Being euro-denominated is a benefit

In order to get the euro perspective for corporates when comparing the currencies of the Nordic countries, Nordea On Your Mind author Viktor Sonebäck  turns to Tomi Hintikka, Group Treasurer of the Finnish crane and lifting equipment group Konecranes. Tomi shares his thoughts on the merits of reporting in euros, how the various forms of FX risk are managed and how the group might be affected from hypothetically having a smaller, floating currency.

Viktor Sonebäck (VS): Could you briefly describe how you approach FX risk at Konecranes? Which are the key risk elements and currencies? Transaction risks versus translation risks versus balance sheet risks? How do you assess them and manage them? 

Tomi Hintikka (TH): Starting with the balance sheet, we do not hedge FX risk in the equity of our subsidiaries. We do, however, focus heavily on our cash flow, where we hedge the operative results of our group entities. 

Based on the nature of the business, we do it in two ways. We call it flow hedging when speaking about our industrial services and cranes areas, where the operating model is such that the front-line entity – typically a country-level entity – is selling and servicing the cranes in their own country and in their own local currency. So, the potential FX risk relates mainly to the intercompany purchase of goods, which we have centralised to our supply units, meaning the backline entities, and hence gathering the full FX exposure to one place, and in turn internally hedging those flows with the group treasury. It is a rather straightforward setup, with short tenors, where we typically do not go beyond a time horizon equivalent to the account receivables/payables

Then we have our business area ports, primarily related to container handling equipment, where customers are truly global and can be located pretty much anywhere on Earth. Here, the major FX exposure is in dollars by nature of the business. I would not say we hedge this exposure strictly contract by contract, but rather given certain milestones and commitments. And, in this case, the tenors can be long – up to three or four years even. We basically hedge the entire orderbook, and in some of the business units we may even hedge beyond the orderbook. When we hedge longer than the orderbook, it is always together with the respective business unit and dependent on their judgement of demand and the market outlook, and sometimes even in an opportunistic manner where we take advantage of beneficial currency levels. One example would be the favourable exchange rates in SEK relative to major currencies, meaning it can be lucrative to go longer than the current orderbook.

Our main reason for this overall strategy is to defend our sales margin. But, in addition, we are supporting the intercompany pricing logic. This in turn is reflected in the end prices in local entities. And, in doing so, we ensure stability in sales prices over time and keep the price list changes sensible, and with higher visibility.

VS: With Konecranes having such a global presence, do you see any specific advantages or disadvantages with reporting in euros?

TH: We see it as a benefit. Our main cost base is in euros, and we operate in all of the euro countries and have the majority of our business volume in euros. So, being a Nordic country, coming from Finland, at least compared to the historical Finnish markka, it is clearly a better position to be reporting in euros. Comparing to a scenario where Finland still had the markka, I believe it would make things related to FX risk management a bit more cumbersome. It would still be manageable since it would be a fully deliverable currency not falling into any 'banana currency' category, so I suppose it would be mostly a technical challenge solved by rolling up sleeves and doing more work. But, at the end of the day, it should not change the rationale of our strategy dramatically. Having said that, it is more straightforward with the euro.

Looking at it from a competitiveness angle, it would be a different situation if we were a more asset-heavy business with a purely local cost base while selling internationally. But being a rather asset-light company, and with a very global footprint, this is not really the case.

Comparing the Scandinavian environment, I suppose the underlying FX risk management problem is the same; for example, providing fixed bids for a tendering process and managing the risk. It is rather currency-agnostic in many ways, and it doesn't make a lot of difference if you are located in a krona area or the euro area. And even though we are a euro company, we still have a lot of different FX crosses. Even if we were a dollar company, we would still need to manage it in a similar manner. So, maybe the reporting currency in this respect doesn't play a big difference. 

If Konecranes has major FX exposures in high carry currencies, we might not apply our normal hedging procedures, but rather look at it on a case-by-case basis, involving the business if needed to determine the most cost-efficient way of hedging the risk. If we have a very strong euro and are trying to sell in other currency regions – competing with local manufacturers – it might be a challenging situation if, on top of our cost base being mainly in euros, you have to add high forward premiums due to hedging. But I think this challenge is similar for Finnish and Swedish entities in a sense, given the Swedish Riksbank policy closely following the ECB. But, perhaps it is more easily managed being a euro company.

VS: How helpful could a weak or strong EUR be for your costs – are significant materials, components or production volumes based in other currencies? Has the nature of your net FX exposure changed significantly compared with ten years or 20 years ago?

TH: There have not been any dramatic changes in the past ten, or even 20, years. Coming from the theoretical perspective, surely a weak euro would be of benefit to an exporting company like Konecranes. Also, from the angle that since we are a natural long dollar company, selling a lot in dollars, then surely a weak euro benefits us as a company from that perspective. There are some benefits from a strong euro too, but perhaps these are not as obvious compared to the situation where we sell better with a stronger dollar than a stronger euro. But there are surely individual cases; for example, our intercompany sourcing in Chinese renminbi becomes less expensive. But as a company as a whole, I would say maybe not a weak euro but weak-ish or a low range between the euro and the dollar would suit us the best

VS: Would you say that currency is a meaningful factor weighing into investment decisions, such as adding product line capacity, adding a service centre, opening up in a new market?

TH: In the past ten years, we have not really done any greenfield investments, so we don't have any historical evidence on this particular question. But looking at the overall picture, currencies and exchange rates for sure might play a part; for example, in some of our subcontracting contracts or end-customer contracts where we have typically been operating in major currencies. Take the euro for example. Should it happen to be that the customer or the supplier is China-based, nowadays we are actually able to benefit if they would be selling or we would be purchasing from them in Chinese renminbi. So, the currency aspect is not meaningless, but it would not typically be a decisive factor