don’t do anything about the prices in the respective countries, than the fact that their currencies lose value against the euro will progressively erode your income. There are extreme cases where we can lose 30 to 40 per cent in value in a year, which cannot be remedied by hedging. In such cases you have no option but to constantly increase your product prices.” It means, for example, that the price of a toothbrush in Argentina can suddenly rise by 10 per cent from one month to the next. “But not everyone in the business does this, which is why education plays such an important role in the project; it has to be visible. For many people the effect that currencies have on results was far from clear. We therefore developed an FX model to make the currency footprint visible. It shows us which currencies our EBITA is derived from and the extent of our various exposures. Thanks to this new policy we can make EBITA more predictable and less volatile, although we still cannot completely cover the risks.”

The real risk management is mainly to be found in the market; for example, where can you best procure in order to reduce your susceptibility to currency risks? Van de Luitgaarden says: “Take Japan, for example, where we are huge in medical equipment, representing substantial income in Japanese yen. But we don’t spend anything there because we don’t buy there. Three years ago the Bank of Japan began to devaluate the yen to stimulate the country’s economy, and this had huge repercussions for us. A 20 per cent drop in the value of such a currency results in our sales and profit also falling by 20 per cent – that’s just how it works. And if you don’t do anything about it, the situation won’t change. In addition to short-term hedging, to reduce your vulnerability to such currency fluctuations you need to consider procuring more in yen, or even opening a factory in Japan.”

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More consistency and efficiency

The old way of working, centered on a policy set up about 18 years ago, was based on a Philips that was both organized very differently and was much bigger than it is today. Van de Luitgaarden continues: “Back then we had 12 product divisions but our performance, in particular, was managed differently. Every factory had its own P&L account and budget. If a factory was exposed to currency risks it had to reduce them itself and if any hedging was necessary that too had to be done by the factory in question. Now we measure our performance at a higher level, via the business-markets combinations. The factory’s P&L is now less important – it’s about the result of the group as a whole. The exposures that you hedge are therefore the ones that affect the result of the group. It’s much more efficient. If you're in a ‘long position’ in a particular currency, you sell it, in a single transaction. In the past this was done factory-by-factory, in several transactions. Given the tens of thousands of transactions that we used to do, this now represents a huge efficiency boost. The spread is no longer paid multiple times by buying and selling the same currency. We hedge currencies in the same way. We’re looking for risk reduction, so it makes little sense if everyone follows their own policy – it has to be done consistently. That’s actually more important than the net group exposure.

It's a combination of the two: hedging at group level and the highly consistent application of our hedging policy. That has an enormous  impact on the risk reduction that’s achievable.”

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Headwinds and tailwinds

The project was launched in September 2014 and the new FX policy went live in November 2015. Given that it involved the whole organization, which was used to doing things the way they’d been done for the past 18 years, it was a formidable challenge to make the necessary changes. Moreover, three weeks after the start of the project it was announced that the company was to be split into the lighting division (Lighting Solutions) and a combination of the Healthcare and Consumer Lifestyle divisions (Royal Philips). The organization’s focus, particularly at the IT and Treasury departments, was then obviously on the impending split. It affected much more than just the business; it also had repercussions for Tax – which had to be paid in 100 countries – and Accounting and how it would all be technically processed in the books with the use of hedge accounting. All-in-all, it was a sea change.

“Its implementation was indeed quite overwhelming,” concedes Van de Luitgaarden. “It was complex material for which there were no ready-made solutions. We were dealing with people in the business who did not fully understand the situation; they only took into account what they did themselves and didn’t look at the bigger picture. This sometimes made it difficult to explain. Take, for example, a factory in the UK making mother & child-care products.

A high exchange rate of the pound against the euro at the time decimated profitability because procurement and manufacturing costs just kept on rising. But looking at Philips as a whole, the rise in the value of the pound was a good thing; we earned more pounds than we spent. We didn’t have to buy pounds to cover costs; we sold pounds to cover our sales. But try explaining that to the UK factory – at the end of the day currencies influence bonus targets. Sometimes you have a tailwind and at other times a headwind.” Last year was a good year for those who sold in dollars; which rose against the euro. “Thanks to the dollar being so much stronger, our sales in 2015 were EUR 2 billion higher, which is an awful lot on a total of 24 billion. That’s something to take into account, because it was certainly a windfall. This new way of looking at things needs time.”

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What else has Zanders done for Philips?

• Treasury management: the extrication of treasury operations and the setting up of new treasury functions for Philips’ former television business (TP Vision) and the lifestyle entertainment business (WOOX Innovations).
• Risk management: the development of a new commodity price risk management framework.

Do you want to know more about risk management for corporations? Contact us.

Canada’s largest railway set out to simplify its payments and improve reconciliation with enhanced remittance data, while also reducing IT support costs. The project will run parallel with the Canadian Payments Association’s (CPA’s) initiative to modernize the system and introduce ISO 20022 formats. So, following a thorough request for information (RFI) and request for proposal (RFP) process with the banks, the Canadian National Railway Company (CN) now has its future vision for bank connectivity and global-standard payments, as well as a multi-year roadmap to establish best practices.

‘North America’s Railroad’

CN operates approximately 20,000 route miles of transcontinental railroad from Vancouver in the west to Halifax in the east, and all the way down to New Orleans on America’s southern coast. Its market cap of US$43bn (C$57bn), as of February 2016, makes ‘North America’s Railroad’, as it’s known, the biggest rail company in Canada in terms of both network and value. The majority of business, consisting of freight, takes place in North America, but CN’s reach extends much further, with operations and transport services in Asia and South America.

The group treasury, centralized in Montreal, takes care of cash management functions and does all FX hedging and cash pooling with the two main operating currencies, Canadian dollar and US dollar. This business model meant that CN needed a bank with a strong presence in the US and Canada, as well as an international footprint. In 2015, therefore, the company started to look into streamlining its banking relationships.

European perspective on Canada

Zanders was asked to provide guidance on both the RFI and RFP phases of the bank selection process. The aim was to choose one or two relationship banks for domestic and global operations. Due to the specifics of the Canadian market, the company chose one bank for its North American operations and one for the rest of the world. Zanders was an active ‘sparring’ partner in this process and supported CN throughout the RFP, during the evaluation of responses, decision-making, and selection phases.

The vision

Paul Tawel, who was senior manager of treasury operations at CN during the RFI and RFP process, explains how the project began: “Our main goal was to get a vision of best practices in different areas of treasury, so it originally started as a ‘quest for knowledge’. On our side, we had a lot of good processes in place but we wanted to learn more about protocols for bank communication.”

The project group at CN went through a questioning process, looking at all outsourced services and how it communicated with its banks. While they recognized that many of the protocols in place were already working well, there were areas that could be improved. Tawel, who has now retired from CN, adds: “We really wanted an internal vision and we now have that – we have put in place a cross-functional task force, including treasury, accounting, procurement, marketing, and IT to implement the vision and roadmap that we have developed. We have a timeline of three years to put these changes into practice. There are separate plans for AP, collections, and treasury. On the payables side, the vision can be implemented quite quickly.”

The job is ongoing, and CN is currently drawing up an action plan for three areas: payments and collections, payment format harmonization, and bank connectivity.

World-class payments and collections

During the research phase, which took place in mid-2015, running alongside the bank RFI and RFP, it became apparent that there were areas of payments and collections that could be optimized. Cheques are still a mainstay of CN’s collections in both Canada and the US, representing 43 per cent and 62 per cent of collections volume, respectively. Meanwhile, on the payments side, there was far less reliance on cheques (seven per cent of volume of payments in Canada, 10 per cent in the US), although there was still an opportunity to reduce volumes. Another factor on the collections side was the wide variability of remittance data sent by customers. “We want to eliminate cheques as much as possible. However, in North America, they are part of the culture, and suppliers demand them. The right communications strategy will be a key part of successfully encouraging suppliers and customers to accept another digital payment,” says Tawel.

Another important consideration was the unique payments environment in Canada, explains Mark van Ommen, associate director at Zanders: “We had to take the nature of the Canadian payments system into account. One of the challenges is that they are still very much cheque-driven, mainly on the receivables side, so that is a big difference in the Canadian environment.”

CN’s overall vision for payments and collections is to rationalize payment/collection methods and reduce cheques in receivables, while also increasing the level of pre-authorized debits. On the outbound payables side, as well as further reducing cheque usage, it was decided to leverage SAP technology.

Formats harmonization

CN also wished to simplify the way it communicates transaction data with its banks. The company currently uses a large number of formats, some of which were customized, and this increases payment and IT costs. Moreover, the Canadian clearing system doesn’t permit payment messages to contain all the data necessary, so that separate files are required for remittance.

