Corporate View: Sigurd Dahrendorf, Knorr-Bremse

Published: Jul 2009

The Knorr-Bremse Group is the world’s leading manufacturer of braking systems for rail and commercial vehicles. In 2008 the Group posted sales of €3.38 billion and employed a workforce of 15,000. This month, Sigurd Dahrendorf, Head of Knorr-Bremse’s Munich-based Corporate Treasury, tells us about the company’s supplier finance programme – a project which was Highly Commended in the 2008 Treasury Today Adam Smith Awards.

Sigurd Dahrendorf

Head of Corporate Treasury

Sigurd Dahrendorf was born in 1954. He has a PhD in National Economie and has worked in leading functions of mechanical engineering companies for more than 30 years. He joined Knorr-Bremse in 1990 as an MD to one of its affiliates. Later he took over the financial accounting department at Knorr-Bremse’s headquarters in Munich. In 1997 he built Knorr-Bremse Group’s treasury department and developed it to fit the requirements of a fast growing group, now seizing more than €3 billion in sales.

Sigurd Dahrendorf is married and has two adult daughters. In his free time he plays classical music in an amateur orchestra.

Please could you give me an overview of Knorr-Bremse?

Headquartered in Munich, Germany, for more than a century the company has pioneered the development, production and marketing of state-of-the-art braking systems. Other lines of business include automatic door systems, rail vehicle air conditioning and vibration dampers for internal combustion engines.

Our parent company, Knorr-Bremse AG, is structured as a holding company, with several specialised departments servicing the whole Group. One of these is the Treasury Department, which is responsible for financing and risk management for the Group as far as liquidity, currencies, interest and commodities are concerned. We see ourselves as service providers to the Group as well as to each of its more than 90 affiliated companies worldwide.

How is your treasury structured?

We are a relatively small treasury department compared to the size of the company, and we carry out some functions which are not usually part of the traditional treasury set-up, such as credit management and some elements of group accounting. We are specialists within the Group, with a relatively high degree of centralisation. A total of five people cover the functions worldwide as there are no treasury departments within our affiliated companies. One exception is our regional headquarters in Hong Kong, which serves all affiliates in Asia and Australia, with a regional treasury which acts as the ‘extended arm’ of the department in Munich.

Our Treasury Department consists of the four big ‘C’s:

  1. Cash management.
  2. Currency management.
  3. Corporate finance.
  4. Credit management.

We are very streamlined, so we have paid a lot of attention to the introduction of contemporary IT systems such as SAP and links to Misys and 360T.

What were the reasons for developing your Supplier Finance Programme?

The Supplier Finance Programme, for which we won an Adam Smith Award in 2008, was developed with Deutsche Bank. It is designed to aid working capital reduction by extending the days payable outstanding while supporting suppliers in financing longer payment terms. The initial idea came from one of our North American affiliates that had local experience of a similar programme.

So what was the main goal?

It’s very interesting – when we designed the programme with Deutsche Bank, we did not talk about the credit crisis. At that time there was a big boom in all our economies. Nevertheless, we recognised that working capital is always important, not only in times of crisis. So we looked at what we could do to improve working capital from the treasury side. When we came up with the programme we saw that it was a good financing tool, and a way for us to convince suppliers to extend their payment terms, financed by the programme.

That was the initial idea – of course now, when people need finance, when they have exhausted their bank credit facilities, everyone is looking for new sources of liquidity. This is one such source. A lot of suppliers that actually refused to participate in the programme initially are coming back and asking for a second chance.

What are the benefits?

We always say that we are in a triple win situation with this programme. The winners are Knorr-Bremse, the suppliers involved and the bank. Knorr-Bremse has two strong public ratings – Baa1 from Moody’s and BBB+ from Standard & Poor’s – which of course lead to a strong credit rating with the banks, much stronger than a lot of our suppliers. The programme transfers this to the suppliers to a certain extent, which increases their willingness to agree longer payment terms, which in turn benefits us. And there is no cost to us, because payment handling for suppliers in the programme is transferred completely to Deutsche Bank.

The supplier gets additional financing on top of their bank facilities because the bank is purchasing its Knorr-Bremse receivables. There is no administration fee, no dilution reserve, no del credere fee – just a margin on refinancing, which is often much less than the supplier’s own credit margin. The supplier’s benefit is that the financing of the longer payment term can offer additional borrowing capacity at a lower cost.

How does it work?

Deutsche Bank has a web platform for the programme and once we have decided to include a supplier, from that day on we electronically transfer all the invoices that are checked and ready for payment to this platform overnight. The supplier has access to their account on the platform, which means the next morning they can see what we put in the previous evening. Then they can put a tick by every invoice they want to sell to the bank. Any that they do not tick will not be sold. Deutsche Bank pays the purchasing amount to the supplier a day or two later.

