Treasury that rocks
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“The really important issue is the complex settlement of royalties that are due to the song owner, making up a crucial part of our work in the treasury department. (…) This makes it all the more important for us to optimize system support in order to make netting as precise and predictable as possible.”
Swen Scholz | Vice President Finance & Treasury, BMG
BMG Treasury Profil
About BMG:

BMG is the new model music company founded by Bertelsmann in 2008 as a direct response to the challenges of music’s digital revolution. Key to its innovative approach is the fact that it represents the traditionally separate music publishing and recording rights off the same state-of-the-art platform internationally. BMG is already the world’s fourth biggest music publisher and the first new global player in the recordings business in decades. BMG’s pitch is unique – a relentless focus on fairness and transparency and service to its artist and songwriter clients. BMG’s 14 offices across 12 core music markets now represent over 2.5 million songs and recordings, including the catalogs of Chrysalis, Bug, Virgin, Mute, Sanctuary, Primary Wave and Talpa Music, as well as literally thousands of artists and songwriters attracted by its fresh approach. BMG is owned by international media, services and education company Bertelsmann, which also includes the broadcaster RTL Group, the trade book publisher Penguin Random House, the magazine publisher Gruner + Jahr, the service provider Arvato, the Bertelsmann Printing Group, the Bertelsmann Education Group, and Bertelsmann Investments, an international network of funds. With its multi-platform perspective, integrated technology platform and commitment to help artists maximize their income, BMG aims to be the best company in music to do business with.

The types of companies who deal with treasury are much more diverse than one would maybe think: BMG is an excellent example of this. They also illustrate just how different treasury responsibilities can be. BMG in Berlin certainly has a different “ring” to it, and the atmosphere and workflows in this hip and young business are very different from those in more traditional companies. BMG is a business unit of a multinational group and has independent, supporting treasury structures – a factor that must be taken into consideration when discussing their treasury practices. Common treasury topics such as cash pooling or refinancing have become irrelevant since Bertelsmann acquired the shares previously held by financial investor Kohlberg Kravis Roberts & Co. The syndicated loan from back then has been replaced and current accounts have been integrated into the parent company’s cash pool. Even FX trading is handled by an in-house bank, and BMG no longer requires independent banking connections. With around EUR 400 million in turnover, treasury responsibilities seem to have a limited scope. But, taking a closer look, you quickly realize that the business model of a company that manages copyrights and recording rights comes with its own specific issues, namely international, immaterial music copyrights. This entails just as many challenges for the BMG treasury team headed by Swen Scholz as in other companies.


Swen, how would you describe BMG’s core business?

At BMG, everything is about music – and its commercial exploitation. Our business has two main pillars: the publishing section ensures that the copyright collecting societies in different countries (such as the US, the UK or Germany) collect royalties in connection with the use of certain songs to be passed on to the author and owner of the copyright. In some cases we have the copyright; in others, we manage the rights on behalf of the owner. The recordings (labels) business section, on the other hand, concentrates on marketing music recordings as well as on corresponding processes. For example, we pay the artist an advance, arrange for production and marketing and then split the royalties with the musician.


BMG has an annual turnover of around EUR 400 million – that seems a manageable amount, isn’t it?

Only at first glance – the devil is in the detail. We don’t manufacture goods but manage immaterial rights. If you take that into consideration, such an amount does become significant in an inter-national context. Music copyrights are either managed by one of the three major marketers next to us or by one of the many different small and medium-sized companies in the sector. Essentially, acquiring copyrights or catalogs can be compared to acquiring a business. The challenges involved are equally complex. We become the owner of a unit that is different in each case and that needs to be accommodated from a treasury point of view. Each of these many acquisitions means a complicated integration process for us – starting with bank accounts, payment processes, refinancing or netting.


How many of these entities do you have at BMG?

A little while ago we were still over 150 entities but this has been reduced to 60 due to mergers and liquidations – and this with an increasing turnover. This is a very positive development for us but it has limitations. While I would sometimes like to see even more consolidation to achieve an even more manageable number, I realize that this will hardly be feasible, in particular in the UK. There, artists can veto any transfer of the copyrights to their music from one entity to another. In these cases, a merger is neither possible nor does it make sense because we do want to ensure we keep the rights.


So the key challenge is process integration when you acquire copyrights?

This is only one of our challenges and I don’t think it’s the most important one. The really important issue is the complex settlement of royalties that are due to the song owner. This makes up a crucial part of our work in the treasury department.


Why exactly is this settlement so complex?

