Stories from the Front:
Changing Expectations in Foreign Exchange

Craig Jeffery: 

Welcome to the Treasury Update Podcast. This is Craig Jeffrey, today’s host. I’m here with Ron Vodicka who’s the corporate FX dealer at XE and Steve Johnson who’s the chief financial officer at PMI foods. Wanted to start with you, Ron. I’m so glad to have you on. And I was just wondering, I think it’d be useful if people hear a little bit about the highlights of your career and then not everyone knows about XE. So maybe just give us a little bit of a view on your role at XE. 

Ron Vodicka: 

For me, it all began just as I have a keen interest in international business, financial markets and sales and marketing. And so I pursued that as the direction of my career. When I graduated school, I ended up in Chicago and got into trading at the Chicago Mercantile Exchange in the futures market. And I worked for an options market making firm doing the delta hedging. From there though, I recognize that maybe trading wasn’t necessarily the right route for me. So I transitioned into the bank side working for in a sales trader role in foreign exchange. And I did that at three different banks beginning with Bank of Tokyo-Mitsubishi, which is now MUFG, a large Japanese bank, ABN AMRO, which was a large European bank. And then most recently I was with the U.S. Bank in North America. 

Ron Vodicka: 

And that’s a role I found very fulfilling, but then beginning of this year in January, I transitioned to XE partly, which is kind of a fit in the FinTech space offering payments, but also risk management to kind of middle market, lower middle market firms offering them risk management hedging alternatives, but also really kind of trying to push the envelope in the payment space. 

Craig Jeffery: 

Yeah, very good. So when you say middle market, this is what some people classify as commercial market? This is up to one or two billion, or is this in the 500 million range? 

Ron Vodicka: 

I should have categorized that. So in my career, I’ve worked in the foreign exchange sales trading role with all sizes of business from the largest multinationals down to some of the smallest companies. The bulk of my career, and the most satisfying part of my career has been in the middle market space, which I would define really as kind of two billion down to say 50 million on the lower end. The bulk of my career has been spent over the last 10 years, working with clients really in the one billion to 100 million in annual revenue range. 

Craig Jeffery: 

Oh, excellent. Thanks Ron. Well, Steve, I also wanted to welcome you as well. Maybe you can give us an overview of PMI, the business overview and then your role as chief financial officer, some of your areas of focus. 

Steve Johnson: 

Okay. So PMI is a global food company. We started out as mainly a food trading business. We have now since moved into distribution, as well as food service in various parts of the world. We source food products from the major… We are in proteins. So we sell proteins, which is meat and eggs. We mainly source our products from the largest meat producing markets in the world, which would be North America, South America. We actually have presence in Central America as well, Europe, Australia are mainly where we’re sourcing our products from. And we then sell mainly to Asia, but we also have sales in the Middle East and Africa. We have sales in Southeast Asia, so we’re in most parts of the world. 

Steve Johnson: 

And we sell a fairly large volume. We sell between probably 22O0 and 2500 full container loads of product a month. And that is either 25 metric tons or 52,000 pounds, depending on how you view it. And so we really focus on sourcing what we can sell in these markets. Our next and talking about my role in the business as chief financial officer, I work with finance and accounting, the treasury is under my role, human resources and also IT. 

Craig Jeffery: 

Excellent. So yeah, pretty much every area of the globe you have responsibility for, in terms of your business. 

Steve Johnson: 

Yes. Because we’re a corporate team in the US, and yes, we have responsibility for all of those functions and we really touch every continent but Antarctica. 

Craig Jeffery: 

Now COVID broke in the US middle of March. I know some of the regions of the world that you operate in probably at an earlier faster response. I’d like you to talk, maybe walk us through the changes that occurred around the globe, because it seems like they cascaded in different parts of the world at different times. Tell us what happened and give us a sense of the speed. Maybe if there’s a difference by region or just how that impacted your business. 

Steve Johnson: 

That’s a great question. And it did impact our business differently by region. So in the beginning, I have always tend to go over to Asia, to China, Hong Kong, and China would be where I would go. And I would go at the end of the year, basically the end of our year, which is in January. When I say the end of the year, I’m there for our 12/31 close. Making sure they’re closing okay. And when I got there I’d read one article on a US website talking about the fact that they had a maybe what they called it, a pneumonia type disease going on, a virus in China. So I went thought, okay, that’s fine. In Hong Kong, the folks that worked for us in our Hong Kong office, they were bringing me masks saying, “Hey you got to wear this when you go into China, because they’ve got this virus.” And it was in Wuhan. 

