The perfect Treasury Package
Mondi is an international packaging and paper group, employing around 25,000 people across more than 30 countries. Their key operations are located in central Europe, Russia, North America and South Africa. They offer over 100 packaging and paper products, customized into more than 100,000 different solutions for customers, end consumers and industrial end users – touching the lives of millions of people every day. In 2015, Mondi had revenues of EUR 6.8 billion and a return on capital employed of 20.5%. The Mondi Group is fully integrated across the packaging and paper value chain – from managing forests and producing pulp, paper and compound plastics, to developing effective and innovative industrial and consumer packaging solutions. Their innovative technologies and products can be found in a variety of applications including hygiene components, stand-up pouches, super-strong cement bags, clever retail boxes and office paper. Mondi’s key customers are in industries such as automotive, building and construction, chemicals, food and beverage, home and personal care, medical and pharmaceutical, packaging and paper converting, pet care, and office and professional printing.
You may not be aware of it, but you encounter Mondi’s products on a daily basis. Over 100 packaging and paper products are customized into more than 100,000 different solutions for customers and end consumers – touching the lives of millions of people every day. Innovative technologies and products can be found in a variety of applications including hygiene components, stand-up pouches, super-strong cement bags, clever retail boxes and office paper. Key customers are in industries such as automotive, building and construction, chemical, food and beverages, home and personal care, medical and pharmaceutical, packaging and paper converting, pet care, and office and professional printing. For Mondi, sustainability is a rewarding business strategy and is part of the way people work every day. This includes looking for ways to achieve more from less, to increase resource efficiency and extend the range of sustainable product solutions.
Mondi is an international group with more than 100 production sites. For the treasury department, this requires a particular emphasis on managing the resulting currency exposures and a pragmatic approach to currency hedging. The international setting of the group makes issues such as liquidity management using various cash pools, group-wide intercompany funding and monthly netting very challenging. So we we’re excited to meet Andreas Resei, European Treasurer at Mondi, in Vienna to find out how these challenges are tackled. But why – in such a global business – are we meeting him in Vienna of all places?
Managing the finances of a large group thanks to teamwork
The organizational setup of the group is as follows: headquartered in South Africa, the group has a dual listing on the Johannesburg and London Stock Exchanges. Mondi Europe & International is headquartered in Vienna but for the purposes of our story, we’d like to focus on the treasury department which has a team split between the corporate office in Addlestone, southwest of London, and the Vienna office. Although they operate as one department, the team in Addlestone is mainly responsible for all external dealing and funding for the group, including operating the in-house bank. The Vienna team is responsible for operational treasury matters. This separation in itself goes a long way in illustrating the complex group structure. There are multiple layers to Mondi’s organizational setup, in line with regional responsibilities in connection with different product sections. All of this ultimately impacts treasury.
At Mondi, teamwork is not just a requirement but also part of the corporate philosophy: Group Treasury in London consists of the Group Treasurer and three other employees whose work is dedicated to optimizing group financing, and the external credit rating that is essential in this context. The London team undertakes all external trading and the corresponding internal transactions with group companies. The other half of the treasury team, consisting of four people, is based in Vienna. They’re responsible for setting up and monitoring the group’s eleven cash pools – one in each of the relevant currencies. The Vienna team also manages carbon emissions trading, something that is becoming increasingly important within the framework of European energy policies. Paper production is a highly energy-intensive industry and as a result Mondi is allocated carbon emissions credits that need to be managed. In addition, Vienna’s responsibilities include the reconciliation of receivables and payables in connection with intercompany trading of goods and services – a process that was firmly established a few years ago. The result is included in monthly netting runs and is reconciled and settled via London’s in-house bank.
Mastering high and long-term investments
Next to the traditional treasury disciplines of cash management and FX management the number one priority for the treasury team is to provide cost effective financing for the group and its subsidiaries. Paper and packaging manufacturing plants require significant long-term investment. A new papermaking machine can easily cost in excess of EUR 300 million, and whilst packaging machines are more affordable, they’re still highly capital-intensive. Mondi has invested over EUR 3.8 billion since 2008 in such projects, and over EUR 500 million per annum is in capital expenditure planned for the next few years. In addition to this investment, Mondi has grown through acquisitions, with EUR 1.9 billion spent on acquiring other companies since 2007. Treasury’s responsibility to ensure that adequate liquidity is available on the best possible terms is therefore critical for the successful growth and operation of the group. In managing this responsibility, treasury maintains the group’s investment grade credit ratings, allowing it to access bond markets to secure long-term, attractively priced funding. Further liquidity is accessed via global relationship banks participating in a multicurrency revolving credit facility.
