Among particular interest is Henkel’s use of technology to manage foreign currency risk and its cash pooling structure. Henkel is currently in the process of centralising its processing of both external and internal payments.

How is treasury organised within Henkel?

The Henkel treasury function is highly centralised. The Central Treasury Department (CTD) at Henkel KGaA in Düsseldorf is the central provider of all treasury services to the group. It is solely responsible for managing liquidity and financial risks across the group. Henkel has over 170 companies in about 75 countries that have active treasury requirements.

I am the director of CTD, which is part of the Corporate Finance Department (CFD). My department acts as the front office of the CFD. We manage the worldwide cash, foreign exchange risk and interest rate risk, as well as financing on both the money and the capital markets. We are also responsible for the management of banking policies.

CFD also includes the following departments:

• Treasury Controlling and Systems (middle office), which is responsible for collecting all treasury-relevant data from the companies around the world, running analysis on them, controlling the activities of the front office and managing the financial systems.
• Treasury Processing (back office), responsible for processing and executing the treasury transactions.
• Financial Controlling Affiliated Companies which is responsible for optimising the financing structure of the subsidiary companies.

All four sections report to the VP Corporate Finance.

How are you held accountable?

CTD’s objective is to optimise the net profits of the Henkel Group, operating in a set of treasury guidelines. We are incentivised to do this, although we act as a service centre, not a profit centre. Our performance is assessed with reference to benchmarks.

As mentioned, I report to the VP Corporate Finance. A treasury committee meets every two weeks to decide on hedging strategies. Once a month, this meeting is attended by the CFO of the Henkel Group and the VP Financing and Controlling and more strategic issues are discussed.

In addition, we have six regional corporate finance hubs, headed by regional corporate finance managers. These managers meet with the VP Corporate Finance, the head of Financial Controlling Affiliated Companies and me four times a year – twice physically and twice in video-conference – forming our Global Corporate Finance Committee (GCFC). This is used as a forum for information, discussion and decision on corporate finance issues.

How do you manage cash?

The main objective of our liquidity management policy is to ensure that we can meet all our group-wide debt obligations at all times. We have two cash pool structures in place to achieve this.

Firstly, we have a worldwide cash pooling system with Citibank. Included in this cash pool are groups of operating companies in:

• Europe
• Asia/Pacific, where the currencies are convertible (HKD, SGD, JPY, AUD, NZD)
• North America
• Mexican group – this is denominated in USD and linked to the North American pool

All the local participants zero-balance their accounts to a header account in their own country. These header accounts are held in the name of Henkel KGaA (or Henkel Corp in North America). In some countries where zero-balancing is not permitted, for example in Russia, we operate a notional pool.

Secondly, we operate a separate euro cash pool for our eurozone companies. We have several local banks, each operating in-country cash pools in their own countries, which are zero-balanced to header accounts in the name of Henkel KGaA. We then have an overlay structure in place, which pools the cash to Deutsche Bank, Düsseldorf.

What do you do with surplus cash?

Generally we have a group-wide zero cash policy. We try to use all cash internally via the cash pools and group loans.

Nevertheless, when we need to make short-term investments at Henkel KGaA, we split them and invest in bank deposits, purchase CP and deposit with money market funds. Investing in bank deposits is limited by bank, as is the case when we purchase CP where we have counterparty limits in place. In addition, we are forbidden to purchase paper whose issuers are rated lower than Henkel, i.e. lower than A1+/P1. Diversification of our counterparty risk is key.

How do you arrange funding?

We prefer to arrange our external financing via the money and the capital markets. We have three programmes in place. We have a €1 billion ECP programme in the name of Henkel KGaA and a $1 billion USCP programme in the name of Henkel Corp. Because of rating requirements, these are backed up both by a five year renewable $750m syndicated loan and some bilateral credit lines. We also have a €2 billion debt issuance programme listed on the stock exchanges in Frankfurt and Luxembourg. Under this standardised documentation, we are able to issue medium and long-term debt whenever we need to in a very short period of time.

At present, we have fewer outstandings in these programmes, as a result of the sale proceeds from the sale of Cognis, our chemical business, and our joint venture with Ecolab Inc, both in 2001. These funds were mainly used to reduce our financial borrowings. However, we do issue some CP from time to time, not because we need the funds, but rather because we want to keep the Henkel name in the market.

We generally fund our subsidiaries in their local currency via group loans and cash pools. When this is not possible due to local regulations, we will support them when they need to arrange local credit facilities by providing headquarter guarantees.

Our main objective is to achieve as low a cost of funds as possible from a group’s point of view.

What risks do you face and how do you manage them?

The main risk that we face is foreign exchange risk. For all booked, contracted and forecasted transactions in foreign currency, data received from 170+ operating companies is centralised and analysed at CTD. We then decide whether or not to hedge the net exposure, and define respective hedge ratios by country. In case of hedging, we usually use spot, forwards and swaps. Options are used occasionally, when appropriate. Hedging is only allowed based on an underlying position.

