Swiss Companies Cheer Currency Cap as Franc Crimped Profit

Swiss Companies Cheer Currency Cap
The Swiss National Bank said yesterday it won’t tolerate an exchange rate below 1.20 francs per euro following the currency’s 13 percent gain against the euro this year. Photographer: Gianluca Colla/Bloomberg

Swiss companies from knife-makers to cheese producers welcomed the central bank’s decision to halt the franc’s appreciation against the euro, which had left them struggling to compete and pushed investment abroad.

The Swiss National Bank said yesterday it won’t tolerate an exchange rate below 1.20 francs per euro following the currency’s 13 percent gain against the euro this year. The benchmark Swiss Performance Index today extended yesterday’s 4 percent gain after the Swiss currency posted a record drop against the euro.

“If we have an exchange rate at 1.20 and this is more or less stable, then we have something we can count on,” said Peter Hug, chief executive officer of Wenger SA, a maker of Swiss army knives costing $43. “Of course, 1.30 is better. Being realistic, I can say this is a good step in the right direction.”

The strength of the franc threatened 25,000 jobs at Swiss exporters, industry association Economiesuisse had said before the central bank’s decision. Companies including drugmaker Novartis AG, watchmaker Swatch Group AG and cement producer Holcim Ltd. said first-half earnings growth was crimped by the franc. The Swiss economy slowed in the second quarter, expanding 0.4 percent from the previous three months, as exports slumped.

“I am so happy,” said Benedikt Germanier, chief executive officer of Zai, a maker of luxury skis based in Disentis, Switzerland. “It reduces the currency risk you don’t need during times like this.”

Saving Jobs

Clariant AG, a Swiss maker of pigments and additives used in plastics, textiles and paint, fell 16 percent in Zurich trading on Sept. 5 after cutting its full-year outlook for sales and profitability, partly because of a stronger franc.

Chief Executive Officer Hariolf Kottmann is moving textile-and paper-chemical businesses out of Switzerland to Asia and Spain, a move that will further reduce franc-denominated costs. The SNB’s move may help companies avoid such measures, executives said.

“This will help me save jobs,” said Daniel Frutig, chief executive officer of AFG Arbonia-Forster Holding AG, which makes heating systems. He said Aug. 3 the company was losing money every day. “A currency rate of 1.1 has a direct impact on how many people we can employ. A rate of 1.30 or 1.40 would be like the old days, but that’s history.”

Record Plunge

The franc plunged more than 8 percent yesterday to trade near the limit at 1.20685 euros. It reached a record of 1.0075 against the euro on Aug. 9 as investors turned to find a haven from turmoil provoked by the debt crisis. The franc was 41 percent overvalued against the euro on Sept. 5, based on a measure of purchasing power as calculated by the Organization for Economic Cooperation and Development.

Cie. Financiere Richemont SA, the second-biggest luxury-goods company, said today net income in the current financial year will be affected by the strong franc, which will lead to a “translation” loss on Richemont’s cash balance.

ABB Ltd., the world’s largest maker of power-transmission gear, has been buying more components from the euro zone for its Swiss factories.

“Intervention by the SNB can only be supportive for ABB’s exports from Switzerland and for Swiss industry in general,” ABB Chief Financial Officer Michel Demare said by e-mail. He said “only a minor” portion of costs are in francs.

Drugs, Chemicals

The strength of the franc forced Lonza Group AG, a Swiss chemicals maker, to extend working hours without increasing pay in order to boost competitiveness.

Holcim, the world’s second-largest cement maker, said Aug. 18 that the currency’s strength shaved 916 million francs ($1.1 billion) off sales in the second quarter and reduced operating profit by 203 million francs.

Interpharma, a Swiss drug industry trade group representing companies including Roche Holding AG and Novartis, and the Federation of the Swiss Watch Industry both welcomed the decision, though said it wasn’t enough.

The central bank wasn’t able to announce a higher target because it needs to be one that it can credibly defend, according to Gerold Buehrer, the head of Economiesuisse, a trade group representing 30,000 companies. The Alpine country needs an exchange rate of 1.35 to 1.40, which would make purchasing power on par with the euro zone, he also said.

“The action of the Swiss National Bank is a step in the right direction,” said Heinrich Villiger, owner and chairman of Villiger Soehne AG, a cigar maker. “However, I would have preferred 1.25 instead of 1.20.”

No ‘Miracles’

Paul Thompson, chief financial officer of hearing aid maker Sonova Holding AG, said he’s not satisfied with the target rate, though the central bank probably can’t do more. “These issues are much bigger than Switzerland,” he said.

Currency shifts will strip 19 percentage points off Nestle SA’s full-year sales growth, David Hayes, an analyst at Nomura, estimated earlier this week. The maker of Lean Cuisine meals and Purina pet food seeks to offset that effect through productivity gains and new products such as BabyNes formula-milk capsules, Chief Executive Officer Paul Bulcke said last week.

“The measure from the SNB certainly helps and it’s good to change things on the Swiss side, but in the end it’s a global economic issue and we can’t expect miracles,” said Esther Gerster, a spokeswoman for Emmi AG, Switzerland’s biggest cheesemaker.

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