However, the Canadian Payments Association (CPA) has now launched an initiative to modernize Canada’s core payments infrastructure, gradually replacing multiple formats – often based on Electronic Data Interchange (EDI) formats – with the international ISO 20022 standard payment formats. The design phase of the initiative is expected to be completed by the end of 2016, but implementation will take several years. The CPA will also adopt Extended Remittance Information (ERI), which will enable the reconciliation of payment remittances to be automated, saving companies such as CN significant resources.

Despite the CPA’s initiative to introduce standardized XML payment formats by 2020, CN had to consider the best option in the current environment. They chose to adopt CGI payment formats that provide combined payment and remittance info, enabling more efficient reconciliation and less complexity from an IT point of view. Van Ommen adds: “We were able to provide advice based on our experience of European XML standardized payment formats. Although the non-standard payments environment in Canada is a challenge, the CPA is intent on bringing this in line with global standards.”

Bank connectivity

The multiple payment format types, along with the company’s multiple host-to-host interfaces with various e-banking systems, mean there is a raised cost in terms of IT support – the so-called ‘cost of ownership’. The more systems and types of format are used, the greater the cost of making any modification to each system. CN wanted more independence.

Zanders partner Judith van Paassen worked closely with CN on this issue. She explains that: “The ‘cost of ownership’ of maintaining the current multiple types of file formats and bank connectivity was too high. CN needed more standardization to reduce this cost and to ‘future-proof’ its treasury and payments operations. But first, treasury and IT needed to convince other departments that this would be both necessary and beneficial.”

The solution put forward in CN’s vision and roadmap was to simplify the systems landscape and number of interfaces. CN already had Swift’s Alliance Lite2.0 in place but this was only used for treasury payments and wires and, in any case, was unsuitable for the volume of commercial payments for a company of CN’s size.

Tawel explained that the aim is to adopt a standardized, bank-agnostic communication channel for all bank communications: “We want to leverage our Swift communication platform, but in future we may need a Swift Service Bureau. This will take time, and as we are already on Swift, we see it as primarily an IT project.”

A communication strategy was needed across the organization to get all departments aligned with the best practice identified by treasury and IT in the areas of bank connectivity and payment formats harmonization. Van Paassen adds: “We advised the treasury and IT teams to view this project as a long-term strategy. It was a challenge to get departments such as A/R and A/P to support this vision, but CN’s treasury succeeded.”

CN was vindicated in its long-term strategy for banking relationships, bank connectivity, and payment formats. It has already been able to reduce its banking fees significantly via the bank RFI and RFP phase and in future expects to improve security and simplify the process of making commercial payments.

Vision and roadmap

Having already selected two relationship banks and with its vision for future bank connectivity and payments firmly established, CN is now planning the initial steps along its roadmap, which will take it up to 2021. In early 2016, treasury began looking at document solution design and payment formats. Van Paassen says: “The challenge will be in the implementation, but we are confident that we helped treasury see the bigger picture, which will enable them to make the necessary changes.”

A factor that was vital to the project’s success was getting buy-in from several different teams. While some departments initially questioned the need for the proposed changes, they reached a consensus, helped by the objective, fact-based methodology used during the RFI and RFP phase and the bank communication standardization project. Irene Kwan, senior manager, treasury operations, at CN, said that at the end of the project, treasury’s vision was shared and supported across all departments. She says: “The project was well received in the company. Everyone was on board and everyone was clear about what we wanted to achieve. In my view, it would be really beneficial to carry out projects on best practices more frequently.”

Would you like to know more about bank connectivity or other treasury challenges? Contact us today.

In 1963, LeasePlan Nederland started equipment leasing and providing services to the business market with the ‘Maatschappij tot Verhuur en Financiering van Bedrijfsmiddelen’. Not much later, the company was focusing entirely on leasing vehicles. The operational form of leasing, where all services are provided – including maintenance and insurance as well as financial leasing – was still new at the time. It turned out to be very successful and LeasePlan began its own activities in Belgium and Germany in 1972. Since 1983, LeasePlan also has a branch in the United States. According to the 2015 annual report, LeasePlan now has more than 1.55 million vehicles and employs 7,200 people. The company’s revenue is EUR 6,475 billion and it is active in 32 countries. “We are steadily building on international expansion,” says Rob Keulemans, director of LeasePlan Bank. “We are now working on the start-up of a branch in Malaysia. And our strategy is to continue to grow in Asia.” The profit is growing with the expansion: in 2015, LeasePlan reported a net profit of EUR 442 million, an increase of EUR 70 million (+19 %) compared to 2014.

Banking license

LeasePlan’s history is closely linked with banks and, for part of its existence, the company was part of ABN Amro. “In the history of the company we have basically always been a bank,” says Keulemans. “In the period that LeasePlan was part of ABN Amro, LeasePlan applied for an independent banking license. We got this license in 1993. Until 2009, we funded ourselves on the capital market, with bank lines and securitizations.” That all changed with the crisis, however. “That made it clear that the dependence on wholesale funding was too big. Therefore, a funding-diversification strategy was developed in which the retail bank was a new component. We already had the full banking license, meaning we could attract savings,” says Keulemans.

After thorough research into the savings market and consultation with DNB, in 2009, LeasePlan started incorporating the savings bank: LeasePlan Bank. Keulemans explains: “In a year’s time, we were able to set up all systems and the organization. In February 2010, we opened and our product was distinctive for that time; our interest was linked to the one-month Euribor plus a fixed surcharge. At the time, there was the obvious suspicion as to how banks set their interest. Our transparent interpretation of the savings product proved successful; we got a lot of savings.” LeasePlan Bank is a lean and mean savings bank, with only two products: flexible savings and term deposits. “We only have 17 full-time employees on the payroll, and thus outsource a lot. That works very efficiently,” says Keulemans. “Like some other Dutch banks, we are also active in Germany. With the advent of SEPA, among other things, we did not have to open a branch there. Our German operations are done cross-border from Almere. We now have about 200,000 customers in the Netherlands and Germany. We manage around EUR 5 billion in savings and, thanks to our transparent model, we have a very loyal customer base.”

Longer than overnight

At first, the flexible savings were lent on an overnight basis to the central treasury organization, which is responsible within LeasePlan for the intercompany funding of the countries. “That approach went well for a while,” says Keulemans. “In the meantime, however, we gained a better understanding of customer behavior. The special feature of flexible savings is that you do not know in advance what the duration will be. It was evident that it was longer than overnight, but without historical data, you cannot prove that.”

To get a better idea of customer behavior and thus manage the risks, the bank decided to investigate the interest and liquidity typical terms of the flexible savings. “The liquidity typical part is the most tangible,” says Michelle Ebens, associate strategic finance at LeasePlan. “Because the question is: if a customer has a deposit, how long is it for? The next step was: how can we make a loan portfolio that also mimics the interest typical behavior? If we create eight loans per month, with various maturities, each month an amount is released – and you can then reinvest it every month. It is the intention that the proceeds from this so-called replicating portfolio continue to cover the cost of savings.”

Investment methodology

LeasePlan Bank attempted to translate customer behavior into the loan portfolio, which replicates the behavior of the savings. For this replication, there are two commonly used investment methods: the marginal investment and the portfolio investment strategy. The difference between these is that the marginal investment strategy invests the volume with a fixed allocation in fixed maturities. “And we have opted for the marginal strategy,” explains Ebens. Her role in the project was to gain an understanding of the interest and liquidity typical period of savings. And then analyze how this knowledge could be best implemented in practice: what are the advantages/disadvantages of all the possibilities, what are the risks, how does treasury deal with it? They received help from Zanders consultant Wouter Dikkers. “It’s a tricky matter, but since we are not bound by all kinds of restrictions, we could set up the investment methodology exactly as we had devised it,” he says.

Valuable insight

The interest is no longer linked to the one-month Euribor plus a fixed surcharge – the bank now tells its customers each month what the interest is. “This is now also based on what follows from our model,” said Ebens. “The tricky thing about the project was changing something that had been done in a certain way for five years. We knew that it could be better, but to know how we had to or could change, that takes time.” Keulemans nods in agreement: “Previously, we lent everything briefly to our central treasury organization. But that means that you increase other risks, such as interest rate risks. The approach of this model has put us on the right track. The insight that it provides is very valuable. We now create loans that mimic customer behavior, with which savings are invested longer and the cost is lower. And that is good for the company.”

What has Zanders done for LeasePlan?

• Research on the interest and liquidity typical terms for both variable savings and term deposits;
• Making the transition to an investment strategy, whereby these insights are included in the balance sheet management in the right way;
• Proposal for customized interest and liquidity risk reports to improve the understanding of the risks.

