• Treasurers are facing a highly volatile period – putting risk management front and centre
• Proactively modelling a host of different scenarios is where treasurers are adding significant value for their businesses
• Kraft Heinz follows a layer-by-layer approach to its treasury operations, with a solid foundation of control and compliance leading towards value creation and strategic advisory at the top

Today’s treasurers face a myriad of new challenges, coupled with several more familiar ones. Interest rates are at their highest level since the 2008 crisis and the current level of inflation was last seen in the early 1980s. At the same time, supposedly rare ‘Black Swan’ events have become regular occurrences with treasurers – on the tails of Brexit, US-China trade wars and Covid-19 – having to deal with the combined impact of the energy crisis, the Russia-Ukraine war, post-Covid monetary policy tightening and a potential global recession. The result is a highly volatile operating landscape – one that is “taking no prisoners across currencies, commodities and interest rates”.

This was the scene set by Lisa Dukes, Co-Founder of consultancy Dukes & King and former Corporate Finance Director and Treasurer at Drax Group, the UK-headquartered power generation company. She chaired the webinar, Risk management in times of high volatility and inflation hosted by Economist Impact and supported by Deutsche Bank. “With such extreme moves in market dynamics, companies have been considering how to manage both the risks and the opportunities arising from their exposure to these markets,” said Dukes. This includes reviewing the cost of capital and capital allocation, among other policies, to ensure they are fit for purpose “both reactively but also proactively, not just for current environments but looking to the future”.

“We have seen more tail risks materialise in the market than ever before – at least in my 20-year career in the business,” said panelist Todd Yoder, Global Managing Director of Strategy Finance of the engineering, procurement and construction (EPC) company Fluor Corporation. He went on to highlight the energy crisis, and how power and food costs “hurt those who are least able to deal with non-core inflation”.

“There are a lot of things we, as treasurers, can do to be able to anticipate changes and be proactive,” continued Yoder. “Modelling these tail risks, for example, is where treasurers can add considerable value.”

How is treasury adjusting to the new environment? Speaking on the panel, Yang Xu, Senior Vice President, Global Finance and Treasurer at Kraft Heinz – a multinational food company active in more than 130 countries and with a host of globally recognised brands – explained that mitigating the impact of volatility is certainly high on the agenda.

As a global consumer goods producer, Kraft Heinz has felt the effects of resurgent inflation, not least because pricing its products is closely linked to the cost of raw materials. At the same time the energy crisis is impacting the company’s day-to-day operations, as well as sectors that are integral to its supply chain, such as packaging. Given its global presence, a steady depreciation against the dollar for many emerging market currencies is also an ongoing challenge for Kraft Heinz.

The impact of the prevailing environment is felt not only by companies, but by consumers as well. The cost-of-living crisis is hitting people’s wallets and changing their purchasing behaviours. At the same time, companies are looking to pass on some of the inflationary pressure to their end customers, which is introducing a difficult dilemma as to how changing demand and rising prices can be effectively managed.

For treasury to play a role in managing these dynamics, it needs to be extremely connected to the business’s performance. As a result, Kraft Heinz does much scenario planning – delving into how the business will perform and whether the existing capital structure remains appropriate.

As Xu noted, “I think the volatility will always be there, just to varying degrees. But what is always important is being able to see and project where the volatility is going to be impacting the business – whether positive or negative – and to plan for all kinds of different scenarios.”

“You cannot move on to the top without having an extremely strong foundation”
Yang Xu, Senior Vice President, Global Finance and Treasurer at
Kraft Heinz

When communicating the responsibilities of treasury to her team, Xu uses what she calls the ‘reverse pyramid’. As she explains, “I call it a reverse pyramid because you cannot move on to the top without having an extremely strong foundation” (see Figure 1).