Companies Warn Currency Swings Will Weigh on Earnings

By Nina Trentmann 

Multinational companies say billions of dollars in revenue and profit are at risk from recent currency fluctuations triggered by escalating tensions between the U.S. and its trading partners.

The Chinese yuan last week touched a new one-year low against the U.S. dollar. The euro gained 0.98% against the dollar over the past six weeks but has retreated 2.50% against the greenback since the start of the year. In the past month, the buck has rallied 1.03% against the yen and lost 0.97% against the Canadian dollar.

These market moves are now playing out in corporate earnings. Facebook Inc., which last week surprised investors with slower-than-expected growth, attributed the miss in part to currency swings and expects exchange rates to act as a headwind in the second half of the year, said Chief Financial Officer Dave Wehner.

British-drinks maker Diageo PLC's sales were GBP454 million ($590.5 million) lower during the financial year ended June 30 because of currency effects, said CFO Kathryn Mikells.

Consumer-goods maker Unilever has also been hit. "Currency translation decreased turnover by 8.9%," said CFO Graeme Pitkethly, according to an earnings transcript. "This is a result of the euro strengthening against almost all of our major currencies."

Nearly two thirds of the 200 finance chiefs in a July survey said their earnings got hit by unprotected exposure to foreign currencies, according to HSBC Holdings PLC. And, 47% of CFOs at companies with revenue exceeding $5 billion said they want to increase their protection against currency gyrations, while 77% plan to allocate more funds for this, HSBC said.

Finance chiefs at companies including hotel booking site Trivago NV and dairy commodity trader Interfood Holding BV said they plan to expand their currency-risk management despite the added cost. Koninklijke Philips NV, a Dutch technology firm, has turned to trading bots to limit its currency exposure.

The renewed focus on dampening currency risk comes as international trade tensions cloud the outlook for global economic growth and raise concerns about the future of the multinational business paradigm. Decades of globalization and free-trade policies have encouraged scores of companies to source in one country, produce and sell in others, making these companies vulnerable to currency swings. Both sudden and gradual changes to the value of the dollar, euro or yen can hurt earnings at firms already challenged by technological disruption, the threat of tariffs and rising interest rates.

"The perception of risk is higher because of increased political uncertainty and volatility," said Holger Zeuner, director of thought leadership in HSBC's corporate treasury solutions unit.

Trivago finance chief Axel Hefer said he would explore launching a currency-hedging program over the course of the next 12 months. The German travel company hasn't hedged its foreign currency exposure yet, and it has plans to expand to countries including India, Turkey and Russia. The U.S. dollar and euro are Trivago's primary vehicles for transactions.

Dutch dairy products trader Interfood includes the cost of hedging in every trade and hedges all business transactions, said Group Treasurer Vincent Almering. What has changed for the company now is it places a hedge the moment a deal has closed. "We are no longer waiting [even] a few hours," Mr. Almering said.

Interfood generates roughly $2 billion in revenue a year, he said. Mr. Almering checks the company's FX exposure daily and introduced secondary checks, resulting in a higher frequency of checks than the bimonthly routine he followed 18 months ago.

"When the currency pairs were more stable, this wasn't as necessary," said Mr. Almering. "Because of volatility, we have tighter controls and tighter policies around foreign currencies," he said.

New technologies that allow companies to automate most of the risk management process are making it easier for CFOs to keep a closer eye on exchange rates. Philips has a fleet of software robots to manage its foreign-exchange risks. "With robotics you can now cover all regions in the world, not just the core markets," said CFO Abhijit Bhattacharya.

One reason companies don't hedge currency risks more widely is the cost, which can account for as much as 20% or more of the transaction, according Rudi Alexis, head of foreign exchange distribution at Barclays PLC. "In emerging markets in particular, hedging an asset can be extremely expensive," he said.

But other CFOs say peace of mind, and certainty about profit margins, is worth the investment. Associated British Foods PLC, owner of fashion chain Primark, typically hedges its garment purchase orders and capital purchases six months ahead.

"There is obviously a cost that comes with having a currency hedge," said finance chief John Bason. "That cost is small compared with the removal of that risk on the margin," said Mr. Bason, adding that "currencies can make quite a large move in six months."

Write to Nina Trentmann at [e-mail]

(END) Dow Jones Newswires

August 01, 2018 05:44 ET (09:44 GMT)

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