JCI is the global leader and largest manufacturer of automotive batteries, powering nearly every type of passenger vehicle, heavy-duty and light commercial trucks, motorcycles, golf cars, lawn and garden tractors, and marine applications, and a leading provider of building technology, products, and solutions (building automation & controls, HVAC, refrigeration, fire, security, and integrated solutions). The multinational has USD 30 billion in sales and employs 120,000 employees spread over 2,000 locations on six continents. Building automation & controls, HVAC, refrigeration, fire, security, and integrated solutions are part of the Building Technologies & Security (BT&S) division and represent the majority of sales: USD 23 billion. The Power Solutions division has sales of USD 7 billion. One in three cars around the world is powered by a Johnson Controls battery. There are over one billion cars in circulation globally, and with a production of 150 million batteries a year, JCI is a world leader in this field.

Increasingly less automotive

Three years ago, JCI had a very different company profile. Its activities were divided into four divisions, including a very large Automotive division mainly focused on the interior of the vehicle. This division consisted of two parts: Automotive Seating, which manufactured car seats, and Automotive Interiors for the production of dashboards, floor and overhead consoles, and door panels. A fourth division, called Global Workplace Solutions, provided facility management services for third-party buildings. “We first divested Global Workplace Solutions by selling it to CB Richard Ellis. We subsequently contributed our Automotive Interiors division into a joint venture with Yanfeng, one of the largest automotive suppliers in China. Then the company decided to dispose of the entire Automotive division – including the stake in the Yanfeng joint venture – in a spin-off,” says Jean-Philippe De Waele, VP & Treasurer EMEA, responsible for the treasury activities in the EMEA region. “This division eventually became an autonomous publicly listed company called Adient.” But prior to completing the spin-off, JCI merged with Tyco, where JCI’s building automation & controls, HVAC, and refrigeration activities were combined with Tyco’s fire and security activities.

Automotive represented more than half of JCI’s revenue when the spin-off of Adient was announced in July 2015. The operational spin-off had to be realized in a very short time frame, with Adient becoming a fully independent unit under the JCI umbrella by July 1, 2016. All the teething problems had to be identified in a dry run period of several months in order to properly and efficiently execute the legal spin-off on October 31, 2016. After all, the entire Automotive division had to be completely disconnected in terms of processes, systems, and employees.

Systems and people

In a very short period of eight months, a brand new treasury department had to be set up from scratch to support Adient, a global organization with revenue of USD 17.5 billion. In the fall of 2015, JCI was looking for external consultants to assist with the treasury spin-off project. Jean-Philippe De Waele explains: “Because we knew we could never accomplish this without external help, I visited EuroFinance in Copenhagen looking to secure the right consultants. A large part of the treasury spin-off consisted of implementing a treasury management system for Adient. Given the time constraints, we therefore decided to copy JCI’s current treasury systems and processes to Adient. As Zanders successfully assisted JCI in 2010 with the initial implementation of our treasury management system, Quantum, it was a logical choice to reach out to Zanders for this part of the spin-off work as they were already familiar with the system, processes, and people.”

JCI first upgraded its current system from version 4.6 to 6.2 and then cloned it for Adient. Jean-Philippe De Waele: “It was a very intense project as we had to go live on July 1. As part of our global liquidity management and inter-company netting processes, we use a cross-currency notional cash pool at Bank Mendes Gans (BMG). A similar structure was set up for Adient, and Zanders assisted with its implementation.”

Zanders helped us to audit, streamline, and improve the back-office processes.

Jean-Philippe De Waele, VP & Treasurer EMEA

Merger

In January 2016, employees learned that JCI – for the part that did not continue as Adient – was going to merge with Tyco, a company that provides fire and security systems. The merger with Tyco took place on September 1, 2016 – two months before the spin-off of Adient came into effect. As a consequence of the merger, JCI had a new footprint of treasury centers around the world. Jean-Philippe De Waele explains: “The US treasury center of Tyco was located in Princeton, New Jersey, while we were based in Milwaukee, Wisconsin. In Asia, they were in Singapore, and we had offices in Hong Kong and Shanghai. In Europe, they were in Switzerland, while we had an establishment in Brussels. And while we were in Brazil, Tyco did not have an active presence in Latin America. It was clear that there had to be a rationalization in treasury centers. In the US, the office in Princeton was closed; in Asia, everything was concentrated in Shanghai, and in Europe, it was decided to keep Tyco’s treasury center operating as a satellite of Brussels.”

With the merger of the treasury centers in Brussels and Zürich, it was necessary to determine which processes would be conducted where. “Because Tyco had an established and operating back office in Zürich and our back office in Brussels operated post spin-off with temporary workers and Zanders consultants, we decided to centralize our back-office activities in Zürich. Zanders helped us to audit, streamline, and improve the back-office processes, and then we transferred those operations from Brussels to Zürich.”

Trade finance

When the transfer of the back-office activities and other treasury integration work were successfully completed, a new internal project started at JCI: the implementation of a new trade finance system. This project was also a result of the merger with Tyco. Jean-Philippe De Waele: “We have a fairly extensive portfolio of bank guarantees and letters of credit. We have about 8,000 bank guarantees outstanding, amounting to approximately USD 1.2 billion. We also have a large portfolio of parent guarantees. At JCI, we did not have a system in place while an old trade finance system existed at Tyco. The integration activities triggered us to think about what should be done in this area. Move from no system to the Tyco system? Or would it be better to switch to a brand new system? Zanders analyzed the Tyco system and compared it with the current needs of JCI, where Swift connectivity is extremely important. The conclusion of this audit was that the cost of upgrading Tyco’s legacy system would be about as high as the implementation of a brand new system. That is why we decided to implement a new system, GTC (Global Trade Corporation), in which all communications with banks occur via Swift. Zanders is assisting with the implementation and the onboarding of the various banks on GTC and Swift.” The project started in mid-September, and the first bank will go live in February 2018.

Decommissioning

With the merger, whereby Ireland-based Tyco International Plc acquired the US-based Johnson Controls, Inc., the new parent company (Johnson Controls International Plc) was incorporated in Ireland. “As all our derivatives trading is done in the name of the parent company, a lot of work was done in transferring our hedging activities – FX and commodities – from the old (Johnson Controls, Inc.) to the new (Johnson Controls International Plc) dealing entity, and Zanders supported us with this transfer,” says Jean-Philippe De Waele. “Tyco operated a very large in-house bank which we decommissioned. In addition, we dismantled Tyco’s notional cash pool and integrated it into our BMG cash pool structure. We transferred all Tyco’s hedging activities from its treasury management system (IT2) to Quantum, and all Tyco banks were on boarded on our AvantGard Trax system (Global Payment Factory) and Swift.”

Awards

The list of projects gives an indication of the extensiveness of the treasury operations at both companies. After the spin-off of Adient, Johnson Controls was a company with USD 20 billion in sales. Tyco was a company with sales of USD 10 billion, bringing total group sales to approximately USD 30 billion. As Jean-Philippe De Waele notes, “During the merger of two such large companies, there are significant integration efforts at all levels, including the treasury level.”

