Giacomo Orlandi is a member of the Board of The Italian Association of Corporate Treasurers (AITI).

How is N&W’s treasury organized?

The group treasury team of four is equally split, with two in the front office and two in the back office. In the subsidiaries, the treasury role is played by the local CFO or the local controller. Given the degree of centralisation of treasury, this role in the subsidiaries is increasingly limited to payments and collections, and forecasting.

Did the fact that the group was established from a merger, where some companies (the Electrolux companies) were used to dealing with a group treasury and some (those from Wittenborg) were not, make it difficult to establish a central group treasury in the new group?

Although there were two different cultures, the more important factor was the fact that there was no incumbent treasurer coming from either group. This meant that, although I had to communicate with the subsidiaries about what the group treasury could do, there was no internal resistance to the establishment of the group treasury.

For what are you responsible?

As Head of Group Treasury, I am responsible for all traditional treasury activity such as funding, cash management, FX management and interest rate risk management. Beside these activities, as a risk management centre we manage insurance programmes.

With the implementation of IAS 39, we became the pivotal point for complying with the standard and therefore we support group entities for all aspects related to this.

Finally I am responsible for the management of tax issues related to the treasury activity such as withholding taxes or thin capitalisation rules. Because of our experience when setting up the cash pooling, we assess any double taxation treaties and issue certificates of tax residence. We also take the lead in asking for a lower tax rate if we think it is applicable.

When did the group start reporting to International Accounting Standards?

We started from the beginning, in fact from 1999. This was because our financing group was made up of international banks from a number of countries – UK, Germany, France, Italy, Denmark and the US. These banks required us to translate our accounts to conform with IAS as one of the conditions within the financial covenants. When IAS 39 came into force in January 2001, we adopted it. We started to prepare for that a few months beforehand.

How are you held accountable?

I report directly to the Group CFO. The reporting produced by the group treasury is sent to the senior management of the group on a monthly basis. In addition, I also report to the group’s shareholders, Compass Partners International.

For each of the activities carried out, we are measured against benchmarks, both quantitative and qualitative. The appropriate benchmarks are agreed as part of the budgeting process. They are typically set and reviewed annually. Our profits will be part of that measurement. Profits need to be adjusted for the results of hedging. This is because, for example, the main focus of our foreign exchange activity is to protect against falls in our sales currency.

How do you manage your cash across the group?

Because we operate in a leveraged environment, there is a strong incentive to introduce effective cash management systems. As long as we have proper financial planning, excess cash can be used not only to reduce overdrafts, but also to reimburse the longterm debt, which is normally relatively expensive.

Over the last two years, we have implemented a multibank euro cash pooling system for the eurozone countries. This allows us to concentrate the liquidity of the euro area on the master account of the group parent company using a target balance system. We opted for a multibank framework because it allows us to benefit from the normal pooling features as well as from the efficiency and cost of using local banking services. The master account is held with BNL in Italy. We also use BNP Paribas in France, BBVA in Spain and Dresdner Bank in Germany and Austria.

The non-euro countries, those in Northern Europe and South America, are outside this structure. We had considered a multicurrency notional pooling structure, which could have included sterling. However this was difficult as such structures are prohibited in both Italy and France. There are also regulatory problems with incorporating the Northern European currencies into the target balance system. One problem is that UK legislation does not accept the way that Italian legal entity bank accounts can be pledged to a pooling structure. The problem for the South American countries is that the time zone makes even notional pooling almost impossible. So for the non-euro countries in both Northern Europe and South America, we use a manual pooling system, which is also used to hedge currency risk.

How do you arrange your funding?

We discriminate clearly between short-term borrowings and long-term financing.

Short-term funding is arranged by the group treasury on a daily basis. We have the full authority to act within pre-determined limits. In addition, two of our subsidiaries, those in Denmark and the UK, have the ability to arrange working capital finance locally, although only after authorisation from group treasury.

Long-term financing structures are developed together with the international banks which normally arrange our syndicated loans. These financings can be defined as project finance activities. They last between eight and ten years and are often extremely complicated. The financing also has to be tailored to the particular investment, for example to pay for a takeover. The importance and the complexity of this type of financing mean that both the shareholders and the senior management are involved when it is being arranged.

Because arranging this type of long-term financing is considered to be a strategic activity within N&W, we look for partners who are able to provide us with the most convenient solution in terms of cost and service. When analysing the solution, we look at a number of key factors including the underwriting capacity, cross-national lending ability and the ability to structure suitable securities.

How do you manage your risks – interest rate, foreign exchange and credit?

The treasury policy implemented together with IAS 39 clearly defines the objectives, responsibilities and benchmarks for interest rate and foreign exchange risk management.

