Founded as the Dutch state mining company in 1902, DSM is now focussing on its specialty chemicals business, selling its petrochemicals division last year. The company’s objective is to achieve a turnover of €10 billion by 2005.

How is the DSM Treasury organised?

The first thing to say is that corporate treasury in DSM is highly centralised. This means that at the local level there is no treasury function at all. All funding both external and internal, cash management and risk management for the group is performed by the corporate treasury.

Corporate treasury is part of the corporate finance and economics department, which also includes the corporate control and accounting, fiscal affairs and insurance.

The corporate treasury is staffed by fifteen people. The treasury is split into three departments:

• Corporate finance.

  The team of three acts as a front office for the treasury, arranging all the internal and external funding for the group. They are also responsible for portfolio risk management, essentially interest rate risk management. Finally they perform a more traditional corporate finance role, providing advice on financial policies and M&A and other strategic projects.

• Cash management.

  This team of three – a cash manager and two dealers – is responsible for managing all the liquidity within the group. They also manage the group’s foreign exchange risk.

• Back office.

  This includes a controller who is responsible for all the management reporting and accounting. The other members of the team perform all the regular operational accounting.

Although we run a number of different technology systems and platforms, we only get staff to manage them on a project by project basis. All the rest of the technology management is outsourced either to the corporate IT department or to external suppliers.

How is treasury held accountable?

I report to the director of Corporate Finance and Economics every two weeks, although I will consult him in the meantime if necessary. We also report formally on a monthly and quarterly basis. The five members of DSM’s Managing Board all have oversight responsibilities within the group. A sub-committee of the CEO and the CFO is responsible for overseeing the work of the corporate finance and economics department, including treasury.

Treasury is set a target for net financial income over the year. We also have a target for net debt. Finally, we have to manage interest rate, foreign exchange and credit risks within certain levels. In addition, treasury is also set both a cost budget and an investment budget.

How do you manage the cash across the various entities within the group?

The most important thing is the structure, what we call the financial logistics. We run ten cash pools across the group. We have a US Dollar pool, a Sterling pool and several local euro pools in the various Western European countries. Most of these pools are zero-balancing, although, for historical reasons, there is also a notional pool that operates alongside these zero-balancing pools in the Netherlands. The other main factor in the cash management structure is our in-house bank. Almost all our subsidiaries keep accounts with the in-house bank. This structure enables us to manage about 90% of the group’s global liquidity, which we do very closely.

The other 10% is not controlled directly by the central treasury, but rather by our subsidiaries in-country. These subsidiaries are located in countries, typically in South America and Asia, where there are significant barriers to have accounts at the inhouse bank.

Are all your cash pools operated by the same bank?

We have a banking policy which is based on relationship banking. We work with a core group of five banks that can provide us with the full range of banking services on a global basis. This includes capital markets, money markets and investment banking business as well as the cash management services.

In addition to these five, we use some domestic cash management banks to operate cash pools for us in certain countries. However the most important cash management bank for us in the Netherlands and the USA is ABN AMRO.

Do you determine which bank the local subsidiaries use?

Yes. We specify that the subsidiaries should concentrate with only one bank and that they must hold an account with one of the cash management or core banks. We do, of course, provide the subsidiaries with advice and support on managing their bank relationships.

What do you do with any surpluses in the cash pools?

Our objective is to manage these pools to a zero balance target, so usually there is not a significant surplus. When we do have a surplus in the short-term, we will place it on deposit.

However, we are in an unusual situation at the moment. We have just realised €3 billion from the sale of our petrochemicals and natural gas businesses, which we have reinvested on a temporary basis. Part has been invested in commercial paper, part placed on deposit, with the majority invested in a taxefficient structure.

How do you arrange your funding?

At the moment, there is no real need to access external funding as a result of the divestment. However in a normal situation, we would seek to raise long-term finance from bond issues, with short-term financing coming from the issue of commercial paper.

In the past, we issued bonds, mainly euro- and US Dollar-denominated. At present, we do not expect any refunding issues when the first bond comes up for redemption in 2004. Others come up for redemption in 2005 and 2006.

On the commercial paper side, we have both a €900m Euro CP programme and a $400m USCP programme. We recently increased the Euro CP programme from €500m. This was because we had found it difficult to fund ourselves cost-effectively using the USCP programme. As a result, the USCP is barely used at the moment, whilst the Euro CP programme has about €500m outstanding.

Internally, with a few exceptions, all the business units are funded centrally. The exceptions are, for example, our joint ventures in China and in South America. Those group companies that are funded centrally use the corporate financing company, DSM Finance BV, which provides long-term loans and short-term loans (up to twelve months). This is done with the close co-operation of our fiscal team, who provide the help needed to keep up-to-date with, for example, thin capitalisation rules. More generally, we have to be alert to any changes in the rules, such as the recent ones in the USA, so that we can react in an appropriate manner.