Steve Johnson: 

And so I didn’t think that much about it. However, as I got to China, it became apparent that it was very serious. And upon my return, I did not have COVID-19. I got home okay. But upon my return, which was the 15th of January, it was starting to hit heavily in China. But a big problem that happened with it was that in the West, most of the people we deal with, which are the meat plants, they just viewed it as something that was going on far away. And so for us, it was already getting challenging. As supply chains were shutting down in China, there was significant disruption in the supply chain, but people didn’t really understand much about it here. In fact, I had some plants where we told them we might have cashflow challenges in paying them. One person was dumb enough to say, “Well, you should’ve thought about something like this. You should have planned for it.” 

Steve Johnson: 

And I was like, “Okay, you don’t know how bad this might become or how bad it seems to be.” But then in China we saw it hit hard. And then they had their shutdowns. And then in March, everybody in the Western world started really feel that same pension. And then when the shutdowns occurred, then I think everybody understood much differently what we were really dealing with, but it escalated quickly. And we don’t need to go into the whole backstory now, but as it escalated quickly, China has also recovered faster. And so we saw it hit the Western world. And as we can see right now, we really aren’t out of it yet in the Western world. 

Craig Jeffery: 

Yeah. I know there’s more like the backstory and then some of the actions as well, but I also wanted to maybe, Ron start with you about this, the difference or the distinction between normal standard times and disruptive times. There can be a significant difference in the operations when everything’s fine. There’s not a virus or series of wars or other types of disruptive events. What did you see and couple that with some of the perspectives and maybe we can start with you, Ron. I know you’ve got some stories about that. 

Ron Vodicka: 

Yeah, I do Craig. So thanks for the good question. I think I’d preface it by saying in my career working with corporations, there has been the trend towards automation and basically how can a corporation do more with less staff? And the way to achieve that is really just through embracing technology and driving automation. As any of us might know, particularly if you’re on the older side, even technology is fantastic when it’s working, it’s when it doesn’t work that suddenly all the problems can come. The question is what do I do and how do I solve it? So the reason I kind of mentioned that is in my experience, working with treasury groups at corporations, particularly as we say, even as you get into middle market corporations, where maybe you don’t have quite as extensive the depth of the size of the treasury group compared to a large multinational. 

Ron Vodicka: 

When everything’s flowing fine, it’s great. The file upload to send the outgoing disbursement of wires to the bank go smoothly, just everything, every element of your automation goes great. So it’s particularly in a foreign exchange, as there has been a migration towards automated trading platforms, which connect ultimately to their counterparties through, let’s say Fxall, 360T, there’s … Bloomberg. A variety of methods, maybe even a direct transmission channel directly to one of your counterparties. Again, when everything’s great, it flows fine. The bid-ask on the FX rates will be tight. There’s ample liquidity, and you can just bang it out. But what happens when those rare moments come, which those who were around for the 2008 great financial crisis, and then also now the COVID crisis is when it goes wrong, it can go really wrong. And what was intriguing was the COVID crisis starting in March in the financial markets, just when it hit, it hit really hard. 

Ron Vodicka: 

And as we saw with the equity market tumble, we also saw the exact reverse in the US dollar soaring higher. The challenge can be the trading counterparties who provide the liquidity to the markets when they get to extreme levels, they’re going to shut off the automation. The bid-ask in Euro, which might be like let’s say it’s around 116.50 now, normally it would be 116.50, say one 116.54 or something like that bid versus offer. It can be where the trader will quote 116, 117, 100 pips wide, or they’re not willing to make an offer or a bid. And so I think what I’ve noticed in my career, we happen to have like the two large magnitude events, the great financial crisis and of course the COVID back in March, extremes. But even during smaller extremes, corporate treasuries are sometimes unaware and perhaps, maybe the junior staff, but it could also be the senior staff unaware of the counterparty side or the bank side or whoever they’re trading with. 

Ron Vodicka: 

And that trader is making a market and they just assume there always is a market. And what can happen is when these big events hit, there is no market and it can create a frustration and flustering to the staff who was kind of unaware. “Why is it my effects all trade going through as seamlessly as normal? Why am I getting this bad rate?” And I think it’s a function of just and a lack of awareness oftentimes by the treasury group of the other side of the transaction. 

Craig Jeffery: 

Yeah. That’s great. It’s not a problem with the tech. It’s a problem with the market’s not there. There’s probably more you can say too, but I want to pull Steve in here to this, did that match your experience? What were some of your stories from this time with this volatility in the market? 

Steve Johnson: 

Well, it’s interesting too. There’s a couple of ways that I would look at it. Number one is from, as Ron talks about with counterparty risk, I mean, banks from my perspective on the other side of that equation is they’re looking at their counterparty risk. Everybody likes to look at their mark to market. And when we saw things, now we are exposed as we mentioned we are exposed in currencies where we source. So that’s the Euro and the pound typically and we’re also exposed where we sell, which would be where we’re selling in Japanese yen, we’re also selling in South African rand, which is a more exotic volatile currency. We also have some exposure in Hong Kong dollars, which is the exact opposite of the spectrum. But everything looks good, or for us it looked pretty good. 

