Oliver Gygax describes the role of treasury within Swarovski. He outlines some of the problems faced when establishing a euro cash pool and also how the company selected a new treasury management system.

How is the Swarovski treasury structured?

The global treasury in Swarovski is centralised, forming part of the group’s corporate finance department, and acts as a service centre. We concentrate on Swarovski’s core business – Crystal Products – and do not enter into any speculative transactions. Corporate Finance is divided into front, middle and back offices. The front office, which includes corporate treasury, consists of three people. The middle office includes the treasury controller. The back office, which consists of three people, is part of the accounting department and is responsible for recording entries as well as making payments. One person is also responsible for managing the operational netting cycle.

For what are you responsible?

As corporate treasurer, I am responsible for all corporate treasury activities within Swarovski. This includes a number of specific responsibilities:

• Foreign exchange.

  Foreign exchange exposure is the group’s largest financial risk. I am responsible for managing the group’s overall foreign exchange position. This includes identifying the exposures and putting suitable hedges in place.

• Cash management.

  A second responsibility is the efficient management of the group’s cash. This involves management of our cash pools as well as arranging any activity in the money market.

• Advice to subsidiaries.

  As the treasury function is highly centralised in Swarovski, none of the group subsidiaries have their own treasury departments. The subsidiaries have finance departments, which are primarily operational, dealing with matters such as accounts payable and accounts receivable. From time to time, these local finance departments do have local treasury needs, such as arranging local funding or altering bank accounts. My role is to provide advice and support to the local finance departments when they need it.

• Project management.

  I will manage any significant treasury project such as, for example, the recent implementation of a new treasury management system and the current establishment of cash pools.

• Information technology.

  I am responsible for the managing the IT infrastructure in the treasury. This includes the selection of treasury management and other systems and ensuring that these systems interface with each other as necessary.

• Supervision of other activities.

  In addition to these specific roles, I also have to supervise other activities, such as the netting cycle and the treasury reporting.

Finally, I am both responsible to the Vice President of Finance and I deputise for him in his absence.

Broadly speaking, the Vice President of Finance is responsible for the long-term financial decisions, such as asset management, whereas I am responsible for all the short-term activity.

Does the fact that Swarovski is a privately held company cause you any difficulties from a treasury perspective?

As a privately held company, we only make certain financial information, such as turnover, public. This can cause some problems when managing our bank relationships, as they do not receive as much information as they are used to and thus they can find it difficult to evaluate the value of our relationship. In addition, tax issues arise from time to time, again due to a lack of published information. But, in the end, the fact that we are a privately held company brings more advantages than difficulties.

How do you manage your bank relationships?

I define an optimal position as small enough that a bank feels competition when, for instance, quoting a price for an option or a forward. This allows us to make a meaningful comparison of pricing that is offered. At the same time, our group of banks must be able to deliver all the services we need. At the moment, we have core bank relationships with three banks.

However, because of the nature of our business, we also need some local banks as well. As a large portion of our core business is selling of Crystal products via retail stores in various countries around the globe, we need access to retail banking services, such as the ability to deposit daily cash receipts and the provision of credit card facilities.

Our current project, the implementation of a euro cash pool across the Euro zone, illustrates the point. No bank can provide the access to local branches and other services that all our retail outlets need across Europe. This means that we still need local banks in most European countries in addition to the bank operating the cash pool structure. As a result, we have implemented an overlay structure for our cash pool.

This example illustrates the need to meet the requirements from the centre, whilst recognising the subsidiaries’ needs. In this sense, our optimal bank account structure is one central bank and then one local bank. We have to accommodate both the central treasury view – the minimum number of banks – with the local subsidiary view – easy access to banking services.

How do you manage your cash?

Our cash management objectives are to avoid liquidity risk and to optimise the interest income. At the heart of our cash management strategy is the development of two cash pools with ABN AMRO. The first – a cash pool for all the Swiss Franc accounts in Switzerland – is already operational. This works by zero balancing all the relevant accounts to a master account in Switzerland on a daily basis.

We are currently in the process of establishing a cash pool for all the euro-denominated accounts in the Euro zone. This will also be a zero balancing structure, although the daily sweep will be to a master account in the Netherlands. We will implement this in a series of four phases, bringing different countries in at each phase.

What difficulties have you had in setting up the euro cash pool?

There have been a number of problems. Of these, perhaps the biggest was the need to cope with the accounting requirements arising from the daily zero balancing of all the bank accounts. We wanted an automated process whereby we would receive a daily statement from the bank. Ideally this would then feed directly into the treasury management system. This would then feed the entries straight into our accounting package, SAP, eliminating the need to re-enter data.

Initially, we tried to implement an interface between the bank and SAP, such that the bank-generated data could be fed straight into the accounting package. Largely because the bank uses different account structures in different countries, we were unable to develop a single interface to achieve this, making the whole task very difficult.

Once we implemented our new treasury management system, the task was much easier. The supplier supported the design of two interfaces – one between the bank and the system; the other between the system and SAP – and so straight-through processing of this information is now possible.

