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US consumer giants suffer $4bn headwind as the dollar strengthens


Treasurers at US consumer multinationals with high foreign currency exposure added $9.1bn of FX hedges as accelerating dollar weighs on earnings.


by Anmol Karwal

Published: May 31st 2022

The strengthening of the US dollar against a basket of currencies has reduced revenue of US consumer companies in the S&P 500 Consumer Staples sector index with at least a third of their sales from foreign markets in 2021 by over $4.06 billion since the start of the year. The FX hit amounts to about 2.6% of total revenue, according to EuroFinance analysis. 

Amid worries over soaring inflation and supply disruptions, treasurers are locking in foreign currency rates, increasing notional FX hedges by $9.1 billion in the first quarter of 2022. Meanwhile, many are increasing prices of their products to recoup FX losses but at a risk of losing market share to competitors.

FX headwinds

Consider the multinational tobacco company, Philip Morris International (PMI), which generated 94% of its revenue from international markets in 2021. Hedging foreign currency risk is of utmost importance for PMI as it receives revenue for goods sold in foreign markets in local currencies but pays for input costs in US dollar, leaving its gross margins highly susceptible to changes in FX rates. 

This is particularly painful in a rising US dollar environment, when dollar value of foreign currency revenue reduces but costs of raw materials remain the same. This had left the company nursing a loss of $590 million in the first quarter of 2022 and another $252 million in the second quarter, as per EuroFinance’s estimates, taking the total FX loss to $842 million since the start of 2022.

To mitigate this impact, the company increased its notional cash flow hedges, which hedged a portion of forecasted cash flows denominated in foreign currencies, by 29% or $1.1 billion to $4.9 billion, when expressed as a proportion of foreign sales equates to only 16.7%.

However, derivatives generated a gain of $141 million in the first quarter, covering only a quarter of FX related losses during the same time period. That suggests its hedging programme was not as effective and the company has to increase prices of its products in foreign markets. 

“We assume full year pro-forma pricing of around plus 3%” said Emmanuel Babeau, CFO at PMI

Meanwhile, the household products multinational Procter & Gamble’s (P&G) FX derivative portfolio remained unchanged as it held a notional FX forward contracts and swaps of $15.3 billion at the end of Q1, sufficient to hedge 39% of its international sales, which comprised more than half of its total revenue.

While an appreciating dollar had a 3% or $581 million negative impact on net sales in the first quarter, EuroFinance estimates a further $380 million bump on international sales in the second quarter. 

“Foreign exchange rate has also moved further against us since our last guidance. We now expect FX to be a $300 million after-tax headwind to earnings for the fiscal year.” said Andre Schulten, CFO at P&G.

The consumer goods giant doesn’t hedge its commodity exposure at all and is now forced to increase prices to offset losses. “Foreign exchange rate pricing is a reality we're dealing with everyday… it's being executed in some markets” said Andre Schulten, CFO at P&G.

The US beverage giant, Coca Cola earned 66% of its $38.6 billion annual sales outside the US, and held notional FX cash flow hedges of $7.5 billion at the end of first quarter, or 27.14% of its foreign sales.

While these hedges reduce the risk of net cash inflows from sales outside the US and net cash outflows from procurement activities be adversely affected by fluctuations in foreign currency exchange rates, the company reported a -6% or $204 million negative impact to operating income due to an appreciating US dollar in Q1 and given the continued strength of the dollar in the second quarter, EuroFinance estimates another $299 blow in Q2.

As FX hedges only generated a gain of $136 million in Q1, gross margins deteriorated by 90bps due to currency headwinds and acquisitions.  

“Based on current rates and our hedge positions, we are reiterating our currency outlook of a two-to-three point currency headwinds to net revenues and a three-to-four point currency headwinds to EPS for FY2022.” said John Murphy, CFO at Coca Cola.

Meanwhile, the producer of paper-based products- Kimberly Clark, skin & hair care products manufacturer-Estée Lauder and US consumer products giant-Colgate-Palmolive, also increased notional cash flow FX hedges by 13%, 10% and 2% respectively, in the first quarter. 

While Estée Lauder suffered a $53 million impact from FX fluctuations in the first quarter, EuroFinance estimates the loss to increase to $148 million in the second quarter. However, based on the sensitivity analysis provided by the company, a fair value gain of $114 million from FX hedges will be able to provide temporary relief.

The company didn’t respond to a request for comment. 

Natural Hedging 

While FX hedges may only be able to provide a partial and temporary benefit, corporates are also focused on implementing strategies like natural hedging in order to recoup losses.

With natural hedging, treasurers are able to reduce net exposure to FX fluctuations as both revenue and input costs are denominated in the same currency. However, supply chain bottlenecks coupled with some commodities being traded internationally only in US dollars make it difficult for treasurers to execute this strategy. 

For instance, executives at Philip Morris told investors that they are increasing invoicing customers in US dollars in order to equalise the equalise the currency in which they receive revenue and in which majority of their cost are comprised (US dollar).

While this has helped the e-commerce giant, Amazon to extensively reduce its foreign currency exposure and thereby eliminate the use of derivatives, as earlier reported by EuroFinance. 

Similarly, German automakers including VW, BMW and Mercedes-Benz have also been ramping up local production in China as they estimate significant cash inflows from the region in the coming quarters. 


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