Steve Johnson: 

And then all of a sudden, you see scenarios where maybe you have a huge… For me, it actually went the right direction in the beginning, but the South African Rand, we ended up with a very high mark to market. Had we gone the other direction, though, then you wonder how nervous people are getting as the banks, because we have a very large marked market loss potentially, in our case we ended up with a mark to market gain. But that was one that was interesting. And sometimes I think, because it was so volatile, if you have a huge gain in their minds, banks may think, counterparties may think, well, they were lucky this time to get the gain, but next time we could have a big loss. And really it’s not in my mindset to be somebody who would walk away from hedges that they had on the books. 

Steve Johnson: 

But that’s what they’re worried about. And you don’t know what your situation is, but I think Ron brings up a great point is things were going well, and things were working okay for us. But a few were a scenario where they were not, where things were not working very well, and you were already a little bit on the ropes, then these types of things are very volatile. And as from a counterparty side of the banks, it makes them very uncomfortable. The other issue is from this volatility is you’re going to see situations where the market has moved tremendously. Can you take advantage of it? Can you act quickly enough or is it really hurting you and maybe your models that you have run will show you that we’re okay trading in these ranges or hedging in these ranges. 

Steve Johnson: 

Maybe you have a budgeted exchange rate that you’re using for the year. Well, you can have scenarios where you’re completely outside of that rate instantly. The other thing we saw and I’ll speak about two currencies was the South African rand and the Japanese yen. If you look at historic trends and Ron could actually check my facts here, I’m going kind of off the top of my head, but we haven’t seen the yen as low as the 101 range for several years, maybe up to five years as strong again as the 101.5, which it was for a moment, a brief moment when the COVID overreaction started. And so I was lucky enough to be able to lock in some currency that day, because I just happened to be watching my phone on a Sunday night, which I showed the rates on… I’ll give Ron a plug on his app XE. 

Steve Johnson: 

It’s a great app you can get on and you can get on your iPhone or whatever phone you use. You can get that rate to see it. But on the other side, also the South African rand almost reached 20 to the dollar, which is unheard of, and then it pulled back. But the question you have to ask yourself on the days of the crisis, is this the end, or is it getting worse? So in other words, could we see a yen strengthening to 90 within a matter of days? 

Steve Johnson: 

I mean, to see it move that much five yen points, five yen, yen in a matter of a day or over a weekend is very unusual. And so the question is how do you react to those types of trends? And you don’t want to get caught on the wrong side, but it was very volatile to watch. And then you wonder what happens now. And what we’re seeing what’s happening in Europe today with the COVID cases, are we going to see the dollar strengthen? Because everything from an economic perspective is telling us the dollar should weaken except for the uncertainty with the cases in Europe. 

Craig Jeffery: 

Excellent. Ron, did you have anything you wanted to add to that? 

Ron Vodicka: 

So after Steve mentioned dollar yen I had the luxury, I took a quick peak and it was Q4 of 2016, the last time the yen was around or broke near the 100 level. But noting looking at the chart again, dollar yen, was trading at one 12 just the week before. So it took basically a 10% move in just one week. And that’s significant. So for Steve’s business, which operates or his conscious of the margins that they operate on, the FX rate is an important component of all their transactions. And Steve alertly just as as I learned of the company XE through Steve, but a lot of CFOs monitor the market on our app and he was poised and ready to act. But all the currencies were moving and it was the extreme volatility. 

Ron Vodicka: 

And it’s not easy to pull the trigger always because you think, “Oh, sometimes it could keep going.” And then Steve mentioned maybe a dollar yen was going to go through 101 down to 95 or even a 90, because it has been there. And this was a very unique time, but I give him credit because he also knows his positions. He knew the contracts that he had, maybe he had confidence because he’s selling proteins that at the end of the day, people need to eat. And will his counterparty back out on their contract? Probably not. And he was willing to execute and he caught the dead low and then it was 5% higher probably just two days later. And he got a great transaction in, but of course it’s not about picking the higher, the low with Steve recognizing that he had a contract that he had business that was going to get executed and the market had given him an opportunity and he acted. So that volatility transfers to all markets. 

Ron Vodicka: 

The Australian market saw the FX rate dropped 35% same thing for the New Zealand, the Kiwi. And it really just created incredible disruption. And Steve is right. Counterparties and trades are looking at mark to market positions and it can really strain a relationship and it’s not just FX. It could happen on an interest rate portfolio or a commodity portfolio. And that’s where I think it really behooves the corporation to, I would say, because I’m on the other side of the equation, not take their bank or trading counterparty for granted, kind of realize that they are your partner, certainly there’s the exchange rate component. And then there’s, you always want to get the best rate and you want to make sure that whoever you’re trading with is giving you a fair rate. 

