Tenaris is a global manufacturer of seamless steel pipes and supplier of oil services with annual net sales of over $6 billion and 17,500 employees worldwide. This month we speak to Andrés Huerta Arena, Treasury Manager of Tenaris, who is based in Buenos Aires, Argentina. In particular, we discuss the large-scale centralisation project which Tenaris embarked on in 2002.

Could you give me some background information about Tenaris?

Tenaris is a leading manufacturer of seamless pipes, which we deliver to clients in the oil exploration and transportation businesses, as well as the construction and automotive businesses. We have a presence in more than 30 countries globally and the turnover in 2005 was $6.7 billion.

Our clients are spread throughout the world, between the Americas, Europe, Asia and Africa. We are publicly traded in four stock exchanges: NYSE, Milan, Mexico and Buenos Aires. Our market cap is around $24 billion.

How is the treasury structured?

In our company the financial director reports to the CFO. The financial director has four departments:

1. Credit department.
2. Treasury direction.
3. Back office.
4. Department of risk management, financial analysis and planning.

The treasury director is in turn in charge of managing the company’s debt, the local treasuries and what we call the corporate treasury. This is a specific department in charge of managing all the cash flows in strong currencies – which comprise most of our revenues – as well as monitoring cash position in all currencies, managing the funding scheme for the company units and coordinating the seamless integration between treasury activities, banking systems and their accounting visibility.

We have at least eight really big regional treasuries in the manufacturing mills, and local treasuries in commercial branches. The main regional treasuries are located in Argentina, Mexico, Brazil, Italy, Canada, Venezuela, Romania and Japan.

What are your main responsibilities?

I am the treasury manager, which means that I am in charge of the corporate treasury. I am responsible for co-ordinating the movement of funds between the legal entities in strong currency denominations. I am in charge of concentrating US dollars and euros as well as Canadian dollars, I manage the company’s treasury vehicles and I also manage most of the accounts where collections are received in G7 currencies such as sterling or Japanese yen. This involves somewhere in the vicinity of 160 bank accounts.

My responsibilities also include preparing and consolidating the short-term cash flow forecast, the cash position and real cash flow reporting. We interact with regional and local treasuries to ensure optimal use of financial, technical and knowledge resources. We are also in charge of implementing bank stations, interfaces and treasury extensions where the need arises, and we are key collaborators in the process design of general treasury activities.

Could you tell me about the centralisation project you began in 2002?

The company had been in existence for over 50 years as the supplier of pipes to local markets, and at that point it was structured as a strategic alliance between several manufacturers, which were trading on different stock markets with different shareholding stakes. So in 2002, an offer of exchange was launched which resulted in our consolidation into a single global company, Tenaris. This was a lever for us to centralise the activities on the finance side as well. So we decided to reduce the costs that were involved in the numerous banking relationships that we’d had up until then, while trying to minimise the risks derived from having different procedures and a really diversified banking base. We also tried to take advantage of the fact that we had strong revenues in G7 currencies by concentrating the cash. We reduced the financing costs as up until then each local treasury would take debt on a local market and manage their assets as if they were separate companies. Our overall aim was to create synergies wherever possible.

What were the main challenges?

The project included three main aspects that I find interesting:

1. Technical aspect.
2. Legal aspect.
3. Financial aspect.

Of course, the main driver for us was financial, because we had a big opportunity to create value to our shareholders. On the technical side, the first challenge we had was to get all the units to use the same platform wherever possible, which in the end, for the purposes of cash management business, resulted in us having a relationship with one global bank and a number of local banks. We also had to implement an accounting system everywhere so as to unify the accounting schemes and reduce the differences that came when consolidating information – especially when information had to be at hand as quickly as possible. So the two challenges we faced from a technical point of view were implementing a bank station and interfacing it to a single ERP (Enterprise Resource Planning System). We have implemented Citibank’s CitiDirect as our bank station. Our ERP is SAP.

From the legal point of view, the challenge that we faced was how to produce a contract scheme that linked our cash management scheme between the different units in full accordance with each jurisdiction’s standards and regulatory framework, which is of course an issue that everyone with a global presence faces. From the financial point of view, we wanted to optimise our cash management, which meant trying to identify in which currencies we had the largest flows and how we would optimise those flows by putting them to good use. So in the end we had three concentration schemes – US dollar, Canadian dollar and euro. We treated other currencies as ‘accessory currencies’, whereby collections denominated in those currencies needed to be converted into the three main currencies. Tenaris’ accounting currency is US dollar.

Although Tenaris comprises many different legal entities, in the end there are one or two basic collection locations per entity, as opposed to retailers which may have several collection points et al. As a result, the largest cash concentration scheme we have (USD) covers 30 bank accounts, 27 of which are open at the same branch of the same bank. The accounting scheme for our in-house bank setup was a simple business with one current account per entity/ currency.

When you have a global presence, there are lots of regulatory, clearing and technical issues to confront before moving funds. The implications in financial terms are such that you may end up having to build a more complex structure than you initially wanted. We ended up having two treasury vehicles in different jurisdictions. Both were set up between 2003 and 2004.

How many bank accounts did you have at the outset of the project?

It might look as though we haven’t made any progress because the number of bank accounts that we currently have is roughly the same as the number we had when we started! However, in the meantime, we have incorporated further entities into the scheme – we keep growing. Once we finalised the operating procedures and guidelines and completed the legal environment and solved any technical implications, we had a template that could be applied elsewhere. So now, when we purchase a production unit – as we did in Romania in 2004 – the start-up is not a traumatic experience from a technical point of view.

