Multinationals Still Losing from Currency Impacts, says FiREapps
Since early 2011, multinational corporations (MNCs) have consistently lost money to currency impacts, according to FiREapps, the foreign exchange (FX) exposure management solutions group. The trend continued in Q213, when the aggregate quarterly impact from currency volatility totaled at least US$4.04bn in losses and is likely to have been significantly higher.
The average currency impact to earnings per share (EPS) was $.03, or three times higher than the industry standard benchmark of less than $.01 EPS and brought currency-related losses to US$7.7bn for the first half of 2013.
FiREapps notes that the figure equates to approximately 308,000 jobs, based on an average annual salary being around US$50,000 Had the money stayed in corporate coffers companies might not necessarily have hired extra workers, but currency impacts nonetheless continue to erode significant revenue that could otherwise be used for productive purposes and are certainly not helpful to a hopefully recovering economy.
Yet while a significant number of companies continue to see EPS eroded by currency impacts, an increasing number of companies are becoming aware of how currency impacts corporate earnings. There is a trend of companies reporting currency impact as a function of EPS rather than as a function of revenue; this is likely due to companies beginning to understand that currency impacts erodes EPS and, ultimately, shareholder value.
Impacts during Q213 resulted from currency volatility among some usual suspects, including the Japanese yen (JPY) and the euro (EUR). But impacts also came from some more unexpected places; volatility in the Australian dollar (AUD) surprised many companies, landing the AUD among the top five most impactful currencies for the first time since FiREapps began compiling the list in 2012.
Key highlights from the group’s Q2 research include:
Currency impact in Q213
FiREapps conducts a quarterly analysis of the earnings calls of 800 publicly traded companies (a subset of the Fortune 2000 companies that have at least 15% or more international revenues in at least two currencies). During Q213, 233 companies reported negative currency impacts (headwinds), a 9% increase over Q1 and a 10% increase over the 2012 average, reflecting the fact that companies continue to be whipsawed by currency volatility.
Figure 1: Number of Companies Reporting Negative Currency Impact
Of the 233 companies reporting negative currency impacts in Q213, 95 quantified the negative impact, which totaled US$4.1bn. Although much lower than in Q212 and Q312, it is 12% higher than Q113 and significantly higher than in 2011. It is reflective of currency wars in Latin America and Japan and ‘surprise’ impacts from countries like Australia that continue to significantly erode EPS.
Figure 2: Size of Reported Negative Currency Impact
Average Hit to Earnings
The average hit to EPS among the companies disclosing EPS impact was $0.03 in Q213, same as in Q1. Considering that foreign exchange (FX) managers from leading MNCs increasingly have management objectives of less than $.01 EPS impact from balance sheet exposures alone, an average $.03 hit to EPS from all exposures is large and material.
There is evidence of an increasing trend among companies toward looking at currency risk as EPS at risk and reporting currency impact as a function of EPS. FiREapps’ research also shows that companies which disclosed currency impact as a function of EPS in prior quarters are more likely to disclose currency impacts as a function of EPS in future quarters, when they do disclose impacts.
That trend represents a break from the past; previously, there was no consistent, standardised way to report currency impact. Furthermore, there was a disconnect between the way that the FX manager or treasurer looked at currency impact (as net FX gain/loss) and the way that the chief financial officer (CFO) looked at currency impact (as an erosion of the bottom line). So seeing currency risk as EPS at risk and managing it so that impact to EPS is below $.01 represents significant progress in thinking.
The trend toward disclosing currency impact to EPS as a standard for currency impact disclosure reflects an increasing understanding across all levels of the organisation that currency does have a direct impact on EPS. Instead of hearing CFOs say something like “Net sales declined approximately 5%; the largest impact was a 4% decline from foreign currency translation” we increasingly hear them say “The effect of foreign currency movement on adjusted EPS for Q2 was $0.01 per share.”
That represents a consistent, standardised way to disclose currency impacts as well as a best practice because it reflects the underlying reality: currency affects EPS and – as a consequence – shareholder value. Within that context, it becomes clear how important currency risk management is; risking EPS is dangerous business because investors tend to react (usually negatively) first and ask questions later on earnings surprises.
Australian dollar surprise is omen for euro
Four of the five currencies that companies mentioned as impactful in Q2 earnings calls also made the top five list in Q1. The JPY continued to impact multinationals, for the third quarter in a row. Euro-related impacts are rising again as upcoming elections in the euro zone keep currency volatility high. And the two Latin American (LatAm) currencies that were most frequently cited last quarter – the VEB and BRL – were frequently cited in Q2 also, reflecting the residual impact from volatility in the region that continues to plague MNCs.
The newcomer to the top five list is the AUD, which has not been a top-cited currency since FiREapps started keeping track in 2012. Elections were a primary cause of unexpected currency volatility in Australia, as they have been in Europe. In fact, the AUD surprise portends increasing euro volatility in advance of the German elections.
Figure 3: Top Five Currencies Mentioned in Earnings Calls as Impactful (Companies Mentioning)
Figure 4: Top Five Currencies Mentioned in Earnings Calls as Impactful
Residual impacts from Yen and LatAm currencies continue
For the third quarter in a row, MNCs continued to be significantly impacted by the JPY, which fell 5.4% against the US dollar in Q2. That impact should not have been surprising given the number of companies that were impacted by the yen in the first quarter and given how transparent Japan has been about plans to continue currency devaluation. The JPY has fallen by a total of 15% since the beginning of 2013, and remains a leading instigator of competitive devaluation in the global currency wars.
Companies faced residual impacts from devaluation in Venezuela and Brazil as well. The value of the VEB relative to the USD was flat in Q2, but fell 32% in Q1. The BRL fell 7.8% relative to the USD in Q2.
In FiREapps’ Q1 report, the group advised unprepared companies to expect impacts from competitive devaluation in Japan and Latin America to continue through the rest of 2013 and likely into 2014. That advice remains the same, though companies can (and many have) manage the impact of yen and LatAm currency volatility to less than $.01 EPS.
Aussie dollar surprise an omen for the return of euro volatility
The AUD’s entry into the top five list follows a 12.3% fall relative to the USD in Q213 – largely the result of fears about this month’s Australian federal elections. That fall demonstrates how politics can impact currency volatility; uncertainty about the political climate and economy in general can lead to currency devaluation as traders look for safer currencies to hold their cash in.
For those same reasons, FiREapps expects to see greater levels of euro volatility relating to this weekend’s national elections in Germany. For companies not prepared to manage increasing euro volatility, the group sees greater impacts ahead; indeed, the number of companies reporting impacts from the euro already began to increase in Q2 as the euro fluctuated from a low of 1.2806 to a high of 1.3390 relative to the USD. But the stakes of politics are much higher in the euro zone than in Australia; the outcome of the German election has potentially enormous ramifications for the fate of the euro zone and certainly the value of the euro.
Expectations for Q3
FiREapps predicts that its Q3 report, to be produced later this year will be talking about companies impacted by the BRL, Indian rupee (INR) and Russian ruble (RUB). In fact, in the third quarter to date, these currencies are already impacting corporate earnings, even though companies are not yet reporting those impacts. The BRL has declined 5.7% against the USD. The INR has declined 10.1%. The RUB has been marked by dramatic volatility, and has declined 2%.
As we move toward the next earnings season, these three currencies will become much more visible as leading sources of impact to EPS.