How do you manage foreign exchange risk?

The first thing we do is distinguish between translation, transaction and economic risk.

Economic risk is not managed by the treasury. We argue that we are not in a position to do so. It is therefore for the business units to manage, which they do by seeking a balance in the structure of their operations and facilities with the pattern of their sales.

The management of transaction risk is also primarily the responsibility of the business units. They are required to keep track of their position. We provide the business units with advice on how to get control of the positions and then how and how often to hedge them. The business units are not allowed to hedge with external banks; rather they hedge their positions with us in the corporate treasury. The business units will hedge their positions via the group’s internal electronic banking system.

The two dealers in the cash management department then hedge the net position with the external banks. At the moment, about 70% of our trades are transacted through the electronic trading platform, Currenex. Our goal is to trade all of our foreign exchange through Currenex by the end of the year. At the moment two of our six foreign exchange banks are not on Currenex. We have told these two that, if they are not on Currenex by the end of the year, we will cease to use them. We chose Currenex originally because it was the first available platform. Although initially we signed up for a six-month pilot with the intention of trying an alternative platform, at the end of the pilot period the alternative had gone out of business. Because we were perfectly happy with Currenex at that stage, we continued to use it.

In the past, it was our policy not to hedge translation risk. However after we made a major acquisition in the US in 2000 (the purchase of Catalytica Pharmaceuticals), our balance sheet’s exposure to the dollar was very high. We decided to hedge 50% of the translation risk. Initially this position was hedged using our USCP programme. However it is not easy hedging a long-term translation risk with a short-term instrument such as CP. As a result, we now hedge translation risk with long-term dollar funding.

How do you manage interest rate risk?

Two years ago, we conducted a study to find out whether there was a correlation between our operating results and the interest rate. This study found that the correlation between the two was quite high. As a result, we decided that a maximum of our net debt should be funded at a floating rate. In practice, this means that the proportion of our net debt that is subject to a floating rate varies between 40% and 60%. Within this 20% band, we try to ride the yield curve and to pick the optimal moments to switch fixed debt to floating and vice versa. We find that this system works well for us.

What instruments do you use to manage interest rate risk?

Selecting the correct instruments to use is the real challenge. We mainly use interest rate swaps. However within the 20% band, if we decide we need to fix the rate of some additional debt, we have to decide whether to fix existing euroor dollar-denominated floating debt. This is quite difficult. There is no formula that we can use to help us. As a result, this decision is mainly based on our view of the markets.

We then compare our results to three different benchmarks:

• A theoretical portfolio, where 100% of the debt was fixed.
• A theoretical portfolio, where 100% of the debt was floating.
• The third benchmark is the most important. This is again a theoretical portfolio, but one where the split between fixed and floating rate debt is 50/50. We try to get as close to this measure as possible.

Your other major exposure is to credit risk. How do you manage that?

This is fairly straightforward. We have limits in terms of both the amount of business that we put with any one bank and also the individual instruments, for example deposits and derivatives. All our counterparty banks must have a minimum rating of A1.

How do you use technology within DSM Treasury?

Technology is developing very fast. For the last two years, DSM has had an internal global communications network. Every employee within DSM has a workstation that has access to that network and uses standardised software. This intranet makes communication within the group very easy.

Treasury is more complicated. We had a patchwork of about ten different systems and applications. Two years ago, we decided to restructure treasury’s use of technology and to focus on SAP applications (which are being used in the rest of the group) as much as possible. We started by implementing SAP’s Corporate Finance Management system to replace the older treasury management and risk management systems.

We are now in the process of replacing our current internal electronic banking system, which links the treasury to the subsidiaries, with one based on the SAP system. This will make things easier for us as the new internal electronic banking system will connect to the ERP systems in the business units, which are mainly also SAP systems.

What are your next challenges?

Once we have implemented the SAP internal electronic banking system, we will establish a payments factory, using the SAP platform. At the moment, all the subsidiaries are responsible for making their own payments and thus all have their own links to their banks. Once we have a payments factory, the subsidiaries will only link to the payments factory, allowing us to be more efficient in the way we manage our cash.

As I mentioned, by the end of this year we want to have all foreign exchange transactions routed through Currenex. After that we will be looking to perform our money market transactions over a similar platform. The main advantage of these types of platform is that they interface directly with our back office, providing for straight-through processing which reduces manual input costs and the chance of errors. DSM is committed to the TWIST standards and we are now cooperating in the working group that is developing standards for commercial payments. We see the development of industry standards as an investment in the future; there will be shortterm costs but the realisation of straight-through processing will create real long-term benefits.

Our other challenge is to integrate the Roche Vitamins and Fine Chemicals business which we will acquire this year. This will also be a major undertaking as this will add about €2.5 billion of sales and an organisation of more than 60 companies operating in about 40 countries to DSM.