L’Oreal SA (OR) Chief Financial Officer Christian Mulliez told analysts last month there’s one guaranteed earnings driver for the world’s largest cosmetics maker this year: the euro.
“There may be some negative factors, factors that we can’t quantify today,” he said on a Feb. 12 conference call. “But we know that we have at least one positive upside, which is that of the currency hedges,” he said, referring to contracts that lock in costs and sales at a predetermined exchange rate.
Europe’s biggest companies are betting a second year of recession in the region will drive down the common currency, helping them better compete as countries from Japan to the U.S. battle for exports. L’Oreal is hedging at $1.26 per euro this year, down from $1.36 in 2012. Bayer AG (BAYN), BASF SE (BAS), Heineken NV, Deutsche Telekom AG (DTE), MTU Aero Engines, Infineon Technologies AG (IFX) and Beiersdorf AG predict exchange rates ranging from $1.25 to $1.31, compared with the $1.3193 the euro closed at on Dec. 31.
“Given the region’s growth outlook, Europe, more than most, needs a weaker currency,” said Adrian Owens, a money manager who helps oversee $48 billion at GAM UK Ltd. in London. “We are now seeing a much clearer recovery in the U.S. We are running a short position on the euro against the dollar.” A short position is a bet that an asset will fall in value.
European Aeronautic Defence & Space Co., the parent company of Airbus SAS, bought $30 billion in new hedges throughout last year, locking in an average rate of $1.30 to the euro to protect the future revenues for its commercial aircraft, helicopters and satellites.
“We’ve taken advantage of a more favorable U.S. dollar environment, accelerating our hedging speed in 2012,” EADS Chief Financial Officer Harald Wilhelm told analysts last week.
Almost all of the 588 Airbus planes the company delivered last year were paid for in dollars, with more than 50 percent of costs incurred in euros. Every 10-cent drop in the value of the dollar against the euro costs the company about 1 billion euros ($1.3 billion) in pretax profit, EADS calculates.
Instead of falling amid the region’s debt crisis and slowing economy, the euro has climbed from a two-year low of $1.2043 on July 24 to $1.3024 as of 8:28 a.m. in New York after European Central Bank President Mario Draghi’s pledged to do “whatever it takes” to preserve the 17-nation currency bloc. The ECB has also avoided debasing the euro through bond purchases, unlike in the U.S., Japan and U.K.
Since it began trading in 1999, the euro has fallen as low as 82.30 cents in October 2000 and risen as high as $1.6038 in July 2008. It ranged from $1.204 to $1.349 in 2012.
The median estimate strategists and economists surveyed by Bloomberg is for the euro to trade at $1.30 by year-end and $1.27 in 2014.
Output in the euro-area will shrink for two-consecutive years for the first time since the common currency was introduced, the European Commission predicted on Feb. 22, scrapping an earlier growth forecast. The median estimate in a Bloomberg survey is for the economy to contract 0.1 percent in 2013, compared with 1.8 percent growth in the U.S. and 1 percent expansion in Japan.
European officials have signaled they would prefer a lower exchange rate. The euro reached a 15-month high of $1.3711 on Feb. 1, or two weeks after Luxembourg Prime Minister Jean-Claude Juncker said Jan. 15 the currency was “dangerously high.”
“There are a couple of conflicting forces at work in the euro region,” GAM’s Owens said. While the deteriorating outlook for the European economy may weaken the euro, the region’s surplus of trade in goods and services may support confidence in the currency, he said.
Deutsche Telekom AG, Germany’s largest phone company, which is merging its T-Mobile USA division with MetroPCS Communications Inc., said Feb. 28 that its fourth-quarter results were boosted by 145 million euros in revenue gains from a stronger U.S. dollar. The Bonn-based company predicts a euro value of $1.27 for this year.
Other companies that benefited from the euro weakening against other currencies last year include brewer Heineken, staffing provider Randstad Holding NV and chipmaker Infineon, which based its 2013 plans on a euro-exchange rate of $1.25.
Heineken said last month that it hedged 81 percent of its predicted U.S. dollar inflow for this year at a euro rate of $1.31. STMicroelectronics NV, Intel Corp.’s largest competitor in Europe, in January also predicted the euro to trade at $1.31 in the first quarter of this year.
Fiat SpA Chief Executive Officer Sergio Marchionne said yesterday at the Geneva Motor Show that the euro “doesn’t deserve” its current valuation and won’t stay at that level in the long term. The Italian carmaker that controls Chrysler Group LLC generated last year about 58 percent of sales in Canada, Mexico, and the U.S.
Bayer Chief Financial Officer Werner Baumann said in an interview last month that a 1 percentage point change on the company’s entire basket of currency exposure would boost or reduce sales by 270 million euros and earnings before interest, taxes, depreciation and amortization by 70 million euros.
Aftershocks from the indecisive Italian elections, which ended in a four-way split, are also spurring bearishness as the country’s political instability threatens to reignite concern that Europe’s debt crisis will deepen.
Voters handed more than 25 percent of the vote to the party of comedian-turned-politician Beppe Grillo, with its anti- austerity message and a call for a referendum on euro membership.
The skepticism is reflected in expanded hedging positions at companies across the continent.
EADS boosted its hedge book to $84 billion in 2012 from $75 billion a year earlier. L’Oreal has around 80 percent of its 2013 transaction needs hedged, Mulliez said. Bayer’s policy is to hedge 100 percent of booked currency exchange exposure and typically about half of its future exposure, Finance Chief Baumann said.
Western European companies’ growing fondness for the dollar also shows in how they sell debt. The value of bonds sold in the U.S. currency by companies from the region more than doubled in the last quarter of 2012 to $33.4 billion, according to data compiled by Bloomberg. The amount sold in the region’s own currencies meanwhile rose by just 58 percent to $87.6 billion.
Siemens AG (SIE), Europe’s largest engineering company, last week sold $500 million of five-year bonds alongside a further 2.25 billion euros of notes.
“That’s a way of hedging,” Roland Chalons-Browne, head of the Munich-based company’s financial services unit, which doesn’t handle debt sales, said in an interview.
Without currency effects, L’Oreal’s 2012 operating profit growth of 12.3 percent would have been reduced to 8.2 percent or 8.3 percent, the company said last month. CEO Jean-Paul Agon told analysts that he bets on a similar boost this year:
“We have good hedges for this year,” he said, “which is good news to start the year.”
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