Eva Gotthardsson talks about the challenges which arise when implementing a European cash pool and how she uses technology.

What are you responsible for as Director of Treasury?

When I joined the company, Findus had just been sold by Nestlé and it did not have a treasury. Following a decision by the board, my role was to establish the Findus treasury department. My role now is that of a traditional corporate treasurer and includes managing bank relationships, interest rate and currency risk. I am also responsible for managing the internal funding of our subsidiaries. No subsidiary is allowed to raise external debt, so they are all funded through the group treasury via our netting and pooling structures. As a result, netting is an important activity for us.

I report to the group CFO. We are in contact daily, although we meet probably twice a week. There are two other people within the treasury department who report directly to me. The dealer is responsible for all internal transactions and is the main contact for the subsidiaries in group treasury. A second member of the team is responsible for both the back office and running the netting system. We also have an accountant who, for security purposes, reports to our director of accounting.

How do you arrange your funding?

The group’s funding is arranged through a syndicate, led by Mizuho Bank in London. The original loan was for €250m. This was structured in two tranches. The first part is a €45m short-term revolving loan, with the remainder structured as a long-term facility.

How do you manage cash?

We are a net borrower, so we do not often have any surplus cash. Instead, we try to net the group’s balances as efficiently as possible. We are just completing the implementation of a cash pool for most of our European subsidiaries – our operations in Central and Eastern Europe do not participate yet. We have established a structure which allows account balances to be swept to a master account held with Nordea in Sweden. It is a multi-currency pool, incorporating Sterling, Euro, Norwegian Krone, Swedish Krona and the US Dollar (which we hold for commercial trading).

Why did you choose the bank?

It was a combination of factors. Nordea is one of the main participants in our syndicated loan and they are strong in our major market, the Nordic countries. They have also introduced a new operating platform which was an important factor when we came to choosing the bank. It took about six months to select our banking partner. It has then taken a further year to implement the new structure.

What have you found to be the main difficulties during this process?

I think the hardest part was in understanding all the detail when we were going through the selection process. It was difficult to identify what all our subsidiaries need in each location. Although all the subsidiaries, with the exception of Norway, involved in the cash pool are members of the European Union, we found there are major differences in the ways both payables and receivables are treated. For example, cheques are still widely used in both the UK and France, whereas they are almost non-existent in the Nordic countries. Given these differences, it has been a major challenge to identify the most effective structure for the cash pool.

How did you work to overcome these problems?

Starting in Sweden, we spent a lot of time interviewing our subsidiaries with a view to developing an understanding of each company’s requirements. We collected a range of details on the nature of all the payment activities, such as the value and frequency of payments as well as the payment methods used. We also asked the banks to provide us with similar information, including a breakdown of the pricing.

One of the more difficult issues to understand was how the cash pool should be structured. In particular, we needed to decide whether it was better to have local cash pools in each country or whether to have a single bank account feeding into the cash pool. At the same time, we needed to decide whether the local cash pool or bank account should be held in the name of the local subsidiary or group treasury. We found that these decisions varied and were determined by the different local regulations in each location.

My main lesson, and my main recommendation for anybody going through the same process, is that it is important to ignore the banks in the beginning. We started by trying to identify what all our operating companies needed and how the group expected to benefit from implementing a cash pool. Once we understood our core requirements, we could then approach a number of banks to see whether they could provide them. We recognised that if we approached the banks too early in this process, they would try to provide a solution which would suit their products and not one which would meet our requirements.

How do you manage foreign exchange risk?

Our objective is to concentrate all the foreign exchange exposure from entities within the group into the treasury and for the subsidiaries to assume as little currency risk as possible.

On the commercial side, whenever a subsidiary receives a foreign currency invoice, it is submitted to the treasury payment service for settlement. Treasury will make the external foreign currency payment in settlement of the invoice to the party which issued it. Treasury will be reimbursed by the subsidiary through the netting system. The subsidiary will make a payment in its operating currency equivalent to the value of the paid invoice.

In addition, all internal transactions within the group are cleared in the netting system and all payments between the subsidiaries and group treasury are made in the subsidiaries’ operating currencies. This structure incorporates all the European subsidiaries.

In addition, we have a separate netting procedure for our Asian operations. There are a lot of flows between our two main operations in the region – primarily a manufacturing centre in Thailand and a sales operation in Australia. These are netted in a structure, also overseen by group treasury. Subsidiaries are also able to enter into internal forward foreign exchange contracts with group treasury to manage appropriate exposures.

At group treasury level, we then hedge the netted external foreign exchange exposures. In most cases, we use forward foreign exchange contracts to do so, although we also use other plain vanilla derivatives where appropriate.

How about interest rate risk?

All external contacts with banks are handled by group treasury. As a result, interest rate risk management has been centralised. Our present policy is to maintain a broadly floating interest rate, which we usually implement through the use of interest rate swaps.

This policy is reviewed on a monthly basis by the group’s treasury committee. When assessing our policy, we look at our net borrowing portfolio and its duration and consider whether our policy is appropriate in the light of that and our view of the market.

We also manage financial counterparty risk centrally. The commercial counterparty risk is managed on a country by country basis but is consolidated to the group level.

How do you manage banking relationships?

We have a core banking group of three or four banks. We have found this to be a good number for a company our size. On one hand, there are sufficient banks for them all to feel some competition for ancillary business. On the other hand, it would be difficult for us to have more than five banks as we do not have enough additional business to satisfy that number of banks.

This core group of banks all participate in our syndicate. We try as far as possible to use the cash pool bank in every location for our payment activity. However, in some locations, we also use domestic banks to execute some local payments such as salaries and tax payments. These payments represent no more than between five to ten per cent of a subsidiary’s transactions.

How do you use technology within the treasury?

We use CRM Finance, which is a treasury management system developed in Sweden for medium-sized corporates. It allows us to manage all our financial transactions, including currency positions, and to track our bank account balances. It also generates accounting entries for the company’s general ledger. In other words, it provides a complete treasury risk management service.

As well as this, we use another software program, SEB Netting, to manage our netting process over the company’s intranet. This was developed by SEB, although it is separate from the bank.

At some point, I want to be able to import bank account balances directly from the electronic banking software into the CRM system. This will give us a complete view of all our bank account activity on a real-time basis.

When planning our technology infrastructure, my philosophy has been to build it around one main platform. With this platform in place, in our case CRM, we can then work to link other functions into it.

Findus has said that it intends to launch an IPO in the future. How does that affect the treasury?

Although there is no date at present, the future IPO does affect us. Whenever we are contemplating introducing new practices or rules, we will always discuss them with our auditors first. We are very careful not to do anything which would later be in conflict with an IPO.

What do you see as your next challenges within the treasury?

The ongoing one is to complete the implementation of the cash pool.

After that, I want to work to integrate our liquidity forecast into our operating system. At the moment, the subsidiaries provide us with cash flow forecasts on a spreadsheet, which takes time to consolidate. I would like to be able to implement an intranet-based liquidity forecast. This will allow subsidiaries to upload a new forecast whenever they change it, so that the visible forecast on the intranet will always show the latest data. Similarly, we will benefit from having as much detail as possible on our currency requirements.

Like everybody, we have been working towards implementation of IAS 39 in January 2005. This is part of a wider project at the corporate finance level which is being implemented across the company.

Finally, I am conscious that treasurers should never forget the importance of working capital. Although they may not be directly in charge of it, managing working capital should be the main issue for all treasurers. This involves understanding payables, receivables and inventory. It can be very tempting to concentrate on the complex treasury issues, but without an understanding of the balance sheet no such issues would exist.