TREASURY & CASH MANAGEMENT

Moderated by Joe Giarraputo

Treasurers from leading Fortune 500 companies and executives from top banks gathered at the Harvard Club in New York in November to discuss the challenges they face in a post-crisis world.

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Global Finance: Companies are always looking for ways to extract cash from their operations and increase working capital. What’s working for them and what’s not?

Michael Connolly, vice president and treasurer, Tiffany & Co: Before you do anything, talk to your tax guy. You really have to understand the tax consequences of what you’re going to do. If the home office is doing something on behalf of, for example, the local branch in Singapore, make sure that they charge and they pay for it. If you’re a US home office company, you should look at your stock-base composition to your affiliates outside the United States. How are you awarding that stock to that managing director? What’s the intercompany transaction? That’s actually a way—if you follow the rules properly—to bring cash home without a tax impact.

Ashok Madhavan, vice president, treasurer, Campbell Soup: At Campbell’s, the focus for us has been working closely with our supply chain, ensuring that a director who’s working in procurement, for example, who’s trying to negotiate terms with a customer, is doing it with the idea that nothing comes for free. So they may be trying to extend days payable outstanding terms, for example, from 25 days to 60 days. But if the director doesn’t communicate with the rest of the organization, you may still have it [DPO] within your ERP system at 25 days. That is a very simple example, but I see so many examples where things fall apart when it comes to these nitty-gritty details. It’s focusing on these details that actually gets you the extra bang for your buck.

Julian Oldale, North America head of international cash management solutions, The Royal Bank of Scotland: Looking at the changes in regulation now, you can pull the funds out of China, for example, and put them into pooling solutions that a company can then use to fund its operations globally. That’s another way that many local companies are starting to take advantage of how they can utilize long cash positions.

Navneet Govil, senior vice president, corporate business development & treasurer, CA Technologies: We’re not a capital-intensive business. We don’t have inventory, and we’re a high-margin business, so our focus is on cash and cash flows. We have enterprise license agreements with customers and we have to balance the idea, do we collect the cash gradually over the life of the contract or do we take the cash as an up-front payment? When I first joined CA, I thought it was kind of counterintuitive that the company gave guidance on cash flows, given that it’s a high-margin software business. But it’s very important to our investors because they look at the stream of future cash flows when they value us.

Donna Grier, vice president and treasurer, DuPont: We’ve spent a lot of time over the last several years working on capital productivity on the receivables and inventory side. We also established a supplier-financing program that allows our sourcing group to use the strength of its business and our creditworthiness to enable them to extend their payment terms—at no cost to us. It’s a way of balancing your financial strengths with your working capital and using cash more efficiently than you otherwise would.

GF: Liquidity management is more critical than ever. How has the function changed in recent years? And how might it change in the future?

Govil: A couple of things have happened; one is obviously the 2008 financial crisis. A lot of us, as treasurers, are now holding more liquidity in the event that companies go through a downturn for some reason, and liquidity becomes trapped. A lot of companies were thinking about backup plans. One thing is that, in general, companies are keeping a larger buffer of cash. The other thing is, if you look at interest rates, they are at historic lows. A lot of corporates that used to invest cash for longer periods got higher interest income, but they have been keeping them in short-term securities, treasuries, and so forth. The third element is, where is that liquidity? Going back to the financial crisis again, there was a concern about whether banks were going to fail. If you had one global bank that had all of your cash, and that bank failed, what does that mean if you need to access that liquidity? Now you’re seeing a lot of corporates going from one bank to having multiple banks.

Grier: The other thing for us is, as we’ve grown in the emerging markets, the warnings we’ve had around liquidity and risks have driven us to make sure we have solutions everywhere in the world with trusted financial institutions.

Oldale: When you look at liquidity, the visibility discussion and the spread of counterparty risk round your core banks, is absolutely essential, as is moving that risk away from peripheral banks.

Madhavan: The other thing that we are focused on is the availability of credit lines; the ability, first of all, to measure what you really need in terms of liquidity before you decide that you’ve got enough or not enough. It’s not only about being able to fund whatever is coming up, but if a disaster or something happens, it’s about being able to run your normal operations, and having enough of a line of credit from the banks, and hopefully a good set of banks, that you feel are going to survive.

