Discussions highlighted some of the exposure drivers and hedge considerations emanating from panelists' business models, geographical footprint and financial profile like gross margin and off- vs. onshore cash levels. Key takeaways are below.
This week Anne Friberg, The NeuGroup's senior director of peer knowledge exchange and leader of the FX Managers’ Peer Groups 1 and 2, led a panel on FX risk management at a conference in San Francisco, with panelists from Agilent, Gilead Sciences and TRW, the former two of whom are members of The NeuGroup Network. In fact, many NeuGroup members and alums were among the speakers, showcasing the caliber of the 350+ member strong NeuGroup Network.
The event was EuroFinance’s inaugural US west coast conference, entitled "Managing Rapid International Growth: Finance and Treasury Supporting Change," and about 150 corporate practitioners (many of course in the tech space, given the location and conference theme), bankers, and vendors were in attendance. iTreasurer featured the growth theme in its November 2014 issue, guest edited by Ms. Friberg (available here for NeuGroup Network members and iTreasurer subscribers).
Foreign Exchange Risk Management
The panel on FX risk management, moderated by Ms. Friberg, featured treasurer Guillermo Gualino from Agilent( members of the Tech20 Treasurers' Peer Group), and assistant treasurers Peter Shen (member of the FX Managers' Peer Group 2) from Gilead Sciences and Guy Simons from TRW Automotive.
The discussion highlighted some of the exposure drivers and hedge considerations emanating from their business models, geographical footprint and financial profile like gross margin and off- vs. onshore cash levels.
Risk management 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 is 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. An exposure above $1 million is a common threshold. Of course, there are exceptions that need to be approved for currencies that are expensive to hedge, for example emerging-markets currencies, where the cost of hedging sometimes wipes 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 offsets 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."
Crash Course in Treasury and Lessons From Rapid Growth
Sponsored by Bank of America Merrill Lynch, HSBC and BNP Paribas on the bank side and a sprinkling of vendors, the event was a crash course in treasury for companies about to embark on or ramp up international growth. Jennifer Ceran, former treasurer of eBay, current finance VP at Box and alumna of The NeuGroup's Tech20 Ttreasurers' Peer Group, kicked off the conference with lessons from her tenure at several high-growth companies. Other sessions focused on the treasury organization, bank relationship management, cash visibility, trapped cash, technology choices, emerging markets challenges, European cash management, cash collections and taxes.
The NeuGroup is the leader in peer knowledge exchange and intelligence for treasurers through its iTreasurer publication and The NeuGroup Network of 18 member groups serving more than 350 treasury and finance professionals across functions, industries and global regions.