Looking back at the projects, Jean-Philippe De Waele is very satisfied. “The work accomplished for the Adient treasury spin-off was impressive,” he says. “This is also recognized outside of JCI. We obtained two awards for the work that we have done in this regard. One from CFO Magazine as ‘Best finance team - best treasury practices’, and one from Treasury Management International Magazine, for ‘Best Treasury Transformation’. In addition, we received several requests to share our experiences concerning this project - including ATEB, the Belgian Association of Corporate Treasurers and at the EuroFinance conference. Our practices have become a showcase for many people on how to best handle a spin-off and carve-out of a business division.

Future

Under Jean-Philippe De Waele’s stewardship, there are still a number of ongoing integration activities relating to banking and cash management that will continue over the next 12 months. “Zanders will remain onboard until an initial group of countries have become active on the new trade-finance platform. Meanwhile, we have completed the recruitment of our additional analysts, who will be managing our BMG cash pools.” We are never sure what the future will bring, notes Jean-Philippe De Waele. “The company has been very active in M&A and divestments over the past three years and publicly stated that it is focused on creating long-term shareholder value in the remix of its business portfolio. For example, as we were integrating Tyco, the company decided to sell part of its business (Scott Safety) to 3M, a US company. So who knows…”

Gasunie, which is wholly owned by the Dutch government, transports natural gas through more than 15,500km of pipelines in the Netherlands and Germany. In addition to these pipeline systems, Gasunie’s assets comprise hundreds of installations, including one for liquefied natural gas (LNG), an LNG import terminal and facilities for underground gas storage. Every year, the company transports approximately 125 billion cubic meters of natural gas, equal to about a quarter of Europe’s total gas consumption. As a bona fide gas country, the Netherlands has become ‘Europe’s gas hub’, the central trading place for gas.

Terrific challenge

One of the government’s key objectives is to make the Netherlands one of the most sustainable countries in Europe by 2020. To limit climate change, the country is currently working on an energy transition: a switch to a CO2 free energy supply. This means that fossil fuels will increasingly be replaced by fully renewable energy sources, such as solar, wind and geothermal energy, and biogas. Due to this, natural gas, which is undisputedly the least polluting fossil fuel, has now been cast in a somewhat less-than-positive light. “You just have to mention energy transition and the level of uncertainty is very obvious,” says Janneke Hermes, manager of corporate finance & risk advisory at Gasunie. “And there are plenty of givens. But many people don’t have the right information – about the reliability of energy sources, their costs and what they can be used for. Solar panels on roofs have become symbolic of renewable energy, but even if they covered all the roofs in the Netherlands, they could only generate a limited percentage of the country’s energy requirements. So much more needs to be done. The role played by gas is, and will remain, crucial in the energy transition. This will increasingly be renewable forms of gas, such as gas from biomass, or hydrogen that can be obtained from wind energy. But natural gas also has a role to play, because it can reduce CO2 emissions significantly using it instead of coal in power stations. The big challenges we face are how to connect all the energy lines in the near future and how it should all be organized. It’ll take a lot of time and money and it constitutes a very substantial challenge for the Netherlands and the rest of Europe.

Hydrogen

Gasunie is already involved in a number of innovative projects. “Many impressive projects are already being carried out, by players big and small,” explains Hermes. “TenneT, for example, wants to harvest offshore wind energy on the North Sea, on a large scale, and our contribution can be to convert the excess electricity into hydrogen and transport it via existing gas pipelines to land, where it can be used as renewable fuel.” Adding CO2 to hydrogen produces methane, which can be introduced to the gas network as a gas. A further advantage of doing this is that hydrogen, or the gas that it helps to produce, can be stored as a buffer for subsequent energy generation or use. Many industries already use hydrogen in their production processes, continues Hermes. “Naturally, we are exploring how, with the existing infrastructure in our country, we can optimally exploit and facilitate this fact.”

Into Europe

In addition to its network in the Netherlands, Gasunie also has one in Germany, which also plays a key role in the security of supply of natural gas to the Netherlands. “Our number one strategic pillar is to remain the reliable, safe player in the Netherlands when it comes to gas infrastructure,” assures Hermes. “To this end our focus is very much on the storage of energy, during both the summer and winter and on a daily basis too. In other words, monitoring peaks during the day and deciding how to cope with them. Our second pillar is the facilitation of the gas markets elsewhere in Europe.”

While in the Netherlands gas has fallen out of favor – as a result of the earthquakes in Groningen, for example, and because it’s a fossil fuel – the opposite is true in the rest of Europe. Gasunie’s strategy looks beyond the Netherlands, Belgium and Germany. “We are looking further afield – the gas market is developing very strongly outside the North European area. The further you venture into Europe the more popular gas seems to be, to the extent that in some regions it’s akin to an emerging commodity. Thanks to our knowledge and expertise we can help, facilitate and invest in those markets. For example in the construction of new pipelines and networks, and new LNG terminals. I’m talking about countries in which we want to accumulate experience step-by-step, starting off by providing advice and service. Later this can be expanded into participation in a consortium in proportional stakes. We want to build up our presence incrementally.” According to Hermes, the third strategic pillar focuses on the afore-mentioned energy transition. “We are increasingly and emphatically demonstrating just how important a role we can play in all this. By supporting solar and wind energy, offering gas as a back-up, and making our own products more sustainable, or green. Green gas, by the way, is the same quality as natural gas. We are working on innovations that should lead to an increase in scale in the supply of green – so sustainable – natural gas.

Diversified supply

Alongside the transport of gas, Gasunie is also focusing on heating networks based on geothermal energy or residual heat. “Together with Eneco, the Port of Rotterdam Authority and Warmtebedrijf Zuid-Holland, the so-called Heat Alliance, we are trying to make optimum use of residual heat produced by the Port of Rotterdam for heating in the immediate region.

We are striving for open access in that market, with all customers and suppliers enjoying access to the infrastructure. Independence has always been a key aspect of what we do; we have no interest in the commodity. We make it possible for the various players – such as producers, customers, traders – to find one another. Our range of activities is currently very broad, from doing the right things today to exploring what’s possible in terms of tomorrow’s services and facilities and how we can contribute to their realization.”

The energy supply in the Netherlands is strongly dependent on gas. In 2016, a third of all energy in the Netherlands was supplied by natural gas. And due to the reduction of production from the Groningen field as a result of earthquakes in the province, its dependence on countries like Russia and Norway seems to have increased. This is why Gasunie wants the supply of gas to be as diversified as possible, says Hermes. “Customers find it important to have options; it prevents unilateral dependence. In this respect, southern Europe is gaining in importance because that’s where gas from the Middle East comes in. As a supplier of gas, Russia is still a very important partner for all of Europe, but this only strengthens the argument that LNG could be an excellent way of realizing the desired diversity.”

