Published: February 01, 2014
HeidelbergCement has a centralised group treasury function based in Germany comprising 14 professionals across front, middle, back office and cash management. With a flat hierarchy and a direct report to the Group CFO, the department is able to be highly responsive to both market and business changes, and take a pragmatic, hands-on approach to problem-solving. In this article, David Flory, Head of Group Cash Management, discusses cash management at HeidelbergCement, in particular the role of cash pooling in achieving the group’s cash and treasury management objectives.
Our cash management business is relatively complex. We have over 210 banking partners and manage 1,700 bank accounts across 45 countries. In the cement and aggregates business, and still more for ready-mix concrete, production needs to take place within close proximity to customers, so we have to support payment and collection needs across a wide diversity of locations within each country which are often quite remote. Consequently, it is more difficult for us to reduce the number of our banking partners than for other industries, as we need to work with banks that have a strong branch network and support local payments and collections. This means that we need to manage a wide range of electronic, manual and cash-based flows as well as diverse regulatory environments across the countries in which we operate. Furthermore, we have a mix of both long and short cash positions across the group, and a variety of different shareholdings, from wholly-owned subsidiaries to minority joint ventures, which again adds cash management complexity.[[[PAGE]]]
At the end of the third quarter 2013 we had a group net debt position of approximately €8bn, financed through a variety of capital market borrowings and backed by a €3bn syndicated facility with 19 banks. Like many multinational corporations, we make extensive use of cash pooling to minimise net debt and enhance our total return on cash. Furthermore, we use cash pooling as a form of ancillary business for our core lending banks.
We first started using cash pools in the early 1990s, and the number and complexity of these structures has continued to evolve since then as a result of organic growth and acquisitions in new regions. Bearing in mind the regulatory diversity across the countries in which we operate and the complexity of our liquidity management needs, we need to use both zero-balancing and notional pools, single and multi-currency, domestic and overlay. Although we have used these structures for a number of years, we went through a major review in 2005 when we centralised group treasury.
Before 2005, treasury was managed by three treasury teams that operated on a largely independent basis. They had a largely reactive approach to cash management, particularly as our cash flow forecasting strategy was not yet well-developed. These teams set up and managed cash pools, although these were not linked to a treasury management system or ERP. Furthermore, there were a large number of accounts not included within a cash pool. Before centralising treasury, we had 13 cash pools in Europe and a further 14 Nordic pools. Most of the European cash pools were zero-balancing pools, with the exception of Poland and Czech Republic where we had notional pools. We also had a European overlay pool. In North America we had two notional cash pools in Canada and two zero-balancing pools in the United States (figure 1). By managing cash and liquidity on a largely decentralised basis, we ended up with multiple cash pools for the same currency/ country, such as three SEK pools and six USD pools.
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A decentralised approach to cash and treasury management brings a variety of challenges, but one of these, as this example illustrates, is that using cash pooling does not necessarily imply that cash and liquidity is being managed in the most efficient way. Since 2005, however, the HeidelbergCement Group has undergone a number of major organisational changes, of which one of the outcomes has been a revised approach to treasury in general, and to cash and liquidity management in particular. In 2007, for example, we acquired Hanson Group, which involved integrating more than 100 bank accounts and seven cash pools in various countries into the business. Shortly afterwards, we sold the maxit Group, which meant that treasury needed to decouple 37 entities in 11 countries, each of which needed to be separated from our cash pools on the closing date. We have also made a series of smaller mergers, acquisitions and divestments which continue to emphasise the need for a dynamic approach to cash and liquidity management, such as cash pooling.
Although the concept of cash pooling has not changed substantially since it was first introduced over 30 years ago, the type of solutions that can be implemented have evolved in response to the increasing complexity and international reach of corporate treasury. Diverse regulatory conditions in each market also impact on the nature of cash pooling. For example, when setting up, reviewing or refining cash pooling structures, treasurers need to work with their banks to consider options such as: domestic vs cross-border; zero-balancing vs notional; single vs multi-currency (and domestic vs foreign currency); minimum shareholdings in entities included in the pool; resident vs non-resident entities, and single vs multi-entity. Issues such as documentation also need to be addressed. Clear documentation needs to be put in place both with the bank(s) and participating entities, with information given to participants of the financial standing of the master account. The method of interest calculation, which must be done on an arm’s length basis, also needs to be specified.
