Corporate View: John Langrick, Sauer-Danfoss Inc.

Published: Mar 2004

We spoke to John Langrick about his role as Director of Finance-Europe and discussed Sauer-Danfoss’ plan to create a global treasury centre in Neumuenster, Germany, and the $250m multi-currency revolving facility agreed in September 2003.

John Langrick

Director of Finance – Europe

Sauer-Danfoss Inc. is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components for use primarily in applications of mobile equipment. With more than 7,000 employees and revenue of more than $1 billion, Sauer-Danfoss has sales, manufacturing, and engineering capabilities in Europe, the Americas, and the Asia-Pacific region. The Company’s executive offices are located near Chicago.

What are you responsible for as Director of Finance – Europe?

auer-Danfoss has a complex, multidimensional matrix structure. I am responsible for the worldwide treasury system. On the European side, I am responsible for investor relations, tax and legal as well as the day-to-day treasury management of the company.

I report to the CFO of the group who sits in Chicago. He is also Group Treasurer.

How is the treasury department structured?

The company has been very decentralised. At present, we have analysts in three regional centres responsible for the day-to-day treasury activities, with specialists in some subsidiaries as well.

However, we are now in the process of building a new global treasury centre in Neumuenster, Germany. This will administer our new global syndicated loan, manage the company’s cash and FX exposure and perform other global treasury operations. This will be done off the back of a new computerised treasury management system. Germany was selected as the location for the global treasury centre for a number of reasons, including the local expertise in managing cross-currency activities in Europe.

Why are you restructuring the treasury?

I think it is important to consider where we were. As I mentioned, we have been a highly decentralised organisation. This meant that centralisation offered the opportunity to both control our exposures and manage our positions in cash management, debt management and foreign exchange much more efficiently. For example, we still have too much cash lying idle on accounts in our various banks. We also consider we will benefit from netting more of our foreign exchange positions. Our interest margins are also higher than they should be. Finally, restructuring will give us the flexibility to move cash where it is needed, rather than to use cash where the credit lines are available.

What are the key issues which need to be overcome?

Some people in our subsidiaries were reluctant to give up both the control of activity and the benefit of their relationships with the different banks.

Some local banks were also uncomfortable with this. These local banks had profitable relationships with our local subsidiaries at branch level. As our local subsidiaries are now treated as part of a larger group by the banks, so the relationship changes. The local branches now find that they have to operate within rules laid down by the bank’s international or corporate banking department or, in some cases, the responsibility for the relationship is taken away altogether.

We have changed as a company too. We are now a truly multinational company with needs as complex as those of a company such as Daimler-Chrysler, although with a much smaller scale of operations.

There are also some complicated legal and tax issues which need to be addressed as we try to centralise, including exchange control issues which may or may not be possible to overcome.

Finally, we are aware that, although we have diversified the banks through the syndicated loan, most of our credit is concentrated in the same contract. This is a risk we need to manage.

How did you approach this restructuring?

The first step was to look at the volumes. There had to be sufficient volumes of the same currency in the same jurisdiction to justify consolidation. If volumes are small, it may not be worth the aggravation of change. In some countries, such as Poland, India and China, local rules and regulations provide significant inhibitors to consolidation.

Why did you choose one global location?

One department allows us to benefit fully from economies of scale. Although the department will be centred in Neumuenster, we will also have people in different time zones with treasury responsibilities.

How do you maintain the support of the people working in the subsidiaries?

We work hard to keep people involved and informed. We hold a lot of meetings, both internal and external, to provide advance notice of what we are planning, giving interested parties time to react and respond to proposals. As a company with operations in a number of different locations, we also work hard to respect the various cultural sensitivities.

How have the banks reacted?

Some have been disappointed when they lost business. Instead of having small amounts of foreign exchange and money transmission business alongside the credit they used to provide, all banks are now bidding for a proportion of a much larger piece of business. This has led to a dynamic change in the way that banks treat us as a customer. Despite these changes, none of our relationship banks have refused to work with us.

Why did you arrange the syndication?

