Currency risks: Company relies on forward transactions when hedging

"To secure our margin, we have to hedge our currency risks."

The people at Scott Sports enjoy taking risks but not when dealing with exchange rate fluctuations. In this interview, the CFO of Scott Sports, Alain Hasler, explains why Scott swears by forward transactions for hedging its currency risks.

Scott Sports was founded in the US in 1958, where it began by inventing the first aluminum ski poles. Today, Scott Sports is one of the market leaders in the development and marketing of high-end sporting goods. The globally successful company with Swiss organization and Swiss and Korean financing has American roots, but it bases its development and marketing activities in Europe, manufactures internationally, and insists on strategic currency hedging for its business.

Scott Sports got its start in the US by manufacturing ski poles. What products does Scott Sports make today?

Alain Hasler*: Scott Sports no longer represents one brand, one product, or a single sport. We now operate as a multisport and multibrand company specializing in the development and marketing of sporting goods. In other words, Scott supplies the cycling, skiing, running, and motor racing markets. We design entire collections – from head to toe – for our customers. In addition to our Scott items, we offer brands such as Syncros, Bergamont, Dolomite, and many others.

As a company, Scott Sports has established a wide base. How has Scott managed to stand out from the competition?

At Scott, we live by our two slogans: "Innovation, Design, and Technology" and "No Shortcuts." Those factors are critical to our company and are part of our DNA. We do not cut corners. We try to develop innovative and high-performance products without having to compromise. At the same time, we rely on a strong brand name and global marketing.

How important is the Swiss market to you, and where does Scott sell the most products?

Switzerland is an important market for us because we are permanently established here; we generate roughly eight percent of our sales at home. Our business activities are generally concentrated in Europe, where we earn over 60% of our revenue, especially in Germany, Austria, France, and Italy. Nevertheless, we have a global presence and market our products in over a hundred countries.

In which currencies does Scott Sports do business?

We operate in a wide variety of currencies: From the Swiss franc to the euro and US dollar, to local currencies like the Swedish krona or Danish krone and the Indian rupee. Our sales are conducted largely in euros, while we make purchases partially in euros but often in US dollars and Japanese yen. It is challenging for us to sell in currencies other those used for purchasing.

How do you set your prices at Scott?

We design our collections two years in advance. Six to eight months before introducing the new collection, we then determine our prices. As a rule, the market determines the price. However, we also have to keep a close eye on our product costs and hedge the associated foreign exchange risks so we can protect our margin.

What currency risks is Scott Sports exposed to?

Scott Sports mainly faces two currency risks, and that is because we operate in different currencies. First of all, there is the risk to our margin and our cash flow since, like I said, we have to monitor our production costs with an eye toward setting prices. We have to keep our cash volume constant so we have enough purchasing power to buy even when prices are relatively high.

The second, albeit less obvious, risk to Scott is revaluating our balance sheet. We operate in a wide variety of currencies, but we prepare our consolidated balance sheet in Swiss francs. Currency fluctuations in Swiss francs can therefore significantly influence our consolidated figures.

How do you safeguard the company against these currency risks?

When we engage in currency hedging, our aim is to protect our margin and cash flow. We generally set exchange rates for the purpose of costing 10 to 12 months before the market launch of a new collection. Our strategy in doing so is to achieve that goal with standard products like forward transactions. So, forwards are what we use most often. When we do, it is essential for us to ensure that we do not deviate from our budget too sharply with the exchange rates and manufacture the products within the specified price range.

Why did you choose to go with conventional forward transactions?

When selecting hedging products, it is important for us to find the middle ground between efficiency and how our company is organized. Our strategy of hedging with forward transactions goes well with our corporate structure, both in terms of flexibility and with respect to the timing of our procedures and the available resources.

Do you regularly change your strategy, or does Scott rely on what is tried and true?

Our strategy has been proven over all these years. Nevertheless, there are cases – production delays, for instance – in which we have to adjust our cash flow and fine-tune our currency needs with swap transactions. If exchange rates are extremely volatile, we will need to examine our goals, of course, and analyze the impact on product margins. That may mean we need to postpone production of some items in the collection. The stability of our prices is also a benefit for our customers.

How important is working with a bank in these matters?

Since our business is seasonal, we need a strong partner to finance our production and inventory in our peak periods. It is important to have a bank we can trust. We have been working with Credit Suisse for 30 years. Our financial partner offers us the best possible assistance on key issues, including currency hedging.

What prospects do you see for the next few years?

We have a positive outlook about the future. We expect another increase in production and marketing of e-bikes. We see potential mainly for e-mountain bikes for summer tourism in the mountain regions, e-urban bikes for city riding, and e-cargo bikes for delivery services. Our goal is to find solutions and suitable products for current issues: Increasing traffic and overcrowded cities and their associated environmental problems.

What's more, we are expecting further growth in outdoor activities. The need to be outside, the desire to break out from one's daily routine, and the attractiveness of outdoor family activities are becoming increasingly essential. Last but not least, the retail sector, even in the sporting goods industry, is changing as a result of digitalization, especially with omnichannels such as e-commerce, and we want to be a player in that field as well.