As regulations change, new opportunities for cash pooling open up (or may become more restricted) so treasurers need to monitor market and regulatory changes constantly. For example, we were able to set up a zero-balancing cash pool in 2010 in Russia for the first time. We are currently looking into a variety of issues in parts of Asia, such as comingling resident and non-resident accounts in a zero-balancing cash pool in Malaysia, and the potential for cash pooling in joint venture entities in China.
As a result of proactive monitoring of market and regulatory conditions, and working closely with our banks, we have now managed to set up zero-balancing cash pools across many of our key markets (figure 2). This means that 300 group entities’ accounts are included in a cash pool. These cash pools then sweep into group treasury’s central accounts where balances can be used to reduce borrowings and fund working capital requirements across the business.
For cash pooling to be efficient, external structures need to be supported by an integrated approach to managing, reporting and accounting for cash pooling flows. We collect information on cash flows, including zero-balancing flows, via MT940 (end of day statements) and MT942 (intra-day statements) through SWIFT. This information is then transferred automatically into our treasury management system (TMS), where interest on each intercompany account is calculated automatically. The TMS is integrated with our ERP so that zero balancing entries and interest on intercompany accounts are posted automatically. We also use the TMS for reconciliation of intercompany accounts and cash pool monitoring so that we maintain full visibility and control over our cash positions.[[[PAGE]]]
Cash pooling is a technique that has been an essential part of treasurers’ toolkit for many years, and continues to be a key component of our treasury strategy for the years ahead. Pooling is about more than simply transferring cash between accounts, however, it is an intrinsic element of an efficient centralised treasury. For example, centralising both flows and information has been a catalyst for implementing our shared service centre (SSC) structure and harmonising our ERP platforms. By achieving direct SWIFT access with our core banks, we have streamlined our information flows and facilitated automated, secure payments from the SSC. Cash pooling is also a valuable means of wallet sizing with our syndicate bank group.
As well as using cash pooling as a means of centralising cash, we have been able to roll out an in-house bank structure and establish treasury as a centre of excellence that acts as a central counterparty for group companies, supported by dedicated country experts. The concept of centralised cash and treasury management is now a well-defined principle within the business, and cash pool participation is now mandatory for group entities. We also avoid setting up new accounts that cannot be included in a cash pool wherever possible, and we have been able to close a large number of non-cash pool accounts.
Cash pooling is just one element of our treasury strategy for centralisation and rationalisation. For example, we are rolling out our TMS to group companies to provide functionality such as payments and reconciliation, and reduce our dependency on proprietary bank systems. Within treasury, we managed to eliminate no less than 14 such bank systems over the past years. We are also leveraging our cash pool for working capital purposes. Each cash pool has an overdraft to absorb working capital fluctuations and avoid surplus, unused balances. All borrowing facilities are managed by group treasury to centralise counterparty risk and leverage the group’s credit rating, with €350m in working capital facilities available for the benefit of the group as a whole.
Looking ahead, we are focusing on setting up cash pooling structures or alternative liquidity management solutions in more regulated countries, especially in Asia and central Africa. India is a good example for this: in the past, we had six banking relationships and financed the local business using onshore term loans. Surplus cash was held on deposit or on current accounts. As we restructure our cash and liquidity in India, we will have one core cash management bank, with a domestic zero-balancing cash pool linked to an overdraft facility for working capital financing. Onshore borrowing is being replaced with offshore financing from central treasury via external commercial borrowing (ECB) loans and a qualified foreign investor (QFI) programme. As we optimise cash and treasury management in more complex markets, cash pooling is not the only element of our treasury strategy, but it is an essential means of facilitating our cash and liquidity objectives both locally and on a group-wide basis.
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