You mentioned a netting process – how does that work?

We operate a netting centre within the central treasury. This nets all cash flows within the group for which it is permitted. For instance, we do not net ‘in country’ Indian flows, because netting of these flows are only allowed when the netting centre is located in India. The netting system developed out of our exclusive wholesaler and logistics centre in Liechtenstein, which invoiced all subsidiaries, to become a full netting system. The purposes of the netting system are to minimise costs by reducing the cash flows, to reduce our foreign exchange exposures via natural hedges and to reduce the transfer risk.

Once the netting system was operational, it has not been difficult to add additional participants as needed. Indeed, we now have a small number of external counterparties participating in the netting cycle. However, we only allow new entities to participate in the system if they generate a large enough turnover and frequency of payments to make this worthwhile.

That is one way of managing foreign exchange risk. How do you manage the remaining exposures?

The first step is to assess the nature and extent of our exposures. This used to be done using an Excel-based system. Soon, we will use our treasury management system to achieve this.

Swarovski Crystal Business has two different kinds of foreign exchange exposure. Firstly, the Consumer Goods Business, which sells our products to the retail clients. Secondly, Crystal Components Business deals with wholesale customers. In the first case, we carry the full foreign exchange risk. For the second one, we normally face a reduced foreign exchange risk, as prices adapt to foreign exchange rates. We combine these two risks, which will then be our foreign exchange exposure.

We have a two-year horizon when managing our exposures, which we evaluate on a rolling monthly basis. This means that, within any two-year period, 80% of the exposures for the next three months will be hedged, 60% of the exposures for the 4-12 months period and 30% of the exposures over the one to two years period. With this strategy, we try to achieve an average rate to reduce the volatility.

At the end of the netting cycle, we transact the resultant exposures on the spot market. Up to the six months exposures, we will hedge using a combination of forwards and options. Primarily we use plain vanilla and single barrier options (these have a ‘trigger price’ which, if reached before maturity, causes an option either to come into existence or cease to exist), although we also employ some options strategies, usually zero cost structures. In other words, we only use options that can be clearly explained and understood. For the long-term exposures, we exclusively use forwards.

You have also recently implemented a new treasury management system. How did you first select and then implement your chosen system?

We started the process at the end of December 2001. We got together with six other Swiss corporations to evaluate various treasury management systems. With the assistance of a treasury consultant, who acted as facilitator to the group, we held a series of workshops looking at the various aspects of each system. At the end of August 2002, we decided to implement System 10 from TietoEnator.

When selecting the system, we wanted a risk management tool that would provide all functionalities we needed to fulfil all the tasks we face in the corporate treasury. We wanted to have one system for the front, middle as well as the back-office. We were also attracted by the modular structure of the system. This means that we only need to pay for the parts of the system that we used. The other factor was the level of support we would receive from the system provider and in what form updates and new releases would be produced.

The implementation process went in a series of phases. Initially it took about two weeks over a period of one month, starting in October 2002. After these two weeks, the system was in operation for our basic needs, such as deals capture, basic valuations, payments, basic reports, forecasts, etc.

However, it is difficult to say exactly how long it takes to implement such a system. Once you begin to use a new system you always find things you need to change. Initially, you concentrate on the major issues – e.g. to ensure all the deals are captured in the system and all the exposures are identified. Once these have been solved, more detailed requirements arise. So, for instance, how the treasury management system coped with interest charging to our subsidiaries was not an issue to start with, but arose once we started using the system.

We are able to get support from the system provider in two ways. Firstly, we can file a case via the Internet – we will then receive written feedback within a certain time period. Alternatively, we can get support on the telephone. Although the system provider is Scandinavian, there are support offices in Switzerland. The key thing about system implementation is that it never really stops. As we get more familiar with the system, we find additional ways in which to use it.

Do you use the Internet within the treasury?

We do use the UBS Key Link system, although the majority of our transactions are still agreed over the telephone. We do not use any of the multibank foreign exchange portals.

We have just implemented a web-based reporting tool for our cash flow forecasting from Schwabe, Ley and Greiner, replacing a system that we had developed ourselves. This new tool allows the subsidiaries to complete their cash flow forecasts every month via a form, which they receive on their desktops over the Internet. We started to roll this out at the end of last year.

What do you consider to be your main challenges over the next couple of years?

We are still busy with the implementation of the Euro Cash Pool. As the roll out for phase 1 is foreseen by mid September 2003, it will take some time until all the participants of the 4 phases are included. Therefore, this is and will be a major issue for us.

We have to increase the awareness of the ‘hidden’ costs, e.g. accounts receivable and accounts payable in currencies other than the local one. There remains a lot of cost saving potential, which we want to take advantage of. Moreover, financial risk management will remain a major issue to take further.

It is very important to provide a professional service to our subsidiaries, as they face increasing competition in their markets. Therefore, we try to prevent volatility in the foreign exchange markets reducing their margins via optimal hedging strategies and by providing them with the funds they need to extend their businesses. This means we must be an innovative treasury department and we have to keep track with the leaders in the treasury markets.