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How IROs Can Handle Foreign Currency Fluctuations

Global currencies are in a constant state of flux – here’s how IR professionals can better prepare for this inevitability.

Recently, the old adage “the only constant is change” may feel especially poignant to those working in the financial sector — Britain’s exit from the European Union has certainly changed the financial landscape, and we will likely be feeling those changes for years to come. One of the most immediate and significant of these impacts was the value of the pound, which dropped to its lowest level since 1985, a collapse outlined by the Washington Post.

In just a single day, the pound fell more than 8%, serving as an important, if difficult reminder of the delicate relationship between foreign markets and their respective currencies. For IROs, communicating the complex impacts of international currency fluctuations is an inevitable challenge, requiring consistent and simple messaging, according to NIRI.

Different Strokes

Of course, different companies will have different responses to fluctuating international currencies, “depending on their revenues from non-U.S. markets and the reporting practices of industry peers,” says Margo Van Porter of NIRI. In the 12 to 18 months leading up to the U.K. referendum, the U.S. dollar was showing remarkable strength, and therefore significantly impacting many companies’ revenue, particularly those based in foreign currency.

As an IRO, it is critical to understand how such fluctuations affect your company, or more specifically, how they affect your reporting. Ciena Corporation, for example, conducts around 45% of its business out the United States, but because most its contracts are written in U.S. dollars, the company opted against constant currency reporting. “Currency fluctuations are not something that typically affect us, so we don’t have to normalize for it,” according to VP of investor relations Doug Lampf.

BGC Partners Inc./Cantor Fitzgerald similarly decided against constant currency reporting. Instead, says Managing Director and Head of IR Jason McGruder, “We give analysts the amount of money we would have had so they can do their own constant currency if they choose…We give them the information they need to do an apples-to-apples comparison vs. our peers.” Every company is different, so make sure to determine the best reporting practices for the unique needs of you and your shareholders.

Changing Guidance

In the same way, you may want to change how you issue guidance. Knowing that currencies may be especially volatile in the coming months, you may choose not to issue your guidance in terms of absolute dollars, for example.

Central European Media Enterprises made this very decision, as the company’s Head of Investor Relations, Mark Kobal, explains: “Heading into 2015, management recognized that foreign exchange would be a significant unknown over the course of the year, so we changed the way we gave guidance to avoid a likely situation where we might be forced to update guidance because foreign exchange rates moved, even though operations continued to perform as expected.”

Being cognizant of when you give your guidance can also be an effective way to compensate for fickle foreign currencies. Danish company Novozymes provides guidance annually based on organic growth rates and reported growth rates, and using currency exchange rates from the previous day. “If you do anything else,” Senior Manager of IR Martin Riise says, “you are essentially speculating in the currency markets…[and] that is probably not your core business.”

Be Prepared

In the end, preparation and consistency are a must. Get a firm understanding of current currency fluctuations and work with your executives to develop a solid plan of communication. Compiling a sensitivity analysis that “shows how earnings change if the dollar goes
up or down” is a great way to give you and your shareholders an idea of possible scenarios, according to McGruder. Perhaps most importantly, stay in regular contact and keep your messaging clear, but simple.