We pay all the invoices we have transferred at the net payment date, then Deutsche Bank subtracts what they have financed, and they forward the balance to the supplier as agreed in their service contract. In an extreme case, if an invoice is not ticked at all, after the net payment period – let’s say 60 or 90 days – it will automatically be settled when we make a payment to the bank.

How many suppliers are involved?

More than 40 companies are participating, mainly in Germany, and we are preparing to extend the programme to Hungary and the Czech Republic. In the US, where the programme originated, we are also recruiting suppliers very successfully.

Suppliers without a high credit rating are becoming more interested in the programme simply because they save money. They can also reduce working capital by selling their receivables and get access to an immediate additional source of liquidity outside of their normal bank credit or other facilities. Those with stronger credit ratings are also asking about the programme, because it offers a new source of liquidity to them.

How successful has the programme been?

I can really recommend the use of this tool. It is successful, but if you want to use it, you need to be aware that you have to spend time and money introducing it – especially time, because our experience is that you have to convince the suppliers to take part, even though they get the most benefit from the programme. They are always suspicious that you want to take something away from them.

To overcome this, we use teamwork – representatives from the purchasing department, the financing department on our side and the bank work together on supplier days or personal visits.

What particular challenges have you encountered as a result of the financial crisis?

There are three categories of increasing risk which are affecting Knorr-Bremse:

  1. Providing liquidity for our daily business at a reasonable price.
  2. Much higher volatility in the currency markets.
  3. Risks of insolvencies and bankruptcies of customers and key suppliers.

A key priority for the Group as a whole is making sure the necessary liquidity is available at any of our affiliates at any time. Reduction of working capital is the absolute priority at top management levels, and cash generation features heavily in our key performance indicators. Managing receivables, advanced logistic systems and supplier finance are all being used to create cash, and we have a worldwide focus on cost reduction in order to stabilise gross cash flow.

What about credit facilities?

Because we have a stable rating, we are still a very attractive partner for banks despite the crisis. We have no problem getting the facilities we need from our core banks, with whom we have good long-term relationships. Some banks are obviously trying to compensate for losses they experienced in investment banking by doubling or even tripling their margins at corporate level, and are reluctant to pass on to their customers liquidity which has largely been provided by the Central European Bank and various governments. Not every bank is acting like this, but the administrative authorities should take strong action to ensure that the money they are issuing goes to the companies that need it.

The Supplier Finance Programme has nothing at all to do with the financing of Knorr-Bremse and therefore has not led to any reduction in our credit facilities.

How do you deal with FX rate fluctuations?

Five years ago we introduced a ‘layered hedging’ system. We hedge our FX exposure over three years using different percentages, and adjust and increase the volume yearly. This gives us a moving average over the three years, which provides a relatively reliable calculation base for our business to operate on.

For example, let’s say I’m planning for the medium term and I find I have a dollar long, euro short exposure of $1m in 2012. What I do is immediately (ie during this running year) hedge $300,000 in vanilla options at, say, $1.30 to the euro. Next year, I add another 25% – $250,000 – to the existing hedge at the actual rate for the year – say, $1.35 to the euro. So the mixed rate is now $1.32 to the euro. The same procedure runs until 2012. By hedging over a period of three years in equal tranches, I can avoid the very high fluctuations that I may encounter if I hedge over a shorter time – say one to six months.

I cannot beat the trend using this method – it’s impossible. But after 18 months following this principle, I’ve hedged around 50% of the exposure. So I can give my salespeople the worst case hedged rate for 50% of the $1m, and this helps them with their calculations. As part of the deal is optional, I can take opportunities later on to improve on the worst case.

It’s a very conservative approach – to my knowledge, in Germany only Lufthansa uses a similar system. Last year my average was always in good shape compared to the spot rate. Of course, at the end of last year the dollar strengthened dramatically compared with the euro, but because our calculations were transparent it didn’t hurt us operatively.

Finally, you mentioned that credit risk management is becoming increasingly important. What does it mean for you?

As a result of the financial crisis, credit risk assessment has taken on a much higher importance for the company. Identifying and preventing credit risks as early as possible is essential to protect the company from potential negative impacts on sales and/or purchases.

Because of this we have set up credit risk steering committees at all affiliated companies to monitor such risks even more intensively, in order to take co-ordinated and appropriate actions in time. Such actions can include talking to the counterparts concerned early on to see what we can do to avoid or mitigate the risk – for example, encouraging them to take part in the financing programme. This is our understanding of partnership under the circumstances of crisis.

All our content is free, just register below

As we move to a new and improved digital platform all users need to create a new account. This is very simple and should only take a moment.

Already have an account? Sign In

Already a member? Sign In

This website uses cookies and asks for your personal data to enhance your browsing experience.