Ron Vodicka: 

But also you need to know that they’re running a business as well. And the more information you share or the better your relationship with your trading counterparty, I think the better it is for your business. And again, it’s not the 98% of the time when things are smooth, but it’s when the relationship kicks in when the 2% of the time happens and things are difficult. And Craig, well, the other thing I’d just like to add in just thinking about liquidity, which is the primary function of when an extreme moves liquidity dries up, but there are other times when liquidity drives up. It’s on a Friday afternoon. So in my career, I’ve had many, a corporate client come across after 2:00 PM Pacific where I’m in Pacific, which is 5:00 PM Eastern Time, 4:00 PM central, 3:00 PM Mountain. But the FX market is closed on a weekend. So on a Friday, there is no market after 2:00 PM Pacific Time. 

Ron Vodicka: 

And a treasury group needs to know that you can’t put through a 10 million Euro trade at that time, you could probably do 100,000 Euro trade, no problem, but not a 10 million Euro trade. And same thing when you get the opening on Sunday afternoon, North American Time with the New Zealand or the APAC region, starting with New Zealand and then Australia, it’s relatively thin trading. And I think the only other thing I mentioned to the treasury teams that we’re maybe talking to, is that not all currencies trade equally liquid all the time. So we’re seeing more and more interest in dollar Indian rupee and say even dollar Central Europe where a lot of software companies or software as a service businesses are hiring developers and needing for payroll and paying for staff. Those currencies are not always liquid 24 hours a day. 

Ron Vodicka: 

So the Indian rupee shows its greatest liquidity, certainly during the Asian hours and then during the London hours. But it certainly diminishes once London tunes out during the day. Also the Canadian dollar is really a North American currency, if not really traded in Asia, certainly you can always get a market, but it’s just, again, there is not really a trader in Beijing or in Singapore or Australia maybe Australia, but looking to have a long or a really big position in the Canadian dollar. So I just think, again, the teams need to be conscious of the variables that go into making good pricing and good liquidity. 

Craig Jeffery: 

Yeah. Appreciate the movement, the discussion about some of the different currencies and how the markets operate normally as well as this disruptive time where they dried up. Just continuing the discussion about this impact of the disruption, I don’t know if there’s any other items you had or lessons learned? You talked about the mark to market swings that happened, the stress on the counterparties. This put perhaps a challenge on the ranges that you wanted to be hedged. Anything else, anything else happened operationally or with your trades? 

Steve Johnson: 

Well, there was, I mean, operationally, there’s really lots of things occurred and you can kind of look at them from different situations. So for us it became very challenging, couple of things that made the challenges worse. For example, we were expecting certain things to happen at meat plants that didn’t always happen. So some of them were shut down by COVID. Some people were able to ship products, some people were not able to ship product. We were really on a night by night watch to see who, if anybody was going to get shut down or get delisted as we call it from China, so they would not accept a shipment. 

Steve Johnson: 

When that happens, we’re really scurrying around like crazy to understand, when does that occur? It is as of what date is production dates of such and such a date, other situations, or maybe the things are arriving, that was very difficult. In the heart of COVID at the very beginning, a big thing that happened to us from an operational basis, which was probably one of the hardest things I’ve seen in my almost 15 years here at PMI was the Chinese ports shut down. 

Steve Johnson: 

So when China went into the main lockdown, they really locked it down tight. It’s a scenario that I think as a westerner, we really don’t understand how shutdown a shutdown was. And so at that point, goods are arriving at port, they are then stuck at port or, which was a tough situation for us, always is, is that the boat decides to stop at a transshipment port. So it’s kind of the analogy of you’re flying from Atlanta to LA and all of a sudden the plane stops in Houston, Texas. Why did it stop in Houston, Texas? Just because it did. And there’s really nothing you can do to get back going again. So those were extreme disruptions for us. Also, there was problems with plants, but remember with a business like ours as was what the case with most food related businesses, food service businesses around the US did this. 

Steve Johnson: 

And now they’re doing this around the world, which is we have purchased a product that we expect to be sold to somebody else consumed by the end user, repayment received and cycle again, right? That’s what our cashflow cycle is like. What happens though, when you actually can’t get your product even out of the port in China. So that means people aren’t paying you quickly, maybe they can’t pay you at all. And by them not being able to pay you, then you’re not able to pay your plants as quickly as needed. An interesting thing in our business. And it depends but varies by region, but US businesses expect to be paid really on net seven-day terms. They’ve already paid the rancher for the cattle, let’s say, and you can’t string them out to net 30 days. So there was a lot of those challenges that hit us. 

