Germany's Merck Boosts Hedges Against Currency Gyrations

Date : 08/10/2018 @ 8:58AM
Source : Dow Jones News

Germany's Merck Boosts Hedges Against Currency Gyrations

By Nina Trentmann 

German drugmaker Merck KGaA ramped up its currency hedging efforts in recent months as wild swings in exchange rates took a bite out of earnings.

"Currencies have become more volatile, which is why we increased our hedge ratios," Chief Financial Officer Marcus Kuhnert said in an interview with CFO Journal.

Merck hedges between 30% and 70% of its expected currency exposure over the next 12 months, and the company is close to the upper end of that range now, Mr. Kuhnert said. Merck hedges up to 50% of its expected currency exposure over the next 24 months, and up to 30% over the next 36 months. The company also hedges its order book.

However, Merck expects annual sales to decline 3% to 5% this year due to currency movements, despite its hedging efforts.

"They are dealing with the currency risk the best they can," said Luke Sergott, an analyst at ISI Evercore, a unit of Evercore LLC.

Merck operates in various countries around the world and became more exposed to the U.S. dollar in 2015 through the acquisition of St. Louis-based Sigma-Aldrich Corp., a chemical, life sciences and biotechnology company.

Adverse foreign-exchange moves contributed to a decline in net income in the quarter ended June 30, to EUR247 million ($286.6 million) from EUR426 million in the prior-year period.

Merck isn't alone in grappling with currency swings of late. Nearly two-thirds of finance chiefs in a July survey by HSBC Holdings PLC said currency-market fluctuations hurt their earnings.

Merck's Mr. Kuhnert said he is using derivatives such as options and forward contracts to protect against swings in international currencies including the U.S. dollar, Chinese yuan, Japanese yen and Swiss franc.

While a hedging program can protect a company against adverse moves in exchange rates, it also can increase costs and lead a firm to miss out on beneficial changes in currency values.

Currency hedging losses are "likely to be higher than expected due to the most recent developments of key currencies such as the Chinese renminbi as well as the euro-U.S. dollar exchange rate," Merck said in its June 30 interim management report.

The company in May for the first time drilled down on the impact of fluctuating exchange rates on its results, issuing detailed guidance.

Merck also continues to digest its $17 billion acquisition of Sigma, completed in November 2015. The drugmaker took a EUR20 million hit in its life science business in the quarter ended June 30, part of which stemmed from the integration of Sigma's production networks.

Once Merck brings all its life science products onto Sigma's e-commerce platform and optimizes its supply chains and production networks, it expects to gain synergies of around EUR90 million by the end of the year, Mr. Kuhnert said.

Merck also will firm up its financial standing once it completes the sale of its consumer health business for EUR3.4 billion to Procter & Gamble Co., an agreement struck in April. The proceeds will help Merck to reduce net debt, Mr. Kuhnert said. Merck's net debt was EUR10.7 billion in the six months ended June 30, compared with EUR11.2 billion at the end of the prior-year quarter.

"Deleveraging is our top priority," said Mr. Kuhnert, adding that the company won't spend more than EUR500 million on deals this year.

Write to Nina Trentmann at nina.trentmann@wsj.com

 

(END) Dow Jones Newswires

August 10, 2018 04:43 ET (08:43 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.


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