Cycling seems to be more popular than ever. In many countries cycling is the fastest growing sport, due to its sustainable character and the improving quality of bikes. The bicycle market is highly diverse in terms of characteristics, preferences and taste. The recent growth of electric bicycles (e-bikes) has clearly contributed to this. Europe’s market leader in e-bikes is Accell Group, headquartered in Heerenveen, a true sports-minded town in the North of the Netherlands.

Growing with e-bikes

Accell Group has recorded continuously growing net turnover numbers in the past few years. In 2014, its net turnover was EUR 882 million. In the third quarter of 2015, Accell Group recorded continued growth in turnover in most countries. The company is now market leader in Europe and among the largest players in North America in terms of sales via specialist bicycle and sports retailers. Accell Group is mainly known for its strong, national bicycle brands, like Batavus, Koga, Sparta, Loekie, Winora, Haibike, Ghost, Lapierre, Raleigh, Diamondback and Redline. Next to these, Accell Group has brands in the bicycle parts and accessories market, such as XLC – sold via the specialist bicycle and sports retail trade.

Approximately 50 per cent of the Accell Group bikes are sold in the Netherlands and Germany, with its strongest brands Koga, Sparta and Batavus. In Germany, Haibike is a very successful brand of high performance e-mountain bikes (e-mtb). Sparta was one of the first brands successfully selling e-bikes in the Netherlands, where now many have followed. The bicycle company always looks for opportunities in the market to expand its portfolio.

Most of the people working here are passionate cyclists

Jonas Fehlhaber, treasurer at Accell Group.

“Many therefore know the products and brands in our markets well. In 2013 and 2014, we have acquired two parts and accessories businesses in Spain and Denmark, in line with our internal and external growth strategy.” The main growth in turnover comes from e-bikes. “We sold 1.7 million bicycles in 2014, a slight decrease in units compared to the previous year, but an increase in turnover thanks to the higher price of e-bikes.”

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Two risks to hedge

With 2,800 employees working in 18 countries, Accell Group has its own support facilities for the assembly and spray painting of bicycles. The company’s two segments – bicycles and bicycle parts & accessories – are very complementary, but each has its own dynamics. The more expensive, high quality bikes, such as Koga, are assembled and then heavily tested in the Netherlands. On the production and assembly side, Accell Group is supplied by suppliers from different countries. It has, for example, a Turkish steel frame maker, while the high-end frames come from Taiwan and China. “Our risk management objective is to mitigate all substantial risks arising from foreign currency cash flows in connection with the manufacturing and sales”, says Fehlhaber. “Additionally, we hedge the interest-rate risk on our borrowing. That part is relatively simple: we are financed by a banking syndicate of six international banks. The financing is made available through term loans and a revolving credit facility. The interest-rate risk on borrowings is hedged using interest-rate swaps – first of all because it’s a requirement in our financing agreement, and secondly to limit volatility in interest expenses.”

“Part of the group’s spending is in foreign currencies. The main currency that we are dealing in is the US dollar, which concerns mainly our suppliers of frames and components in Asia. Because of the Shimano components, the Japanese yen is also an important currency for us. The Chinese renminbi is becoming increasingly important too, as well as the Taiwanese dollar – the high-end parts come from Taiwan, while the mid-range mainly come from China. In order to protect our margins, we hedge to prevent any P&L volatility through foreign currency fluctuations.” Accell Group’s strategy is to cover most of the downside risk by protecting the margins against adverse exchange-rate fluctuations. Fehlhaber explains: “On the downside, we want to be protected against adverse rate movements, but be able to participate on the upside should the rates move in our favor.”

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Zanders valuation desk

The valuation desk supports organizations with financial instrument valuations, hedge accounting and complex modeling. Zanders helped Accell Group with:

• Valuation of FX forwards, FX options and swaps in compliance with IFRS13 (including credit or debit valuation adjustments – CVA/DVA);
• Hedge effectiveness calculations in compliance with IAS39 (dollar offset test, regression test);
• Definition of the Accell spread for the DVA calculation.

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Hedge accounting

To mitigate the profit and loss effect arising from derivatives used for hedging, Accell Group applies hedge accounting under international accounting standards covered by IFRS 9 (IAS 39). “We do cash flow hedges, which means that we have a hedging instrument in our books, while the exposure itself is not in our books yet”, Fehlhaber explains. “If you revaluate your hedging instruments you get a P&L impact without the offsetting impact of revaluating the underlying item, because the cash flow is in the future. The value changes in our hedge instruments
can be booked in equity instead of in the P&L. Therefore, hedge accounting is extremely important for us. Since the accounting standards in relation to hedge accounting are very challenging and the application time consuming, we were looking for a solution to have the whole process of hedge accounting outsourced to one partner. That’s why we asked Zanders’ valuation desk to help us.”

Zanders consultant Jaco Boere was involved in the testing of the hedge effectiveness. “Hedges are for economic purposes, so they lock in future cash flows”, he says. “Therefore you want to match the timing of the hedging instrument with the underlying item that affects the P&L.”

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Future plans

In the years to come, Accell Group intends to focus on safeguarding and reinforcing the market positions of its strong national brands. “We will try to complete our portfolio and generate growth by maintaining our number one position in the growing e-bike market. We also put a lot of focus on the supply chain – there are a lot of synergies to be gained in streamlining that process, especially concerning our procurement.”

As an organization, Accell Group is fairly small, lean and mean, Fehlhaber explains. “We therefore don’t have the capacity to have our own valuation desk. Complying with the IFRS requirements demands a lot of work on the documentation side. We report twice a year, in June and December, and for these reporting dates Zanders prepares the full set of hedging documentation as well as the valuation and effectiveness testing.” Pierre Wernert, who has worked with Accell and represents the Zanders valuation desk, explains: “Each hedging instrument is part of one or more hedge relations and Accell Group has many foreign exchange instruments used for hedging. According to IAS 39, each hedge relation needs hedge documentation.”

“The efforts are both on the process and on the advisory side”, says Fehlhaber. “We had many meetings and calls to discuss our specific requirements and at the same time satisfy the IFRS requirements in all aspects. That’s where Zanders has been a great partner.”

As well as being a member of the board of the DACT (Dutch Association of Corporate Treasurers), Bart-Jan Roelofsz is mainly known as group treasurer and insurance manager at Endemol Shine. This entertainment group is the result of a merger between Endemol and Shine. The merger means that the Shine companies have now adopted Endemol’s holistic approach to risk management. But what does that mean in practice? We asked Bart-Jan to explain.

Endemol took over the Shine Group at the end of 2014. What exactly does the joint venture do?

“We now have our own offices in nearly 40 countries but there’s quite a market beyond those countries as well. There are three aspects to our operational activities: creating, producing and distributing formats. The production activities involve scripted and non-scripted productions. The scripted productions, such as Humans, Ripper Street and Black Mirror, have production budgets that can run to over EUR 5 million per episode. Some examples of non-scripted shows are reality TV series such as Big Brother and game shows such as Deal or No Deal. Once a production has been completed, we distribute these ‘finished programs’ around the globe. In addition to these distribution activities we also license formats or concepts to third parties. These are then allowed to produce a show in a country where we don’t have an office ourselves.”

To what extent has the operational side of the ‘old’ Endemol changed as a result?

“The scripted and non-scripted activities haven’t really changed since the merger with the Shine Group; they have primarily just multiplied considerably. What’s important is that the programs that come from Shine complement the programs that Endemol already had. That’s great, because our financing model is largely based on – indirect – advertising revenues. In the food world, there were brands that didn’t particularly advertise around Endemol’s programs, but the big food brands are very interested in advertising around a program such as Master Chef, one of Shine’s best known programs. So the two libraries of formats that we had didn’t result in any mutual cannibalism. Moreover, our distribution division was already big, but can now distribute Shine’s entire catalog as well – which triggered a huge growth spurt in 2015 compared with previous years.”

How are the two organizations integrated financially?

“The Shine Group’s revenues were half the amount of Endemol’s, so it was a relatively big takeover. There was a geographical overlap in seven countries, so we had to physically integrate the various local entities in those countries. It was only in the four Scandinavian countries that there was virtually no overlap. The accounting guidelines also had to be adapted. Shine reported using US GAAP, not IFRS, and it also had a split financial year. To minimize the liquidity risk within the group, it was also important to concentrate as much liquidity as possible. Endemol already did a lot of cash upstreaming, but that wasn’t the case in the Shine organization. Endemol had been using a manual, international cash concentration structure for many years. When operating companies make funding requests, our responsiveness as an in-house bank is so good that they’re confident in placing temporarily excess cash with group treasury. Because the Shine Group had a historical mistrust of the practice, it was difficult to introduce cash upstreaming, but the great thing is that we gained that trust. So we are able to increasingly align Shine’s liquidity targets with those of the Endemol organization.”