Steve Johnson: 

And sometimes in retrospect, I wonder how we survived, but we did. So we worked with partners, we worked with banks, we worked with plants. We communicated, over communicated with our major partners. Let’s say both on the external side, meaning like banks, but also with our plant partners, there was a lot of that that hit us and really, but I’m not understanding and what had gone on in China or trying to understand that the ports were closed. But that meant, okay, now the port is open, does that mean there’s a trucker that can drive to the port? So now we have a port open and a trucker that can drive to the port, but we don’t have a warehouse that is able to accept the product. 

Steve Johnson: 

So those were crazy, crazy things that we saw in the early days. Now, by the time the Western world was feeling the pinch of COVID, we were actually, I wouldn’t say recovered, but China was nearing back to normal. So by in April or May, and we were kind of on the opposite side of it. Now we were seeing that things had recovered in China, so that allowed our business to get back on its regular cashflow cycle. But everybody has faced as we’ve seen that same cashflow cycle interruption. 

Craig Jeffery: 

Yeah. Whether that was for a month or two months, that might be interesting to explore at some point. I want to keep the discussion on you for a second, Steve, and then jump over to Ron, talking about adaptability. In the disruption, you have to adapt quickly. What adaptations were the most notable from your side. And you already talked a little bit about communication, make sure you’re over-communicating or talking with the different partners, but are there other adaptations that are worth sharing? 

Steve Johnson: 

Yes, I think so. Really, I view it this way and it’s an analogy I make. Some of the people that work with me, some of my staff is it’s kind of like this joke that says it’s kind of like a game of musical chairs. It doesn’t get interesting until the music stops and then you figure out what the problem really is. And so in the beginning, things are moving along quite well and things are going okay. So for us, really what are kind of learnings or things we tried to emphasize on is, okay, what is our most important? What are we to do really as a finance function? We have some balance sheet issues maybe related to inventory, potential losses and inventory. We also have some income statement issues. Maybe we’re going to lose money this quarter, have to keep the banks happy there. 

Steve Johnson: 

And really from a cashflow perspective is what we looked at, but ultimately a lot of it, I think for us, what we tried to do and employ our strategies was understand first and foremost, our cashflow positions. And it’s as dumb as this sounds and Ron brings it up about automation is do you have a report that actually tells you your cashflow? How closely do you monitor this cashflow? And I think from my role and the CFO, I mean, we need to delegate, we need to have teams that are doing what they do, so you don’t have to be caught up in the minutia on a daily basis. But in a cashflow crunch, understanding really what you owe, who you owe it to, which partners are you able to perhaps I hate to say this word, but stretch a little bit, which partners can you not stretch? 

Steve Johnson: 

What are your really most important cashflow decisions to make? And so I always view it like kind of the waterfall, you fill up waterfall one, pool number one with a certain amount of money, what’s left to move to pool two, what’s left to move the pool three, but those are things that you have to change on the fly when changes happen in specific cashflow cycles. So things that you always have seen happen for years and years and years in the situations which we face this year, they just didn’t happen. You can’t count on things that you always counted on. So we’ve tried to kind of, this gave us an opportunity to stress test our models. And we know some things now that we didn’t know back then, but we have different procedures that we’re doing every day. We still haven’t really gotten out of that habit of our daily every other day review of some of these cashflow cycles to really understand and now we’re feeling pretty good. 

Steve Johnson: 

But then again, we’re seeing challenges are hitting, look at Europe right now, hit again. So could we have trouble with our European plants not being able to ship? So all of that is something that we’ve just kind of incorporated in our minds of what we do weekly, or at least what we know we can do to go back to that crisis survival mode, if we need to. 

Craig Jeffery: 

Ron, I wanted to bring you in on that too, about adaptability and Steve mentioned about tech, but how does tech help me become adaptable? You started off earlier talking about how tech can sometimes fall apart because there’s no market or you have an over-reliance on tech. But how can tech help us with the adaptability? 

Ron Vodicka: 

Well, it’s a great question, Craig, and thank you because earlier I was basically saying when things go wrong, how tech cannot work, and if you understand how the markets work, then you can react to that. But what I would add in here is that everything is so fast now. I mean, you look back to the Great Depression of the 1930 or ’28 through ’32, it was several years. Great financial crisis that came up with quantitative easing and central bank responses. And things took like what a year and a half or so to recover. In March of 2020 the central banks of the world acted in harmony. And we’re on it, we’re literally within one to two weeks of the crisis. So everything happened so fast. So with technology, one thing I can provide as the counterparty is we talked a lot to companies. 

Ron Vodicka: 

So I would say to other treasury, the treasury staff listening, a valuable resource can be your salesperson on the other side because they cannot only tell you what’s happening with you, but what happening with other companies and help give you an insight into how other companies are reacting. So one of the biggest trends I’ve seen is the reduction in speed of the FP&A cycle. Some companies still are more traditional, have longer sales cycles. Maybe there’s the movement of goods and contracts are longer, but with the advent of the internet and online businesses, some companies are redoing FP&A cycles every month. And so what Steve did when dollar yen went down to 101.50 and he could act, was because he knew his business, he knew his margins. 

