Alternative performance measures (APMs)

In presenting and discussing the Würth Finance Group’s financial position, operating results and net profit, Management uses certain alternative performance measures not defined by IFRS. These alternative performance measures (APMs) should not be viewed in isolation as alternatives to the equivalent IFRS measures and should be used as supplementary information in conjunction with the most directly comparable IFRS measures. APMs do not have standardised meaning under IFRS, and therefore may not be comparable to similar measures presented by other companies.

To afford a better overview of the development of the Inhouse Banking activities and their added value for the Würth Group, APM adjustments are made that impact the operating income and the net profit of the Inhouse Banking division, which can be specified as follows:

Key Events

Coronavirus pandemic and Würth Group performance

The year 2020 will probably forever be remembered as the “year of the pandemic” or the “COVID-19 crisis”. In retrospect, the effects on the Würth Group and its inhouse bank were quite noteworthy. The parent company’s sales performance quickly recovered after a dramatic slump from March to May. At the end of the year, the Würth Group actually reported sales and an operating result that were level with the previous year’s.

In addition, strict cost management, prudent inventory management, and adjusted capital expenditure and acquisition targets led to record high net cash flow and consequently to a sharp decline in net debt. Overall, the Würth Group has emerged from the pandemic stronger than before.

Management of liquidity reserves

During this period, Würth Finance International B.V. assisted the parent company primarily as a financing unit. At the height of the pandemic, preparations were made to repay the EUR 500 million bond maturing in May 2020 by means of a new issue and to increase the stock of liquidity by a further EUR 250 million in the process. In order to provide a safety net in advance, bridge-to-bond financing was temporarily arranged with the four lead banks. Active management of liquidity reserves remained of central importance in the months that followed.

Stakeholder management at the inhouse bank

The inhouse bank acted not just as a point of contact with Würth Group head office. There was also an increased need for communication with the Group companies, as the entire financial management operation was subject to closer scrutiny, in particular accounts receivable and accounts payable management, liquidity provision including credit limit management, external communication with banks and currency hedging. The proximity of Würth Finance International B.V. to the relevant decision-makers at both the Würth Group companies and the headquarters proved to be helpful in this respect. As a result, communication paths were short, the level of information provision was good and decisions were always focused.

New working methods

In addition to the requirement to ensure employees’ safety, the business operations of Würth Finance International B.V. had to be maintained in full at all times. There was a great deal of reliance on staff working at home. Fortunately, no major problems occurred in the process. The IT environment proved to be crisis-proof. Our greatest gratitude goes to the employees at the ‘s-Hertogenbosch and Rorschach sites, who ensured the continuity of business operations at all times from their home offices, as well as to those employees who continued to carry out necessary work at the office premises, but had to tolerate restrictions in this respect owing to the various protective measures at their place of work and during their commute. Thus, these special circumstances also proved to be a touchstone for the corporate culture.

Business performance

Group Financing

For several weeks in the run-up to the maturity of the bond, it was not clear whether and on what terms refinancing would be possible. As a safety measure, the aforementioned bridge-to-bond financing was therefore set up in advance, the first time this had been used. However, the maturing bond was easily refinanced in May by a new issue in the amount of EUR 750 million with a term of 7.5 years. This gave a boost of EUR 250 million to liquidity reserves in the context of the economic and health crisis. At that time, the capital markets were characterised by low market interest rates, heavy involvement of state institutions, declining credit risk premiums and very high demand for refinancing on the part of corporates.

In the months that followed, the Würth Group’s balance sheet displayed similar effects to those seen during the financial crisis more than 10 years ago: the company reacted swiftly to the drop in sales caused by the crisis, and the measures taken (especially with regard to capital expenditure, acquisitions, inventories and cost savings) acted to free up liquidity given stable gross cash flows. As a result, Group net debt fell by EUR 750 million to EUR 600 million. The effects were also reflected in the balance sheet of the Würth Finance Group, in the form of lower financing requirements on the part of Group companies.

The stock of liquidity grew rapidly and amounted to EUR 1,127 million as at the end of the year – a record in the company’s history. This figure exceeded the previous year’s level by EUR 855 million.

Net interest income in the Inhouse Banking division was heavily affected by the measures taken against the pandemic. The bridge-to-bond financing involved costs that were fully recognised in the 2020 annual results. The reduced funding requirements of the Würth Group companies from the second half of the year onwards had a dampening effect on income. Negative interest rates on liquidity investments also played a significant role for the first time. A positive counter-effect was the lower coupon on the new bond, which reduced the refinancing costs of the Würth Group overall.