What’s the situation regarding the Endemol Shine Group’s currency exposure?

“Each operating company works more or less in its own local currency, so local FX exposure is limited. By grouping their data into the four main currencies in which we operate, we have a better insight into the FX exposure of the entire Endemol Shine Group. That exposure stems chiefly from our external financing which, in terms of currency mix, is not in line with our organization’s cumulative currency mix; our financing is relatively US dollar-heavy – outweighing the share that we earn in US dollar-denominated countries. There are three reasons why the long-term FX risk is important to us. First of all, because of our refinancing exposure in 2020 and 2021. Then there’s the FX exposure on our interest charges and, finally, the exposure on our leverage ratio, as per the definition in our financing documentation. We are trying to prevent currency fluctuations influencing the leverage ratio. As a non-listed organization, partly private equity owned, we have agreed with our shareholders that protecting this leverage ratio is the primary objective.”

Endemol has implemented a holistic approach to risk management. What exactly does that entail?

“Risk management demands an integral approach, because it’s not just about financial risks but also operational and reputational risks, for example. Last summer we set up a multidisciplinary risk committee with people who have certain responsibilities within the existing organization – such as treasury/insurance, compliance/legal, IT, tax, controlling and HR – and who pool their resources on the committee. I now coordinate this committee as risk officer.

As well as identifying, analyzing and mitigating risks in a cross-disciplinary manner, the risks are also reported. Reporting to our executive board doesn’t pass through one of its members, but directly to the full board. In my opinion, within any organization, treasury has the mindset and position needed to coordinate a more holistic risk approach that embraces more than just the financial risks, making it the best choice for that task.

Our risk committee looks at the risks we encounter from the perspective of various disciplines. We compare those risks with our risk bearing capacity (RBC), keeping in mind that components of that RBC have been allocated to previously identified risks. To give you a practical example of such a ‘broader’ risk, we are increasingly using drones, carrying airborne cameras, for our productions. In the insurance world, these are usually still classed as ‘aircraft’. But we aren’t using them to transport people or freight. What’s more, insurers see the use of drones for photography and video recording as high risk in light of the violation of privacy rights – especially among American insurers. We deal with this risk on a daily basis, around the world. Finding suitable coverage calls for flexibility in an insurer – and that takes time... What do you do as an organization while you don’t have that coverage? Have compliance draw up guidelines stating that drones may not be used? As ridiculous as that may sound, you have to estimate the risk involved. The scenario, for instance, of a drone causing a multiple vehicle accident is a possibility, but how great is that probability? Can we mitigate this? Should we organize training specifically for personnel, can the controls be hacked, how do you express that in monetary terms, and how does it relate to our RBC?

All of these issues involved a variety of departments – HR, IT, controls. When determining our RBC, we take into account aspects such as our liquidity, non-committal or even firm profit expectations, as well as financial ratios in our financing documentation, which is treasury’s domain. We even consider whether we have already assigned a portion of the RBC to other risks.”

Is the methodology adopted at insurance companies, which involves looking at probability and impact, also used in treasury? Are risks considered in the same way?

“Absolutely. There’s no difference between mapping treasury or operational risks (which may or may not be insurable), or determining their potential impact using scenario and sensitivity analyses. What you then do with that information may differ. For instance: an organization can accept the FX risk – or hedge it – but it may also try to pass it on to its customers. The liability risk of a potential infringement of third-party intellectual property rights is our core business and we can only accept it or insure it, but not pass it on to third parties. I believe that the process of accepting risks, deliberately allocating the RBC to those risks, and monitoring and reporting on them could be done much better by lots of companies. And that includes us, by the way.”

Looking at the company that was absorbed in 2000 by Telefónica, is the strategy nowadays very different from what it was then?

“Telefónica, which bought Endemol after a bidding war with KPN and World Online, was actually light years ahead of the game. Telefónica wanted to set itself apart from the other telecom companies, not just in terms of price, quality and network, but also in terms of content they wanted to offer their subscribers something extra: access to Endemol content. And the vision they had is now the reality: being able to view content on mobile devices. Both as a replacement for television – i.e. generally available content – but also specific, subscriber-only content. The only thing they were wrong about back then was the speed of the rollout of the 3G and then the 4G network.

In 2007, Endemol was sold to a consortium of three parties: Goldman Sachs, Mediaset and Cyrte Investments. What made this special was the fact that it was one of the last leveraged finance deals before the financial and economic crisis erupted. One of the mandated lead arrangers (MLAs) at the time was Lehman Brothers. We experienced the complications of the bankruptcy of an MLA first hand – absolutely fascinating!

Between 2008 and 2014 the Endemol organization practically had to reinvent itself. Our revenues plummeted as a direct consequence of the sharp decline in the advertising market. But by producing programs far more efficiently, our profit margins actually grew during that period. In 2015, with the new shareholders and capital structure, we focused on integrating Shine into the Endemol organization, and we are now ready for the future. We’re able to roll out new ideas really fast; we are ‘lean and mean’. With our shareholders’ support, we can continue investing at an accelerated pace in the further growth of our organization.”

Bart-Jan joined Endemol as cash manager in 2002. Prior to that, he worked as a cash & treasury management consultant at ING. As from 2007, he became responsible for group insurances as well as group treasury. Since mid-2015, as group risk officer, he is also responsible for the risk committee.

Would you like to know more about cash flow forecasting and/or risk management? Contact us today.

BNG Bank was founded more than 100 years ago – firstly under the name Gemeentelijke Credietbank – as a purchasing association with the main task of bundling the financing requirements of Dutch local authorities so that purchasing benefits could be obtained on capital markets. In 1922, the name was changed to Bank voor Nederlandsche Gemeenten and even today the main aim is, in essence, the same. What has changed is the role of local authorities, says John Reichardt, a member of the Board of BNG Bank. He explains: “Over the past few years they have diversified. Many of their responsibilities are now independent or even privatized. Hospitals, electricity boards and housing companies, for example, were in the hands of local authorities but now operate independently. They are, however, still our clients because they provide public services.”

Different to Other Banks

To satisfy the financing requirements of its clients, BNG Bank collects money on the international capital markets to realize ‘bundled’ purchasing benefits. “And we pass these benefits on to our customers,” says Reichardt. “While our customers have become more diverse over time, our product portfolio has widened. Some thirty years ago we became a bank, with a comprehensive banking license, and this meant we could take up short-term loans, make investments, and handle our customers’ payments. We try to be a full-service bank, but then only for services our customers need.”

The state holds half of the shares and the remainder belongs to local authorities and provinces/counties. “Because of this we always have the dilemma: should we go for more profit and more dividend, or should our strong purchasing position be reflected immediately in our prices by means of a moderate pricing strategy? Our goal is to be big in our market – we think we should keep 35 to 50 percent of the total outstanding debt on our balance sheet. We are not striving for maximum profit, and that differentiates us from many other banks. Although we are a private company, we do also feel we are a part of the government,” says Reichardt.

Changed Worlds

BNG Bank has only one branch in The Hague, with 300 employees. The bank has grown considerably, mainly over the past few years. As of the start of the financial crisis, a number of services from other parties have disappeared, so BNG Bank was often called upon to step in. Now, partly as a result of this, it has become one of the systematically important Dutch banks. “From a character point of view, we are more of a middle-sized company, but as far as the balance sheet is concerned, we are a large bank. We earn our money by buying cheaply, but also by trying to pass this on as cheaply as possible to our customers – with a small commission. This brings with it a strong focus on risk management, including managing our own assets and the associated risks. These are partly credit risks, but we have fewer risks than other banks – because, thanks to the government, our customers are usually very creditworthy.”

BNG Bank also runs certain interest rate risks that have to be controlled on a day-to-day basis. “We have done this in a certain way for a long time, but in the meantime the world has changed,” says Hans Noordam, head of risk management at BNG Bank. “So we thought it was time to give the method a face-lift to test whether we are doing it right, with the right instruments and whether we are looking at the right things? We also wanted someone else to take a good look at it.”

So BNG Bank concluded that the interest rate risk framework had to be revised. “Our approach once was state of the art but, as always with the dialectics of progress, we didn’t do enough ourselves to keep up with changes in that respect,” Reichardt explains. “When we looked at the whole management of interest rate risk, on the one hand it was about the departments involved, and on the other hand the measurement system – the instruments we used and everything associated with them used to produce information which enabled decision-making on our position strategy. That is a big project.