Ron Vodicka: 

He knew he’d been in touch with the sales team and he knew this contract was valid or he had contracts that are valid and he could execute. Technology, you can be very well-prepared, you can get constant updates to your sales forecast. You can have your business expectations of what’s going to happen over the next several months, ready information that you can act on. Also maybe put a probability on it, assign the, “Okay, I think only 80% of this will happen. 60% of this will happen. Therefore I’ll only be comfortable hedging a certain amount or taking action on a certain amount.” But I think that’s the biggest change. And I saw this with one of the tax holidays that the US government gave to overseas earnings awhile back. 

Ron Vodicka: 

So this is going back maybe five, six years ago. But there was one company, it was on June 1st, the tax holiday started and it was June 1st by 7:30 AM. And they banged out €500 million in the next 20 minutes. They were the first trade to come through. Everybody had talked about it, but they were prepared. So my takeaway was that company was so well-organized, cohesion between the finance, treasury operations, tax legal group. They brought it all together. So and you can see when companies don’t have that. So I guess my answer is technology and systems allow companies to be really well run. They have information at their fingertips. And I guess my thought is always when times are quiet, make sure you run like a good clean group. Because then the boy scouts is about being prepared when the crisis does come, you don’t have to spend time gathering information, you have the information, you trust that it’s there and you’re ready and prepared to act. 

Ron Vodicka: 

And so I guess I would say continue to leverage your partners for information on what others are doing. That’s something I think treasury groups should do. They can get great insight or confirm that what they’re doing is correct. And then also I would just say the speed of execution is so fast that you do need to be prepared and ready to act because market movements you can’t really wait even 24 hours anymore. You have to just know, “I’m ready to act. I want to do this. And I need to act now.” Because if you wait 48 hours, which I’ve done many times in the stock market and watched it go against me, that speed and need to act fast is a really interesting development of the technology era. 

Craig Jeffery: 

Speed matters is a clear statement of what you said. And maybe you can help balance this. I don’t know if these are all even, or if one’s more important than the other. I heard about tech is important, but you can’t rely on that exclusively, relationships matter, particularly in crunch times. The business understanding and the ability to act fast is also, well, let’s just say particularly vital in disruptive times. Are you giving those equal weights or how would you calibrate that? 

Ron Vodicka: 

That’s a great question again, Craig. So thinking about straight through processing and automation is what drives the results. It brings costs down, drives efficiency. You want to go that route. All I would say is the treasury teams and maybe it starts with the senior management, making sure the younger people are just conscious that it can all disrupt and be prepared in their back pocket. So I would say if I had to give equal weighting, it’s the speed, it’s the use of technology, having great information, having your decision tree ready to go, knowing your line of command, all that is more important. But in your back pocket, you just have to be conscious and ready that when there is disruption that you understand why it’s happening and just don’t have an expectation that markets will be as liquid on Tuesday as they were on Monday. But there was an earthquake overnight. So I hope that answers the question, but I think straight through processing drives results. So that’s the most important aspect. 

Steve Johnson: 

I think when we talk about technology the question is what are we thinking about? How basic do we want to make it be in that answer? And so I would say this, it may be states the obvious, but for my business, I can take advantage of having people all over the world. I mean, we say we’re six continents, you know the old British empire joke, the sun never sets on PMI. You can actually use that. We’ve really found in these scenarios we use it to great benefit. Because if I want to talk to somebody in Asia tomorrow, I just wait until six, five o’clock tonight I’ve got a person I can talk to and do I do it? Well, it gets a little annoying, but we got 101 ways. We got WeChat, we got WhatsApp, we got Microsoft Teams, we’ve got email, we’ve got texts, we’ve got everything in the world that you can talk to people, but they’re collecting information and reading things and seeing things that we don’t have. 

Steve Johnson: 

So it’s a 24-hour global economy now. And then if you can take advantage of that, like we talk about the XE app, but how do we know? I mean, I’ve gotten to the point, it’s probably a bad habit, but if I wake up in the middle of the night, I can look at my phone and see what the currency markets are doing. And I don’t know that I can do a heck of a lot about it, but sometimes I actually could. And maybe that’s the case if I’m traveling in Asia, I can call back to someone like Ron and say, “Oh my gosh, what is going on?” But that’s the greatest way in my opinion to use technology is we’re just constantly plugged in. Now there’s probably some other issues, mental health issues, social issues that don’t make that great, but you have to take advantage of it in this situation. And you’ve got that ability. So that in my mind, the simplest technologies may be the most effective in managing disruption. 

Craig Jeffery: 

Yeah, we’ll leave the sleep disruption for another podcast, but no, the point is well taken. I wanted to shift for the last main topic on the economic side and Steve, maybe we can start with you. So you’re not able to deliver things. You might have a problem with the plant. A number of different activities can change what you’re shipping, receiving, billing. You could end up over/under hedged. What happens when that occurs economically, what are some of those challenges? 