As I mentioned, we wanted the flexibility to fund subsidiaries when they needed it, rather than where the banks would permit. As a group, we wanted uniform pricing for all entities, which is appropriate for a company with highly integrated products and sales and marketing approaches. A syndication loan would also be easier to administer from a centralised treasury with uniform terms and covenants. Finally, this secured our medium-term credit facilities, giving us a springboard for the future.

How did you arrange the syndicated loan?

Initially we asked a small group of four house banks, each with good international exposure, to complete a request for proposal (RFP). We analysed these responses not just on price, but also on other criteria such as flexibility and marketing. Eventually, we selected a German bank (Deutsche) as our lead bank. Because different banks like to operate under different legal jurisdictions, we chose to arrange the syndication under English law, mainly as a compromise between US and European law. We selected Allen and Overy as our legal advisors.

We then drew up a very detailed term sheet. However, our complex organisational structure gave us some legal and tax problems we had not anticipated. This also meant that the banks were potentially subject to structural subordination, which took time to sort out when negotiating the legal documents. It took six months, from April to September 2003, from drafting the term sheet to signing the deal.

We invited thirty-nine banks to participate. Of these, twenty-two agreed. This was a substantial success, especially because the syndication was 100% oversubscribed and none of our more significant relationship banks turned us down.

We could have completed the deal quicker had we set internal deadlines. However, we were in no urgent need of the cash and some issues arose which no one had foreseen. The big problem for us derived from the fact that the main borrowers under the syndication were five different companies – two German, two US and one Danish. In total, structural considerations meant that I needed legal and tax advice from five main jurisdictions.

The first thing is to have a good broad international knowledge of these issues personally. This does not mean knowing all the detail, but rather knowing enough about tax and legal issues to know what questions to ask. It means having a good working relationship with financial controllers and advisors.

You have to have an open mind to cope with the issues which, at first sight, seem so weird that they cannot be true. You also need patience and persistence. On occasion, I will get the response from someone that some problem cannot be solved. It is my job to ensure that these problems can be solved. This also means I have to be imaginative in seeking solutions, coming back to the importance of an open mind.

How do you manage foreign exchange risk?

Our main approach is to manage it strategically. We try to ensure the manufacturing base reflects our sales. For example, about 45% of our goods are produced in Europe and about 45% of our goods are sold in Europe. This gives us a natural hedge. We still think this approach is the right one for our company.

How do you manage interest rate risk?

Historically, we have had a large proportion of fixed rate debt which has arisen from both property mortgages and also from some inherited debt from the distant past. We are now trying to increase the proportion of variable debt so that we have a balance closer to 50% fixed, 50% floating.

You are also responsible for investor relations. What does this entail?

I am part of a transatlantic team. The company is listed on both the New York and the Frankfurt Stock Exchanges. I am responsible, with one colleague, for managing investor relations on the European side. Most of the annual reports and press releases are drafted in the US and then have to be translated into both German and Danish. This information is also placed on our investor relations website. I hold about four or five investor meetings in different centres (for example in Switzerland, the UK and Germany) every year, as well as a variety of individual meetings with interested parties. I am also responsible for ensuring we comply with the requirements of the Frankfurt Stock Exchange. From the treasury, I am in a good position to ensure that the information provided to investors is consistent with that provided to banks and major finance houses. I probably spend between a fifth and a quarter of my time on investor relations.

What do you see as your main challenges over the next year?

I think there are five:

  1. I have to complete the establishment of the central treasury operations. In 2003, we had one fulltime member of the treasury department. Two more started on the 1st January 2004. I also intend to install a treasury management system.
  2. I want to get a fuller understanding of the group’s exposures. This will allow me to develop an increasingly effective risk management approach.
  3. We want to change the format of the 2003 Annual Report. We intend to release only a set of summary financial statements and a Form 10-K. We expect some initial reluctance to this changed approach from the general public and we will need to manage this.
  4. I want to reduce the number of banks we work with. We are currently dealing with 66 banks worldwide, which is too many.
  5. In 2003, we started a process of legal restructuring for the group, which we need to finish. We want to simplify the group holding and sub-holding structure. In those countries where there is more than one legal entity, we would like to consolidate into one. However, there are operational, tax and employment issues which all need to be overcome, so this will not be an easy task.

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