Project Harry

Over the past few years various developments have taken place in the area of market risk. When BNG Bank changed its products and methods, various changes also took place in the areas of risk management and valuation, including extra requirements from the regulator. “So we started a preliminary investigation and formed one unit within risk management,” says Reichardt. At the end of 2012, BNG Bank appointed Petra Danisevska as head of risk management/ALM (RM/ALM). “We agreed not to reinvent the wheel ourselves, but mainly to look closely at best market practices,” she says.

Zanders helped us with this. In May 2013 we started an investigation to find out which interest rate risks were present in the bank and where improvement levels could be made.

Petra Danisevska, Head of risk management/ALM (RM/ALM) at BNG Bank

Noordam explains that they agreed on suggested steps with the Asset Liability Committee (ALCO), which also provided input and expressed preferences. A plan was then made and the outlines sketched. To convert that into concrete actions, Noordam says that a project was initiated at the beginning of 2014: Project Harry. “This gets its name from BNG Bank’s location, also the home of a Dutch cartoon character, called Haagse Harry. He was the symbol of the whirlwind which was to whip through the bank,” says Noordam.

Within ALCO Limits

“During the (economic) crisis, all sorts of things happened which influenced the valuation of our balance sheet,” Reichardt explains. “They also had many effects on the measurement of our interest rate risk. We had to apply totally different curves – sometimes with very strange results. Our company is set up in a way that with our economic hedging and our hedge accounting, we can buy for X and pass it on to our customers for X plus a couple of basis points, which during the period of the loan reverts to us. We retain a small amount and on the basis of this pay out a dividend – our model is that simple. However, since the valuations were influenced by market changes, we were more or less obliged to take measures in order to stay within our ALCO limits. These measures, with respect to managing our interest position, would not have been realizable under our current philosophy; simply because they weren’t necessary. We knew we had to find a solution for that phenomenon in the project. After much discussion we were able to find a solution: to be more reliable within the technical framework of anticipating market movements which strongly influence valuation of financial instruments. In other words: the spread risk and the rate risk had to be separately measured and managed from one another. The world had changed and our interest rate risk management, as well as reporting and calculations based upon it, had to as well.”

After revision of the interest rate risk framework, as of the second half of 2015, all interest-rate risk measurements, their drivers and reporting were changed. The market risks as a result of the changes in interest rate curves, were then measured and reported on a daily basis by the RM/ALM department. “There is definitely better management of the interest rate risk; we generate more background data and create more possibilities to carry out analyses,” Danisevska explains. “We now have detailed figures that we couldn’t get before, with which we can show ALCO the risk and the accompanying, assumed return.”

More proactive

Noordam knew that Project Harry would involve a considerable effort. “The risk framework would inevitably suffer quite a lot. It had to be innovated on the basis of calculated conditions, while the implementation required a lot of internal resources and specific knowledge. Technical points had to be solved, while relationships had to be safeguarded; many elements with all sorts of expertise had to be integrated. The European Central Bank was stringent – that took up a lot of time and work. We had an asset quality review (AQR) and a stress test – that was completely new to us. Sometimes we were tempted to stay on known ground, but even during those periods we were able to carry on with the project. We rolled up our shirtsleeves and together we gained from the experience.”

Reichardt says: “It was a tough project for us, with complex subject matter and lots of different opinions. In total it took us seven quarters to complete. However, I think we have accomplished more than we expected at the beginning. With a combination of our own people and external expertise, we have managed to make up for lost ground. We have exchanged the rags for riches and we have been successful. Where do we stand now? As well as the required numbers, we have a clear view of what our thoughts are on ‘what is interest rate risk and what isn’t’. The only thing we still have to do is to fine-tune the roles: what can you expect from risk managers and risk takers, and how will they react to this? We will continue to monitor it. RM/ALM as a department is in any case a lot more proactive – that was an important goal for us. We can be more successful, but the department is really earning its spurs within the bank and that means profit for everyone.”

The International Organization for Migration (IOM) is the principal intergovernmental agency in the field of migration. Due to increasing migratory flows over the past decade, which have escalated in recent months, the organization realized that its treasury needed a transformation in order to continue supporting the organization and its cause.

The IOM is committed to the principle that humane and orderly migration benefits both migrants and society. The organization was established in 1951, then known as the Provisional Intergovernmental Committee for the Movement of Migrants from Europe (PICMME), which helped people resettle in Western Europe following the chaos and displacement of the Second World War.

In subsequent years, the organization underwent a succession of name changes to the Intergovernmental Committee for European Migration (ICEM) in 1952, the Intergovernmental Committee for Migration (ICM) in 1980, and the International Organization for Migration (IOM) in 1989. These name changes reflect the organization’s transition from a logistics operation to a migration agency. The IOM’s members currently include 157 states and 10 observer states. It has offices in more than 150 countries and at any one time has more than 2,500 active projects ongoing.

It works to help ensure the orderly and humane management of migration, to promote international cooperation on migration issues, to assist in the search for practical solutions to migration problems, and to provide humanitarian assistance to migrants in need, including refugees, displaced persons, or other uprooted people. The organization works closely with several partners in four broad areas of migration management: migration and development, facilitating migration, regulating migration, and addressing forced migration. The IOM assists in meeting the growing operational challenges of migration management. It aims to advance the understanding of migration issues and encourages social and economic development through migration, while upholding the human dignity and well-being of migrants.

Differing paces

In 2008 and 2009, the organization went through a major transformation. “As recently as 10 years ago, the organization was still executing payments manually at its headquarters – payment by payment,” says Malcolm Grant, head of treasury at the IOM. With a new enterprise resource planning (ERP) system, the IOM took its first step towards improving its treasury. But more change was needed. While migration activities were growing – leading to increases in staff, projects, and donation allocation – treasury didn’t grow at the same pace as the rest of the organization. On top of that, in the years thereafter, the financial crisis resulted in a sharp increase of compliance requirements. “Due to all these developments, our treasury was way behind where it should have been.

The impact of the organization’s growth in an outdated system environment was that people looked for solutions by firefighting; they built up several different systems and various ways of working. For example, new bank accounts were added, instead of using existing bank accounts and relationships. We found ourselves with more than 700 accounts and over 150 bank relationships. We needed to bring treasury back to the heart of the organization – a huge challenge, because we needed more people, more up-to-date technology and improved governance.”

Due to the tight funding in the years following 2009, it was a slow process, says Grant: “From a treasury point of view, we look like a corporate; we get money in, we pay it out and invest it. A corporate has a profit motive, a different set of values and different stakeholders. So there are cultural differences and due to political issues some things don’t happen as quickly.”

A treasury blueprint for the future

Eventually, the organization’s management was persuaded to review its treasury. Grant explains: “So in 2012, we initiated the ‘treasury review’ project. We wanted a comprehensive wide-reaching review that tackled just about all key areas of treasury. Therefore, we asked some consultant firms for treasury advice and after some meetings we hired Zanders to reinforce and challenge our assumptions. And it turned out to be a great step; they added deep knowledge of treasury, markets, and best practices, and together we built a very strong business case showing what needed to be done in our strategic planning to overhaul our treasury.”

Based on the organization’s strategy, Zanders helped IOM in writing a blueprint for the future, based on a number of areas such as treasury management, financial risk management, and treasury governance. “And a few months later we started our ‘global treasury design’ project, aimed at scaling up our treasury operations. But then the question was how to get there. So, how could all issues be improved?”

Treasury risk committee & governance

But before IOM’s treasury realized these three objectives on the technical side, it had already looked at some of the ‘no-cost’ recommendations. Grant says: “In terms of structure, we were very keen to make sure we had a written treasury policy – we now have one. We also lacked an annual treasury plan, which we have now introduced. And one of the most important aspects was setting up a treasury risk committee, which brings together some senior managers in finance and one from operations. They have now been meeting quarterly for two years and it has added enormously to treasury transparency. Moreover, it’s a two-way channel; it has also been a very effective channel for feedback into senior management – to show what treasury is doing and what we want to achieve in the near future. As a result of the review, some serious and valuable changes have been made.”

Grant’s treasury department worked hard to realize the targets as described in the roadmap. He needed some assistance in finding the organization’s banking partners for its cash management, to solve the problem of a too widely dispersed bank portfolio and bank account structure.

“We need to see what money is where,” says Grant. “We don’t see certain key collections in our accounts. Different field offices have different cultures; some are very proactive and engaged in centralized cash management, yet others aren’t. Therefore visibility is very important and a big challenge.”

Simplifying bank relationships

So, last year, IOM asked Zanders to conduct a European Cash Management RFP. Grant notes: “The number of bank relationships was over 150 across our organization. When we did the European RFP, we had 39 countries in scope with 38 different banking parties in those countries. Depending on the region, you could begin to centralize payments. We don’t need to have bank accounts all over Europe, for example. So instead of having 38 bank partners, in the future we may only have five or six.”