Steve Johnson: 

It’s a significant challenge and see for us, we’re trying always, as Ron alluded to, we have are a high volume, low margin business. And we can look at what a food service margin might be. You’re looking at what’s publicly available, like a Sysco foods, a US Foods. You can see they make about 15% gross margin. The trading businesses are lower than that. So we have very little margin, very little room for error. So it’s a very difficult time to end up in a situation. So as far as that economic comment goes, that’s one reason why you never want to speculatively hedge. That is a very, very difficult situation. And we all think we’re right. And another old joke, it works really well until it doesn’t. And when it doesn’t, it doesn’t, you’re getting involved in a big hit. 

Steve Johnson: 

So some of that is also when you look at use of technology, I mean, through ERP system, through whatever you’re doing, you really need to understand what kind of exposure you really have honing in on your own exposure, making sure you really understand that. And if not, if you get in the position that you really are over hedged, that’s when I reach out to the Ron’s of the world to really help us understand what we think is going on. Now, it’s never perfect, but there are some trends, the nice thing about FX, is nothing ever goes for zero, nothing ever goes to 100. I mean, it doesn’t. And under, especially if you’re dealing in currencies that are not so exotic or volatile, you can probably watch them move around a little bit and then maybe find better ways to unwind a position. 

Steve Johnson: 

It’s scary and it feels good when you’re able to do it. And it works okay. It doesn’t feel good when it goes the other direction, but really what I found in my time working at PMI, I was international focused in another job a little bit, not to this level. We’re basically %100 export. We have only maybe 2% US domestic business. So I was able to learn things that I think I learned new back in the old college days, but really they weren’t as clear in my mind about economic trends and what’s really going on. The what happens when a central bank does something? Because that’s where you can’t, you’ve just got to be proactive to try and find out as much information as you can, and act in the most prudent manner. And I have to say, I think I’ve been pretty fortunate in how that’s turned out for PMI, but it couldn’t have just as easily gone the other way. 

Steve Johnson: 

So honing down exposures and really being on top of it. It’s not a job you can casually look at, and it’s kind of like the stock market. You kind of look at that stock a once a month and understand what’s going on and it’s a pricing to move accordingly. So it’s something that you’ve really got to look out yourself. But as I mentioned, there are experts out there, XE, banks, people like that can help you really make some decisions that you might have to make if you find yourself in a position that you don’t want to be in. 

Craig Jeffery: 

Ron, I didn’t know if you wanted to add to that or jump in on the discussion about economics, man, I guess there’s a way you respond maybe operationally or analytically to these situations. I didn’t know if you had anything you wanted to weigh in on. 

Ron Vodicka: 

Steve and have known each other for a while. And honestly, he’s one of the best at managing their corporate risk. And it’s partly because like I said, he knows his business inside and out, and he’s very connected at the pulse of the sales and the importing side, I guess, or the cost of goods sold side. But what I would say is like a broader brush stroke is certainly all these things that you do. I mean, I guess I made the boy scout analogy, but being prepared if you can stress test periodically, just know your extremes. When does it really turn bad for you? Do you have an intercompany alone that you’re going to blow a covenant if the FX rate moves? If there some point where you turn negative and I just like, “This deal no longer make sense, what are we going to do?” 

Ron Vodicka: 

And usually what people do and if you could say probably in the equity markets and interest rate markets as well. But they freeze when it goes against them. And of course they’re happy to react when it goes in their favor, and then I find it gets actually quite skewed risk rewards where you’ll find people on the take profit side. So again, if they wanted to buy euros and they wanted it 116.50, but oh, it goes down to 115, “Woohoo, I picked up one and a half percent or so. I’m going to buy.” Or they’ll then watch it if it goes at once from 116.50 to 118 to 120 to 122, and they’ll watch it go against them. So what I’ve worked with Steve and other clients a lot with them, like have a valid risk reward model. 

Ron Vodicka: 

You should always be wanting to get more reward than risk. So meaning if you’re going to put a bi-level at an opportunistic bi-level at a certain amount, make sure you don’t watch it go against you the other direction by that amount or greater, that’s a bad trade. And what I learned with Steve is and I think back to when president Trump won the last election, the Euro kind of took off. I work with stop losses, meaning everybody… Steve’s a buyer, his business is a buyer of euros, right? He wants the rate to go down, but if it’s going higher again, rather than watching it, we always talked about, is there a point where you just need to buy? Don’t let anything get away from you and place a stop loss level. 