How has the company’s geographic spread impacted on the centralisation process?

In the end it impacted less than expected because of the fact that we collect in a small number of currencies. So from a financial point of view, geographical spread did not represent an increase in currency risk. From a work environment point of view, the fact that we communicate in English between the local treasuries and the corporate treasury made it easier for us, but on the other hand it didn’t solve some cultural issues that appeared as we moved on. Nevertheless, the fact that we can work together almost online with local treasuries so geographically spread out means that we have quite successfully solved the cultural issues that this represented, which I find one of the greatest and most exciting advantages of working in this company.

The impact of the different time zones has been less than expected because we are mainly concerned with US dollar and euro clearing times. In the corporate treasury we don’t have a lot of transactions in currencies other than those. This has also been a driver for process standardisation and automation, and has been a clear incentive to create a work culture of dealing with matters in advance. Less of our time is now devoted to facing urgent issues and more is dedicated to perfecting technical knowledge or finding new ways of doing things.

What challenges did you encounter when setting up your Shared Service Centre?

This was in 2002. We were facing the fact that many of our commercial branches had independent treasuries which were creating certain costs in terms of idle cash and in terms of spread banking relationships. In reality what we wanted from the commercial branches was above all to enhance the relationship between the company and the clients. So we set up a shared service centre to do part of the administration work for most of these units, enhanced the service by creating a banking structure that caused all of the units to collect the funds in a single bank, and created an accounting structure and operating procedures which standardised the way financial information was entered in the then several accounting products.

The challenges we faced were mainly because we had a pretty large amount of idle cash which was not acceptable in the new world we were entering. There were technical challenges because we needed to implement a new bank work station and make it work without a new ERP. And there were cultural challenges involved in adjusting the role of some of the locations and having everyone get the most out of the place they were occupying in the organisation. This was a pretty successful experience because we reduced the idle cash by up to 75% in the commercial branches. Following this success came the global ERP and its Financial Management extension.

We encounter cultural challenges every time we incorporate new units into the scheme. Lately the main cultural challenge has been the role of internal controls in the organisation. As a publicly-traded company in a US stock market we are subject to the restrictions of the Sarbanes-Oxley act. Our biggest challenge today is to have everyone working on the same control environment and adhering to the same procedures, even when they seem to be more detailed and require a lot of actions and reporting, which requires a level of training and dedication.

What is your policy on outsourcing?

It may sound commonplace, but our policy on outsourcing is to transfer daily, non-strategic tasks if necessary. It is not our usual policy to outsource activities generally speaking, so our experience of outsourcing in the global treasury is limited to one location. Outsourcing with a good set of policies and procedures should have the same effect on these tasks as buying an intelligent software that takes over the tasks for you and that shares your vision of the business. In our case, we rely on a bank to perform some of the administration tasks that our in-house bank requires. This gives us the chance to rely on people whose core business is similar to the part of the business they get from us, but who will also adhere to our own corporate policies and procedures. Sometimes, when you outsource, you have a chance to use the agency’s systems for transactions and then interface it to your ERP. We chose not to do that, but to have the agent use our systems. And this is another issue because since they are subject to the same procedures that we are, we gain in terms of control, but may need to provide more frequent training as the agency staff turnover is higher than ours.

Up until now the experience has been relatively successful. We see outsourcing as an area of opportunity. I think there is potential for growth in outsourcing activities. However, it really takes time in terms of implementing the solution and maintaining the solution. Outsourcing is seen as a way to reduce a burden that you have – either in terms of financial cost or time – but it needs care and a lot of attention, especially during the implementation phase.

Have you encountered any drawbacks to centralisation?

It’s a trade-off. You always lose some sort of relationship that you previously had with your local entities, which can be a real problem in some locations. Any of the companies with a global presence can tell you that they need to have people locally when they operate in areas with complex local regulations or business frameworks. It’s good to keep people locally for the purpose of helping us identify and handle local issues sooner and better. We are trying to keep contact with our local treasuries as close as possible, on a daily basis.

In the end any cultural issues that we faced at the units have been offset, even on a local basis, by the benefits. I think the local treasuries are now more comfortable than when they were operating on a decentralised basis. It brings you a lot of security to know that you are using the same procedures as every other location in the world and that your needs are being carefully watched by someone else – although so is your compliance with these procedures. From an operating point of view, I think we have managed to establish a mutual reassurance between local treasuries and the global treasury, on the basis of sharing knowledge and working very closely to solve issues. We have globalised teamwork.

What are your plans for the next 12 months?

This year we are focusing on our internal controls. We have a very comprehensive set of controls in place and now we want to automate as many controls as possible. We want to further increase our concentration schemes by adding more accounts and more currencies – currently the US dollar and Canadian dollar are the only ones fully operational and we’re going to implement a euro concentration scheme.

We want also to maintain the ’close-to-STP’ scheme that we have. We want to progress on having the systems recognise the type of payments and delivering to the right banks at the right moments and reconciling the amounts on the next day without any error. Currently, we have a very small error rate but there’s always a level of manual intervention needed, especially the moment before sending payment batches to the banks. And, of course, we want to continue to report our cash debt on a daily basis, from our accounts – not from a TMS – on an end-of-day basis, which will be an improvement as we’re currently reporting on a next-day basis.