Published: May 01, 2008
The mission of Group Treasury is to find the right balance between the business strategy of the Group as a whole and the treasury strategy.
Richemont Group Treasury faces similar challenges in treasury and cash management to those of many other companies which have a decentralised structure. A key challenge is the number of accounting and electronic banking systems used by the Group operations as well as the high number of payment centres. In Europe alone, the Group has 14 electronic banking systems and 30 payment centres. The mission of Group Treasury is to find the right balance between the business strategy of the Group as a whole and the treasury strategy.
Richemont Group Treasury was created in 2000 when the Group’s Board of Directors took the decision to centralise treasury and cash management activities with a view to achieving visibility over cashflows, managing liquidity more effectively, leveraging assets and improving management reporting. The centralisation process can be summarised in four main phases (fig 1).
Between 2001-2003, the focus was on implementing the treasury module of SAP at a Group level, establishing local cash pools and core banking relationships, and designing a centralised strategy for foreign exchange risk management. 2004-2006 were the years of further centralisation of treasury activities, including the introduction of a intercompany netting system to automate and centralise the settlement of intercompany transactions. Liquidity and funding were further centralised and automated with the implementation of the notional multi-currency overlay cash pool and a centralised electronic balance reporting was implemented which improved significantly the ability for Group Treasury to have a real time view on its cash positions. In 2007, the Group launched another important project, with the objective of centralising external payments by implementing a payment factory.
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Since 2004, with significant currency volatility, the Group has set a policy of hedging its net currency flows. The main objectives of this hedging policy are:
1) to reduce volatility in operating results
2) to reduce volatility of net cash flows and
3) to minimise transaction costs
The main benefit of centralising FX management is to net the exposures of Group entities and implement a consistent hedging policy. Richemont Group Treasury hedges 70% of its expected net flows in foreign currencies relative to its functional currencies CHF and EUR, twelve months in advance. Centralisation of FX activity also allows the Group to leverage natural hedges and to respond rapidly to major adverse currency movements.
1) Rationalising banking relationships
In the past, it was difficult to leverage the size of the Richemont Group, not to mention the difficulty of gaining visibility over Group’s net cash positions. Consequently, one of the first steps in the centralisation process was to rationalise Group banking relationships and to move to a regional structure (fig 2) with a single bank in each core market.
The netting system has significantly reduced the administrative workload at local level.
Due to the retail operations of the Group, banks’ branch networks had to correspond with Richemont’s point of sales network - therefore, only banks with an extensive local retail network were invited to participate in the RFP process. The selection process for Group relationship banks was coupled with the implementation of local cash pooling structures and ensuring that efficient cash management structures were established in each of the Group’s core markets. As a result of this initiative, 95% of all Group cash balances have now been pooled. With a regional banking structure in place, further centralisation of the Group’s liquidity was possible by implementing a multi-currency notional overlay cash pool. The main objective being to invest and fund Group’s operational cash or debt requirements with the Group’s net cash in an automated way without changing the existing local banking structures. Although local operations still retain control over their bank accounts and therefore over payments and collections, centralisation of liquidity and funding is bringing to the Group significant annual savings, primarily through improved yields, reduced bank spreads, improved working capital financing and increased efficiencies, at both local and Group levels. [[[PAGE]]]
2) Centralisation of payments - from intercompany netting to payment factory
With a large number of legal entities, the number of intercompany transactions is significant, ranging from manufacturing and distribution to after-sale invoicing. The Group used to have around 7,000 intercompany payments each year, almost all of which were cross-border. Implementation of a netting programme has reduced that number to 700 per year (a 90% reduction), with the resulting savings on cross-border fees and improved FX spreads. Apart from the purely financial benefits, the netting system has significantly reduced the administrative workload at local level, as each Richemont operation only has to monitor one payment per month. Payments are automatically executed via direct debit and the details of the netting payments are posted automatically to the local accounting system. Another advantage from a local standpoint, is that although entities had very limited FX transactions (as FX is managed centrally), they still had some foreign currency invoices to pay. By settling these small FX invoices via the netting system, they are now benefiting from highly competitive spreads, negotiated by the Group with the netting bank based on the total Group volumes. From the Head Office perspective, the main benefits achieved are regularity of payments, improved cash flow management and visibility of the Group’s net FX exposure.
Having now centralised intercompany payments, Group Treasury is facing a new challenge in its drive to become the Financial Shared Service Centre for the Group. This challenge is the centralisation and automation of the external payments to suppliers. The payment factory project is different from the previous centralisation projects as 1) it is much more dependent on Group IT involvement and 2) it can only be rolled out to entities which are on the same accounting system. As Richemont Group IT is in process of rolling out SAP to all Group operations, the payment factory will be part of the standard SAP roll-out.
The objectives of the payment factory are to make payments from one location, for all countries which are on same SAP system, using a unique channel of communication for all banks, based on 100% of payments made using wire transfers, and to have one bank per currency. The estimated cost reduction is 60%, which is achieved by 1) reduction in transaction costs (100% of payments will be electronic); 2) increased efficiency (with manual payments eliminated, increased STP rate, automatic reconciliation; 3) unique system to maintain vs multiple systems and 4) 20% reduction in bank accounts.
The Group will further benefit from a standardised approach to controls and security and improved cash management and forecasting. Our approach has been to implement best practices and add value to the Group by having access to world-class capabilities & services without having to build them from zero. We therefore try to automate treasury operations as much as possible and outsource maintenance and operational activities to the experts:
All this reduces risk, enforces controls and allows Group Treasury personnel to focus on strategic rather than operational activities.
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