Ron Vodicka: 

It gets triggered. Usually you’re bummed out that it gets triggered, but you know what? Oftentimes a week later it’s 2% higher and boy are you really glad that you placed that stop loss. So I just think for a treasury team that’s running a business, maybe even younger people right there, they feel like they’re trading. So they get a little excited about it, but also be conscious of what kind of a stop-loss level is. And at what point do you need to really just buy it and then move on and be able to walk away which I think is very important mindset to have, because again, I just see people get frozen. So I think that’s an important attribute. And also, I guess Craig, you asked, again, the relationships of having your counterparty or the partners that you work with, whether again, interest rates, commodities, whatever it is, having that relationship that when things go wrong or when you need a favor, you can ask for it. 

Ron Vodicka: 

And that just, that’s not something that turns on with a switch. You have to build that over time, build the trust make sure each party knows that they’re valuable to you. And then you’ll have that for that relationship in place, the relationship capital when you need it. 

Steve Johnson: 

Well, and I’ll make one comment too additionally, from what Ron has said, and he’s taught me lots of things. I’ve enjoyed working on with him and understanding these things is kind of fun, but you have the ability and remember while you’re asleep, the currency market isn’t so you can put your orders in. You can put orders in that are protecting you on the downside. And if you’re looking for some upside, you just put your orders in. Maybe you’re lucky enough to wake up in the morning and find that they all filled. And that’s a nice thing about it. And this is a little bit, again, we talked about the stock market, but if you know your risk and you know where you’re going, you know where your points are, where you have a pain point and where maybe you don’t want to see it get above that, then you better put a stop loss in. 

Steve Johnson: 

And but you can try limit trades to get you in to help you gain some upside when you can. And I think that’s the best way to play the markets. I also remember Ron, you probably remember this that I was on a business trip to Europe, but I had my son with me. So I was entering in my vacation time and it was Brexit. And that was another day where the markets were an absolute turmoil. And we kind of knew where our exposures were and where we were happy placing orders. And we could find a way to make some orders at a more favorable point for the company. That was great. I mean, those are interesting days. Because whenever there’s a lot of turmoil, you see the ability to lock in some profits sometimes. 

Craig Jeffery: 

Thank you both for your time on this podcast. I want to head to the final section where just get some words of advice or any final thoughts you have. And maybe Steve, we can start with you and then end with Ron. What piece of advice would you give to a seasoned professional or those who are new in risk management? What would be a summary thing that you would want them to understand? 

Steve Johnson: 

Well, I think number one, it would be mainly to look at, understand your business. We always say everybody needs to understand their business, but you understand it better by the crisis. You understand it better by the model of the stress, testing your model. So we make sure that you have looked at what my… People always use the trend towards like the black swan event, et cetera. 

Steve Johnson: 

Well, what happens if you see a move that moves you this far down in your hedging, this far down in your cashflow, this much of a disruption, what would you do? And I think the other thing is examine your partners, both from your… Talking about banking partners, but also with other people in your supply chain, who could you push if you had to, where are the soft spots in the supply chain, who is an absolute don’t touch partner? And I think by doing that, you understand exactly what you would do in these types of scenarios, because we always liked, as Ron pointed out, you’re talking about the good days. Everybody loves that, but the bad days are what’s going to surprise you. And if we look at people around the world, I think that this is the most important thing. Would we have ever thought that no one would be going to movie theaters all this time? Well, what if you own a movie theater? What are you going to do? I think that would be my piece of advice. 

Craig Jeffery: 

Great. Thanks Steve. And Ron. 

Ron Vodicka: 

The best companies have kind of a defined chain of command, meaning they’re ready to react and act when needed. That can come through developing a risk management policy that’s not just in someone’s head, but actually formally written out, but empowering the treasury staff or the people involved in the finance group to act opportunistically within the boundaries or defined boundaries that the corporation has. I’d also say don’t be afraid of foreign exchange. I’ve seen treasurer spend hours going over an interest rate swap because they’re very comfortable talking US interest rates, but they’re uncomfortable talking foreign exchange just because they don’t know it. But that’s where your sales person and counterparties come in, find the trusted ones that can help you become comfortable with it. It’s their job to make you look good or perform well within your organization. 

Ron Vodicka: 

But definitely the FX component and maybe even the commodity component, I will oftentimes see people shy away from it because they just don’t understand it therefore, they don’t give it the time that it needs. And I think I’ve said this before, it’s kind of obvious, but know your business by that I’m saying just be aware of your sales or your purchases. Steve is a shining example of being dialed into the sales groups around his organization and that allows you to act. And so again, the FP&A cycle, all of that is part of it, but use technology to your advantage that you can be well-informed if you’re the treasurer or the treasury staff. And lastly, I have relationship capital built up. You just do that by being good partners to each other over time. But it definitely in a moment of a crisis, it’ll help you out. 

Craig Jeffery: 

Excellent. You guys had certainly a few of those overlap nicely, and there’s a lot from that. So Ron and Steve, thank you so much for your time on this episode. 

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