Bucher’s clean sight on asset exposure
With its expansion in Asia, Bucher Industries faced a tradeoff between local currency funding or central intercompany funding in Swiss francs for its foreign subsidiaries. This choice has an impact on the company’s net asset value exposure. In order to pro-actively manage these translation risks, Bucher looked for a partner to develop an integrated decision-making framework.
Bucher Industries is the world leader in its field – yet the company may not be a household name for most of us. Surprisingly, we have all probably encountered one of the company’s products in a European city or in the country. On five continents, this Swiss company manufactures machinery and vehicles, used for a variety of purposes, such as harvesting, producing and packaging foods, or as hydraulic drive systems for high-performance equipment. Moreover, Bucher is the world-leading supplier of municipal vehicles for cleaning and clearing operations in urban areas.
In 2015, Bucher Industries generated sales of CHF 2.5 billion with its 11,500 employees located worldwide. The Swiss-listed multinational operates in five divisions, each manufacturing a range of specialized products: municipal cleaning vehicles (Bucher Municipal), agricultural machinery (Kuhn Group), hydraulic systems (Bucher Hydraulics), glass containers (Bucher Emhart Glass) and Bucher Specials (comprising Bucher Vaslin, Bucher Unipektin, Bucher Landtechnik and Jetter), which produces systems for winemaking, fruit juice, instant products and beer.
The group aims at further strengthening its leading position in its various sectors. Currently, Bucher’s main attention is on two strategic pillars. First, the company is in a process of streamlining certain business divisions by optimizing the location of the production while maintaining centralized competency. Second, it aims for growth by increasing its investments in emerging markets.
“Our objective there is to keep the streets clean”, says Frank Rust, head of treasury at Bucher Industries with respect to Bucher Municipal. With the further expansion of the group’s businesses, Bucher is more active in India, China and Turkey.
“Our objective there is to keep the streets in the Asian cities clean”
“The expansion into Asia is interesting, both from an operational and a financial point of view. To say it in laymen terms: the streets in certain Asian cities have another dirt intensity compared to the streets of European cities. So for the group’s Asian expansion, we need to re-engineer our products to deal with the new environment in which they operate. With the re-engineering, new market-specific techniques are developed too.”
Procurement of local components also becomes a topic to ensure the overall product fit with the local market. Not only technical challenges arise, also the negotiation process with potential business or banking partners is different in India, China or Brazil as compared to the developed markets. In China, for example, a joint venture approach to market entry might be opportune, instead of starting with a greenfield project.
From a corporate financing and risk management point of view too, the expansion offers new challenges. Bucher has been active with international acquisitions for a long time. In Brazil the first material acquisition was in 2005, the group acquired METASA S/A, which enabled the Kuhn division to establish a local base with engineering, production, sales and service capabilities. In 2014, Bucher acquired Montana, a company that specializes in self-propelled crop protection sprayers and fertilizer spreaders.
“We needed to decide on the funding structure: a choice between local funding in Brazilian real, or central intercompany funding in Swiss francs”
After this second substantial Brazilian acquisition, the Brazilian real (BRL) exposure became material; after the euro and the US dollar, it was the third largest currency exposure. “At the time of the acquisitions, we needed to decide on the funding structure: a choice between local funding in Brazilian real, or central intercompany funding via Switzerland in Swiss francs”, says Rust. The choice on either local real funding or Swiss franc funding has an impact on the net asset value (NAV) exposure from a consolidated level. The NAV, in its turn, has an impact on Bucher’s translation risk.
A strong appreciation of the Swiss franc, compared to other currencies in which Bucher has a NAV exposure, would impact the equity of the company and the related equity and leverage ratio. With further international expansion, the NAV exposure would increase, hence the potential impact on the equity of the company and its ratios. The risk bearing capacity for further acquisitions has to be in place. Previously, Bucher calculated its NAV exposure and translation risk via its IT2 treasury management system, but this concept was never really validated.
Key risk indicator
The existing model used a scenario analysis to simulate the NAV given different factors. A pragmatic hedging approach was used, by which 50 per cent of the funding requirement was funded locally; 50 per cent in the local currency and 50 per cent via Swiss franc intercompany funding. It paid off quite well, but given the significant fluctuations of currencies in scope, the need grew for a more sophisticated approach. “We didn’t know the risk on the equity piece.
“The new model is fully integrated in supporting our corporate finance plan”
And so, in order to pro-actively manage these translation risks better on the balance sheet, we asked Zanders to review and validate our current approach and to be a sparring partner for NAV exposure measurement and management”, says Rust. Another objective was to define a risk framework linked to the risk bearing capacity of the company.
“Zanders developed a dynamic way of looking at NAV by establishing a key risk indicator linked to the equity ratio – that was the key for having a sound solution. The new approach gives more insight into the potential impact of translation risk on the equity of the company. Furthermore, instead of looking at this risk from a static point of view in which a maximum risk limit is defined, the new model has linked the NAV exposure to the dynamic and time-varying risk bearing capacity of our company.”
The interplay between Bucher and Zanders was very successful, according to Rust, due to the balance of business consultancy skills, content and technical capabilities. “The delivery of the project was excellent, I would say. It has given us trust”, he says. “Zanders was the external sparring partner to have our ideas validated and they asked us the critical questions on our modus operandi.”
The new risk model also had to be approved by the audit committee and the company’s board, Rust says: “At first, the audit committee was a bit reluctant to accept the new concept, because it has an approach that is more quantitative and therefore more difficult to apprehend. But now it is completely accepted. The outcomes of the model form part of the quarterly reporting package and were also used for Bucher’s latest annual accounts, disclosing risk factors according to the IFRS requirements.
“The NAV model and risk bearing capacity framework will continue to assist Bucher with our financing decisions”
Not only has the new model been used in the financial reports, it also helped our company in the decision-making process for our ongoing funding requirements. It is therefore fully integrated in supporting our corporate finance plan.”
For the next few years the expansion into Asia will remain the biggest strategic challenge. The new challenges for treasury are the additional risks in international assets, as well as more complex financing structures. “In the end a new European financing can be done in a matter of days, while the same financing structure in India can take months”, according to Rust. “The NAV model and risk bearing capacity framework will continue to assist Bucher with our financing decisions. We could include an interest optimization element in the model, but that would over-engineer the model, which makes it not fit for purpose anymore.” After all, this innovative Swiss company knows exactly how to engineer something to serve its clients.