Forex and Cellestis.

The impact of foreign exchange rates upon Cellestis is something that I know has generated a lot of discussion. Because Cellestis sells most of it's product overseas and with the exchange rate fluctuations of recent times, it is something that is worth trying to understand. I'm sure that with the upcoming Half Year results this matter is being considered by many of the Cellestis investors.


I always have problems in understanding anything but the basics of forex. So, to provide something that is far more useful than what I could provide I called on my friend, Cellestis investor and fellow tractor owner "Elleburra" to bring his expertise to bear on this issue.


Here is what he has to say.

With regard to the effects of changing foreign currency values on CST revenue and expenditure figures there are many different aspects to consider.

Firstly we do not know what, if any, hedging contracts or options the company uses from time to time so for the sake of this exercise we cannot take these into account and thus any conclusions drawn can only be of a general nature and could be wide of the mark.

The company has said that more than anything they rely on the natural hedges in place and only hedge very selectively and for a short term when a definite large ingoing or outgoing sum is clearly scheduled and in their opinion needs action.

Of course hedging via contracts or options comes at a price which can be anything up to 5% or even 7% of the sum involved and thus very often hedging is just not viable. Also you can often get caught by a currency going in the opposite direction to your hedge and thus potentially forfeit some extra $s. Many times it has been wisely said that the best option where a company is exposed to exchange rate risks is to leave well alone and do nothing with the currency swings over time more or less compensating for the roundabouts sort of thing. Some real hedging disasters have brought a number of Australian companies to their kness, hedging by selling forward at a fixed price in US$ of gold production comes to mind where Australian miners incurred massive losses in their hedge books.

Natural hedging-------- one example is the US operation. All revenue from the US is of course initially in USD. However CST have substantial infrastructure in the US, warehouses, offices, staff, etc and the current expenditure for all this is of course paid in USD. Thus it is only the net of US revenue less US expenses that can be impacted by changes, positive or negative, in the AUD/USD exchange rate when the net proceeds are remitted to Australia. Another factor that does also come into it is the impact in CSTs A$ balance sheet each accounting period where any US assets or liabilities outstanding have also to be brought to account and translated into A$. However to my way of thinking this balance sheet aspect would be comparatively minor as premises in the US are only leased and manufacuring is done under contract thus the CST fixed assets in the US, or other countries for that matter, would be fairly minimal..

Another way to look at natural hedging is to consider the effects of exchange rate changes on profit and loss items. Say for example the A$ weakens considerably against the US$. That of course will mean US $ revenue when included in the P & L in the Australian books will show as an increased A$ figure. However US expenses will also increase in A$ terms in the P & L and again it is only the net figure that is affected.

Some time ago comment was made on SS that marketing expenses had increased when comparing one H/Y to the next, to me at the time it looked more like an exchange rate effect rather than an actual increase in marketing expenses paid overseas.

One other factor is timing where the CFO can take a view regarding repatriation of funds back to A$. That is say if the A$ is weakening should he delay for a while bringing funds back? Once again a real headache as trying to judge short term forex movements is almost akin to playing the tables at the Crown Casino. Then there is the aspect of transfer pricing but maybe that should be considered more as a taxation matter than a forex matter.

In summary a weaker A$ will see increased profitability in the A$ accounts and conversely a stronger A$ will see reduced profitability in the A$ books. However the extent of these changes basically is impossible to accurately assess because of so many factors unknown to us of which some are listed above. I'm not an accountant's bootlace and it would be tremendously interesting to get a full rundown on this from the CFO. I do suspect even he would need to write quite a screed which would probably need a number of readings before a reader could properly understand it.