One of the world leaders in snacks, foods and beverages, PepsiCo is the home of a number of iconic brands including Pepsi-Cola, Quaker Oats and Tropicana. Operating around the globe, the company has over 185,000 employees. Revenues in 2007 were over $39 billion. This month we discuss the current US economic climate, risk management and ongoing treasury projects with Cash Management Manager William Faulkner.

William Faulkner is the Manager for Cash Management at PepsiCo, a worldwide supplier of consumer beverages and snack products. In his current role he is responsible for all bank arrangements, cash structures, positioning and forecasting. Prior to joining PepsiCo, William spent 12 years at General Electric in a variety of Finance roles including five years in Treasury.

Faulkner is a member of the TWIST Corporate Executive Council, the European Association of Corporate Treasurers, TBG5, the Corporate Reference Group, the Association of Financial Professionals and is the founder of the International Bank Compensation group.

William holds a degree in Business from Purdue University, a Masters Degree in Finance from Fordham University and has attended executive training at Harvard Business School.

What is your role and main responsibilities?

My role is Cash Management Manager for the US and Canada – effectively North American cash management. My responsibilities include ensuring that our banking structures are as efficient and streamlined as possible, as well as looking for opportunities to consolidate where possible.

In relation to project management, recently the focus has been on file transmissions. With SWIFT MT820, MT822 and MT828 messages going between the banks and our company, a little intervention is sometimes needed and the data, of course, is very important for positioning purposes. So if things go off track, it is my responsibility to step in and co-ordinate with the ECG (Electronic Commerce Group) to ensure those file transmissions operate smoothly.

How is PepsiCo’s treasury organised?

It’s pretty streamlined. We operate with one Treasurer company-wide, as well as three Assistant Treasurers: one takes charge of cash management; one acts as the international treasurer; and the third has a somewhat unusual role comprising cash management, cash operations and risk. Often companies will designate risk as a sole task to one Assistant Treasurer, so for ours to combine it with other roles is a big responsibility. Globally around 60 people are employed in the treasury – around 35 in the US and 25 outside the US.

Could you tell me how the weak economic climate in the US is affecting your daily treasury duties?

That’s a good question! There are certainly some interesting developments taking place. At the moment the dollar is so low and the euro so high, but can anybody really know how long it will stay that way? I believe that what we’re able to do is find a balance between US and non-US currencies, acknowledge which is the better to borrow from and ensure we take advantage of those opportunities.

As you say, the US economy isn’t so great at the moment while other economies are performing well. As such, each presents its own opportunities and those are the things our capital markets group will monitor and capitalise on. It’s basically the power of big numbers and the power of diversity. Were we a US-only company, things would appear much bleaker.

And how does this climate affect your approach to risk management?

In terms of FX risk and currency risk, we’re fairly well hedged. Because of this hedging programme and the continued attention given to it, not a lot of risk is coming out of the currency markets and fluctuations.

On a wider scale, the goal for the overall risk management group is to try and leverage centralisation as much as possible. In fact, we have an entirely new risk management system, Aon’s Risk Console, which is being implemented as I speak – the first step in centralising all the information so we can leverage economies of scale.

We envisage three stages in the implementation process:

• Step one is to get the application up and running.
• Step two will be getting all the data on a global company-wide basis into the application.
• Step three will be analysing what we have, our inventory of what we’ve got covered and where all of that coverage is, and then looking for either gaps or duplications. We would then get out of the contracts that are duplicative and get ourselves some coverage on any aspect or any possible risk that’s uncovered.

What other risks have you been focusing on?

Other than FX, which we are doing a good job of hedging, I think the risk for us is that we have manufacturing plants around the world. As such, we have to ensure that we are adequately covered for Property and Casualty. For instance, if there is a fire at a plant, do you have fire insurance or not? Of course you do, but then ask yourself do you have enough? Or too much? That’s a component of risk that we might run into more than financial services companies or similar.

What particular challenges do treasurers face during a recession?