GF: How are regulatory and other changes affecting the relationship between banks and companies?

Connolly: We have nine banks in our multicurrency credit facility, and they all ask us to sign the exact same document, but they all ask us entirely different questions in terms of their Know Your Customer due diligence.

Govil: The most significant impact I’ve seen from regulations is Basel III. Earlier this year we refinanced and extended our credit facility. We saw greater participation from US banks and Asian banks, but slightly lower participation from European banks. They were the first to be impacted by Basel III and the higher capital requirements.

Oldale: There’s certainly an opportunity for banks to come together and create a standard which talks about what do we require from companies doing business in many different jurisdictions to identify who they are? Regulation also increases the cost of lending. That’s probably why you saw that, when you went through your refinancing, those banks that maybe had a smaller wallet share could not make the returns. That is due to Basel III.

Madhavan: We’re in the process of refinancing right now, and there is a lot more talk about whether or not banks have the ancillary business. Some banks may be having a harder time of it, but that’s being offset by others who seem to have a lot of assets to play with.

Grier: We cast a pretty broad net to make sure we capture all of the activities in our company that a particular bank is participating in. We’ve done a lot of work to institutionalize that and gain credibility with different banks in terms of showing them all the ways they’re doing business with us.

GF: Counterparty and concentration risks are now major concerns for treasurers. How are you dealing with these?

Connolly: There is a lot more focus, even at the executive and the board levels, on who are our banking partners. They are not only interested in their financial health, they also want to know, “Why these guys?”

Govil: I went through Global Finance ’s rankings of the World’s Safest Banks. There were a lot of names that I didn’t recognize. When we look at our core relationships, we look at it in terms of who’s strong in capital markets. Who’s a strong M&A adviser in the areas where we’ve operated? Who’s strong from a foreign exchange, hedging, or cash management standpoint? And it turns out that the list of banks that are the safest aren’t really the players that do those things. So for good or bad, what we have to do is find the banks that have strengths in each of these areas and determine which of them is relatively safer.

Madhavan: Assessing counterparties is getting a lot of focus from treasurers. We make sure that we get real-time credit default swap (CDS) feeds coming into the treasury workstation so that we can actually measure the market on a real-time basis.

Grier: In addition to credit ratings, we have a robust program for monitoring CDS and whether it is moving in one direction or another. We look at what sovereign risk the bank may be exposed to. Then on the other side we look at where all of our exposures are in any given week, not only in terms of investments but where we are counting on the bank to be there. We’ve moved some business around as a result.

GF: Interest rates are low, and many companies are rich in cash. How does this affect the treasurer’s view of financing and interest-rate risk management?

Madhavan: The penalty for going out long has never been as low as it is. So we’ll put out hedges as far as we can go if we have financing coming up three or four years from now, potentially. The issue is where do you think rates are going to be in three to four years? If you are a betting person, you’d say it’s probably going to be higher than where it is today.

Connolly: We did a 30-year-financing last year. The average life was 20 years, but we’re not publicly rated, so this was a private debt placement. Not that long ago, the board would have said, “Do we really want to lock in for that long?” And now the answer is absolutely, yes.

GF: Banks’ reputations have taken a hit lately. How, if at all, does the matter of reputation influence a treasurer’s view of financial providers?

Madhavan: Relationship managers are the front-person for the bank. During the global financial crisis, you could clearly distinguish between the relationship managers who did a poor job of representing their banks and those who did a really good job.

Oldale: It is the person who calls on you that is the face of the bank. And when you look at many of the big players out there, what they have behind the banker is a commodity. They all have something similar, and it’s the way that we treat and work with you, listen to you. To a degree, you have to be an open book and talk about what is going on within the bank and your commitment to the market.

GF: Major acquisitions and divestitures are now a regular part of some treasurers’ activities. How do these events impact a treasury function?

