Imperial Group is a South African multinational corporation, with annual sales of 110.5bn rand (ZAR) (US$7.7bn). Its core businesses are consumer and industrial logistics, and vehicle import, distribution, dealerships, retail, rental and after-market part supply, plus vehicle-related financial products and services. Imperial’s headquarters are located in Bedfordview, near Johannesburg and the group has around 51,000 employees, working from more than 1,200 locations in 31 countries across five continents.
The global scale of Imperial’s business operations exposes the group to complex foreign exchange (FX) risk, relating to its overseas earnings, investments and expenses, and its import costs. Coupled with this, its base currency the rand has experienced a sustained and continuing period of extreme volatility, due to various global and local economic and political reasons. In response, Imperial has established a sophisticated treasury operation, whose role is to protect the value of the group’s revenue and assets and fund the growth of the group and secure appropriate liquidity.
The business background
Imperial’s group treasury implements the policies and directives for liquidity, interest rate and exchange rate risk as determined by the asset and liability committee (ALCO), a board sub-committee. The ALCO also oversees banking facilities and the provision of services across all group operations. Foreign exchange (FX) risk relating to vehicle imports is managed under the auspices of group treasury, which is responsible for worldwide cash and financial risk management, and access to national and international debt capital markets – as well as bank funding – to finance the group’s operations.
Some treasury activities are delegated: European treasury matters are dealt with by a Netherlands and Germany-based team, and African treasury activities are managed through a multidisciplinary team, and coordinated through monthly treasury committee meetings chaired by the group treasurer.
Imperial imports a range of vehicle brands into South Africa, so is faced with currency fluctuations that need to be hedged and managed. The group provides logistics and distribution services to many large principles in the fast moving consumer goods (FMCG) segment as well as pharma distribution across African countries that include Nigeria, Ghana, Kenya, Malawi, Tanzania, Zambia, Mozambique, Zimbabwe, Botswana, Namibia, Swaziland and Lesotho. Each country presents specific regulatory and risk exposure characteristics. In addition, certain vehicles are imported and distributed into four African counties. This high level of diversity provides many challenges for group treasury relating to funding and FX risk management.
Imperial also operates in Europe, the UK and Australia, where it requires sophisticated treasury services. The diverse services provided by the European operations include inland waterway shipping; just-in-sequence logistics; transport and warehousing; and chemical manufacturing, necessitating the use of a treasury management system (TMS) for effective management.
Expansion of the shipping business into South America has added US dollar (USD) exposure management to the largely euro-based business, which requires the use of powerful technology and process support to achieve an effective hedging solution.
Treasury operations – in-house and outsourced
Imperial addresses its complex FX risk management demand by deploying its treasury services in a number of ways, with an outsourced foreign exchange execution capability in South Africa, together with centralised and regional interfaces to the various markets.
Imperial selected local treasury services company TreasuryOne to provide outsourced treasury services and have established a close working partnership with the company. Together, we operate a closely integrated treasury team, in which our provider’s expert professional resources complement Imperial’s team with FX risk management, deal execution and treasury back office administration.
TreasuryOne performs FX execution for the group in South Africa by obtaining competitive pricing from Imperial’s many banking partners. It uses IT2, a comprehensive treasury management system, to support its outsourcing clients. All relevant Imperial treasury policies, procedures, processes and mandate information is held in the IT2 database, and are enforced in the course of outsourced dealing and settlement operations.
Our services provider receives FX hedging instructions from Imperial divisions either through IT2 or by email or phone, and then enters the market on the group’s behalf. The settlement process is coordinated by TreasuryOne with Imperial’s banking partners. The relationship between the group and its treasury services provider is encapsulated in a master agreement, and business matters are monitored through monthly management meetings.
TreasuryOne performs South African FX hedging execution operations with Imperial’s local banking partners. The money market, cash management, all debt raising and interest rate hedging are handled in-house. FX hedging is performed in-house in Europe and rest of Africa outside of South Africa. Our combined teams provide a full service treasury operation. The supporting IT2 technology provides overall visibility of the group’s cash and financial risk positions that allows integrated management as well as facilitating settlements, cash flows and hedging activities.
The roll-out of operations was planned around five phases, these being
- FX execution in South Africa.
- Money market and cash management in South Africa.
- German and Dutch treasury activities.
- Roll out to individual companies in South Africa
- Payments factory.
Moving FX hedging from another outsourcing company to TreasuryOne was planned to be implemented over a two-month period, and this was completed seamlessly. The money market take-on in South Africa involved numerous companies and a few hundred bank accounts, and was completed within the planned time schedule. The implementation in Germany and the Netherlands involved a comprehensive planning exercise, and was then completed within months.
All FX risk management decisions are made by Imperial group companies within the ALCO policies and guidelines, and funding and interest rate hedging is handled by group treasury. Imperial monitors the activities that TreasuryOne performs on its behalf through monthly meetings where there is a formal review, and any issues that need attention are raised and dealt with. In addition, any day-to-day operational issues that arise are addressed swiftly by the relevant staff.
The value of treasury outsourcing
By partnering with TreasuryOne, and through having access to IT2, Imperial enjoys the benefits of an efficient FX hedging execution capability in South Africa, supported by powerful and flexible technology. In a short space of time, huge progress has been made to move the group’s treasury activities forward towards the future.
Low-hanging fruit have been harvested, and now we are planning to move up a gear to be able to deploy all the capabilities of the relationship. This should enable us to respond effectively in the ever-increasingly volatile environment, to protect a significant proportion of Imperial’s earnings.
The question of whether to outsource or not will always elicit interesting – sometimes heated – debate. However, Imperial believes that using an outsourcing company for FX hedge execution together with the provision of exposure reports and hedge accounting capability complements its in-house treasury expertise. Our provider has positioned itself uniquely by incorporating the TMS offering as an integral part of its outsourcing service, and as such provides a compelling business case for corporates considering outsourced services to optimise their treasury operations.
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