Based on IOM’s requirements, five banks were shortlisted for its cash management bank selection project with a pan-European scope. Zanders helped to write the RFP document, was part of the bank selection, managed the evaluation process, and supported the recommendation to senior management. IOM now has just two banking partners and has started the implementation with both banks. “And it’s going very well. We have good support from our internal IT team, which is extremely important. We did a lot of homework and research in Europe, mission by mission, to establish all treasury requirements and banking needs in detail.”

The strategic recommendations that Zanders gave were gathered in a roadmap for IOM’s treasury, with a prioritization of projects and focus areas. Grant adds: “We started by looking at three key achievable short-term objectives – things we could do within one year. The first was to bring on board the foreign exchange trading platform, 360T. The second was to bring on board a treasury management system (TMS). Third was to conduct a cash management RFP (request for proposal) in Europe for banking services. These objectives have been met; the systems are now live and working. There is still some additional TMS functionality to bring on board, but the initial level of functionality related to reporting and basic payment processing is available.”

The end of the beginning

“Our department is now about a third of the way to where we want to be. Centralizing payments and having payment factories, for example, is still years away for IOM; that demands a phased approach. In terms of payments, reconciliation, pooling, and technical architecture, we are improving our basic structures; we are looking at in-house banking (IHB) and payment factories. You need to walk before you can run. To illustrate it in an appropriate quote from Winston Churchill: ‘This is not the end, it may not even be the beginning of the end but it is the end of the beginning.’ I think that’s where we are now.”

Despite the many tough challenges for IOM’s treasury department, working for an organization in the field of migration gives Grant both energy and satisfaction. “Treasury is a humble servant of the dedicated workers doing the tough job in the field. We are just here to take a potential set of problems away from them. By, for example, ensuring that they have enough liquidity so they can do what they need to do, ensuring they do not get into trouble with local compliance, get best value in buying local currency, and ensuring they have proper banking partners and accounts. Our advice and expertise is a key area of support to the local missions, thereby ensuring that the mission activities in the field are not held up due to treasury issues.”

IOM’s key strategic focus areas:

• Migration management; helping migrants in any way possible regarding security.
• Operations and emergencies: ready to react rapidly to emergency events such as earthquakes or military actions. IOM is not a refugee agency – that work is done by the UN – however it works closely together with UNHCR.
• International cooperation and partnerships: including relationships with donors. IOM is very active in the development of international migration law. It has a team of lawyers and a department working on clarifying, establishing, and modifying international law, as far as it relates to migrants.

In 2014, Lamb Weston/Meijer, a major manufacturer of potatoes with roots in both the US and the Netherlands, decided to expand its capacity with a new production line for its specialty products. Arranging the necessary financing provided a good opportunity for evaluating its cooperation with existing finance providers.

With customers in the proprietary fast-food chains in the quick service segment and many ‘casual dining’ restaurants, Lamb Weston is a major player in the international food market for frozen potato products. The brand is also expanding in the retail sector, particularly in the Middle East and the UK. Lamb Weston invented the Twister®, the now famous curly fries. Moreover, the company also makes Ziggy Fries, which have a flaky structure, to keep them crispy for longer, and recently also introduced Connoisseur fries, which look as if they’ve been cut by hand.

Global ambition

Lamb Weston/Meijer (LW/M) is a joint venture owned by two companies, Lamb Weston and Meijer Frozen Foods. An American company, Lamb Weston was founded in 1950 by F. Gilbert Lamb, a grower from Weston, in the state of Oregon. Lamb developed the water gun knife, a device with which potatoes can be cut into fries by water under high pressure. After later developing Curly Fries and CrissCut Fries, the company grew rapidly. The stock-exchange-listed ConAgra then took over Lamb Weston Foods* with the aim of making it the world’s biggest producer of frozen potato products. In support of that ambition, the company decided to also establish itself in Europe, leading to the existing joint venture with Meijer Frozen Foods. This Dutch potato producer started up in 1920, when Cees Meijer Senior bought a potato plant in Kruiningen and decided to sell potatoes grown in the clay-base soil of Zeeland, as of the fifties in frozen form. The family-owned Meijer company and the listed ConAgra now each hold 50 percent stakes in LW/M. The company’s turnover is about EUR 600 million per year – and they process more than 1.3 billion kilos of potatoes into high-value products.

New production line

Significantly, LW/M’s turnover continues to grow and the company has succeeded in increasing its market share in several European countries. “That’s why we want to expand our capacity,” says Peter van Wouwe, CFO of LW/M. “We’d been toying with this intention for a while and last year we decided to act on it by installing a new production line in our Bergen op Zoom factory. We already have a production line there, but we’re now installing another alongside it for our specialty products like Twister® Fries and CrissCuts®. This was a key reason for us to start looking for fresh financing.”
The expansion called for an investment of about EUR 120 million. And even though the company generates substantial cash flow, it still needed to raise the new financing. “First we wanted to explore the best way of structuring it. We’d enjoyed several years of excellent collaboration with ABN Amro and Deutsche Bank, but it’s always a good idea to revisit existing agreements to ensure you have the best possible starting position.”

Financing form

LW/M had used Zanders for the financing of an acquisition before Van Wouwe joined the company. “That collaboration went very well so we decided to get in touch again for this financing requirement,” says Van Wouwe. “We’d already discussed it with Zanders in the preliminary stages and in December 2014, when we decided to make the investment, we immediately started checking out the best way to structure it all. We set up a good roadmap and the first question we encountered was which form of financing should we opt for.”
The choice was whether or not to arrange the funding through its regular banks. “In addition to the existing credit lines extended by our banks, we decided to also examine other potential financing opportunities,” says Van Wouwe. In exploring its options LW/M decided it was wise to include both a best-case and a worst-case scenario. “A specific aspect of our financing requirements is that there can be substantial fluctuations in our results. This has everything to do with our raw material. The potato is a natural product and one year the price can be very low and the next year prohibitively expensive - sometimes varying by a factor of 20. And, of course, this significantly impacts our results and working capital. This is why we had to include a worst-case scenario; what would it mean for our results and cash flow if we had a very bad year? Any new financing would have to make allowance for such a situation, so that we wouldn’t immediately have to go back, cap-in-hand, to the bank.” That said, new financing based solely on a best-case scenario would also raise questions, thinks Sander van Tol, managing partner of Zanders: “In recent years, the company has been profitable and has earned a lot of money. So it begs the question of whether you’re not allowing yourself too much room so you can make other investments too. It’s a trade-off between how much financing you are looking for and for how long? Based on all this, we checked the flexibility of possible financing instruments and soon came to the conclusion that bank financing was the best option.”

Term sheet

Afterwards, an inventory of the banks was started up. “First, we put together a long-list of banks that might be suitable,” says Van Wouwe. “Together with our partners in the US, we looked at what would suit us the best and with which banks we could maintain a good relationship in the longer term. In this respect we are pretty traditional because we have excellent relationships with our banks. At the end of the day, particularly when the going gets tough, it’s very important that you can always get on with one another.”
After whittling down the long-list to a shortlist, LW/M invited four banks so that it could present the company’s plans and expectations, together with a forecast of cash-flow development during the coming years. “We saw that the banks were interested and, by means of a detailed term sheet, we gave them a proposal in which the terms of the financing were summarized,” explains Van Wouwe. The ensuing discussions were mainly about what LW/M was looking for in the financing and the best way to structure it. Among other aspects, the impact of regulation (Basel III) on the pricing of the financing was also discussed. In the interests of cost optimization, it was decided that the loan should be ‘labeled’ as two separate parts. One part would be for the expansion of the plant (a so-called term loan) and the other would be for the company’s working capital (a form of current account financing that could be used when the company needs it – a flexible variant). “In this way we achieved the best composition for our size and organization,” assures Van Wouwe. “Working with just one bank is hardly ideal, yet every bank that’s added to the equation makes it more complex. At the end of the day this approach, in which banks were invited to participate on the basis of the detailed term sheet, worked out well.”

The devil is in the details

Documenting the agreements in the term sheet is a detailed (legal) process and to accelerate the documentation phase it’s common practice to set up the term sheet in a very painstaking manner. “Banks want to know now what you’ll be doing in three years’ time and lay down agreements on this in the term sheet. During the next few years, for example, we want to be able to establish new entities in different countries, without constantly having to consult the bank – which could suddenly refuse us. That’s the kind of thing you want to avoid.” This is also why Zanders collaborated closely with LW/M’s external legal advisor. “That accelerated the process considerably,” says Van Tol. “What was unique about this process was the time invested in preparing the term sheet that listed all the agreements with the bank. One page can sometimes be sufficient for a term sheet, but in this case it was eight pages. And its importance shouldn’t be underestimated either, because signing the term sheet is like signing a wedding certificate – and it’s always advisable to know exactly whom you are marrying. During the documentation phase, to avoid working with irregular templates that could make the agreements less clear, we used the term sheets of the LMA, or Loan Markets Association. And in this project too it proved successful, because the devil is in the details.” Nodding in agreement, Van Wouwe remarks that it does indeed pay to negotiate the contents of the term sheets in great detail. “The LMA principles adopt a different approach – more at an international than national level. And that’s a much better fit with what we want to achieve.”

