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What European CFOs Are Saying About Threat of a Strong Euro

  • Adidas has hedged currency risk for the next 18 months
  • Merck says second half “will not be a walk in the park”

Europe’s soaring currency, a source of headache for its stock market, has also been a recurring theme for the region’s executives in the latest earnings season.

A 12 percent rally in the euro this year is pushing it toward levels that market-watchers predict will be painful for profits in the region, particularly for exporters who have to both translate their overseas sales back from less valuable currencies, and face competition from cheaper products abroad. The concern has helped drag the Euro Stoxx 50 Index down 5.2 percent since a May peak.

Every 10 percent move in the euro wipes out as much as 8 percent of earnings if not hedged, Morgan Stanley strategist Matthew Garman wrote in an Aug. 1 note. Europe’s global firms typically use financial instruments to manage currency risk: this was evident in 2015, when they failed to reap the full windfall from a slumping euro. The level, timing and duration of protection can vary significantly. Even fully hedging for near-term volatility will “ultimately only delay the impact from FX moves” for a company, Garman said.

Euro-area firms get 48 percent of their revenue and 54 percent of their costs from domestic markets, according to Morgan Stanley. Below is a selection of comments taken from the latest round of earnings calls.

Tech

Infineon Technologies AG: Chief Financial Officer Dominik Asam told analysts on Aug. 1 that every $0.01 change in the euro-dollar exchange rate moves the German chipmaker’s revenue by about 9 million euros ($10.6 million) each quarter. On whether the company can still be more profitable next year, he said there will be more clarity in November.

Software AG: The company predicts as much as 2 percent headwind in the third quarter if the dollar averages at 1.14 per euro, according to CFO Arnd Zinnhardt. That will probably rise to about 4 percent to 5 percent in the final three months of the year, though predicting foreign exchange rates is like “looking through a crystal ball,” he said on July 18.

Consumer

Kering: It’s still too soon to raise prices outside Europe, the Gucci brand owner’s CFO Jean-Marc Duplaix said on July 27. At the same time, he acknowledged there could be an effect on pricing, tourism flows and profitability, as well as translating revenue back into euros and absorbing costs in the shared currency.

Adidas AG: The sportswear maker, which gets cost benefits from a weak dollar, has already hedged its currency risk up to the next 18 months, CFO Harm Ohlmeyer told analysts on Aug. 3. In terms of effects on profitability, the second half of 2017 will be better that the first, and the company may get some benefits next year, he said.

Societe BIC SA: The pen maker has hedges in place at $1.11 per euro for this year, while more than half of 2018 is also protected at a similar level, according to CFO Jim DiPietro. Any impact from the rising euro will be partially offset by stronger currencies in Latin America, assuming it stays around the same level, he said on Aug. 3.

Autos

Michelin & Cie.: CFO Marc Henry said July 25 that the tiremaker is assuming an average rate of $1.15 per euro in the second half of the year.

Daimler AG: Carmaker hedges its currency risk so far out that it’s already covered for most of 2018, CFO Bodo Uebber told analysts July 26.
 
Volkswagen AG: Foreign exchange effect will probably have a net positive impact of about 500 million euros in 2017, CFO Frank Witter said July 27.

Industry, Chemicals

Siemens AG: While the company is typically hedged for the next three to six months, CFO Ralf Thomas agreed with an analyst on Aug. 3 that a strong euro would probably trim the company’s profit margin by between 50 basis points and 100 basis points in 2018.

Bayer AG: The German firm said a 1 percentage point move in the euro versus a basket of major currencies equates to about 300 million euros in sales a year and 80 million euros in earnings. The company on July 27 trimmed its profit and sales estimates for 2017, blaming the currency and a stumble in agriculture.

Covestro AG: The plastic maker has based its 2017 forecasts on an average exchange rate of $1.10 per euro -- weaker than where the currency is now. Chief Executive Officer Patrick Thomas told Bloomberg TV that it was the first time “in a decade or more” that he’d even talked about foreign exchange.

Pharma

Merck KGaA: The company will face headwinds in the second half of the year, given the adverse currency effect and challenges at its performance materials unit, according to CFO Marcus Kuhnert. Achieving financial targets in the period “will not be a walk in the park,” he told analysts on Aug. 3.

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