Interview with the CFO of HYDRO group Thomas Elsner

How’s the financial market looking these days in general?

Well, what we’re experiencing right now is basically the biggest experiment we’ve ever engaged in when it comes to the economy and finance. In fact, to my knowledge at least, there hasn’t been any other experiment in the last few decades that matches the sheer magnitude of the current one, and on top of that, we’re talking about the global economy here.

The monetary policy of the last few years has been based on price controls and the hope that higher inflation rates would create jobs, but this dogma has proven to be inconsistent with our actual economic reality. Basically put, we’re now in a situation that I think is particularly dangerous. Since nothing’s going quite as expected, managers are mostly trying to manage things in the short term, which is really their only solid option when you consider that medium-term and long-term plans are a really tough thing to figure out right now.

 

Does this mean that experience doesn’t really count anymore in the financial sector?

Well, a better way to put it is that we’re all in uncharted waters right now. So what does that mean in practice? We have to go step by step.

 

In your opinion, what’s the recipe for a successful company?

As far as I’m concerned, there are three criteria that play an absolutely crucial role in a company’s success or failure. The first one is people, that is, the team at the company. You can keep enhancing performance and acquiring know-how, but if you don’t have a team that is really committed to the company the right way and has the amount of passion needed for the job, things are going to get stuck at some point. The second one consists of the market and competitive products. In other words, customers and a market need to be there in order for it to be possible to grow, and I’m sure you’re well aware of the fact that our industry has always been a somewhat volatile business. Basically put, planning in the aviation sector is not quite as easy as planning sales for diapers, to give you one example. Moreover, global markets are particularly challenging at the moment, meaning that alarm bells are constantly ringing far in the background, and so it’s extremely important to keep a cool head and not overreact. Finally, the third one is liquidity. I’ve seen enormously profitable companies be unable to stay on the market simply because they didn’t have the necessary liquidity. Extraordinary EBIT and yet a negative cash flow – combine that with limited credit lines, and a company can get into quite a predicament in no time.

 

What will Brexit mean for companies with international operations?

I can tell you one thing, and that’s that Brexit will not be entirely painless for us. Our trade connections with the UK are more important than those of the average company in the German industry, and that means we’ll have to contend with consequences related to import and export tariffs. However, we’ll also need to wait to know what the actual impact of these tariffs will be.
Generally speaking, it’s important to keep in mind that raw material prices and exchange rates are fairly big sources of risk for companies with international operations. These two factors can get a company in hot water in a matter of days, and that’ll be an important aspect to consider given the fact that exchange rate volatility is highly likely to increase once the UK leaves the EU and that this will, in turn, come with greater volatility in regard to our business as well. This is why companies need to have not only sales and distribution organizations in countries with other currencies such as APAC, the US, and the UK, but also production operations. Above all, however, the important thing is to have a supply chain that uses the exact same currency.

 

Politically motivated tariffs are experiencing a renaissance. What should companies do to deal with this?

One obvious solution is to reduce risk by adjusting delivery terms accordingly, and it goes without saying that the best option within this context is “ex works.” Ultimately, however, what we need to do is avoid anything that will result in tariffs being included in our sales price or in us having to assume the corresponding risk. I think we’ve all seen just how powerful of a weapon tariffs have been in the trade war between global superpowers, namely the US and China. And presumptively, this weapon was ultimately successful, as we’re already seeing tariffs between China and the US being eased and agreements being reached. This comes with a huge risk, as other countries, including those that aren’t superpowers, may suddenly decide that using tariffs as a weapon is a valid routine tactic.

 

 

HYDRO is privately owned. What kind of benefit does this have for us as a company?

All business structures have certain advantages and disadvantages. But in regard to your specific question, I can tell you that a bank recently released statistics that revealed that when you compare family-owned businesses to publicly traded companies directly, the balance of success leans towards the family business side – in the long term, mind you. Why? Because family businesses don’t think in terms of quarterly results, but rather in terms of generations. And thinking in terms of generations means that when you make decisions, you’ll be making the ones that may not look particularly good in the next short-term shareholder report, but that will ensure the company’s success in the long run. Basically put, when compared to investors, privately owned companies act as “entrepreneurs” that are much more willing to assume risks, which in turn tend to pay enormous dividends in terms of market success.

 

Critics say that companies that are privately owned are too sluggish. What do you think about that statement?

I think that making comparisons between short-term and long-term decisions doesn’t really make sense within this context. The risk for family businesses is when team members confuse the atmosphere with coziness and, to put it one way, get a bit too comfortable – in other words, when the drive and aggressiveness in the market isn’t always reflected by the people who work at a company. Now, that might not sound so bad, but the reason we’re ultimately all here is that we want to make money as a company. So while it’s absolutely true that we appreciate every single member of our team, it’s also important to remember that we’re a company that is competing on the free market with others, and that the free market is anything but gentle. And what this means is that what’s really important to me is to develop a culture in which both things work: We want our team to feel at home and have a comfortable sense of security, but we also want to have the necessary sense of urgency and agility required in order to be able to flexibly respond to changing conditions on the market.

 

How should companies deal with issues such as volatility and uncertainty from a finance perspective? And what does that mean for you?

Needless to say, there’s a whole series of uncertainties that we can take care of by properly adjusting our payment and delivery terms. And also with contracts that eliminate certain risks, or with derivative hedging. However, for the company itself – and this is extremely important –, it’s absolutely crucial to always have defined limits that clearly separate our actual business needs from speculation. I’m not the least bit interested in gambling. Now, the specific limits depend heavily on each specific company’s risk assessment, but also on its customers and supplier structure. To put it another way, there’s basically no right or wrong way that fits every company’s needs, and things have to be determined on a case-by-case basis. However, it’s worth mentioning that this also makes it necessary to keep one thing in mind, and that’s that every hedge costs money too.

A good day at work starts with…

jogging.

I earned my first money…

selling eggs from our own chickens.

If I could chose my seat neighbor on an aircraft…

I’d choose my wife.

I lose track of time…

when I’m listening to good music or looking for new music to listen to, and that goes from classical to modern jazz and everything in between. Except heavy metal and punk.

The so far most expensive purchase in my life…

my children (laughs).

I have always…

wanted to travel the world.

I have never…

swum with dolphins.

Those aiming for a career at HYDRO…

you must demonstrate collegiality, ability, and character.

When I was 18, I wanted to…

become a pilot in the German armed forces.

Home for me means…

where my family is.