New fries

April 2015 saw the groundbreaking ceremony for the new production facility and six months later they started installing the machines. “It’s a very complex project, comprising three separate projects rolled into one,” explains Van Wouwe. “Firstly there’s the technical realization of the new production line. Then, once the line is established, we must be able to start production immediately, the employees must be properly trained and the right sales contracts must be in place to ensure that suitable sales markets have been found for the production. The third and final of these projects is underscoring the continuity of the factory. The new production line, together with the existing one, will use the same receiving area for the potatoes, despite their packaging being very different. It’s a logistical challenge, but fortunately it’s all going according to plan.”
LW/M expects the new line to start being productive in July 2016. “We’ve never carried out a project of this scale before and we’re extremely pleased that we’ve been able to secure such a good banking solution for it,” concludes Van Wouwe.

On the 18th of November Conagra announced a renewed strategic focus: “ConAgra Foods Announces Plans to Separate Into Two Independent Public Companies”.

FMO provides financing for companies in Africa, South and Central America, Asia, and Eastern Europe, and its mission is to empower entrepreneurs to build a better world.

“And in the context of this mission we have two objectives,” says Paul Buijze, FMO’s director of finance & mid-office.

“We only finance those companies that we expect will make an impact. They must contribute to the type of development that maintains a balance between financial returns and environmental and social aspects. In other words, the investment must stimulate development. We don’t finance ventures that commercial banks already do. We invest only in private companies that would otherwise not be able to grow; it’s not our place to finance governments.”

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Focus Areas

The development bank invests in sectors in which they expect the impact to be the greatest, such as financial institutions, energy, and the agrarian sector. “Many companies are too small to be served from The Hague,” reasons Buijze, “but a local bank is far better positioned to reach companies in a country on a smaller scale. “And without our second focus area, energy, development isn’t even possible. Without light, you can neither read, study nor run a factory. Energy facilitates a great deal of development. “Our third focus area is food and water. By 2050, our planet will be home to nine billion people and they will all have to eat and drink, within the realms of what’s possible, of course. There will probably be enough agricultural land, but at the moment it’s being used very inefficiently. “It’s about the complete chain, incidentally. If there is insufficient refrigeration capacity, food will spoil before it even reaches consumers.”

Finally, in addition to these focus areas, we serve a sector encompassing infrastructure, production and services. Kept deliberately broad, this ‘other’ sector owes its importance to distribution, and mainly because of risk considerations. Here, on specific issues we always collaborate with partners that have certain expertise, while in the first three focus areas we ourselves often lead the way.

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Strong Corporate Governance

With an investment portfolio of €8 billion in more than 85 countries, on a global scale FMO is one of the biggest development banks serving the private sector. It finances entrepreneurs directly through funds, but the decision to invest in funds depends on more than just financial criteria. Buijze is a member of the credit commission that assesses the suitability of projects. “Over the years we’ve built up an extensive list of investment criteria. A bank must have a certain level of solvency. For an investment in energy, for example, we insist that the energy provider will be called on to supply a certain amount of energy over a certain period of time. “And we opt for renewable energy, as opposed to the fossil-fuel-generated variety. We have extensively documented conditions for each type of financing. This is a departure point. “If, on that basis, a request fails to meet our conditions in the areas of the environment, society, governance, or return, we’ll take it from there whether we can implement the development with the company in question. We’ll look at the impact the company can generate, such as employment, for example. Every situation is different, which is what makes working in these countries so complex.” In combination with a report set up by the investment officer, who will have checked out a few things onsite, it’s decided with the aid of the criteria whether financing is eventually granted.

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Negative Travel Advice

But how does that work, for example, in countries governed by ‘dubious’ regimes? “We have very strict and influential corporate governance and compliance officers,” says Buijze. “In that respect, our demands are uncompromising, and we carry out thorough research beforehand. We check, for example, to ensure a company has no ties with the government.” And what about companies in high-risk areas, such as a country embroiled in a civil war? "It’s absolutely essential that we have access to the country in question,” he answers. “We must be able to keep our finger on the pulse. If our government advises against travel to a particular country, funding will not go ahead. “However, if it’s already been extended, we cannot change it. Such a situation was created by the recent Ebola crisis; at one point, we could no longer travel to Liberia or Sierra Leone. “Of course, there are countries in which you are exposed to more risk, but our portfolio has a good spread and includes many countries which are now making good progress and where there is no political tension. “You’ll find savvy entrepreneurs in the most difficult of countries.”

According to Buijze, FMO has had to write off very few investments so far. “Every company experiences a hiccup from time to time, such as local demonstrations or disturbances. But at the end of the day, the situation usually sorts itself out. “Everyone needs energy, just like they need banks and telecommunications, for example. “And, of course, water too, although this issue is somewhat politically sensitive.”

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Setting up authorizations

In many respects, FMO has a completely different risk profile compared to a commercial bank. “We don’t employ traders, and we are not subject to unrealistic financial pressures from shareholders,” says Buijze. “It allows us to be very focused on what we do. In my view, this doesn’t make our risk greater than that of a commercial bank.” Despite vastly differing missions and approaches, FMO nonetheless faces the same demands. “For example, DNB makes sure that our ICT architecture and its system administration comply with certain standards,” says Rolf Daalder, director of ICT & facility services at FMO. “Security must be paramount. FMO is free in its choice of cloud, but it must comply with certain DNB conditions. “We only do things we know about, and if we cannot do something ourselves, we have a number of partners we can fall back on for specific expertise.” Every year, FMO is audited by KPMG, which, in 2014, stipulated that the development bank should take a long, hard look at its internal authorizations and diverse roles and functions.

“Everyone in the bank has a certain function, to which certain rights are allocated,” explains Daalder. “You must know what you are approving. Some 10 years ago, we set up the WSS Suite (Finance Kit) system exactly for this purpose, but it had to be brought up to date.” What FMO needed was an independent party that also had expertise in how others approached this kind of task. “We had no intention of convincing ourselves that everything was hunky-dory; there was no point in the left hand checking what the right hand was doing!”

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Four-eyes principle

How can you effectively monitor an existing system? “FMO wanted to be challenged and asked us for advice on best practices,” explains Zanders consultant Bart Timmerman. “During a regular update to a newer version, Finance Kit gained a new authorization functionality called Security Centre. It’s a completely separate module in which the organizational structure can be set up. It offers more possibilities and works differently, but that doesn’t detract from the fact that it must be checked to ensure that everything is set up properly.” The questions then were: what are all the processes, and what are they used for? “Supposing, for example, that one person was responsible for two processes, Zanders indicated what improvements should be feasible,” answers Daalder. In this way, it was possible to assimilate authorization profiles to the current systems and requirements. “It’s the best way: start from scratch, investigate who does what, who must be able to do what, and then set up the system on that basis,” says Zanders consultant Annelies Labots. The size of the development bank also plays a role, according to Daalder.

“We are a relatively small bank in which, in certain areas, a few people do relatively quite a lot. It makes the four-eyes principle more challenging than it is for larger banks, which have more people for the diverse functions. If one presses the button, another – and maybe even a third – has to check whether it’s all correct.”This is indeed a challenge for relatively small organizations, agrees Timmerman: “Processes must be flexible and easy to carry out, and this implies that there must be a sufficient distinction between functions.”

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Knowledge Sharing

The authorization project, which ran from August 2014 to the beginning of 2015, was complex and comprised numerous small elements that had to be harmonized with one another. “It was completed successfully and to the satisfaction of KPMG,” says Buijze.

And what about FMO’s plans for the future?

“Our strategy is that by 2020, we want to halve our footprint and double our impact. Food production must be maintained at the right level if it is to keep pace with the enormous growth in population, a huge challenge in itself. The population of Uganda, for example, is burgeoning—from just 5 million people in 1950 to 32 million currently, and it’s projected to exceed 100 million by 2050. Another example is Nigeria, whose population will eventually surpass that of the United States. And all these people need to be able to live worthy and dignified lives.” It’s about more than just money, insists Buijze. “Knowledge sharing is also an extremely important way of ensuring that people can grow their own food. All this, combined with being commercially and responsibly active, appeals greatly to the people who work here.” The sheer extent of social engagement at FMO is clearly evident and often critically discussed. “We want to facilitate growth in a country, but this is often accompanied by tension between development and environmental interests,” assures Buijze. “For example, can the installation of a wind farm in a poor region where there is no electricity be seen as a sustainable solution? There will always be people who feel their voice is not being heard. We are not dogmatic, but the result must be the correct one.”

