Unilever’s FX hedging surge failed to stem EM losses

by Nick Dunbar

Updated: March 19, 2019

Sharp declines in emerging market currencies highlight how corporate reporting influences treasury risk management decisions. Nicholas Dunbar reports

Anglo-Dutch consumer goods company Unilever reported foreign exchange translation losses of €4.7 billion in the first half of this year, slashing euro-denominated turnover by almost 9%. That was despite Unilever increasing foreign exchange hedges at the end of 2017 to a five-year high of €25 billion in nominal value, or 40% of annual turnover.

Commenting on the foreign exchange loss on a 19 July earnings call, Unilever chief financial officer Graeme Pitkethly said, “This is a result of the euro strengthening against almost all of our major currencies.”

Unilever’s wobble contrasts with Swiss consumer goods giant Nestle, which reported a half-year currency impact of just 217 million Swiss francs, or 0.5% of annual sales. Both companies have benefited from strong emerging market growth in recent years. Unilever now depends on emerging markets for 56% of turnover, compared with 43% of global sales at Nestle, according to company results presentations.


Then came this year’s rout in emerging market currencies, with Turkey, Brazil, Russia and South Africa all declining more than 15% against the dollar. Given their similar exposure to emerging markets, why did Unilever and Nestle report such contrasting currency impacts? While differences in supply chains and market presence may be a factor, the main reason lies in the mix of reporting conventions and hedging strategies adopted by each company.

A key decision is how to convert revenues booked in foreign currencies to the home currency used for shareholder reporting. Unilever chooses to report its euro-based turnover and profit using current currency, converted at the reporting date. Nestle, on the other hand, converts sales and profits into Swiss Francs at so-called constant currency, using an average rate to smooth out fluctuations.

If a local Nestle operation in Brazil wanted to protect against a rise in raw material costs resulting from a decline in their local currency, it might buy forward exchange rate contracts which would qualify as a ‘cash flow hedge’ against forecast inventory. But as a Nestle spokesperson explains, the use of an average exchange rate means that such hedging strategies can have “no direct impact” on net sales reported at group level because the exchange rates used in the hedges are different.

Now consider Unilever. Because it converts local currency revenues into euros at a fixed reporting date, its treasury department has an incentive to hedge, in order to dampen translation volatility in group revenues. Indeed, the company might have reported even worse results in July if it had not hedged to the degree it did.

However, without more a detailed breakdown of Unilever’s hedging in different currencies it isn’t possible to be sure whether the outsized hedging helped or not. A Unilever spokeswoman declined to comment further.

The question then arises what happens if emerging market currencies fail to recover by the end of the year. At some point, Nestle will have to update the average used in its currency conversions and reconcile the numbers in its year-end accounts. It could be that this will be as painful a result as Unilever, which by then will be congratulated for having got the bad news out first.

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