The interest rate sensitivity of the shareholders’ equity of Würth Finance International B.V. increased significantly with the bond issue and most recently amounted to 12% (as of 31 December 2020). The flatness of the yield curve and the conviction that rising interest rates represent a greater risk for the Group than the missed opportunity of a further fall in interest rates led to this conservative positioning.

The Intercompany Factoring business area deals with the settlement and pre-financing of internal payment flows between the Würth Group companies. Volumes and income in this business area were somewhat below the performance of the Würth Group sales.

Central settlement of payments to suppliers

With a slight time lag, the volume of supplier payments moved in step with the Würth Group’s sales. Thus, the slump in sales between March and May led to a slightly delayed decline in purchasing volumes. While the Würth Group sales were already up year on year in July, the volume of payments processed via the Inhouse Banking division did not exceed the previous year’s figure until December. Overall, the decline in volumes in the central settlement of payments to suppliers in the 2020 financial year was 3%. Income dropped by only 1% to EUR 24.9 million, even though the acquisition of new central settlement agreements was somewhat difficult due to the ongoing travel restrictions.

The processing of 500,000 payments with a volume of EUR 5,700 million in the Payment Factory of the Würth Finance Group was carried out under difficult conditions during the crisis months and partly from home offices. The successful launch of the new Global Payment System in 2019 proved to be a stroke of luck in this regard. The end-to-end digitalisation of all process steps achieved through this brought a significant improvement in efficiency and security. And it made error-free processing possible with reduced personal interaction of the employees involved.

Currency hedging and trading with financial instruments

The currency experts in the Group treasury unit are available to the Würth Group companies at all times for foreign currency trading in all common currencies and for prior advice. The most important objective is to stabilise the gross profit of the Würth Group companies with respect to exchange rate fluctuations by means of individual hedging strategies. During the stress phases of the pandemic, sales and purchasing volumes changed, while fluctuations on the foreign exchange market were large. As the year progressed, the core business stabilised and exchange rate volatility decreased. In some cases, favourable rates were deliberately used for disproportionate hedging into 2021. The high hedging volume and successful management of risk positions in proprietary trading resulted in income of EUR 11.4 million, the highest contribution to earnings in the company’s history.

Securities investments

The investment year 2020 was also significantly influenced by the coronavirus crisis. In mid-March, prices plummeted on the financial markets. Even prices of relatively low-risk asset classes such as top-class bonds, gold and defensive stocks fell dramatically. “Cash is king” was the order of the day.

In this environment, the very defensive orientation of the securities portfolio paid off. In the absence of attractive investment opportunities, the investment volume at the beginning of the year amounted to only EUR 63 million, with by far the largest share being attributable to investment grade corporate bonds of medium duration. This risk-averse management of investments with a low equity allocation paid off in the spring. Nevertheless, the plunge in share prices in March 2020 led to a significant decline in the performance.

The subsequent stock market upswing was largely supported by the large-scale monetary policy measures taken by central banks and the record fiscal stimulus provided by all industrialised nations. Moreover, following the news that a vaccine against this new sort of virus had been successfully tested, the stock market gained momentum later in the year. During this phase, the investment volume was continually increased and amounted to EUR 69 million as at 31 December 2020, although in retrospect the allocation to shares in the Würth Finance Group’s securities portfolio remained too low.

Nevertheless, the annual performance of EUR 2.1 million or 3.5% is good for an absolute return portfolio with benchmarks in the negative interest rate range.

Würth Omnichannel Payment Gateway (WOPG)

Closed shops and nationwide contact restrictions led to a sharp increase in online shopping, including at the Würth Group. Customers made significantly more purchases using the online shops, the Würth app and e-procurement solutions. E-business sales rose disproportionately by 5.8% to EUR 2,800 million, almost 20% of total sales.

With the Würth Omnichannel Payment Gateway (WOPG), the Würth Finance Group offers its clients a global infrastructure for processing electronic payments at the point of sale (POS). The pandemic led to a sharp increase in demand for WOPG services.

The volume of payments processed via the WOPG platform rose by around 40% in 2020 compared with the previous year. In collaboration with the Group companies, a range of projects were implemented, from setting up high-performance POS solutions in the sales branches to the establishment of contactless payment options via smartphones and the implementation of e-payment solutions in Europe and Asia. In the further development of such products it was ensured that all solutions met the relevant compliance regulations regarding electronic payment transactions (e.g. compliance with the Payment Card Industry Data Security Standard and two-factor authentication in accordance with the EU Payment Services Directive).

Partnerships with leading service providers were also further expanded, so that the Würth Finance Group can now offer its WOPG services to the Würth Group companies in Europe, North America and various countries in the Asia-Pacific region.

Income from participations

Reduced income from participations of EUR 0.6 million reflects the sale of the shares held in Internationales Bankhaus Bodensee AG to another company in the Würth Group.