Merck KGaA is a chemicals and pharmaceuticals company based in Darmstadt, Germany. Its pharmaceutical, chemical and life-science businesses are organised into four divisions: Merck Serono, Consumer Health Care, Merck Millipore and Performance Materials. The company employs more than 40,000 people and operates in 67 countries worldwide.
Executive VP, Head of Corporate Finance
Uta Kemmerich-Keil began her career as a financial auditor at Hoechst AG, a chemicals and life-sciences company. She joined Merck KGaA in 1999 as Director of Acquisitions and Controlling and became Executive VP and Head of Corporate Finance in 2007.
She earned a Master’s degree in Economics from the University of Albert-Ludwigs-Universität Freiburg im Breisgau in 1995.
For the best part of a decade, the treasury department at Merck KGaA has been in a state of transition. Throughout much of its history, the company was extremely decentralised, a structure that afforded its subsidiaries a good deal of autonomy, but didn’t always serve the overarching company’s needs, says Uta Kemmerich-Keil, Merck’s Executive VP and Head of Corporate Finance.
“Ten years ago our business model was based on a decentralised structure with globally independent local subsidiaries and they were very entrepreneurial. Step-by-step we have been centralising all treasury activities. Of course you don’t like to lose your responsibilities, but it was obvious to everyone concerned that the centralisation was for the greater good.”
Today, there are no dedicated treasury staff working out of the local subsidiaries and all risk management and core treasury tasks are performed at the company’s headquarters in Darmstadt, the Hessian city in which the company’s founder, the apothecary Friedrich Jacob Merck, founded the company in the late 17th century.
“We now have the technological means to centralise our treasury functions, as all the information we need is centrally available. The starting point of the centralisation was the cash management system, which was our first big centralisation project in 2005 when we installed finavigate, a Siemens system that runs our inter-company clearing and payment factory.”
Uta was installed as Executive Vice President Corporate Finance in the summer of 2007, by which time the centralisation of the company’s cash management systems had already been completed by her two predecessors. Uta was charged with seeing the rest of the project through to its conclusion.
Today, the Merck treasury set-up rests on two pillars: the finavigate cash management system – which acts as an in-house bank and handles all inter-company clearing and payments – and SunGard’s Quantum system, which processes all of Merck’s risk management.
“The more you centralise treasury risks, the better you can handle them. The same is true for cash management. There is a natural hedge potential with a more centralised structure and economies of scale. The same holds true for external financing.”
“The Merck treasury transformation project has proved such a success that Uta’s treasury team, which is headed by Group Treasurer Rando Bruns, took home Treasury Today’s Top Treasury Team at the 2011 Adam Smith Awards ceremony.”
The Merck treasury transformation project has proved such a success that Uta’s treasury team, which is headed by Group Treasurer Rando Bruns, took home Treasury Today’s Top Treasury Team at the 2011 Adam Smith Awards ceremony.
In addition to the centralisation project, the Merck treasury has been active in the world of mergers and acquisitions. Millipore, the international biosciences company, was acquired in July 2010; the funding for the takeover was obtained from the debt capital markets – the extra leverage the company assumed as a result meant the company was downgraded by one and two notches respectively by the ratings agencies.
“Before the acquisition of Millipore, we were rated A- by S&P and A3 by Moody’s. With the acquisition, which was mainly debt financed, we are now rated BBB+ by S&P and Baa2 by Moody’s.” Uta admits that a strong investment grade rating is key for the company. “We feel comfortable in the BBB/A category because access to the bond market is an important financing instrument.”
The bond issuance was undertaken by Merck’s debt capital markets team, one of three that make up Merck’s 20-man treasury. The other two are: cash and risk management and the middle office/treasury control team.
In this interview, Uta tells us more about the Merck treasury, the centralisation project and the department’s plans for the future.
Which are your main cash management banks? How are your relationships with them?
Our main cash management banks are BNP Paribas, Deutsche Bank and J.P. Morgan. We performed an RFP for our major currencies in the first half of 2011. After having acquired two companies with a global set-up (Serono S.A. in 2007 and Millipore Corp. in 2010), we had to adapt our cash management structures and reduce cash-pools and our cash-pool partners.
We also have a pool of relationship banks – something in the region of 20 banks. They are part of our syndicated loan facility. It is a pure backup facility. We share our additional business with those banks. We don’t do business with other banks when it comes to foreign exchange, for example.
How did you choose your cash management banks?
We ran an RFP (request for proposal) for our four major currencies: EUR, USD, CHF and GBP. Based on the performance features that were important to us, we have been focusing our cash management activities on these three banks. We reduced the number of cash-pools from 11 to six and the number of banks from six to three.
Do you pool your cash? If so, is it a notional pool, ZBA or hybrid structure? What are the biggest problems you face when pooling your cash?