New Role

But just what do all these developments mean for the activities of Gasunie’s treasury? “Having made the necessary investments in the Netherlands’ existing gas infrastructure, we can now generate the kind of cash flow we expected,” insists Hermes. “Consequently, this will reduce the amount of debt we’ll need to take on. We have a reasonably diverse long-term loan portfolio and once that’s matured we’ll no longer need to refinance the full amount, which translates to a moderation of our financing needs. For our international activities, however, it’s not yet clear how much funding we’ll need. The same is true when it comes to green gas and supercritical water gasification projects. Relative to our assets, these all represent modest investments, but we don’t yet know how big they will become in future. Once their success has been proven, we’ll scale up projects like these. In terms of financing requirements, ours are indeed very diverse.”

That diversity has not escaped the attention of Gasunie’s treasury, while Hermes’ own role has also changed and become more diverse. “Suppose we’re talking about a benchmark loan of €500 million, it won’t be a problem because we’ve done something similar in the past. But if the discussion is about a new biogas hub with several farmers from Twente, for example, the dynamics become very different. We don’t yet have a contingency plan for something like that so we’ll need to be extremely flexible.” When financing these new, different types of projects, the sums involved are a lot lower, but the same cannot be said about the time the treasury has to invest. “That can sometimes be inversely proportional,” concedes Hermes. “But the contacts are also very different and this calls for a completely different skillset to what was needed before.” It also means that advice is asked more frequently from within the organization, she acknowledges. “Whereas we initially provided corporate financing, we now also extend loans to the business units themselves. This too calls for a different dynamic.”

Sustainable Cooperation

The first advisory role played by Zanders in Gasunie’s treasury activities dates all the way back to 2002, says Hermes. “So for me I’ve only known collaboration with Zanders. Back then it included SAP implementation, in which all kinds of instruments had to be configured. Since then we’ve been in constant contact; whenever the treasury needed support, we contacted Zanders. In May 2016, Lisette Overmars even took on the role of interim treasurer for several months. Our most recent collaboration was the adaptation of our treasury statute, which was necessary because we wanted our treasury policy to be aligned with our new objectives. In a broader context, Zanders has always proved an excellent sparring partner, one that asks us the right questions and provides the necessary structure for tackling the challenges our treasury faces. It’s what I’d define as an excellent and sustainable collaboration.”

If you would like to know more about treasury solutions in the energy sector, please contact our Partner Laura Koekkoek.

Since 1970, FMO has been investing in the private sector of developing countries and upcoming markets. It does this in sectors in which it believes the long-term impact will be the greatest: financial institutions, energy and agricultural sector. With regard to lending, FMO applies a number of criteria. Is the initiative bankable? Does it contribute to a better world? Is it dependent on FMO or can another bank do it as well?

IFRS 9 concerns a number of new accounting requirements for financial instruments and contains three pillars: classification and measurement of financial instruments, provision for possible credit losses on financial assets (impairment) and hedge accounting. The adjustments within the organization fall under the responsibility of the financial division, which is Buijze’s department. “As far as hedge accounting is concerned, the impact is not so relevant for us, but definitely for the other two,” says Buijze. For example, the rules require the bank to look at expected loan losses differently, including taking into account macroeconomic scenarios.

Auditable and executable

During the credit crunch, banks found that the value of assets or liabilities entered on the balance sheet were often too low. In addition, there was also a delay in adjusting the value in response to market developments. The idea that the value of assets or liabilities should reflect the market more closely only seems logical. The question, however, is whether this regulation will achieve this. “It probably will,” thinks Buijze. “But since it arose from a political discussion, it makes it that much more complex. In order to get a grasp on this complexity, we have appointed an external manager to this project. It affects every part of our organization and is a lot of work to not only process it through all the procedures, systems and reports, but also to make sure it is preserved.”

In 2015, FMO began to prepare at a relatively early stage. “That’s why we were able to take all the necessary steps in a constructive way,” explains Buijze. “That process started with the question: what exactly is IFRS 9 and what are we actually facing? After that we needed to verify which elements were already in place. The probability of default (PD), or the probability that a company will go bankrupt, was something we already had a good idea about. As well as the loss given default (LGD), which is loss through default. You need to build your entire framework on these basic elements. IFRS 9 requires a calculation of expected loss (EL) in the next 12 months. However, if the client’s creditworthiness deteriorates, you are responsible for the EL over the entire life cycle of that credit. But what does ‘deteriorate’ actually mean? Such things must be clear; it’s important that it’s auditable and executable.” That raises the question of how one determines the creditworthiness of a local bank in Zimbabwe, for example. No ratings exist for such a bank. Buijze says: “We do that with all the specialists here, through a ranking of the entire portfolio based on the estimated risks. So it’s a relative rating which we subsequently ‘map out’ from the well-known rating scores of Moody’s and Standard & Poor’s.”

Portfolio diversity

Compared with the Basel guidelines, IFRS 9 requires more a point in time, according to Martijn de Groot, director at Zanders. “We had to take a number of measures, especially when using the existing PDs as proof for IFRS 9. Nothing too major, but it must be well founded to obtain approval from the auditor and to be able to take part in the process.” Buijze nods in agreement, saying: “You have to thoroughly explain why certain decisions were made. A lot of banks have very specific problems. As a bank, we can’t do a lot of back testing because we have relatively few clients, and luckily we don’t lose many. To show the expected loss with only historical figures is difficult. You must also substantiate your findings theoretically.” FMO’s portfolio is much smaller but more diverse than that of the average bank. The balance sheet total exceeds €8 billion, with loans amounting to over €4 billion. However, this is distributed among approximately 700 clients in 80 countries.

“There are countries with a high-risk rating, where we’ve never lost a cent, although the expected loss is higher than zero,” explains Buijze. FMO’s expansive agriculture sector does have some consequences. De Groot says: “It means that you have to find a solution for everything for IFRS 9. Because the portfolio is so diverse, so are the effects. A life cycle or credit cycle needs to be modeled, but the FMO credit cycle, based on the total balance, is muted, less volatile, due to the diversity.”

Classification

In the world of FMO, modeling quickly results in highly theoretical levels, says Buijze. “There are no trustworthy figures from a lot of the countries in which we do business. How do you determine the credit cycle in Ukraine, for example? In any case, we try to find the balance: while complying with the standards of IFRS 9, we don’t want to fall into something which appears great in theory, but hardly relates to what’s happening in a country.” All financial instruments must be classified according to the IFRS 9 guidelines. On the liabilities side, there is no impact for FMO but there are implications for the bank’s financial assets. Buijze explains: “We have to separately determine the classification for each loan.” This classification means that loans are entered at cost price or at market value on the balance sheet. However, the market value decreases as the repayment capacity decreases. Because there is also an interest component, in addition to a credit component, the market value is more complex. “Luckily we haven’t needed to price that many loans at market value. We work with normal loans, mezzanine loans and private equity. And for the latter, very different rules apply.”