Interest rate management is a key activity for the group, given its leverage structure. The benchmark is normally defined by the rate used in the financial model supporting the acquisitions. Another key ratio for us is the EBITDA divided by the overall cash interest expense. There is scope for significant savings in the cash interest expense, which will feed through to EBITDA.

N&W has major currency exposure in Sterling, US Dollar, Swiss Franc and Danish Krona. As a result of sales, we are normally long in both Sterling and US Dollar, whilst the experience in the other two currencies is more mixed. In addition, the direct presence of the group in South America (in Argentina and Brazil) and in Eastern Europe (in the Czech Republic and Poland) exposes the results to any fluctuations in these currencies: a selective hedging approach is used in these cases.

Credit risk is a minor factor in our industry. Our receivables arise either from the so-called operators (firms installing and managing the vending machines in different locations such as offices, hospitals and railway stations) or from leading food and beverage companies, which use the vending channel as a marketing tool. Both the operators and the food and beverage companies normally get paid in cash from their final customers, assuring sound cash flows.

What instruments do you use to manage these risks?

We are very conservative in our approach to interest rate risk management. Because of our leveraged position, we cannot afford to put any income at risk as cash flows are the base for repaying our debt. As a result, any instrument must be specifically authorised. However, it is important to bear in mind that, despite its importance, the number of interest rate hedging deals per year rarely exceeds five. We use straightforward products that are transparent and fit the exposure. These include interest rate swaps, caps, floors and swaptions.

Whilst swaps and forwards are normally used to hedge foreign currency risks, the underwriting of options must be clearly authorised on a case by case basis. Option selling is explicitly disallowed in our treasury policy.

Has IAS 39 caused you any problems or to change your behaviour?

IAS 39 has forced the treasury department to consider the accounting implications of its strategies.

Because N&W as a group is very focussed on its profit and loss results, the attraction of using hedge accounting was clear. We normally analyse hedging relationships in advance together with our auditors. We apply hedge accounting for 100% of our interest rate hedges and for 75% of our foreign currency hedges. In both cases, our conservative approach to risk has made it relatively easy to establish hedging relationships that qualify for hedge accounting under IAS 39.

On the other hand, we have found that the requirement to evaluate financial assets and liabilities (including loans issued by the group) at amortised cost was much more difficult when we implemented IAS 39.

How do you use technology within the treasury?

We use the Cash and Treasury Management system from XRT-Cerg as our integrated treasury platform. It provides support for cash management, cash pooling, reporting, foreign exchange and debt and interest rate management. The system is also integrated both upstream to the remote banking system and downstream to the JD Edwards Enterprise Resource Planning (ERP) system. Information flows both ways: from the ERP to the banks and from the banks to the ERP.

The remote banking software, from BNL, allows the group treasury to integrate bank statements (SWIFT MT940 messages) that are originated worldwide into the XRT-Cerg platform. This allows us in the group treasury to understand the positions of all the subsidiaries.

In addition to the two main systems, we also run a financial planning programme (Easy Financial Planning of Gruppo Servizi). This simulates the effects of changes in exchange rates and interest rates on cash flows with a mid-term perspective (12/24 months) by providing monthly balance sheet figures. This programme is also used for verifying the correct dimensioning and structuring of credit facilities.

How do you manage your bank relationships?

Our approach to banking relationships has been completely revised since the establishment of the N&W group in 2000. The two groups that merged to become N&W had had very different approaches to their banking relationships. Electrolux Zanussi Vending had had a few relationships with major local banks in different countries. In addition, it benefited from the Electrolux centralised treasury services, meaning that funding was not an issue. Given the size of the Electrolux group, this structure was perfectly appropriate, although it was not for the new, smaller N&W group. On the other hand, Wittenborg A/S had had a local approach, with the addition of some important relationships with Nordic banks with the headquarters company in Denmark.

Because the new N&W group is involved in complex project finance deals, it became natural to switch the daily banking activity to those banks that, because they were participating in the loan syndication, had a full understanding of, and trust in, the newly established group. As a result, the overall relationship model can be defined as a long-term partnership one.

What do you see as your current and next challenges?

Because the department is still relatively young, we still have two structural projects ongoing: the establishment of a netting system for the group subsidiaries and the implementation of a notional pooling structure covering Northern Europe.

Following on from that, the next challenges will definitely involve evaluating the possibilities offered by e-treasury. I am interested in three main projects:

• Using an electronic FX dealing platform
• The creation of a global payment factory
• The substitution of the current banking system with an internet-based one

I am most interested in creating a global payment factory. The main driver would be to cut costs, although we would need to implement an in-house bank first, as we do not currently operate one. Again, the interest in electronic FX dealing is one of cost reduction. Finally the use of an internet-based banking system will provide better quality information to both the treasury and to the company as a whole. Being able to access payment information in real-time would be a useful credit management tool for example.

In summary, these challenges will add value either by reducing operating costs or by enhancing the flow of information into the treasury.