The Procter & Gamble Company has over 135,000 employees and reported sales of over $76 billion in FY2007. P&G markets over 300 brands including Gillette, Pampers, Pringles and Duracell. This month, we talk to John Goodwin and Crystal Ye about treasury in China and global risk management strategies.
John Goodwin
Treasurer
John Goodwin was appointed Treasurer of The Procter & Gamble Company in January 2004. He joined P&G in 1990 in the United Kingdom, and has worked in various financial roles throughout the company, in multiple geographies. Before joining Procter & Gamble, John worked for Ernst & Young in the Auditing & Tax Department. John is from London, England and was educated at Loughborough University with an honours degree in Mathematical Engineering. He is also a Fellow of the Institute of Chartered Accountants of England & Wales (FCA).
Crystal Ye
Treasury Manager
Crystal Ye obtained a Bachelor Degree in Economics from Shantou University (PRC) and worked with the Bank of China for the initial three years of her professional career. Upon joining Procter & Gamble China in 2000, she rotated through a number of finance assignments before becoming the Treasury Manager for Greater China in 2006.
What operations does P&G have in China?
CY: P&G entered China in 1988. Headquartered in Guangzhou with 6,400 employees, we currently have plants in Beijing, Shanghai, Guangzhou, Tianjin, Chengdu, Dongguan and Nanping, as well as a Technical Centre in Beijing. Most of our products are manufactured by our plants in China. Our main brands in China include Rejoice (shampoo), Safeguard (bar soap), Whisper (sanitary napkin), Pampers (baby diaper), Olay (skin care), Tide (laundry powder), Gillette (male grooming) and Crest (toothpaste and toothbrush), which are all leading brands in their respective categories. With a cumulative investment of $1 billion, we are currently the largest consumer products company in China.
What are your respective responsibilities?
CY: I am responsible for developing and executing strategies for cash management, dividend and funding, pension, insurance, bank relationship and other treasury risk management in China.
JG: I am based at our head office in Cincinnati and I report to the CFO. I have three major areas of responsibility as the treasurer of the company. The first is what we term ‘Global Treasury’. This covers traditional treasury areas, such as managing day-to-day global liquidity, capital markets activities, the management of foreign exchange, interest rates and commodity exposures – as well as the management of relationships with banking partners, counterparty risk, global pension management and insurance programme design and execution.
I also have responsibility for the company’s acquisition and divestiture group. This is made up of several deal managers who lead transactions that have been identified by the company either at the corporate level or within specific business units. We have gone through the process of centralising dealmaking in order to develop the best-in-class practices in negotiation, structures and integration capabilities needed to maximise value creation.
Finally, I am responsible for investor relations and shareholder services. I’ve been involved in this area for nearly six years, as I was the head of the investor relations and shareholders’ services group before being promoted into the position of treasurer three years ago.
How is P&G’s treasury organised?
JG: We have very centralised operations. Most of my organisation is in Cincinnati, with some smaller operations in Brussels, Caracas, Geneva, Guangzhou and Singapore that deal with specific regional and local nuances. The main centralised trading activity takes place in Cincinnati, with part of our global in-house bank located in Brussels. The total number of people in my group is about 100, if we include all three areas of responsibility. In the global treasury group there are 50 people.
CY: Looking at the China treasury, the Treasury and Banking teams are based in Guangzhou. The Treasury team is a lean organisation of three individuals with responsibilities for developing and executing strategies for cash management, dividend and funding, pension, insurance, bank relationship and other treasury risk management.
The Banking team is a team of 10 individuals with responsibilities of executing daily collections and payments, FX conversion, structured bidding on major financial activities, entrust loans, deposit allocation, credit limit tracking and bank accounts/bank contracts management. On top of these, we also ensure compliance of corporate policies and all tax and legal regulations.
What impact have recent regulatory changes had on treasury operations in China?
CY: The recent regulatory changes (such as the Pudong Nine Measures issued by the State Administration of Foreign Exchange and the Six Measures and Widening Floating band of the RMB Exchange Rate by the People’s Bank of China) clearly signal some regulatory flexibility. While it is still early to fully assess the impact, they definitely offer more choices for corporates to optimise cash deployment, improve liquidity, and improve operational efficiency.
How do you expect the regulatory environment in China to develop in the next five years?
