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Exporters Reap the Benefits of Weak Euro

Chris Bryant, Financial Times
Monday, 13 Aug 2012 | 2:24 AM ET

Sanofi, the French drug company, was facing a tough second quarter owing to austerity measures in western Europe and the expiration of patents on two blockbuster drugs.

A one Euro coin stands on a map of Brussels.
Sean Gallup
A one Euro coin stands on a map of Brussels.

But thanks to what management called a “very significant movement” in the euro against the dollar and other big currencies, its reported sales jumped 6.2 per cent and profit declined only 9.6 per cent to 1.9 billion euros ($2.3 billion) in the three months to the end of June. Adjusted for currency movements, its sales rose 0.4 per cent and net income declined 17.7 per cent.

“Only time will tell as to whether or not this is the normal volatility of exchange rates or whether we’re seeing a structural and more long-term change in the value of the euro versus the dollar,” said Christopher Viehbacher, chief executive.

Sanofi is not alone. The weak euro is boosting the sales and earnings of some of the continent’s biggest companies, helping offset weak demand from Europe’s crisis-hit periphery.

Although the effects have so far been partly offset by currency hedges, the biggest winners are set to be multinational companies such as Sanofi with a significant cost base in Europe but a high proportion of sales outside the euro zone. Only about one quarter of Sanofi’s sales are generated in euros.

Jerome Contamine, Sanofi’s chief financial officer, surmised that “if it goes on as it is today, it will have a favorable impact on the reported sales and profit in the coming quarters”.

In addition to pharmaceuticals, German premium carmakers, European chemicals, aerospace and luxury goods makers are among those to profit. In contrast, companies in southern Europe that tend to be more dependant on euro zone export markets have realized fewer benefits, aside from the prospect of a pick-up in tourism.

“The weaker euro can help offset some of the negative consequences of the economic slowdown for some corporates,” said Jean-Michel Carayon, senior vice-president in Moody’s credit policy team. “But the overall picture remains slanted to the negative for European companies as the economy slows.”

Moreover, the weaker euro is unlikely to be a panacea for the eurozone’s broader troubles.

“We see no strong reason to believe that [the euro] has weakened sufficiently for a self-correcting mechanism to kick in,” Jens Nordvig at Nomura told clients in a recent note. “The magnitude of these growth effects is unlikely to be sufficient to counter other negative growth impulses from deleveraging in the euro zone banking system, weak overall confidence, and broad-based fiscal austerity.”

The euro zone’s gain is the inverse of the difficulties affecting U.S. multinationals, many of whom complained of currency headwinds during the second quarter because of the appreciation of the dollar .

The Volatile Euro

The euro fell more than 5 per cent versus the dollar in the three months to the end of June and was down nearly 13 per cent from June 2011. The euro dropped 14 per cent against both the Japanese yen and the Chinese yuan over the same 12-month period. The euro remains volatile but has weakened further against the dollar since the end of June.

BMW said the weak euro would have a mid-to-high triple digit million euro impact on earnings in 2012. Daimler expects full-year foreign-exchange related gains of about 600 million to 700 million euros. Meanwhile, Volkswagen, Europe’s biggest carmaker by sales, said currency factors – after taking into account hedging – boosted operating profit by 500 million euros in the first six months of the year.

In contrast, mass market European carmakers such as PSA Peugeot Citroën and General Motors’ Opel unit continue to make losses as they are reliant on European sales.

“The weakening of the euro seems to be one of many elements required to assist a European economic recovery — however, such an outcome will only contribute in the short term to the already outperforming German carmakers getting stronger,” Arndt Ellinghorst, at Credit Suisse, told clients. He estimated a 3.8 billion euros currency-related gain for German carmakers in 2013, compared with 1.6 billion euros this year.

The weaker euro has helped disguise relatively anemic sales growth at some companies. Siemens, the German engineering conglomerate, had a 10 per cent rise in fiscal third-quarter sales to 19.5 billion euros, but half of the increase was due to currency fluctuations.

Luxottica, the Italian eyewear company that makes Rayban and Oakley sunglasses, had a 15 per cent rise in second-quarter sales. Just over half of the increase was due to currency changes. “Looking at the rest of the year, we see the dollar continuing to help us,” Enrico Cavatorta, chief financial officer, said.

Richemont, the Swiss luxury goods maker known for its Cartier jewelry and Jaeger-LeCoultre watches, expects its half-year profits to be up to 40 per cent higher than last year, helped by the Swiss-franc’s peg against the euro.

Jon Cox, head of Swiss research at Kepler Capital Markets, said: “As the euro falls, their cost base is depreciating in dollar terms. With their revenues mainly in dollars ... they are enjoying windfall gains.”

Not all European companies felt a tailwind from currency effects, however. Deutsche Bank, which has extensive investment banking operations in the UK and US, blamed a rise in second-quarter costs on the weaker euro. Meanwhile, revenues at ABB, the Swiss capital goods company, were reduced by about $600 million and ebtida by about $100 million as the company reports in U.S. dollars.

Last year many European companies experienced headwinds from a relatively strong euro, and the hedges companies put in place have reduced the short-term impact on earnings this year.

“Large manufacturers often hedge their currency exposure for a couple of quarters, so it may take a more sustained weakness of the euro for euro zone companies to realize material benefits,” Mr. Carayon at Moody’s said.

Passenger jets made by EADS, the Franco-German owner of Airbus, are usually sold in dollars even though most of its production base is still in Europe. The short-term benefits of a weaker euro are limited because the company still has hedges – at an average of about $1.35 to the euro, compared with its current level of about $1.24. EADS is one of the biggest industrial users of currency hedges, with an $84.1bn portfolio.

UBS analysts say expectations of a weaker euro over the next few years “significantly changes the profit potential at Airbus” over the long term as those hedges unwind. UBS estimates that each 1 cent fall in the dollar euro exchange rate should be worth an extra E1 to the EADS share price.

Looking ahead, a survey by Commerzbank found that German companies were more upbeat about the euro in July after the European Central Bank said it stood ready to prop up bond markets if politicians requested aid from the eurozone’s bailout fund. Corporates were fairly bearish on the euro over the course of the year due to the euro zone crisis, but that “changed quite dramatically in July,” said Gerald Dannhaeuser, head of forex sales at Commerzbank.

That has led to a shift in hedging patterns, with European exporters hedging their currency exposure more in recent weeks, according to corporate sales desks at both Commerzbank and Citigroup. Earlier this year, exporters were barely bothering to protect themselves against a fall in the euro, investment banks reported.

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