Recently, UK-based Wolseley, the world’s largest heating and plumbing materials supplier and member of the FTSE-100, reported more than a $50 million increase in trading profits. According to their Q3 Interim Management Statement, this was driven in no small part by a fortuitous quarter for exchange rate movements. Edd Hardy, Corporate Market Analyst at World First UK Ltd., digs a little deeper into Wolseley’s results to find out how this occurred, and what small businesses can learn.
As a global business, Wolseley exposes itself to currency risk on a daily basis. As a company that reports earnings in the pound sterling, which saw volatility in the lead-up to the Brexit referendum, this currency risk materializes in one of two ways: either contributing to or subtracting from its bottom line. Wolseley’s largest unit geographically is the US, from which it saw 66% of revenues from February to April this year. During this time, the pound fell to its lowest level since the Global Financial Crisis in 2008 as uncertainty surrounding the UK’s EU Referendum drove investors away from the sterling, and into safe havens such as the US dollar and Japanese yen.
Fortunately for Wolseley, the weakness in the pound increased the value of its US earnings which, when repatriated for its latest set of accounts, translated to a surge in trading profits to the tune of more than $12 million on foreign exchange factors alone. This, combined with the $44.5 million rise in profits outside of the foreign exchange impact, led to a gain of 17.4% when compared to the previous year.
Jeremy Cook, Chief Economist at World First UK Ltd., explains; “Wolseley, and many other UK exporters, were able to take advantage of the weaker pound earlier in the year and the fruits of their labor have clearly paid off. Locking in beneficial exchange rates via forward contracts are one way in which these gains can be extended, allowing future transactions to be executed at a pre-agreed rate for a pre-agreed period of time even if the exchange rate moves against them, as has happened since March as markets take stock in the belief that the UK will vote to remain in the European Union.”
Whatever the size of your company, trading internationally can provide great opportunity, but also adds an additional risk to your business through future foreign exchange uncertainty. Managing this risk allows you to focus on the opportunities of international expansion as opposed to staring at charts of currencies and worrying about what may come. World First USA Inc. is a specialist in international payments and currency and could help you protect yourself against the volatility of trading overseas.