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What Did Zanders Do for FMO?

Since 2006, Zanders has carried out projects for FMO in various areas, including:

• Shaping investment policy
• Providing advice on its property investment portfolio
• ALM (Asset and Liability Management) studies
• IRS rating
• WSS Suite (Finance Kit) implementation
• Assessing an update of the capital planning model
• IRRBB (Interest Rate Risk in the Banking Book) validation

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If you’d like to learn more about authorization issues or any of the above-mentioned topics, you can contact us.

The Estée Lauder Companies (ELC) set out to change its European banking landscape and one of its first goals was to reduce its banking relationships in the EMEA region from 32 to two. The task required a rigorous request for proposals (RFP) process to select the banks. Writing more than 200 targeted questions for the RFP, with guidance based on Zanders' experience in this area, enabled the company to make a clear decision.

Born Josephine Esther Mentzer, Estée Lauder was raised in Queens, N.Y., by her Hungarian mother, Rose, and Czech father, Max. The name Estée was a variation of her nickname, Esty. In 1946 she and her husband, Joseph Lauder, officially launched the company and, almost 70 years on, the company still has an entrenched sense of family history. The Estée Lauder Companies Inc. is one of the world’s leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. Its products are sold in over 150 countries under brand names including Estée Lauder, Aramis, Clinique and M•A•C.

As part of its growth cycle, in 2009, the company appointed an outside CEO – Italian business executive Fabrizio Freda. Since then, the company's net sales have increased from $7.3 billion to $10.97 billion in 2014. This growth cycle has necessitated a more efficient, streamlined way of managing cash flows.

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From 32 to two banks

ELC's European operations cover 23 countries, had 32 banking relationships and approximately 200 bank accounts. This had several implications, including inefficient centralization of cash, increased counterparty risks and difficulty in implementing host-to-host connections. The set-up also meant there was less than optimal control and management of excess cash, as well as an opportunity to gain greater efficiency in payments and statement processing. Hence, ELC identified the need to significantly rationalize the number of cash management banks and bank accounts – so the 'Pan European Bank Structure Project' was born.

So how did the company approach the vast task of streamlining almost 200 bank accounts and its numerous banking relationships? It was decided that two or possibly three pan-European cash management banks should be selected. The project involved implementing a centralized liquidity structure for excess cash with a zero-balancing account (ZBA) structure.

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Success is in the preparation

The first step of the project was an extensive request for information (RFI) project, which lasted 18 months. The company’s international treasury centre (ITC) began by gathering information from ELC's many affiliates in the region and then broadened the research to include current best practices for banking and cash management. Executive director for European treasury and accounting at ELC's ITC, Bart Taeymans, says: “During the RFI process we wanted to reach out to and learn from our relationship banks that participate in our revolving credit facility as well as other major banks. We were looking at what might be possible and wanted to learn best practices on how companies can manage cash in Europe.”

The RFI looked at all possibilities, from the best way to obtain a report on all balances, to ways of pooling or centralizing cash management in each country. It was a vital information-gathering stage to prepare specific, targeted questions for the RFP. Towards the end of the RFI, ELC invited Zanders to come on board to provide input for the next phase – choosing a long-list of banks for the RFP based on the RFI responses. Taeymans, who joined the company in early 2007, says: “Having a consultant next to you when you are learning about best practices is extremely useful. Banks will give differing opinions according to their abilities and strengths. Zanders provided a neutral view in that process of understanding best practice.”

Five banks were selected to participate in the RFP. “Zanders guided us from a structural perspective – they had the required knowledge and knew what questions to ask, as well as how to score and evaluate the replies. That definitely helped us – but it's not something you can completely outsource, so a lot of work was definitely involved internally,” notes Taeymans.

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An eye on the road

Prior to starting the RFP process, ELC also developed a five-year strategic roadmap for treasury. “Zanders was helpful in putting that in place. The consultants' knowledge on treasury best practices helped us draw up a detailed plan on how to integrate treasury systems and processes more efficiently,” says Taeymans.

We wanted to learn best practices on how companies can manage cash in Europe

The treasury roadmap looks forward three to five years. The first step was to set out ELC's current position in relation to its peer companies and best-in-class treasury models. The second step was to decide where the company aimed to be in five years and to establish its short- and long-term priorities and objectives. A gap analysis of the current situation and the desired outcome was valuable in understanding what needed to be done. Finally, the roadmap set out a phased approach to implementing the sub-projects needed to achieve the goals.

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Ask the right questions

A great deal of detail was provided to the banks at the RFP stage – something that many of the banks said they appreciated. The RFP document itself covered 39 pages and included more than 200 questions. As renowned author and professor Clayton Christensen once said, “Without a good question, the answer has no place to go.” This underlines that the preparation and drawing up of the questions is really a key stage in ensuring a positive outcome for the RFP. Taeymans notes: “The more information you provide and the more detailed the questions, the better the responses you receive from the banks. It's about letting the banks know how we operate.” It then took about six weeks from October 2013 to November 2013 to receive the responses from the banks.

ELC used a Six Sigma methodology to score the responses – an area in which Zanders was able to provide experienced guidance. The carefully weighted scoring allowed for banks that were the best fit for the customer's requirements to be differentiated in key areas, while responses to certain questions that did not meet ELC’s core requirements meant that a bank could be ruled out completely.

Hugh Davies, associate director at Zanders, was closely involved in this stage of the project. He explains that the Six Sigma methodology enables companies to have a consistent approach to evaluating and scoring complex data, providing a clear frame of reference which is particularly needed when several people are involved in assessing the RFP. Davies says: “This scoring methodology provides a completely objective, robust and defendable set of results. This is important if anyone – a bank or senior management – later ask questions on how the results were obtained.”

Following the evaluation of the RFP responses from the banks, a round of queries and responses clarified any outstanding issues, as well as further meetings with the banks where they could present their proposed solutions. Following that, reference calls with some of the banks' existing clients with similar requirements were made and the short-listed banks' operations and service centers were visited to validate certain aspects of their proposals.

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A strategic view

As has been witnessed recently, some banks have been rationalizing or closing down their cash management operations completely, so it was also important to understand the bank's longer-term plans for its cash management business. Taeymans says: “We wanted to understand the bank's approach to practicalities such as pooling, accounts, implementation, contingency, data reporting, etc., but we also had an eye on its strategic vision of cash management. It's important to understand the strategic motivation from senior management at the bank, in the region and beyond. We gained an understanding of this from speaking to many different people at the bank, up to senior levels.”

It’s important to understand the strategic motivation from senior management at the bank, in the region and beyond

It was only in the very late stages of the selection process that negotiations on pricing began with the selected banks, while those that were not chosen were informed and given detailed feedback on the strengths and weaknesses of their proposals.

ELC reached its decision in April 2014 and finally, out of five short-listed banks, BNP Paribas and Citibank were chosen. What clinched the deal? Taeymans says it was very much based on the Six Sigma scoring method and the two best performers were chosen. However, the overall relationship was an important factor and services were allocated according to each bank's strength in particular regions.

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Satisfying results

But far from being the end of the project, the bank selection was just the beginning, and in April 2014, the implementation of the pan-European bank project really began. Taeymans says: “Since then, Zanders has been involved on select occasions, in particular with workshops for affiliates because they know how banks operate in certain markets.”

You need to involve your people, including legal, local finance teams and IT

Some of the lessons learned from the project so far include getting early involvement from stakeholders, including the affiliates, as well as IT, legal and accounting departments. Taeymans adds that, when 23 countries are involved, one shouldn't underestimate the time needed for legal and documentary matters. He says: “You need to involve your people, including legal to help with documentary requirements, as well as local finance teams. I myself am definitely not an expert on some of the technical details regarding the file formats needed to integrate with SAP – so that is where cooperation with IT really is key.”

While more work lies ahead on ELC's treasury roadmap, the Belgian ITC can for the moment feel content with its achievements so far. Taeymans says: “It's fair to say, when you see the migration taking place, that's satisfying. It's great to see a workable solution within the company that is the result of a project that is steered from within treasury, but has impacts on affiliates and their financial departments, who all have other priorities. It's very satisfying to see the benefits for the whole company – monetary benefits but also a more efficient process.”

Would you like to know more about RFPs and/or bank selection? Contact us.