In recent weeks, global food and drinks firms have all been keen to split out ‘constant currency’ growth from their actual figures.
You can see why: headline numbers have been battered by extreme currency volatility. Examples are numerous: a 9% impact on full-year revenues at Reckitt Benckiser; 4.6% at Unilever; and 5% at P&G. And the sums involved are enormous. P&G’s profits fell by $1.4bn for the same reason and just this week Mondelez warned it faces a $500m currency headwind in 2015.
Currency volatility has particularly affected companies that report revenues in the strengthening dollar, pound and Swiss franc, while selling into emerging markets.
A cursory glance at recent foreign exchange movements illustrate why. The US dollar has risen 28% in value against the Brazilian real since just September, while it is close to double its year-on-year value against the Russian rouble and has seen strong annual gains against the Mexican peso (14.7%) and the Turkish lira (21% since May).
The dollar and pound are continuing to strengthen in 2015, while the emerging markets currency sell-off shows little sign of reversing any time soon. Carl Hasty, co-founder of international payment specialist SmartCurrencyBusiness.com, says: “In the case of the Brazil and Russian currencies, oil and commodity prices, such as iron ore, have fallen significantly, affecting the country’s economies, and thereby undermining their home currency.”
The market tends to pay more attention to underlying sales and earnings growth rather than top-line figures – so do currency impacts matter?
“Yes,” says EY global consumer products lead analyst Andrew Cosgrove. “You can’t separate organic performance from the impact of currency movements. The search for growth has driven companies in the sector to go hard into emerging markets – that’s the right thing to do, but it opens their businesses to significant volatility in exchange rates.”
City Index market analyst Ken Odeluga says the impact of currency fluctuations has become a source of “confusion, annoyance and frustration” for the investment community. “Companies tend to portray their results in the best possible light, but I take the view that a missed profit forecast is a missed profit forecast. If the bottom line is in the red, that has a material impact.”
Currency weakness can also dampen local demand and growth prospects, says Shore Capital analyst Darren Shirley. “Imported inflation from currency weaknesses has tightened consumer spending prospects in a number of markets.”
So, to what extent will currency fluctuations remain a problem in 2015 and beyond? And how can suppliers minimise the impact?
Firstly, companies clearly have differing exposures. Danone draws about 10% of its sales from Russia, while Nestlé is far less exposed at 2%.
On the other hand, Nestlé is at a disadvantage in reporting in Swiss francs, while the euro – which fell this week to a seven-year low against the pound - will give a headline boost to Danone and indeed Unilever, as both report in euros.
Though any resultant slowdown in consumer spending in the Eurozone will obviously be a drag on sales, Jefferies analyst Alex Howson says currency is now becoming a “tailwind” for many of the sector’s Continental European companies. He believes European fmcg stocks have already begun to benefit as money shifts out of the US over concern about earnings downgrades due to the rising dollar
That’s not to say a strong domestic currency is necessarily bad for food and drink producers. Clearly, the strong pound means imported goods generally become cheaper, so pressure on margin is eased by typically lower input costs. A strong currency is also a boost to smaller fmcg firms that sell most of their goods to their local market as they benefit both from cheaper input costs and the rise in local spending power.
On the other hand, commodities are usually traded in dollars. So, while that has effectively helped make a host of commodities relatively cheaper for currencies that haven’t lost value against the dollar, gains for some crops will be offset by hikes for others.
A one size fits all approach isn’t sufficient to explain current trends. According to EY’s Cosgrove: “Every company’s pattern in relation to commodity costs has been different.”
A cereal manufacturer, he explains, is likely to have benefited from lower wheat prices but other suppliers will have suffered from commodities that have become more expensive, such as protein, coffee and cocoa. Additionally, the overall impact of lower input costs can be overstated as, while commodities have generally fallen, prices are still relatively high on a historic basis.
Firms can also mitigate currency risk through hedging. Carl Hasty, co-founder of international payment specialist SmartCurrencyBusiness.com, says firms should routinely hedge currencies “as any movement will affect their bottom line unless they are naturally hedged to some extent.”
But many fmcg firms have limited hedging activity despite the recent volatility. An FD of one large supplier said his firm would only hedge currency risk on a specific, large transaction and not as part of ongoing financial strategy.
“Companies try to hedge commodities when they have a high degree of certainty,” Cosgrove explains. “But currency hedging is much less prevalent because of the geo-political forces at play that no-one can predict.”
Odeluga, who says effective hedging is “almost an impossible job”, points to the airline sector by way of example, where RyanAir’s hedging of oil recently went wrong. The airline locked its fuel costs in at a far higher level than the current price of crude – effectively now placing the airline at a significant operational disadvantage to its peers.
The trend of emerging market currencies devaluing against the dollar has been relatively consistent for a number of quarters – but the difficulties of hedging means currency fluctuation will continue to affect the sector through 2015.
The picture, though, is becoming increasingly complex, with currency trends starting to benefit one company, just as they punish another.
Shire Capital’s Shirley sums up the uncertain mood: “We do our best to forecast numbers for next December, but given the magnitude of currency volatility we could be changing our numbers on a weekly basis.”