Fluctuations

One of the most miraculous things about IFRS 9, according to Buijze, is that you are obliged to make a choice for private equity investments. “Either everything goes through the balance sheet, so you never see anything in your profit and loss account (P&L), with the exception of paid dividends, even if you sell the investment at a nice profit, or everything goes through the P&L. That leads to some uncertainty, because valuations can fluctuate and are not always as accurate as possible. Consequently, you get huge fluctuations in your income statement. We finance
almost no listed companies, and should therefore, in valuation, mainly look at theoretical values based on what other companies are doing. If we finance a bank and all banks in that region are assessed at a lower value, then we will also asses the bank at a lower value. During the crisis, the large Dutch banks significantly decreased in value, while we were actually doing quite well. If FMO was valuated in the same way as ING at the time… Therefore, it is an approach, but it’s not spot-on. And that’s all because of your P&L.”

De Groot believes there’s something else involved: “The bulk of private equity isn’t in euros, which means that currency volatility also has an effect on the balance sheet value, which in turn is in euros. Previously, that result only went through selling by the P&L, meaning if it were actually realized. Under IFRS 9, it either never goes through the P&L, or every period your unrealized result also goes through the P&L.” In fact, this all means a higher volatility on the P&L.

That will apply to a lot of banks, but with us, it’s even more extreme because we have a relatively large portfolio in private equity.

Paul Buijze of FMO

FMO has chosen to have put everything go through the P&L. “That was a difficult decision, but it involves almost a third of our activity;, so for reasons of transparency, this was too much not to include in the P&L.”

A glance at 2025

Finance is ultimately the most involved department in implementing the new reporting standards. “Zanders had the ‘spider-in-the-web’ job,” says Buijze. “They brought together collaborators within the organization and developed a tool to calculate the credit facilities and market values of loans. This tool also implemented shadow calculations to get a better sense of the choices made for IFRS 9. What does this mean for the periodic numbers? This provides better insight and we can intervene if necessary. We prefer to have the tool in the system itself, but the systems don’t offer this at the moment. In the next three years, the tool must at least have a sufficient level to make our P&L, and be signed off by the auditor. And after that, we hope that our source systems will have the capacity to do this themselves.”

In recent years, FMO has grown both in size and profitability. “Through the years, we’ve had a lot of up-swings,” says Buijze. “Because of the dollar, but fortunately, also because developments in a large part of the world we work in are going so well.”

In the first hundred years of its existence, Boskalis was purely a dredging company. In 2010 the company – to give it its full name Royal Boskalis Westminster NV- acquired a number of other companies and, as a result, evolved from a dredging to maritime service company offering various services to different markets. Over the course of a few years, Boskalis acquired haulage company SMIT Internationale, Fairmount, Dockwise and the dredging business of the German Strabag Wasserbau.

Evolved according to needs

Boskalis has a huge project organization; the company operates in more than 90 countries across 6 continents. As a result of this expansion, the complexity of treasury work increased as well, due to various currencies, local bank accounts, financial structures and different ERP systems. “At a certain time they all have to be in sync,” says Frank Rousseau, Boskalis’ Group Treasurer. Treasury plays a remarkable hybrid role in it all: on the one hand as a ‘holding-treasury’ – namely in the area of corporate finance and everything concerning take-overs – and on the other hand closely involved with projects, mainly financial risk management. Rousseau: “Advising the Board and at the same time being close to the business locally means we play a very central role.”

Rousseau also thinks that the treasury function at Boskalis is special. His department now has 16 people who work on cash management, corporate finance, project financing, bank guarantees and credit risk management. “Our people are often directly involved with projects. The treasury organization has evolved according to the needs of the company. There is a need for strong financial and operational risk management and support for the business units, such as identifying and covering currency risks, credit risks and fuel price risks. At the time a contract is signed, all such risks have to be covered; when the project is underway you can’t intervene. Getting the order book filled is easy, but filling it with revenue-generating work is a bit harder. There is no advantage in taking on work and then doing it badly. Risk management is therefore very important in our business.”

Quick involvement

Large projects involve the whole treasury department in one way or another. “For example, take the
construction of a new arm of the Suez canal, so that shipping can safely navigate in both directions. From 2014 onwards this has been a large project and we had to contend with local bank accounts; Egyptian pounds, which have a currency risk; and managing credit risks, financial securities, bank guarantee structures and fuel price risks. These sorts of things can lead to fluctuations in returns and costs and therefore Treasury is involved at many levels, which makes it really fascinating.”

Our people are often directly involved with projects. The treasury organization has evolved according to the needs of the company.

Frank Rousseau, Group Treasurer at Boskalis

1300 people in total work at Boskalis’ head office in Papendrecht, supporting the company’s large
international projects. The fleet, the pools with crew, the researchers and contractors are all managed centrally. Even the preparation and implementation of tenders is done centrally, by, amongst others,
Treasury, Legal and Tax. “We are involved from the moment potential work is on the horizon up to contract negotiations. But also when the order is under way, for example with payments, the management of cash”, Rousseau explains. Execution of such local projects has to be managed centrally. “We don’t have any local organizations that can develop the necessary competencies; when one project is finished the project organization moves on to the next one. After the Egyptian project, half of the people go on to the next project in, let’s say, Oman. It is, in a way, hit and run work. We only have locations in Amsterdam and Singapore that act as a permanent base for a region.”

Atradius cover

Rousseau’s treasury organization reports to the CFO. Besides administrative and secretarial support, there is a team of four who deal with the daily cash management. Five others handle credit risk management and bank guarantees. Another team of five handles corporate finance, project finance and project development. Customer finance falls under project finance. “Public-Private Co-operation (PPS) is quite labor-intensive: if you tender for a Dutch PPS, you have to do so with a complete financing package. There are international clients – those outside the OECD countries – who have a project, but lack the financing or don’t know exactly how to develop the project. For example, in Panama we had Punta Pacifica, where a client wanted to put two islands off the coast of Panama city. As the client had insufficient funding for this, Boskalis participated with local banks. We were therefore not only contractor/guarantor for the complete execution of the project as far as the financers were concerned, but we also financed a part of the contract value. Treasury tries to add value in order to bring in a project.”

Another example is arranging a loan for clients with Atradius cover. “We did that last year in Colombia,” Rousseau explains. “We arranged bank financing for the client where the bank received credit insurance from the Dutch Export Credit Agency, covered by the Ministry of Finance. Credit risk for the bank is effectively carried by to the Dutch government. This is only possible in combination with a Dutch export product. In this way we try to do more projects by contributing to the economic feasibility of a project. In addition, we are broadening our approach to project development: we are offering parties who have a project in mind the chance to develop this together with Boskalis and make a business plan that is then financeable.” Although this is not a typical Treasury activity at first sight, it fits in the strategic scope of Treasury’s role in Boskalis.