I think there are a couple of things. On the operations side, it is more important than ever to ensure that our cash concentration structure is working at optimal efficiency. That would be among our top priorities domestically because of what the economy is right now. The capital market side would face those continued but shifting challenges we discussed earlier – where to borrow from and how to structure the loans.

The economy is certainly one factor – a big factor – in how the money is moved throughout the company and how all the ‘to’ and ‘from’ aspects are working. But it is also essential to keep our friends in tax plugged in to what we’re doing and how we’re doing it, because they know better than anyone what triggers a taxable event, and ultimately that’s what we would be after as well.

Looking at banking relationships – are you seeing any impact there as a result of the credit crunch?

I know that the market is generally seeing an impact. We have a slightly luxurious position in that our cash from operations pretty much funds the expenses of the operations, thereby enabling us to make a decent profit in the overall business model. Of course we operate with credit lines, but because of the way our cash flow works we will not experience such a direct impact as others.

Would you say that the tighter regulatory culture is a help or hindrance in times of uncertainty?

Generally speaking, whenever a regulator is involved the overall process will run less efficiently because of the subsequent checks, balancing and reporting that’s involved. However, because of such checks, regulations ensure that everything is running fairly and equitably, so there’s a huge upside to it as well.

I do believe that regulators could be helpful if they could somehow facilitate or expedite some of the market trends of treasury and banking. In other words, if there were some sort of regulation to remove certain segments of payables and receivables off of paper cheques and onto electronic payments, there would be a real opportunity for everybody to benefit.

For example, some years ago there was something like $60 billion taken out of the working capital equation in the US economy because of money being in limbo between payable and receivable. If this was done via electronic means, it would be processed faster, cheaper and more accurately and would help free up that $60 billion.

Is financial supply chain management something you’ve been looking at?

It is, and it’s a very tough issue. As you can imagine, on the payables side, everybody wants to pay with cheques so that they can keep the float. On the receivables side, everybody wants to be paid by either a wire or an ACH because it is better, faster, cheaper and more accurate. So it’s tough to get both sides moving in concert with each other, and the US doesn’t really seem to be making as much progress as in, say, Europe.

I think in Europe most payments, especially most business payments, are done via your ACH systems. But in the US we have to go back to our regulators and the Check 21 issue. It was a really good idea – it still is – but it’s also a double edged sword. It expedites the cheque clearing process, and it also makes it no longer a requirement to have the physical piece of paper so long as you have the information on the piece of paper. However, it also keeps people dependent on the cheque cutting and clearing process rather than incentivising them to move on to ACHs.

Check 21

The Check Clearing for the 21^st Century Act (‘Check 21’) came into effect in the US in October 2004. The Act allows cheques to be processed more quickly and cheaply. Under Check 21, both sides of a cheque are scanned to create an electronic image of the cheque (known as a substitute cheque). This image can then be transmitted and processed electronically.

How much work has been done at PepsiCo in terms of automating these processes?

There is certainly a desire to increase the level of automation – it’s just more a question of presenting it in a cost/benefit manner to get the resources and get it done faster. It’s an issue that consistently appears on the radar screen but, because of other priorities, doesn’t quite make it to the top.

What projects are you planning for the next 12 months?

For the next 12 months we are focusing on our treasury management system, Quantum, which is a SunGard product, and completing the upgrade of that project. That’s rather major and that impacts and touches, not just each of the main components of Treasury, but also Accounting and a few other groups.

Then there’s the implementation of the risk management system, which is pretty big as we’re starting from square one. I think getting the system and the application up and running is going to be one part of the challenge, but getting the data into the centralised repository is going to turn out to be one of those less well planned challenges that will have to be faced.

We’re also at the end of a three year cycle for renegotiating bank prices, so finishing up that part of the project is scheduled for early second quarter.

Finally, we are mapping our AFP codes. An AFP code is a code issued by the Association of Financial Professionals, and these codes are used to identify the fees charged by participating banks for specific services. The AFP maintains a standard list of these fees. We’re in the process of analysing and re-mapping them so that they’re a little bit more universal across our different banks. The benefit there, of course, is tighter, better cross-bank comparisons.