CY: We expect the regulatory authorities to continue on the same path of a steady, but cautious move in line with other world economies. Put differently, we believe that the rules will be adapted in a gradual way, ie a constant evolution rather than drastic changes. Likely there will be more encouragement for funds flowing out of China, ie more Chinese investments abroad.
What advice would you give to corporates looking to set up treasury operations in China?
CY: Our suggestions would be as follows:
- Spend enough time on understanding the relevant Chinese regulations before you make your final decision; get as much ‘real life’ experience as you can by talking to your banking partners and to colleagues in other companies.
- Work on establishing good contacts and working relationships with the different regulatory authorities at the local and central level.
- Prepare well but realise you may still need to be very patient: the process may be more complex and time consuming than you expected.
Turning to look at P&G globally, how would you describe P&G’s risk profile?
JG: I would say that P&G is a conservative company when it comes to financial risks. We manage to a credit rating of AA which really reflects the strength of our balance sheet and the cash flows generated out of our operations. We generally operate under the premise that the markets as a whole are efficient – so we don’t take speculative positions on currencies or commodities. We don’t think that’s what our investors are looking for us to do. We look to manage the risks that arise as a consequence of our primary trading and operations, which is the manufacturing and selling of consumer products, and we generally don’t look to step into the market in any big way in order to take a speculative position.
Probably the biggest risk exposures that we have are around the typical operation of the business, ie FMCG – Fast Moving Consumer Goods. If you look at our extended risk management profile, we spend a lot of time thinking about customer relationships, innovation profiles, consumer needs and the competitive landscape. We have broader processes in place to ensure that we mitigate those risks as much as possible. That’s where a lot of our board time is spent with regards to risk management. Then when it comes to pure financial risk management, that’s very much viewed as an outcrop of what’s needed to be most effective in the consumer marketplace.
What exposures do you actively manage?
JG: We actively manage the company’s exposures to foreign exchange movement and changes to interest rates, which have obviously been heightened more recently as a consequence of the incremental debt – the Gillette transaction has roughly doubled our debt portfolio. We manage the day-to-day fluctuations associated with commodity prices and we also make sure we have our funding in place for our legal entities around the globe.
Our approach is that we manage our global liquidity via an in-house bank operation that was established in 1995. The bank uses Wall Street Systems software to efficiently manage the vast majority of our liquidity needs around the globe, supporting over 100 subsidiaries in 63 different countries. The annual throughput on the bank is around $1 trillion in terms of FX, the cash pooling activities and the external debt portfolio and investments that we manage. This significantly reduces the use of external liquidity providers and focuses our global cash management needs in the hands of well-trained experts.
In terms of FX, interest rates and commodity prices, we collect all of these exposures on a global basis and manage them as part of a diversified global portfolio of exposures. So we really leverage our global scale as much as we can by pooling all of the exposures together, and then using software that was developed by RiskMetrics, which is an offshoot of an operation that used to belong to JPMorgan. We use the RiskMetrics CorporateManager to manage the risks to our earnings per share and the company’s cash flow from those combined exposures.
Annually, we present the unhedged risk of all of the company’s global activities to the CEO, CFO and the Finance Committee of the Board of Directors. We share with them our consolidated unhedged position, and then agree what the net hedged position should be, based on an agreed earnings and cash at risk target. That determines the amount of hedging that we put in place. We try to drive a very strong linkage between our internal risk management targets and what we believe our shareholders are looking for in terms of predictability of their earnings stream.
What is your Global Treasury group focusing on in the next 12 months?
JG: We’re still finalising the long-term financing of the Gillette acquisition. We’re also going to be looking into insurance programmes and ways in which we can perhaps move up some of those deductibles, in order to move towards a situation where we may have less in the form of traditional insurance contracts.
We’re moving into new realms with regards to corporate risk management by working with RiskMetrics to find ways in which we can pool all the different asset classes together – foreign exchange, interest rate and commodities – in order to manage them as a total portfolio and then explain externally to our investors how that’s going to be beneficial to them over the long-term.
In addition to this, as a consequence of the number of acquisitions that we’ve executed over the last five years, we have a fair amount of complexity in our pensions plans that we are looking to simplify. We’re going through a process where we’re looking to merge those plans together and do an even better job of leveraging scale. So we’ve got plenty of activity ahead!