New direction for cash management

In 2014 RBS, an important international house bank to Boskalis, decided to stop offering cash management and trade finance services outside the UK. This forced Boskalis to change direction. Rousseau: “We had decided some time ago to take a close look at our cash management, but when RBS pulled out we were triggered into taking action. And we realized then, in spring 2015, that we needed external help.” That’s how the relationship with Zanders came about.

Zanders' added value was in visualizing solutions and thinking strategically about where we wanted to be as company. They helped us to make choices, and with the set up of the whole organization.

Frank Rousseau, Group Treasurer at Boskalis

An important step was selecting a new bank for cash management services. Boskalis and Zanders issued an RfP and, via a short list and various analyses, we finally chose BNP Paribas for international cash management and ABN AMRO for Dutch cash management. At the same time, the cash management structure and the payment process were improved by implementing a bank-independent, central payment hub, which provided more insight into our cash flows. Rousseau: “We can now send a report of our net financial position to the Board every day: where is our money? We have drastically reduced the approximately 700 bank accounts we had and we now have structures abroad to better centralize our cash. Furthermore: we previously had payments from all sorts of different electronic banking systems. That too is now centralized in a standard solution.”

Asian prize

Parallel to these changes, Zanders supported Boskalis with an upgrade and outsourcing of the treasury management system (TMS). “We had three balls in the air at the same time,” says Rousseau. “It was a big strategic project, certainly for our Treasury. It has improved our bank account structure, the payment process and the information flow. Every morning we now receive all balances for about 500 bank accounts electronically via MT940. Our TMS then generates a report which gives the CFO and me insight into our net financial position. In the UK we have just set up a cash pool and we are doing the same in Germany. In our central cash pool we have 19 currencies. Last year we took over VBMS, the former offshore wind company of Volker Wessels, and this component has also been included in the new structure. In these type of processes, Treasury used to be a follower, but now we are leading. We tell the business unit how its cash management should be structured.”

This year Boskalis won a prize from The Asset, a well known Asian trade journal, for ‘Best Cash Management Solution in Asia.’ Rousseau: “In Singapore, one of the few places where we have a permanent base, we have set up a structure with target balancing, so that every day a limited amount remains in the account whilst surplus funds are automatically transferred to the central cash pool in the Netherlands. This solution has won a nice prize and sector-wide recognition.”

Future expectations

Which plans and developments does Rousseau foresee in the future? “We obviously look at where
we can make more improvements, but we have made great inroads over the past two years. For Treasury, support for the business units - the wider role in project finance and project development – is most important. We have a new 3 year business plan for 2017-2019, in which we show that we want to grow in dredging activities and offshore energy, the new components which we have had for several years and in which we expect high growth. As far as credit risk is concerned, we are keeping an eye on the oil and gas sector.” The Board of Directors is close to the organization and to its projects. This means that all departments have a short communication line with them. “They have insight into all projects’ financial risks and how we can cover them,” Rousseau explains. “The people we have here are really good professionals, who can handle derivatives. If you see what we have set up for our cash management and with which people we meet new challenges, then we really are ready for the future.”

Do you want to know more about risk management for corporations? If so, contact us.

As the country’s ‘Quadruple Player’, Türk Telekom offers a complete range of mobile, fixed voice, broadband, and TV services. With the vision of introducing new technologies and accelerating Turkey’s transformation into a true ‘knowledge society’, it offers services to over 38 million subscribers. Türk Telekom provides the information technologies that drive sustainable economic growth and community development. By investing heavily in fiber and mobile networks, Türk Telecom provides people with access to knowledge that, due to economic, social or physical reasons, may otherwise not be a part of this community. As such, Türk Telekom is truly a leading company in Turkey. Türk Telecom split its ownership after its privatization in 2005 and initial public offering in 2008: 15% free float on the Borsa İstanbul, 55% owned by Oger Telecom, and 30% owned by Turkish Government.

The challenge

Türk Telekom is exposed to material foreign exchange exposures due to its sizeable long-term foreign currency funding portfolio, denominated primarily in EUR and USD. Due to insufficient long-term Turkish lira liquidity in the domestic debt market and the high Turkish lira interest cost, access to foreign currency denominated funding is essential for the company. However, this simultaneously exposes the company to foreign currency risk because adverse foreign currency movements inflate Türk Telekom’s debt position and interest expenses significantly. In turn, this detrimentally effects the company’s overall financial position, credit profile, and ability to raise future liquidity to fund its large CAPEX program. “Türk Telekom had established a number of internal mechanisms to manage foreign currency risk, but a formalized risk management policy was still missing,” says Salih Fatih Güneş, Director of Treasury, Türk Telekom.

This was the starting point to define the scope and objectives of the Financial Risk Management Transformation Project in collaboration with the Enterprise Risk Management department.

The project

Türk Telekom decided to embark on a FRM Transformation Project, with the ambitious goal to create an ‘integrated’ and ‘holistic’ solution across the various risk relevant categories: market risk, credit risk towards financial counterparties, and overall company liquidity risk.

Given the complexity and involvement of multiple stakeholders, Türk Telekom required a multistage approach, each with distinct pre-defined deliverables. Türk Telekom invited a limited number of consulting firms to respond to their request for proposal. Salih Fatih Güneş:” We specifically wanted to work with a consulting boutique specialized in treasury and risk management.” Zanders translated Türk Telekom’s requirements into the following tailored project approach.

Best practices and innovation

Türk Telekom Treasury received an Adam Smith Award as a highly commended winner in the Best Foreign Exchange Solution category. The award recognized the following best practices and innovations:

• A holistic approach towards risk management incorporating different risk categories
• Use of a sophisticated, state-of-the-art risk quantification tool
• The incorporation of a risk decision-support tool in which long-term funding/rating criteria are the main drivers
• Joint effort between Treasury function and the Enterprise Risk Management function
• Adoption of a Monte Carlo simulation model

The solution

Zanders delivered a state-of-the-art risk quantification tool, tailor made to capture Türk Telekom’s ‘risk bearing capacity’ in relation to its financial profile. The tool captures financial position data, relevant market risk variables (FX, interest), and appropriate risk models, and incorporates further customized stress, scenario, and simulation tests, including an at risk methodology that uses Monte Carlo simulation. It provides Türk Telekom with 5-year, forward-looking management information, which Türk Telekom uses to decode signals of adverse events at an early stage through key risk indicators and management consults to proactively steer the company’s credit profile. Türk Telecom based the tool on the overall financial strength and risk bearing capacity of the company as the central metrics to set risk limits and bandwidths linked to the outcome of the calculated financial risks.

In addition, Türk Telekom drafted a new Group Financial Risk Management Policy. This policy incorporates strategic and operational guidelines for Türk Telekom’s Financial Risk Management activities and clearly describes the key FRM principles and objectives, steering both strategic and operational decision-making. The new policy clearly states primary and secondary risk management objectives, with liquidity risk the key risk that other risk categories align to and resulting actions derive from.

Developing a state-of-the-art holistic risk quantification model along with new treasury policies, procedures, strategy, and governance is quite unique. In theory, it may sound straightforward, but in practice it is quite difficult to deal with multiple interlinked financial risks in a holistic manner.

