Clements CFO Tarun Chopra talks to WSJ CFO Journal about Currency Risks
May 6, 2014, 2:35 AM ET
By Maxwell Murphy, Senior Editor
Violent currency swings are the new normal for finance chiefs, forcing them to go beyond traditional hedging strategies.
Currencies in at least 20 countries have fallen 6% to 37% against the U.S. dollar over the past year. The economic turmoil in Argentina and Venezuela and the conflict between Russia and Ukraine have hit their currencies, as well as the first-quarter earnings of dozens of international companies, such as Avon Products Inc., Coca-Cola Co. and Ford Motor Co.
To augment or replace hedging programs, more CFOs are rethinking their relationships with suppliers and distributors, their corporate structures and, when they can get away with it, their prices.
“Companies have never been as exposed as they are now to the violent movements of foreign currencies across the globe,” said Wolfgang Koester, chief executive of FiREapps, which advises clients on currency risk.
That’s partly because smaller companies and even startups are selling abroad, he said, and larger companies are penetrating faster and deeper into emerging markets. Roughly 98% of U.S. exporters are small and medium-size companies, according to the U.S. Department of Commerce, though they represent less than a third of the value of American exports.
Companies typically hedge to protect their profits by buying contracts for the option to buy or sell currencies at a fixed price in the future. But the more volatile a currency, the more costly the contract, making that a poor long-term solution.
The increasingly sophisticated approaches companies are taking to manage their currency exposures are why an April 2013 survey by the Bank for International Settlements showed that corporate foreign-exchange trading had fallen 50% from the bank’s previous survey in 2010.
Of course, renegotiating business contracts or finding new suppliers takes time, and a currency swing can come suddenly.
Russia’s ruble has tumbled 8% against the dollar since January and has been mentioned in more than 115 company conference calls, according to FactSet. The drop is a problem for McDonald’s Corp. restaurants in Russia, which import almost half of their food and typically pay for it in dollars or euros.
“If you assume the ruble is going to stay at this depressed level, that’s something we’re going to be battling with for the rest of the year in our European margins,” Chief Financial Officer Peter Bensen told investors recently on a conference call.
To help offset the ruble’s decline against the dollar and euro, Alexey Kornya, CFO of Mobile TeleSystems OJSC, said the Moscow-based cellular carrier is asking certain foreign suppliers to accept payment in rubles.
By contrast, Air Tractor Inc., a closely held Olney, Texas, maker of crop-dusting and firefighting aircraft, has “lost sales” in places like South Africa recently, because it demands payment in dollars, said CFO David Ickert. In the past year, the rand has fallen 15% against the dollar.
Nicole Anasenes, CFO of Infor Inc., a New York-based business-software provider, said she might consider accepting payment in a foreign currency, but only “if it’s an existing customer,” and she could use the money locally for salaries and other operating costs.
Having strategically placed subsidiaries overseas can help insulate companies from currency swings.
When Northern Technologies International Corp. expanded into nearly two dozen countries, including Russia, Malaysia and Indonesia, the Minneapolis-based maker of anti-corrosion packaging materials, took on local partners. The strategy initially was about growth, but CFO Matthew Wolsfeld said it helps to offset currency volatility. If need be, the company’s joint ventures can leave cash in countries with weaker currencies and extract it from those with stronger currencies.
Mr. Wolsfeld said the firm is most affected by the euro’s swings, and has used the euro’s recent strength to pull dividends out of its German joint venture.
Sometimes, currency changes leave companies with little choice but to raise prices, which can be especially hard to do on discretionary products or those on which a local competitor isn’t facing the same margin squeeze. A company’s best hope is that its rivals will have to do so too.
That can happen with latex gloves, most of which are made in Malaysia, whose currency has weakened 7% in the past year. When currency swings prompt local vendors to raise prices, medical-products suppliers like Henry Schein Inc. typically raise prices in lock step. Where Henry Schein can pass prices along, it does, said CFO Steve Paladino.
Regardless of their hedging strategy, currency volatility is a fact of life for international companies. “You almost have to have a foreign-exchange [emergency room],” said Tarun Chopra, CFO of insurer Clements Worldwide, which may move some operations outside the U.S. to reduce the impact of currency swings. “There is no point in pegging everything back to the dollar.”
Situations like the military friction on the Crimean Peninsula had “historically been one-off events,” with a 5% or less risk of occurring, Mr. Chopra said, but they are “now becoming part of the 95%.”