By Anne Friberg
EuroFinance launches West Coast effort; managing FX exposures, trapped cash and cash visibility among topics.
When it comes to managing currency exposures and hedging, FX managers need to take into consideration business models, geographical footprint and financial profile like gross margin and off- vs. onshore cash levels. This was just one of the takeaways from a recent FX panel discussion at EuroFinance’s launch of its inaugural US West Coast conference entitled “Managing Rapid International Growth: Finance and Treasury Supporting Change.”
The FX panel session was moderated by The NeuGroup’s Anne Friberg and featured Guillermo Gualino from Agilent, Peter Shen from Gilead Sciences and Guy Simons from TRW Automotive. Other EuroFinance conference sessions dealt with cash visibility, trapped cash, technology choices, emerging markets challenges, European cash management, cash collections and taxes. Many NeuGroup members and alums were among the speakers.
FX considerations
In the panel on FX, it was observed that objectives often focus on reducing FX-driven volatility on earnings and cash flows from balance sheet revaluation and transactional exposures. The policies underpinning the FX program are important but in reality, unwritten rules are often equally important, such as “if there are no questions about FX impact on earnings on the investor relations earnings call, treasury has done its job.”
For companies whose exposures internationally are relatively new, what usually prompts a decision to begin hedging is some materiality threshold that, if the exposure goes unhedged, would have an impact on results beyond some acceptable level established by policy. Exposures above $1 million are a common one. Of course, there are exceptions that need to be approved for currencies that are expensive to hedge, for example emerging markets currencies, which sometimes wipe out any gross margin the business makes.
What begins as a simple exposure by exposure hedge approach can for some companies develop into a longer term strategy to rearrange operations such that natural offs are created and the need for outright currency hedging is reduced. Agilent has a deliberate strategy to effect such change over time.
One if the chief challenges for an effective FX program is the exposure forecast that supports hedge decisions, as well as well-understood accountability for its accuracy. Here, understanding the business and how it works is key. Gilead’s Mr. Shen noted that when the company introduced a cure for Hepatitis C, forecasting of its sales was a big challenge as sales of a cure is fundamentally different to forecast than ongoing drug therapy for a lifelong condition like HIV or diabetes.
Agilent’s Mr. Gualino emphasized the importance of challenging business assumptions and thoroughly analyzing the business profile of the company before and after a merger, or in his case, the split of Agilent into to two companies of roughly the same size: “Don’t assume that the profile will be the same, only smaller,” he cautioned. TRW’s Mr. Simons agreed that forecast accountability was paramount, and in that context, treasury should carefully consider what information it needs from other part s of the company and only ask for what it really needs. After all, TRW does not stand for a “Thousand Reports Weekly.”
Getting the new entity going
New companies with high-grow potential need to prioritize what they need to get done, starting with getting the insurance required to operate the business and set up the basics of cash management and bank accounts. Those were just a few of the takeaways from Jennifer Ceran, former treasurer of eBay, current finance VP at Box and alumna of The NeuGroup’s Tech20 treasurers’ peer group.
Ms. Ceran’s session, which kicked off the conference, sought to impart lessons from her tenure at high-growth companies. Other nuggets: Keep in mind that a complex legal entity structure means more bank accounts and more intercompany transactions. Also, if you anticipate a growth phase, hire before it starts, if at all possible. Leverage networks, peer groups and conferences to, learn and avoid costly mistakes.
The treasury organization
One of the key items for a growing company is establishing an effective treasury organization. Chaired by Robert Navaria, a panel of accomplished women in the tech sector, Anita Prasad from Microsoft, Deepa Palamuttam from Intel, and Meredith Vance from eBay, imparted some of their collective wisdom on how to achieve a “hands in, hands off” treasury structure. Lessons, which reiterated some of those from Ms. Ceran, included the importance of prioritization for example of cross-functional collaboration (think treasury, accounting, tax and legal) and leveraging technology for control, cash visibility and efficiency in a centralized treasury, with the usual caveats and examples of how long a well-executed treasury technology implementation can take.
A scalable treasury as the company grows was also highlighted (and throughout the conference), as well as the ability to be nimble and adapt to a changing company profile over time.
Finally, having the right talent, not just warm bodies manning the treasury, is of critical importance, and the panelists said they dedicate a lot of time and effort to finding, vetting, hiring, training, developing and motivating staff members.
Bank relationship management
John Gleason, former AT at HP, former EMEA treasurer at Dell and NeuGroup alum, led a panel on bank relationship management with participation from Debbie Kaya from Cisco, David Nelson from Cognizant and David Johnson from Toyota Financial Services (TFS).
One of the things panelists agreed on was that in selecting a bank group/credit providers, try to find banks with different areas of expertise and coverage to complete geographical and service white spots and “what we don’t already have,” as TFS’s Mr. Johnson put it.
As the treasury wallet is limited, scorecarding is important. Being in the credit facility is an opportunity for banks to try to win business, but treasurers take the view that business is won with competitive prices and expertise, and not necessarily portioned out according to proportion of credit provided. The credit providers should also challenge the company with new ideas and drive best practices. An open and honest dialog, supported by real numbers on business awarded and other performance metrics, should help manage expectations on both sides.
The San Francisco event was a veritable crash course for treasury and finance leaders of companies embarking on or ramping up their international growth journey. About 150 corporate practitioners (many in the tech space, given the location and conference theme), bankers, and vendors were in attendance. iTreasurer dedicated its November 2014 issue to the growth theme (available here for NeuGroup members and iTreasurer subscribers).
The next EuroFinance event in the US will be held in Miami on May 13-15, 2015