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%.”
Labels: CFO, currency risk, industry news, risk, Tarun Chopra, wall street journal
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