Grier: Treasury is not just about getting your arms around where the cash is, but how it actually flows and making sure that the acquisition is integrated into how you manage the rest of your businesses. For the divestiture and the spin-off side, it can teach you a lot about cash and liquidity and setting things up to work well.

Govil: At CA Technologies, we look at acquisitions in the context of our capital allocation program, so there are really three legs to that. The first is, how much are we investing in the business organically? Second is, how much are we investing inorganically, through acquisitions? And the thirdly, how much are we going to return to the shareholders in the form of dividends or share purchases? We need to decide what’s the optimal mix between the three that provides the highest total shareholder return.

Oldale: With many companies being cash-rich, what are they going to do with all that cash? Are they going to acquire new companies? How do they get that whole treasury system quickly and efficiently into their existing treasury structure? Some companies are excellent at that, while others, five years down the line, are still operating as if they are two to three different companies.

GF: Dealing with exchange rates is an important part of a treasurer’s role. Is there anything new or interesting going on with this function?

Govil: Most of the other treasurers that I speak to, they all have some sort of foreign-currency hedging program in place, but the focus varies. What we’ve done is primarily focus on hedging the balance sheet and our cash flows. Historically, a lot of companies primarily hedge with forward contracts, but increasingly, we use currency options to hedge.

Connolly: What’s new for us is being able to push the impact of currency fluctuation onto the radar of our operational units. So the people running the store in Japan, or running a diamond polishing operation in Namibia, they are starting to really learn now that if I have this invoice for a piece of equipment from Australia, and I wait four months to actually pay it, we’re highlighting to them the impact of timely accounting.

Oldale: One of the big areas with FX is the low-value payment or low-value receivables. Many times you’ve got euro accounts, somebody’s paying you in dollars, it goes into your account in euro, and you haven’t got a clue what exchange rate is used. Banks now have more tools in place where they’re tailoring rates and margins so that when you make your payment from your dollar accounts to euro, for example, it’s done at a rate that’s visible on that day.

Madhavan: One of the ways in which I reward the banks is to make a very conscious decision about how we do the FX business with them. We may say this is a discrete transaction, so we’re going to do it with this particular bank where we haven’t done any other business in the recent past.

Grier: After the financial crisis, treasury partnered with credit and some of the financial leaders, and we engaged our businesses by saying to them, “Here’s some practices that will help mitigate risk beyond a typical curreny heding program.” It’s a good way to engage and broaden treasury’s influence with the businesses.

18b-michael-connolly-tiffany Michael Connolly is the vice president and treasurer of Tiffany & Co. Having been there for almost 25 years, his primary areas of responsibility include treasury operations, global tax matters, financial and operational risk management, issuance of credit to customers, payments fraud and insurance. Connolly has served as a member of the board of directors of the Association for Financial Professionals since 2007.

18c-navneet-govil-ca-technologies Navneet Govil is senior vice president, corporate business development & treasurer, at CA Technologies. He is the board director for nonprofit Youth Spirit Artworks. Previously he was vice president, corporate development project finance, and treasurer at SunPower. He held a number of treasury and finance positions at Sun Microsystems, including controller of the Microelectronics group.

18d-donna-grier-dupont Donna Grier is vice president and treasurer at DuPont. She has held various roles of increasing responsibility in various divisions since she joined the company in 1982. She holds a BA from Washington & Jefferson College and an MBA in finance and accounting from the University of Chicago Graduate School of Business.

18e-ashok-madhavan-campbell-soup Ashok Madhavan is vice president and treasurer at Campbell Soup. He has previously held positions of increasing responsibility at the treasuries of Atlantic Richfield, PepsiCo and Bristol Myers Squibb. He holds a BS degree in Electrical Engineering from the Massachusetts Institute of Technology and an MBA from Dartmouth College.

18f-julian-oldale-royal-bank-of-scotland Julian Oldale assumed the role of head of international cash management solutions, North America, at the Royal Bank of Scotland in March 2010. Before that, he held various roles within the leadership team of GTS EMEA, covering the cash and trade business. He joined from ABN Amro in Amsterdam, where he held leadership roles that covered client services, implementation management and new product rollout within the transaction banking unit.