Earnings Bring on FX Blame Game

P&G, Philip Morris cite currency as culprit for weaker second-quarter results.

Procter & Gamble Co. and Philip Morris International Inc. found a common culprit for weaker financial results in recent weeks: changes in currency values.

P&G, the world’s largest consumer products company, had initially been counting on foreign exchange to bolster results this year. Instead, Chief Executive Officer Robert McDonald told investors last month it’s turned into “a strong headwind” that may have cut about $3 billion in revenue and at least $400 million in profit from previous projections.

The currency blame game is just beginning with second-quarter earnings reports kicking off this week. Members in the Standard & Poor’s 500 Index are forecast to end 10 straight quarters of profit gains and report a 1.8 percent profit decline on average, according to data compiled by Bloomberg.

CEOs tend to point their fingers at external causes when they come up short, even if they’re given millions in compensation for their management prowess, said Jeff Sonnenfeld, a professor at the Yale School of Management who lectures on corporate governance. McDonald, who had total compensation of $16.2 million last year, has cut forecasts three times this year and come under fire from analysts who fault poor execution for the Cincinnati-based company’s market share losses.

“From the perspective of the CEO, good news is their own doing and bad news is an externality,” said Sonnenfeld. “It’s Europe and currency. It’s Obamacare. It’s all this horrible uncertainty. Woe is us. The problem is, you often have competitors in the same industry and they aren’t all suffering the same injury.”

P&G rival Kimberly-Clark Corp. reaffirmed a full-year forecast for adjusted earnings of $5 to $5.15 a share on April 20. Analysts estimate sales and earnings rose in the second quarter. The company generated about half of its revenue outside North America last year, compared with 59 percent for P&G.

Unless they are hedged against the risk of an appreciation of the dollar, U.S. companies are taking in less revenue for products sold in places like Brazil, India, Russia and the euro region. The dollar erased year-to-date losses against most major counterparts in the second quarter as investors sought the safety of U.S. assets amid Europe’s credit crisis. The euro had its worst period versus the dollar since the third quarter of 2011, weakening 5.1 percent.

“There may be many companies caught flat-footed on this,” said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts. “The long term hedge has been to protect against a weaker dollar and a stronger euro.”


’Not Excuses’

P&G is focused on its top businesses, innovations and developing markets, as well as its $10 billion cost savings program, said Paul Fox, a company spokesman.

“Headwinds such as currency and commodities are not excuses but are realities we feel are helpful to explain to investors,” Fox said. “Since they are out of our control, we are focused on what we can influence so we can return to stronger growth.”

Some companies have found ways to mitigate the losses. Adobe Systems Inc., which generated about 57 percent of its sales outside the U.S. last year, used hedging to cut $10.7 million from a potential $14.5 million reduction in revenue related to currency for the fiscal second quarter, Chief Financial Officer Mark Garrett said in a June 19 conference call.

Google Inc.’s currency hedging probably helped the company lessen the hit of a stronger dollar in the second quarter, reducing revenue by 2.1 percent instead of 3.7 percent, said Carlos Kirjner, an analyst at Sanford C. Bernstein & Co., in a July 11 report. The company may still miss sales estimates when it reports next week, he said. Jim Prosser, a spokesman for Mountain View, California-based Google, declined to comment.

About 81 percent of Fortune 100 companies report they are actively hedging currency in some way, according to an analysis of regulatory filings by Fireapps Inc., a Scottsdale, Arizona- based company that makes software to help manage fluctuations.

“Nobody should be surprised by this, that is why they have treasury departments,” said Fireapps CEO Wolfgang Koester. The CEO needs to ensure the treasury department has the funds to deal with currency issues, “but a lot of the time the treasury department isn’t given enough money to solve a huge problem.”


Philip Morris Cuts

Philip Morris cited the dollar’s strength in cutting its full-year earnings forecast to $5.10 to $5.20 a share on June 21, from an April prediction of $5.20 to $5.30. The New York-based cigarette maker, a spinoff of Altria Group Inc., gets all its revenue outside the U.S., including 30 percent from the European Union last year.

“It will not come as a shock to you that currency has moved in the wrong direction since April,” Chairman and Chief Executive Officer Louis Camilleri told analysts June 21.

One day earlier, PepsiCo Inc. also said headwinds from a stronger dollar increased in the second quarter. The Purchase, New York-based company gives its forecast on a constant currency basis and anticipates fluctuations will equalize over time. The snack and soda maker made about half its revenue outside the U.S. last year.

“As it relates to currencies, we do hedge transaction to the degree that we can,” CFO Hugh Johnston said on June 20 during the same Paris investor conference where P&G cut its forecast. “It’s fairly challenging to predict at this point.”

CEOs are paid in part to manage outside factors such as currency fluctuation. The adjusted average compensation of CEOs in the Standard & Poor’s 500 Index rose to $12.9 million in 2011, or 380 times the average worker’s pay, the AFL-CIO said in an April report. That’s up from $625,000, or 42 times the average worker’s pay, in 1980, based on the report.

P&G’s McDonald and Philip Morris’s Camilleri both made more than the average CEO in the S&P 500 last year, with Camilleri receiving total compensation of $21.6 million. The companies are two of the biggest in the index.

“CEOs are not hired to take blame,” said James Post, a professor at Boston University School of Management who has written about governance and business ethics. “The board wants a CEO who is going to proclaim victory, or better, achieve it.”

When a CEO is forced to admit a failure of strategy or execution, the goal is often to find a unit or another person to blame, Post said.


‘So Many Excuses’


P&G’s McDonald faced such criticism from Wendy Nicholson, an analyst at Citigroup Inc. in New York, on an April 27 conference call. The owner of Tide and Gillette is scheduled to report fiscal full-year earnings next month.

“There’s so many excuses,” she said. “‘Not our fault, competition didn’t follow the pricing; not our fault, Venezuela changed; not our fault, the developed consumer isn’t robust.’”

P&G’s McDonald responded by saying he would get the right leaders and programs in place to deliver. The company lost market share after raising prices and is now reducing prices in six categories, including North American oral care, razor blades and dish care, as well as laundry detergent in the U.S., U.K. and Mexico.

“It is my fault,” McDonald said at the time. “I am the CEO of the company. I do take responsibility.”

PepsiCo CEO Indra Nooyi also took responsibility in February for decisions that led to a depressed share price. Management didn’t do enough to support the brands, especially in North American beverages, and didn’t anticipate commodity volatility in 2010 and 2011, she told investors at a meeting in New York.

The propensity of analysts to see any “drop of blood as a reason to peck a company to death” fuels a reluctance by companies and their CEOs to be any more forthcoming than necessary, says Elaine Eisenman, dean of executive and enterprise education at Babson College in Wellesley, Massachusetts, and a director at shoe retailer DSW Inc.

“You’re in between a rock and a hard place,” she said. “There’s a balance between what investors need to know and what it would be nice to know. You don’t want to be premature.”

Undoubtedly, fewer CEOs were previously crediting a weak dollar for helping profits returning to the U.S. from other countries, said Sonnenfeld, the Yale professor.

“If you’re walking down the street, and you trip, you think, ‘Gosh, can’t this city pave these streets?’” Sonnenfeld said. “But if you’re watching the person, you think, ‘What a clumsy fool. Can’t chew gum and walk at the same time.’ It depends on whether you’re the actor or the observer. The CEO is the actor.”


Bloomberg News


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