We are considerably exposed to emerging market risk, so we take special care for these countries. We have adapted the Goldman Sachs Watch system to meet our requirements. This provides us with an early warning when it turns out that there is a high probability for a currency devaluation within the next three months. We decide whether to hedge this emerging market risk by taking both the probability of devaluation and the cost of hedging into account. Up to now, our experience with this model has been good. Additionally, we communicate with the local finance managers regularly to get frequent updates on the local markets.

Where cost and local regulations permit, CTD acts as the central counterparty for all foreign exchange transactions. The operating companies are not permitted to transact foreign exchange without central approval.

Henkel hedges translation risks selectively, after considering FX rate expectations and hedging costs.

Compared to FX risks, interest rate risk is not such a big issue. We measure the risk by looking at the maturity gap both at the group and the country level and also by currency. When we do decide to hedge, we can use the full range of instruments.

We have a number of rules in place to manage credit risk. We have counterparty limits in place for all banks, where we can only deposit with banks that have ratings equal or better than ours. Managing customer credit risk is not a treasury responsibility.

How do you manage your bank relationships?

We classify our banks into three groups:

• International banks.

  These must offer a full range of bank services in at least one region that is important for Henkel.

• National banks.

  Additionally in several countries and in those countries not covered by our international banks at all, we use national banks. These banks shall preferably have an international standing.

• Niche banks.

  We are trying to reduce the number of relationships we have with niche banks. However, due to exceptional know how and/or conditions sometimes it is valuable to use them.

In all cases, we attach a high importance to the provision of credit: no credit commitment = no business. Operating companies worldwide need prior approval from headquarters to set up new relationships with local banks.

How do you use technology?

We are continually working on solutions that will provide integration, standardisation and automation.

The core item is our treasury management system, Trema’s Finance KIT. This system interfaces with:

• Reuters for market information
• Electronic banking software from Citibank and Commerzbank
• The general ledger, which uses SAP software
• Our home made treasury reporting system
• E-Dealing platforms

Within Henkel treasury, we differentiate between the financial and the operating cash flows. All the financial cash flows are executed and processed through the Trema system. Entries are pre-booked and transferred as a batch file to the SAP general ledger. The interface with SAP also provides us, on a daily basis, with the booked and contracted foreign exchange positions at the headquarter level at Henkel KGaA. This information flow is fully automated. From our subsidiaries, we collect all Treasury relevant data once a month through our Lotus Notes based Treasury Report, where the entries have to be made manually. Altogether, both interfaces enable us to have all hedge activities as well as the respective underlying positions in our Treasury system at the same time.

At present, we use the Internet to transact with about 50% of our external dealers. This is via both Currenex and one proprietary bank solution. Both interface to Finance KIT which offers us straight-through processing of deals from the initiation of the deal, to confirmation and settlement. We would like to increase the Internet transaction volume to 90%, by possibly signing up to FXall since this will help us to cover our complete FX dealing bank portfolio.

What do you see as your next challenges?

The major project, which is currently under way, is the implementation of a European Central Payment Management (CPM) which is a joint project between CTD and Payment Transfer and Accounts Management. CPM is first focussing on the centralized processing of external outgoing and internal payments. Later external incoming payments will follow. Our work plan to implement CPM is as follows:

1. In 2002, Step 1 – outgoing payments – was established at Henkel KGaA and has already rolled out to several European companies. This roll-out process will continue during 2003. The focus is the conversion of payment files to local formats/domestic payments. Prerequisites are the centralization of the outgoing payments, transmission and conversion of payment files as well as the harmonization of master data.
2. The focus of CPM Step 2 is on active payment management. It will use a complex internal account system with automatic accounting of all incoming and outgoing payments as a centralized service provided to the CPM participants. The payments will be executed in a shared service centre; that means, for example, that a payment from Henkel Iberica for a beneficiary in UK has to be executed via the Henkel UK bank account in the UK. Once our current beauty contest on supporting software solutions has been completed, it will take about two months to design exactly how the software will work. We expect the chosen software to be running live at Henkel KGaA by end of the first quarter of 2004 at the latest. Thereafter, it will be gradually rolled out to the affiliates.
3. Once the software is in place, we will start to integrate incoming payments into the structure.

In addition, CTD is planning to implement Trema’s eKIT later this year. eKit is the web based module of Finance Kit and can be used to link affiliated companies online to CTD, so the flow of information from the operating companies will be automated and provided in real-time. We will also be able to perform our internal FX-deals over the Internet. Both of these enhancements will allow us in the future to connect our internal with our external deals and to net them where appropriate. Not only will this allow more straight-through processing, but it will also enhance our risk and liquidity management. We are currently in talks with both Trema and the Internet platforms to determine how this could work.

In the longer term, we want to be in a position where we have real-time access to all treasury information (“data only a mouseclick away”) as well as all transaction business fully automated and – where appropriated – web enabled. The ultimate vision is to merge CTD with CPM to an In-house Bank so that it can be a standalone business, offering services to the operating companies as an independent unit or even entity. However, these last developments are still some days off!