Yes, we have a very efficient cash-pooling structure in place. We don’t have notional pools and all our cash-pools are zero balanced. We pool all currencies when we have critical mass – ie a meaningful number of bank accounts. The USD is the only currency we have where we need two master accounts to cover the time zones. In addition, we run regional cash-pools in the Nordics, Poland, Czech Republic, Australia, New Zealand, China, Hong Kong and Singapore.
In China we were one of the first German corporates to establish a Chinese yuan (CNY) cash-pooling structure. Of course, currency restrictions in some countries do not allow an efficient cash-pool structure to be set-up. Altogether, we run cash-pools in 14 currencies, including around 30 countries and 100 subsidiaries.
Do you have debt? If so, what’s the breakdown – bank loans/bonds?
We had €3.4 billion of net financial debt at the end of Q3 2011, which mainly stems from the acquisition of Millipore in 2010 for €5.2 billion. We are financing ourselves via our Debt Issuance Programme and our ECP-Programme for short-term borrowings. We have bonds outstanding to the tune of €4.7 billion.
Corporates need to be more flexible than they were a few years ago. A nice maturity profile is essential. We are looking to deleverage and have been doing that. The next bond will be paid and we will see how things evolve.
What’s your debt portfolio like?
We have a rather balanced debt maturity profile with bonds maturing in 2012, 2013, 2015, 2016, 2019 and 2020, with terms from two to ten years and coupons between 2.1% and 4.8%.
Do you have a revolving credit facility (RCF)? If so, with which banks?
We have a seven year syndicated revolving facility of €2 billion which is a pure backup line, but we haven’t drawn on this line given by our core banks.
Has Merck chosen to solicit a credit rating? If so, what is it?
We have had a credit rating with S&P and Moody’s since 2003. Before the acquisition of Millipore, we were rated A- by S&P and A3 by Moody’s. With the acquisition, which was purely debt financed, we are now rated BBB+ by S&P and Baa2 by Moody’s.
A solid investment grade rating is key to us. We feel comfortable in the BBB/A category. We want to secure our access to the debt capital market because the bond market is an important financing instrument. With the rising volatility in the markets, you need to be able to act quickly in order to take advantage of windows opening up.
The debt issuance programme gives us the necessary flexibility. We are regarded as a high quality issuer by the market. We have high cash generation and a stable businesses model.
Do you use a TMS and/or ERP system? Do spreadsheets still have a part to play in your treasury?
Our treasury technology architecture is built around two systems: SunGard Quantum is our risk management system, with eTreasury used for internal trading and treasury reporting. For cash management we use the Siemens finavigate system. It is used as a payment factory by our in-house bank as well as for inter-company clearing. SAP is our ERP-System.
Spreadsheets will never disappear completely. They are sometimes used for data collection – liquidity and FX-planning via SunGard, for example.
What are you FX exposures?
We have a substantial FX exposure. Our main foreign currencies are USD, JPY, TWD and CHF. We have completely centralised the FX-risk management at the in-house bank.
Merck also has a clear hedging strategy. Financial transactions (internal loans) and booked operative transactions are fully hedged. Future operative cash flows (planned sales) are hedged on a three-year horizon with a layered structure – according to our market perception.
Do you hedge your interest rate risk?
Yes we do. We have interest rate swaps for some of our bonds (FRAs).
What do you do with short-term cash?
We have a substantial amount of liquidity, around €1.5 billion. On the one hand, we feel comfortable with a higher amount of cash in these volatile days. On the other hand we carefully monitor the counterparty risk. We have our liquidity over different categories: commercial paper, corporate bonds, bank deposits and money market funds.
What terms are your suppliers/customers on?
As a company, Merck has a diversified business model, being active in the chemicals, life-sciences and pharmaceutical sector. Our customers are hospitals, clinics, pharmacies, academic institutions, the electronics industry, the automotive industry, and so on, so terms vary between those industries and customers.
What does the future hold for your treasury? What projects and system upgrades do you have in the pipeline?
One project we are working on is a new systematic approach for our global FX and liquidity planning. Another project that keeps us busy at the moment is to further underpin our German pension obligations with cash/financial assets.
In Germany, the pension obligations traditionally stay on the balance sheet and have no dedicated funding. We plan to put these assets in a Contractual Trust Agreement (CTA) by year-end  to have a more transparent balance sheet.
“We will only manage the Eurozone crisis if politicians start working together and if we stay disciplined when it comes to the role of ECB.”
Could you share your thoughts on the sovereign debt crisis in Europe?
The euro has brought prosperity and stability to Europe. It is worthwhile defending. We will only manage the Eurozone crisis if politicians start working together though and if we stay disciplined when it comes to the role of ECB. Making ECB the lender of last resort is a very dangerous thing. We need to re-establish trust in the euro. I doubt that the ECB needs to give up its primary role in order to achieve this.