Salih Fatih Güneş, Director of Treasury, Türk Telekom.

Next to the industry recognition and Adam Smith Award, the project also improved internal visibility and recognition of treasury’s added value by senior management and other corporate functions. Salih Fatih Güneş concludes: “We have achieved this project in close cooperation with our consulting partner Zanders. It added value with its outside-in views, knowledge of best practice and especially with its pragmatic approach to delivering a concept into a practical, tailor-made solution.”

How does a pension company prepare for the risks and uncertainties inherent in financial markets?

“One of the best ways to prepare is by practicing. The financial industry is actually poorly prepared for the unknown, and can even be surprised by something entirely uncertain. The leading economists at the beginning of the 20th century did not have the big data or computer power we have today, but this has grown enormously over time; we are now able to simulate, optimize, and much more. We are now so enslaved to data and models that we are under the illusion that we have everything under control. Lehman had the most advanced risk management system in the world and it still went bankrupt. The biggest problem with risks is that they concern matters that are actually already known to you. A risk is a measurable uncertainty, yet uncertainty is an immeasurable risk. So when you are struck by an uncertain event, all those models are utterly useless. And when that happens, we are left dumbfounded; we do not know how to act and we forget to communicate - the most poisonous cocktail for trust in the financial sector. We can learn a lot from other professional groups. Pilots, for example, are trained how to act in unexpected, unfamiliar situations. Financial models are our autopilot, but a pilot must also be able to fly the plane when unexpected circumstances occur that the autopilot is unable to handle.”

Was the scenario for the Brexit already known at PGGM

“The Brexit scenario was one of our top five priority risk scenarios. We regularly meet with all investors and economists within the organization to discuss these types of scenarios. Last year, we already had a Grexit scenario which we made even more specific this year to prepare for a possible Brexit. Calculating probabilities is at that point completely futile; you must accept that events are going to occur which you never could have predicted. We assumed that the consequences of a Brexit would initially result in volatility in the stock markets in particular, which can be simulated easily, but the greatest uncertainty was what influence Brexit would have on the rest of Europe. We had previously discussed this ‘butterfly effect’ at length. Of course, the question that also remained was how this will affect our wallets; moreover, we examined our UK and British pound exposure. Our exposure to the pound is covered for nearly all of our clients, but other currencies could well be affected. That is why we also looked at European banks in terms of counterparty risks and credit risks. As for our immediate investments, we mostly looked at the infrastructure projects, because for these you are highly dependent upon the British government – regulatory risk is one the biggest risks there.”

But how can you practice for something that is mostly uncertain?

“We practice with a financial crisis team (which includes the board of PGGM, ed.) that is unexpectedly confronted with an uncertain situation. This is how you learn what can go wrong in a situation. You cannot, of course, devise scenarios for the unknown, but you can practice how you generally handle of unexpected situations.”

Is maintaining buffers the only way to provide some sort of hedge against these uncertainties?

“Based on the Value-at-Risk approach, you must maintain a buffer for something that may occur once every 200 years. When you do get hit, you will have sufficient capital to survive any blow. But the greatest weakness here is that the probability calculation on which this is based is flawed. Nassim Nicholas Taleb also referred to this in his book The Black Swan. Many risk management systems work well, but only when the market circumstances are similar to what they are designed for.”

And what role does interest play in this?

“We have not taken additional measures for interest. The hedges for it are completely tied up in ALM (asset and liability management) for most funds. When you think in terms of financial returns, with the current negative interest situation, it is strange that interest risk must be covered. But seen from the perspective of the Financial Assessment Framework (FAF), hedging the interest risk is necessary because interest rate changes could have major effects on the value of the obligations.”

But when you invest against 0% interest, any pension company surely must know that it won’t achieve that right?

“The FAF is not designed with a very low interest in mind; that is undisputedly true. Many funds are now also suffering under the enormous increase in obligations, which is still mostly an accounting effect. Pension funds must achieve a return of well over 0%, and they normally do, but no investment returns can match the interest effect. The funds with the best cover ratio are those that have hedged their interest risk in time; not necessarily the funds with the best returns on their investment portfolio. I believe these developments will now also bring about the necessary changes in the pension system at a rapid tempo. I don’t have the ultimate answer, but I think it’s good that the discussion about the sustainability of our system with a vastly changing job market is now really gaining momentum.”

What does this mean as seen from a risk management perspective?

“As pension fund management, you have a dual problem. On one hand you have to deal with a FAF and a short term risk of becoming hedged - the reduction of rights. While on the other hand, for the average pension fund, the long term risk you won’t achieve your organization’s objectives is much more relevant. Investing in government bonds with a negative return is then incredibly risky. An average pension fund, with members that are generally not very old, should primarily focus on the long term.”

JP Morgan published a study in which the interest rate could possibly come out at minus 4.5%. What would you advise your clients in this case?

“That is an example of thinking in scenarios. Such economic scenarios are also included in our models these are partly deterministic and partly stochastic. They do assume a low interest - even a negative interest in the short term in certain scenarios, but not in the long term. What I noticed about interest scenarios in many ALM models is the speed at which mean reversion occurs: the return to a long term average. In the short term you can assume any number of things, but if the model for long term interest takes on 4% after 5 years, you can ask yourself - certainly these days - how realistic can this be?”

Does PGGM also employ swap options, for example, against such interest risks?

“We have in the past, but most clients are not keen to invest in swap options. They are not easy to explain and you pay a large premium. In addition, you also have counterparty risk and liquidity risk - it is unmanageable. Smaller funds have a much easier time hedging on the short term than larger funds.”

Is there not enough room on the market?

“Well, there are some insurance companies with equally large balance sheets that are able to hedge themselves. So it is possible, apparently. But you do see signs - the buy-back programs also don’t help here - that market liquidity is declining, certainly for long-term government paper. You can also do a lot with interest swaps, but the developments there, too, make for a difficult market due to, among other factors, EMIR and the capital requirements for the banks that we deal with. What’s more, derivatives are not at all popular in public opinion and are still being dismissed by the media as dangerous and speculative instruments. Pension funds have to deal with this, too. You work in a kind of glass house; everyone has an opinion about it. I don’t envy the average manager.”

During the seminar, you said that pension funds have relatively little to do with legislation. Should this change in future?

“No, you can compare it to banks and insurance companies. In principle, legislation is useful: it ensures a level playing field among the market parties and is meant to protect the participants.”

PGGM also invests in illiquid products. How does PGGM control the reputation risk of this?

“We have been investing in illiquid products for a very long time and this has brought great results for our clients. We currently invest approximately one quarter of the portfolio in illiquid assets - a relatively high percentage. This is comprised of private equity, infrastructure, private real estate, structured credit and the like. A drawback is that such assets are not immediately tradeable, but for a fund with a long investment horizon, that’s less relevant. The costs are normally higher, but even after these costs, the investments make a substantial contribution to overall returns. The great advantage of private investments is that we can directly influence them. We can exercise influence on the ESG (environmental, social & governance) profile, especially for projects where sustainability plays a role. You might even say that I know more about an average private equity investment than I do about an average investment in a quoted company which we also invest in. But due to this big influence, we also have to deal with reputation risk, because there are always some projects where something is wrong, such as a renter that has
gone bankrupt. Our strategy is to always explain precisely what we do and what our role is.”

