CFOs Boost Currency Protections, Extend Hedge Contracts as Strong Dollar Takes Toll

Date: Tuesday, November 8th, 2022
Source: Wall Street Journal

Finance executives at large U.S. companies, including beverage giant Coca-Cola Co. and materials-science company Dow Inc., are increasing their foreign currency hedges and covering longer time periods as the strong dollar continues to take a toll on earnings.

The dollar in recent quarters has surged against major international currencies as the Federal Reserve’s rate increases outpace those of other central banks, making higher-yielding dollar assets more attractive for investors. The Wall Street Journal Dollar Index, which measures the performance of the U.S. currency against a basket of others, is up nearly 15% since the beginning of the year. A strong dollar crimps income from abroad as it gets converted into fewer dollars.

Finance chiefs and treasurers are responding by looking for additional protection, as they try to ensure that their overseas earnings are worth a certain amount when translated into U.S. dollars. Changes to companies’ hedge contracts include covering larger amounts of earnings as well as longer durations beyond the usual 18 to 24 months.

“You’re buying time to respond and pushing the impact into the future,” said Joseph Neu, founder and chief executive of NeuGroup Inc., which runs membership groups for treasurers.

There are growing indicators of the impact of the strengthening dollar on companies’ results and stocks, according to Goldman Sachs Group Inc. The number of S&P 500 companies that beat revenue expectations has declined as the dollar strengthened, the bank said, with 38% of companies outpacing expectations through Oct. 31, compared with 45% in the second quarter and 49% in the first quarter. Share prices of S&P 500 companies with large overseas exposure are down about 23% since the beginning of the year, compared with 18% for the wider index and 6% for companies with largely domestic businesses, Goldman Sachs said.

Atlanta-based Coca-Cola, which generates a sizable chunk of revenue abroad, has increased the number of emerging-market currencies it hedges. “It is a big topic,” President and Chief Financial Officer John Murphy said about recent foreign-exchange movements. “We have taken a position for the rest of the year where we are very well hedged,” he said, adding that the company has added hedges for 2023. “We deploy many of the same techniques, but we are more cautious about the strengthening dollar.”

Coca-Cola in late October said that foreign exchange effects have dented its margins, earnings per share and other metrics and said it expects comparable EPS—a metric outside of generally accepted accounting principles—to include a 7% to 8% currency headwind for the year.

Many companies have hedges in place to protect cash flows, earnings and balance sheets from currency fluctuations, said Mr. Neu. Depending on the situation, executives might layer on additional hedges to increase their coverage.

“A trend that we have seen is [companies] looking to go out longer,” Mr. Neu said, referring to the length of hedge contracts, which can go out to three or four years or even beyond.

Prologis Inc., a San Francisco-based operator of warehouses, is working to extend its hedges, CFO Tim Arndt said. “We’re going longer and longer,” Mr. Arndt said. While the company used to hedge two or three years out, now it is often doing so five or even six years out, he said. “That’s all translating earnings so we don’t have earnings surprises.”

Prologis has also matched assets and debt to reduce its exposure to changing currencies and valuations. “Our euro assets are worth less in dollar terms than they were a year ago, but we have matched them with euro debt. That debt is also worth less and that moves together” with asset values, Mr. Arndt said.

Kimberly-Clark Corp. , which owns brands including Kleenex facial tissue and Kotex hygiene products, also boosted its hedges. “During 2022 we increased the notional level of our foreign currency designed cash flow hedges to mitigate the impacts of significantly increased macroeconomic foreign currency rate fluctuations,” the company said in its most recent quarterly filing. Kimberly-Clark reported $2.11 billion in cash-flow hedges, up from $829 million at the end of the second quarter.

Midland, Mich.-based Dow recorded a significant jump in foreign currency contracts as well, from $5.3 billion at the end of December to $13.13 billion at the end of the third quarter. The company declined to make its CFO or treasurer available for an interview. Defense contractor Lockheed Martin Corp. also reported higher notional hedge amounts during its most recent quarter, quarterly filings show.

Despite the increase in hedging activity, many CFOs don’t plan wholesale changes to their foreign-exchange programs given the levels that the dollar is trading at. “If the company were to be making a change right now, it would be very expensive,” said Anat Ashkenazi, the CFO of pharmaceutical company Eli Lilly & Co. The company reported quarterly revenue of $6.94 billion—up 2% from the prior-year quarter—and said that increases in volumes were partially offset by lower realized prices and a 4% impact from foreign-exchange rates.


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