After having a muted impact on corporate earnings in the second quarter of 2014, currency volatility came back with a bang in the third quarter. That's the headline news from FiREapps' latest "Currency Impact Report." The study analyzed the third-quarter earnings calls of 1,200 publicly traded, multinational companies from North America and Europe, tracking the proportion of these calls on which executives mentioned a currency-related impact on earnings.
The result: Nearly a quarter of all companies (23 percent) mentioned a negative currency impact, for a total reported dollar value of US$8.0 billion in Q3/2014. (See Figure 1 on page 2 of this article.) The average per-company reported negative impact was a 3 cent reduction in earnings per share (EPS). "I think one of the things that is really interesting this time around for North America is the frequency of currency mentions by CEOs," says Wolfgang Koester, CEO of FiREapps. "They wouldn't talk about it if it didn't have a material impact."
For European businesses, the average impact equaled 0.25 percent of annual revenue, whereas for North American businesses that figure was 0.21 percent. For companies in both geographies, the euro-dollar was the currency pair most commonly mentioned as having an effect; it was cited as impactful by 72 North American businesses and 22 Europeans. The next most impactful currencies were the Japanese yen (cited by 34 North American and 11 European firms) and the Russian ruble (15 European and 12 North American firms).
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"It's not surprising that a lot of North American CEOs talked about the euro," Koester says, "but the frequency is a bit surprising. It was mentioned on 72 earnings calls, whereas the currency in the number-one spot is usually mentioned by 15 to 20 companies. That's a big jump. Even the second and third most commonly mentioned currencies are in the range of what we've historically seen for the currency in the first slot. It's quite amazing that you've got CEOs of these very large corporations talking about it."
Perhaps even more surprising were the currencies lower on each region's top-five list. The Brazilian real was the fourth most impactful currency among North American businesses and fifth among Europeans. The Venezuelan bolivar was fifth most impactful for North American companies, and the Argentinean peso was fourth most impactful for European companies.
"Five years ago, people in the United States were talking about the dollar versus the pound sterling, the euro, the yen, and the Swiss franc," Koester says. "Maybe also the Canadian dollar. But if you look at the currencies impacting earnings today, we're no longer looking at a world in which everything is measured in terms of the dollar versus five other currencies."
Companies are now paying attention to volatility in currencies that did not garner much attention in the past, and it's a trend that's likely to continue. "The average company with $1 billion or more in revenue has 200 currency pairs it's exposed to," Koester says. "And across the S&P 500, about 50 percent of revenues come from abroad. If you get 12 percent volatility on 50 percent of your revenues—plus maybe also 50 percent of procurement—currency risk is probably the largest financial risk you face."
Thus, currency risk is taking a prominent position in corporate conversations. "This isn't just the treasurer's job," Koester says. "More and more C-suites and boards are talking about this. It requires collaboration. No longer is it just the CFO bringing the treasurer into the board room to explain what's happening with foreign exchange. All of a sudden, they're bringing in compliance, risk, tax, all these other areas, because this is a problem that can have a significant impact on shareholders and share price."
The solution, according to FiREapps, is to take a holistic approach to currency risk management. This approach is currently more common in the United States, Koester says; many European companies still focus FX hedging activities on individual transactions, one at a time. But the more volatility pervades global currency markets, the more quickly companies around the world will adopt a comprehensive approach to risk management.
"In North America, it's more common to really align economics and accounting," Koester says. "More and more companies are beginning to realize that, at the end of the day, the risk is only over when the exposure has been reduced to a level that's acceptable, if not eliminated.
"We can't forget that there are lots of companies which, because they're managing this risk well, are basically currency-agnostic," Koester concludes. "Currency has no material impact, so they aren't mentioning it."
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