Group-wide netting: a project close to Mondi’s heart
The Vienna team is particularly proud of one specific process: the implementation of automated, comprehensive netting that has made the lives of treasury and group companies considerably easier and has advanced the whole group. Having established a solution-oriented, cooperative and ultimately bilateral reconciliation process, which is in the interest of both parties involved, has added positive momentum and is a source of motivation for everyone involved. When the netting process was first introduced, there was much talk about timing and procedure in connection with “insolvable cases” to be escalated. Now, a few years in, this has become largely irrelevant. Not only have all business divisions become familiar with the process, they would not want to miss it. Reconciliation efforts are drastically reduced and unreconciled balances on intercompany accounts are a thing of the past. Today, over 100 companies are integrated in the netting process, and intercompany payables and receivables are reconciled at invoice level on a monthly basis.
Internal settlement via the in-house bank
Each group entity’s payables and receivables (in foreign currency) are reported to the treasury department. The net settlement amount (in the respective currencies) for the final netting statement is calculated in the second half of the month. It is then up to the in-house bank to make the corresponding bookings on the settlement accounts in accordance with the amounts listed on the statement – at least in countries where this is legal. It is a clear requirement that group companies are always financed in local currency. This is why bookings on settlement accounts are followed by a close-out with the aim of each company being left with balances in their own currency only. Balances on accounts with other currencies, for example resulting from a netting run, are converted at the spot rate. At the end of the month, you only need to check that no balances on foreign currency accounts remain in order to see if the principle of financing in local currency has been adhered to.
FX trade in Eastern Europe and Russia
Mondi’s foreign currency account setup is rather unusual: next to EUR and USD, PLN is one of the most important currencies. In addition to GBP, Mondi’s portfolio also includes currencies such as CZK, HUF, CHF, as well as Scandinavian currencies. There’s a particular focus on Eastern Europe and Russia. FX regulations in Russia make RUB an unsuitable currency for both cash pools and in-house bank activities but as nearly 80% of what is produced in manufacturing plants in Russia is sold locally in RUB, only 20% is exported and therefore subject to FX volatilities, FX regulations and market developments. Other than reporting payables and receivables within the framework of monthly management reporting, Mondi currently refrains from more extensive FX transaction planning. This is mainly due to the fact that market prices for Mondi products change in line with exchange rates, as local companies monitor any alterations and adjust their operations accordingly. Given the countries Mondi is active in, managing financial risk is another common treasury issue for the group.
Ideally positioned in the banking landscape
“Purchasing banking services” is the catchphrase for Mondi’s treasury when it comes to interacting with financial intermediaries. The team closely monitors the rapidly changing banking framework conditions and strives to find the best possible position vis-à-vis their banking partners, and the services most suitable to the business at any given time. The fact that maintaining banking relationships has become a top priority is owed to recent developments: banks have been altering their international profiles and strategies, and KYC (Know Your Customer) and sanction regulations have had an impact on the complexity of communication between banks and businesses. For example, Mondi’s Iraqi subsidiary held an account in Vienna where they received USD payments. More rigorous sanction screening led to payments being rejected that had never been an issue before. Central treasury needed to intervene to clarify the situation and communicate with the banking partner. Increased compliance requirements have made the search for suitable banking partners very time-consuming. Commonplace, everyday transactions are becoming increasingly challenging for both sides given the impressive amount of 450 accounts, integrated in eleven cash pools, with Mondi’s ten relationship banks. In addition, Mondi has at least as many accounts held by subsidiaries with local banks that are not integrated in a cash pool.
No time to relax on the payments front
It doesn’t come as a surprise: despite being in a good position and having an experienced team, neither London nor Vienna can or want to rest on their laurels. They plan to further optimize payments in the next few years by adding payments on behalf of. This process will be kicked off at two Mondi companies in Scandinavia where banking is being overhauled anyway. The treasury department will be making payments on behalf of these entities. For Mondi, this will mean having to deal with a number of new issues – the identification of the party submitting the payment order in cases where payments are made via a central account and not the group entity’s account, or the adjustment of relevant systems being the least of them. Once these pilot projects in Northern Europe have been successfully completed, a comprehensive renegotiation of banking connections in the US could present an opportunity to optimize payments there. Step by step, this brings Mondi closer to the objective of one single bank account per curreny for all outgoing payments, with all group company accounts managed solely by the in-house bank.
There are a number of situations Andreas Resei has encountered in the years since obtaining a degree in business administration that he will probably never forget – both in the banking sector and later in several different businesses in the paper industry. He tells us about the conspicuous market value of a complex interest derivative, where it later emerged that the bank had lost track of the way this was made up and had simply forgotten to include one part of the calculation. He has also been baffled by companies’ willingness to adapt risk limits based on Value at Risk or Cash Flow at Risk on a number of occasions, showing him that the significance of these indicators had been lost on the people in question. Experiences such as these have led Andreas Resei to believe in the importance of treasury which is “simple & elegant.” What ultimately counts is to find efficient solutions for meeting corporate requirements and current challenges in order to act as a service center that meets the needs of the group.
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