In closing: given all the uncertainties, how can we improve the level of trust in the financial sector?

“It is crucial that we as a sector learn to deal with ambiguity better. Organizations should write a concrete risk appetite, where you accept that events are going occur that all of you together have not foreseen. And we should start practicing how to handle unexpected events, just like the pilot example cited earlier. We must also recognize that existing models and processes may not be of any help. In doing so, you will be more transparent and trustworthy in your (crisis) communication. Because after all, who is going to believe the man who claims to have everything under control under any and all circumstances right down to fifth decimal place?”

Bucher Industries is the world leader in its field – yet the company may not be a household name for most of us. Surprisingly, we have all probably encountered one of the company’s products in a European city or in the country. On five continents, this Swiss company manufactures machinery and vehicles, used for a variety of purposes, such as harvesting, producing and packaging foods, or as hydraulic drive systems for high-performance equipment. Moreover, Bucher is the world-leading supplier of municipal vehicles for cleaning and clearing operations in urban areas. In 2015, Bucher Industries generated sales of CHF 2.5 billion with its 11,500 employees located worldwide. The Swiss-listed multinational operates in five divisions, each manufacturing a range of specialized products: municipal cleaning vehicles (Bucher Municipal), agricultural machinery (Kuhn Group), hydraulic systems (Bucher Hydraulics), glass containers (Bucher Emhart Glass) and Bucher Specials (comprising Bucher Vaslin, Bucher Unipektin, Bucher Landtechnik and Jetter), which produces systems for winemaking, fruit juice, instant products and beer.

“Our objective there is to keep the streets clean”, says Frank Rust, head of treasury at Bucher Industries with respect to Bucher Municipal. With the further expansion of the group’s businesses, Bucher is more active in India, China and Turkey.

“The expansion into Asia is interesting, both from an operational and a financial point of view. To say it in laymen terms: the streets in certain Asian cities have another dirt intensity compared to the streets of European cities. So for the group’s Asian expansion, we need to re-engineer our products to deal with the new environment in which they operate. With the re-engineering, new market-specific techniques are developed too.”

Procurement of local components also becomes a topic to ensure the overall product fit with the local market. Not only technical challenges arise, also the negotiation process with potential business or banking partners is different in India, China or Brazil as compared to the developed markets. In China, for example, a joint venture approach to market entry might be opportune, instead of starting with a greenfield project.

NAV exposure

From a corporate financing and risk management point of view too, the expansion offers new challenges. Bucher has been active with international acquisitions for a long time. In Brazil the first material acquisition was in 2005, the group acquired METASA S/A, which enabled the Kuhn division to establish a local base with engineering, production, sales and service capabilities. In 2014, Bucher acquired Montana, a company that specializes in self-propelled crop protection sprayers and fertilizer spreaders. After this second substantial Brazilian acquisition, the Brazilian real (BRL) exposure became material; after the euro and the US dollar, it was the third largest currency exposure. The choice on either local real funding or Swiss franc funding has an impact on the net asset value (NAV) exposure from a consolidated level. The NAV, in its turn, has an impact on Bucher’s translation risk. A strong appreciation of the Swiss franc, compared to other currencies in which Bucher has a NAV exposure, would impact the equity of the company and the related equity and leverage ratio.

With further international expansion, the NAV exposure would increase, hence the potential impact on the equity of the company and its ratios. The risk bearing capacity for further acquisitions has to be in place. Previously, Bucher calculated its NAV exposure and translation risk via its IT2 treasury management system, but this concept was never really validated.

Key risk indicator

The existing model used a scenario analysis to simulate the NAV given different factors. A pragmatic hedging approach was used, by which 50 per cent of the funding requirement was funded locally; 50 per cent in the local currency and 50 per cent via Swiss franc intercompany funding. It paid off quite well, but given the significant fluctuations of currencies in scope, the need grew for a more sophisticated approach. “We didn’t know the risk on the equity piece.

At the time of the acquisitions, we needed to decide on the funding structure: a choice between local funding in Brazilian real, or central intercompany funding via Switzerland in Swiss francs.

Frank Rust, head of treasury at Bucher Industries

And so, in order to pro-actively manage these translation risks better on the balance sheet, we asked Zanders to review and validate our current approach and to be a sparring partner for NAV exposure measurement and management”, says Rust Another objective was to define a risk framework linked to the risk bearing capacity of the company.

“Zanders developed a dynamic way of looking at NAV by establishing a key risk indicator linked to the equity ratio – that was the key for having a sound solution. The new approach gives more insight into the potential impact of translation risk on the equity of the company. Furthermore, instead of looking at this risk from a static point of view in which a maximum risk limit is defined, the new model has linked the NAV exposure to the dynamic and time-varying risk bearing capacity of our company.”

Fully integrated

The interplay between Bucher and Zanders was very successful, according to Rust, due to the balance of business consultancy skills, content and technical capabilities. “The delivery of the project was excellent, I would say. It has given us trust”, he says. “Zanders was the external sparring partner to have our ideas validated and they asked us the critical questions on our modus operandi.”

The new risk model also had to be approved by the audit committee and the company’s board, Rust says: “At first, the audit committee was a bit reluctant to accept the new concept, because it has an approach that is more quantitative and therefore more difficult to apprehend. But now it is completely accepted. The outcomes of the model form part of the quarterly reporting package and were also used for Bucher’s latest annual accounts, disclosing risk factors according to the IFRS requirements. Not only has the new model been used in the financial reports, it also helped our company in the decision-making process for our ongoing funding requirements. It is therefore fully integrated in supporting our corporate finance plan.”

Outlook

For the next few years the expansion into Asia will remain the biggest strategic challenge. The new challenges for treasury are the additional risks in international assets, as well as more complex financing structures. “In the end a new European financing can be done in a matter of days, while the same financing structure in India can take months”, according to Rust. “The NAV model and risk bearing capacity framework will continue to assist Bucher with our financing decisions. We could include an interest optimization element in the model, but that would over-engineer the model, which makes it not fit for purpose anymore.” After all, this innovative Swiss company knows exactly how to engineer something to serve its clients.

When the multinational pharma company Sanofi set out to implement a global payment factory based on SAP, the sheer size and scope of the project made it seem a Herculean task. But with meticulous planning, the right expertise and skilled team-building, the treasury team achieved a very successful outcome.

After a decade of expansion through M&A, Sanofi, the pharmaceuticals company headquartered in Paris, France, with part of its group treasury – the in-house bank team – based in Brussels, decided it was time to bring greater centralization to its payments function. With sales of €37 billion in 2015 and operations in more than 100 countries, the company, active in the research & development, manufacturing, and marketing of pharmaceutical drugs, vaccines, and animal health products, began its journey towards a global payment factory based on SAP.

