Best practice: Flexible working capital solutions in all colors and shapes

Reinhard Ehrenberg (Lasselsberger): For me personally, working capital management is more than just a financing product; it's about optimization along the value chain. There are many stakeholders involved, such as suppliers, customers, the purchasing and sales departments, which should be optimized and integrated accordingly. Topics like payment terms and discounts are very important and should be considered with creditors as well as for debtors. In this context, the following applies: If I am not the one who optimizes, I will be optimized by my business partners, to the disadvantage of my own company. For this reason, I see many levers that can be turned. 

Dominic Walch (Egger): The price level and price volatility over the last few years, driven in particular by fluctuating raw material prices, have resulted in an increased need for working capital or let’s say an increased amount of capital tied up in working capital. This has intensified the focus here in recent years and the discussion on the topic of working capital has been simplified in the last two to three years in the new interest rate environment, because the effects are now easier to discuss than in a zero-interest rate phase. We have historically placed a strong focus on the area of accounts payable, standardizing processes and payment runs there and implementing corresponding optimizations.

Dominic Walch (Egger): To date, we have only implemented solutions for receivables, but we have regularly reviewed solutions for payables and inventory. We have not yet found a structure that suits us from an overall perspective. Relevant aspects of these solutions for us include the structural fit, in particular operational processing and consistency with our financing strategy, which currencies can be mapped, what experience do providers have here in the overall structure? In some cases, there are fintech solutions, including in combination with a bank as a partner. How long-term are these relationships? What are the total costs for these solutions? And how are these structures reflected in the balance sheet? Considering all this, we have not yet found any suitable solutions for us.

Reinhard Ehrenberg (Lasselsberger): Lasselsberger also conducts market sounding on a regular basis in the WCM products area. On the payables side, I think there are some products that are relatively smart and could easily be used throughout the group. But our benchmark is the Group margin, which is significantly lower. We also review the inventory side, which in my view is the most complex of the product solutions, from time to time. The margin structure is even higher there because the solution in this area is very complex (SPV, expert, etc.), at least for our building material products. However, if there are simpler or cheaper products on the market in this segment in the future, we will certainly look into this due to our considerable stock volume. 

Dominic Walch (Egger): We use a classic factoring solution with two Receivables Finance programs, one of which is with RBI. We implemented this program in 2016/17, using a two layer structure. This means that we have an internal financing company which, in the first step, purchases all receivables from the subsidiaries on a weekly basis and then, in the second step, sells them to the external programs depending on our need. We have integrated 13 companies in 7 countries and 5 currencies into the programs, also with RBI. 

Each debtor, who might be supplied by several group entities, is clearly allocated to one program. We work with commercial trade credit insurance to optimize the debtor risk for the portfolio and the structure is designed to be IFRS off-balance.

The decisive reason for this solution was the already existing usage of trade credit insurance within EGGER Group and we also use it independently of the factoring solution. In this respect, it was more advantageous to combine this with classic factoring than with an asset-based finance structure (ABF) and the solution was more flexible for our requirements. 

Reinhard Ehrenberg (Lasselsberger): It's a bit different for us: we have been working with the ABF solution for almost ten years, also structured as off-balance, but in this case it's a mixture between classic factoring and an ABS credit enhancement policy.  In addition, the subsidiaries sell their receivables directly, without bundling by the Group.

We opted for this solution rather than traditional factoring for a number of reasons. The existing product offers a multi-currency solution with the integration of different jurisdictions, such as Benelux, France, Germany, Austria, Italy or Eastern Europe. Traditional factoring solutions would not have been sufficient in these countries.

Selling in bulk was also an important criterion for us, as there is no minimum amount for the individual debtor - even a receivable of just five Euros could in theory be sold. Therefore, the volume sold can be maximized, and the data export from SAP for the sale is also very simple and efficient. 

The program itself was set up relatively quickly and easily, and it takes very little time in the operational handling. But of course the price has to be right even for such special products, and the Group margin also remains our benchmark. 

Reinhard Ehrenberg (Lasselsberger): The priority for this product was rather to optimize the balance sheet ratios, the issue of securing liquidity is only a secondary effect in this case. We therefore decided against a committed line for receivables financing. To secure the Group's liquidity, we have our own syndicated credit facility with a correspondingly large headroom of committed lines for our liquidity reserve. To draw the RCF I do not need any receivables. For a building materials group, there is also the issue of seasonality, i.e. you always sell less in the winter months than in the summer months and the group definitely needs more liquidity during this period in particular. 

Dominic Walch (Egger): In our company, factoring is one of our three pillars of financing and our main instrument for short-term financing and balancing liquidity fluctuations from working capital. It is therefore important to us that we have a long-term structure here with an important strategic partner, but also with a commitment from the partner, which gives us additional security in the form of an obligation to purchase.

You also have to bear in mind that we have a relatively stable receivables portfolio over the course of the year. Nonetheless, in times of crisis such as Covid, the level of receivables can change significantly, but also the trade credit insurance limits can change significantly, which can have a negative impact on financing options, despite the commitment.

Dominic Walch (Egger): It is important to understand how the company's receivables portfolio is developing, which insurance solution should be considered and also what your balance sheet expectations are. You should also ask yourself whether you want to select and implement a program with an external consultant or do it on your own, as you need to weigh up whether you have the resources in-house or whether external support would be helpful. But you also need to be clear about the costs, both direct costs and indirect costs, for example through any agreements with brokers. 

Reinhard Ehrenberg (Lasselsberger): I agree with that. I would also recommend the following: Define your goals precisely. Where do you want to go with the balance sheet or what are your motivations? Ask around in the banking community and involve all affected parties in good time, for example the auditor, but also the subsidiaries and their local managing directors. If you inform all stakeholders in good time and explain the objective, implementation will be all the easier and there should be hardly any negative surprises.  Before signing the contract, I would contact one or two reference customers, if possible from Austria, and ask for their feedback on the selected product. 

Reinhard Ehrenberg (Lasselsberger): RBI has been a reliable financing partner for us for many years and this was one of the basic criteria when selecting the bank. Specifically, the RBI solution was simply the most suitable product for our balance sheet and for our financing mix.

In the meantime, we have put out a call for a new tender and were able to determine that there is still no better product for us. Overall, the cooperation with RBI and the team behind it is really extraordinarily good, very simple and always solution-oriented. We therefore clearly recommend this product. 

Dominic Walch (Egger): Our decision was part of a tender for a second factoring solution, which we were looking for in 2016. Back then, RBI made the leap into our core banking circle and has since become an extremely important, stable partner for EGGER. With the factoring program, we have a solution that runs very professionally, both technically in terms of reporting, but also in terms of processing and finding solutions, as well as in the further development of the program. Since its implementation, we have added further currencies, we have added new countries and, in RBI, we have an expert partner who also ensures in detail that the legal and regulatory aspects are met in the program.

Dirk Fehring (RBI): Thank you very much for the discussion!