There are a number of factors that we need to consider. Let’s take the example of an artist from the UK: he or she writes a great song that doesn’t just make the charts in the UK but also in the US, bringing good revenue there. Obviously, royalties are collected by the US collection society in local currency, i.e. in USD. They then go to the BMG entity in the US who needs to transfer the royalties to the UK entity – but they would like to receive them in GBP. Last but not least, the UK entity needs to pass on the agreed proportion of royalties to the songwriter. You can see that FX issues and the settlement of fees between different entities – sometimes topped by specific tax implications – play an important role. While there are international standards for the settlement, this is handled differently depending on the type of artist and business, and we need to take that into consideration.

What’s the role of the treasury department in this process?

Our main responsibility is to distribute funds and incoming royalties within the BMG Group. We are the reconciliation and clearing center for all payments. This means that, within the framework of the netting process, the US entity would first transfer the royalties they’ve collected to the holding company. We then take care of everything else, including FX conversion and forwarding the money to the respective BMG entities, for example in the UK. So not only do we coordinate everything, but we’re also responsible for the complete settlement of royalties and for dealing with FX risks.


How is the internal settlement at BMG organized?

Essentially, we’re looking at a complex and slightly unusual netting process. Traditionally, netting between the companies of a group is based on internal invoices and clearing them. In our case, external requirements override internal invoicing. Payment terms applying to the copyright owners – let’s call them artists for simplicity – stipulate that we have no influence on settlement dates or due dates in connection with the so-called “royalty runs.” The netting process starts with receiving the money from the collection societies on their payment date every three or six months. It ends with the final payout to the artist. Normally, they’re due their royalties 60 or 90 days later. But again, there are countless exceptions: we have so-called “fast track clients” who receive their payments after only 45 or 60 days. There is also a whole other business section – so-called master rights – that need to be settled separately. All this results in three parallel netting runs in March and again in September. This is quite unusual.


Is at least the actual netting run “normal”?

(laughs) What would be unusual for someone else is normal for us. Many things are different here, and not one day is exactly like the next. Our netting runs are also special: we first receive data from the responsible departments on which payments are to be included in the planned netting run. Based on this, we conduct a preliminary netting run. With the results, we initiate FX hedging for cutoff-dates in 45, 60 or 90 days. The rates we secure with this are the basis for bookings in the individual entities. This way, we aim to avoid exchange differences in local profit and loss accounts. Eventually, we receive the actual data from the entities and work out the potential difference between preliminary and real netting run. And there will always be some differences – not just due to a lack of discipline when it comes to bookings but also due to other factors, such as no exemption from withholding tax in a certain country. We need to resolve all these inconsistencies before we can complete the netting process. These are often substantial differences that require adjustments to FX deals. In turn, that costs money. This makes it all the more important for us to optimize system support in order to make netting as precise and predictable as possible.


Is netting the main focus of your work? What does your day-to-day business look like?

Netting certainly is a focus. We’re a team of two but we don’t really have a daily treasury routine. The dynamic nature and speed at which music copyrights and catalogs are acquired constantly bring new tasks and specific requirements. We for sure never get bored! Next to netting, we’re also responsible for liquidity planning. Again, we need to factor in all the uncertainties that are inherent in the music industry: who could possibly predict which song is going to top the charts next week? Including a song in a commercial, in a TV series or using it for a sports event – for example the FIFA World Cup – can completely change cash flows from one day to the next. This has repercussions for the overall liquidity situation but also for BMG’s currency exposures. While USD and GBP are the most important currencies in our portfolio, the number of payments in SEK, RMB or AUD and BRL is steadily increasing. Hedging in connection with Brazil and China, in particular, is a delicate business. So you see: there’s no routine. The speed at which catalogs and music copyrights are acquired, including in smaller entities, means a lot of effort for us and is time-consuming. At the same time, it is of great importance to us to provide continuous support to the financial units in the subsidiaries – in a young and dynamic creative business, accounting is not always top of the agenda. That can even lead to us in Berlin taking over payments processing for a subsidiary in Australia for a few months. BMG is full of surprises!


You’ve worked for groups such as Continental, Hellmann or Kolbenschmidt. How does BMG fit into this line?

Many things at BMG are different, in particular the mood: in summer, many people wear flip flops; everyone listens to music; and you kind of forget that you’re in Berlin or even in Germany until you step out of the door again. We’re a very multicultural and inter-national business, modern and open-minded in every respect. Everyone has one or many subsidiaries abroad – but we have the international flair right in our office. I’ve never experienced anywhere else that the latest top acts in the music industry come to eat in the cafeteria, sometimes even treating their surroundings to an impromptu rendition of one of their songs.

We’ve finished the Coke that we took from the Marshall-stack-turned-fridge and stepped outside again. Back to the real world and away from the BMG universe – in the midst of Berlin!

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