Need for control and security

This decision was part of an overall initiative to increase centralization in the finance function, according to the company’s head of in-house bank, finance & treasury, Wolfgang Weber. He says: “The reasons for the project went beyond the pharmaceutical industry – the need for control over cash flow, greater security and the pressure for increased efficiency are global trends.”

He explains that Sanofi hoped to gain several benefits from the centralization project, including: lower bank fees and bank connectivity cost; greater transparency over outgoing payments; and an increased level of compliance and control.

Following a selection process to appoint an external consultant, Zanders was asked to work on the SAP global payment factory project at the end of 2012. Mark van Ommen, director at Zanders, explains that the firm used its proprietary design methodology, based on best market practices and years of implementation experience, to design the global payment factory, which included a ‘payments on behalf of’ (PoBo) structure.

Sanofi’s decentralized payments structure presented risks that required attention. The company operated with multiple payment processes, leading to inefficiencies and potential security vulnerabilities. This highlighted the need for global standards and a centralized, harmonized payments system. The project involved issuing a request for proposals (RfP) to select four banking partners.

PoBo and PiNo

The global SAP-based payment factory, currently implemented in the largest countries in Europe and with roll-out almost complete in the US, includes PoBo functionality. This allows Sanofi to channel its payments through a single legal entity, which has obvious benefits for a multinational with a presence in numerous countries. The structure enables treasury to rationalize its bank accounts and simplify cash management structures. Zanders consultant Pieter Sermeus explains that PoBo was a key factor for Sanofi in achieving efficiency and business security. He says: “Payments are now routed to one or (in the case of the euro) very few centralized bank accounts, which are mostly in-country so that cross-border fees can be avoided.”

However, PoBo isn’t practical or possible in some jurisdictions with more complex payments environments, so another solution was needed. Together, Sanofi and Zanders worked on what was internally known as the ‘central forwarding model’, which in effect was a ‘Payments in the Name of’ (PiNo) structure. This model is mainly used in countries with monetary restrictions, such as China, Malaysia and Thailand, as well as in African and Latin American and some eastern European countries. Such countries require the payee to initiate payments from its own bank account. While this does not result in a reduction in the number of bank accounts, the company is able to process payments through a single platform, which brings compliance/security benefits and also allows the harmonization of processes to an extent that makes them more efficient.

The additional security provided by the PiNo structure means there are compelling reasons to extend the use of the payment factory to more countries. Sanofi is currently working on implementing a pilot PiNo structure in Turkey. Weber adds: “Based on Zanders expertise they were well equipped to help us on setting up and designing the PiNo structure.”

Knowledge tranfer and team building

One of the key parts of the project was the transfer of knowledge from the small group of consultants appointed to work on the project to the members of staff in Sanofi’s central treasury and IT departments. Laurens Tijdhof, a partner at Zanders, explains: “Our main goal was to transfer knowledge to key members of staff. We set up training sessions and provided training on the job. This enabled them to really develop their in-house capabilities.”

During the project, there was an emphasis on collaboration between the consultant and the client and preparing Sanofi to become self-sufficient.

Zanders used a ‘train the trainer’ approach, providing training in this way for upwards of 30 key members of staff. The training aspect of the project was a success – an outcome that Weber ascribes in part to the expertise and teaching methods and in part to having the ‘right people’ on Sanofi’s team. He points out that the timing of the training was also important: “We needed to transfer knowledge and IT/SAP expertise to the different departments. This was valuable from two angles: it guarantees stability of the operations and reduces consulting costs over time. The timing of this was crucial because, in a project of this size and scope, you spend a lot of time simply ‘firefighting’ – and you forget about the training. This didn’t happen and Zanders did a good job.” While training was an important part of the project, Sanofi also had to focus on building up its internal team. Weber says: “When hiring for the project, we looked for project management skills and SAP In-House Cash technical skills. We found some very good people. We looked internally – Sanofi has 110,000 employees – as well as externally. We now have a team of 22 hard-working, committed experts. It took a while to get the right team together but I am very pleased with the result.”

Handling the complexity

The nature of the project and the sheer size of Sanofi’s organization meant that planning and coordinating the approach to the global payment factory implementation was no mean feat. Weber says: “It’s easy to underestimate the complexity and size of such a project in such a large organization. The major difficulty is to coordinate internal resources so that people don’t get lost in the complexity of the project.”

There were three defining factors to the project, namely: the size of Sanofi’s organization; the geographical scope of the project (worldwide); and the complexity of Sanofi’s requirements.

Weber underlines that, along with meticulous planning and a very capable team, a flexible approach is also needed to manage an endeavor of this size: “The initial roadmap needs to be adjustable because you may have to reset priorities. Resources may have to be shifted to another area of the project.”

Van Ommen agrees that taking care of the details can be one of the most important aspects of such a complex project: “Sanofi did this really well and they recognized their need for change management – they took a realistic view on the planning and timelines. Wolfgang and his colleague Isabelle really brought the project to the ground, providing a lot of practical input.”

Weber adds: “It’s important to have proper project governance, including senior management support up to board level, in our case represented by the group CFO.”

Security and compliance

The implementation of the payment factory also enables Sanofi to keep tighter control and visibility over its global payments. Regulations around payments are continually changing as problems and conflicts arise or dissipate in different parts of the world. Companies need to be able to react to the ever-evolving regulatory environment. Having a global payment factory in place helps to address these challenges. Cybercrime is also an increasing problem for treasury and the payment factory enables corporates to react quickly, with a centralized, secure platform.

Weber notes that the project will also help his company to keep abreast of regulatory requirements for monitoring third parties: “The implementation of ‘restricted party screening’ – an essential compliance requirement to ensure that Sanofi does not make payments to blacklisted parties – was added to the team’s responsibilities in late 2014. Although it covers master data screening and therefore is only partly related to the payment factory activities, in the Sanofi context the in-house bank team has been identified as the most appropriate place in the organization to both implement the screening as well as carry out the ongoing operations. I believe that we will hear a lot more about restricted party screening in the corporate world going forward.”

Successful outcome

Since the global payment factory was rolled out in Europe and the US, it now processes more than 30,000 fully automated payments each month, from more than 50 affiliates, with an equivalent value of more than €1 billion per month, in 30 different currencies. To help reduce the number of payment rejections, Sanofi also centralized the management of the bank key tables: the master data is constantly updated to avoid rejection due to wrong bank master data.

Weber concludes by expressing his satisfaction with the outcome of the project: “We have really succeeded in implementing a sustainable process that is safer, cheaper, more efficient, providing higher transparency, and which we can roll out across our different areas of operation.”

Would you like to know more about the challenges of implementing a global payment factory? Contact us.

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.

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?”

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.”

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.”

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.”

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.

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.”

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.”

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.

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.”

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.”