Billabong profit warning and job cuts at Thales underline real impacts of strong Australian dollar

Exporters warn the strong Australian dollar is now beginning to have a real impact on business, with surfwear retailer Billabong announcing a 4.5% drop in profit and Bendigo engineering group Thales Australia cutting 100 jobs due to the high Australian dollar.

Ian Murray, executive director of the Australian Institute of Export, says the high value of the currency is putting so much pressure on exporters that many are considering leaving the business altogether.

“Absolutely, we are seeing the dollar now beginning to have an impact. A very large proportion of SMEs are now feeling the effects of this quite solidly,” he says.

Billabong confirmed yesterday that it still expects an increase in net profit after tax of between 2% and 8% for the full year.

However, chairman Ted Kunkel said that 80% of the company’s earnings come from overseas, and once profit is translated into Australian dollars it could fall by as much as 6%.

Kunkel also said the currency took a bite out of 2009-10 profit.

“When you add up all of the regional results, the business actually increased net profit after tax by 8% in constant currency terms but, once profits were translated back into Australian dollars, the result for the year to June 30, 2010, was down 4.5% on the prior year,” Kunkel said.

And in another less-than-inspiring note for the company, chief executive Derek O’Neill said forward orders have been disappointingly low and this will have a significant impact on the company’s financials.

“While the caution by retailers in placing their summer orders in Australia may result in some healthy in-season business, this will not be sufficient to offset the adverse effect of the weak forward order book which will have a significant impact on the half year,” he said.

Forward orders for the Australian winter are down 20%, which suggests tough retail conditions may prevail well into 2011.

Meanwhile, engineering group Thales Australia, which manufactures equipment for the Australian military including vehicles and ammunition, has confirmed 100 workers will be let go from the company’s Bendigo plant when current contracts end.

The company says pressure is building among customers, and the higher Australian dollar is creating a problem for them.

“The Commonwealth and potential export customers are demanding more efficiency and reduced prices,” the company said in a statement.

“The rapid rise in the Australian dollar has made this more urgent. The rising dollar reduces the competitiveness of domestically manufactured goods against imports here in Australia, and in export markets abroad.”

Murray says while exporters have been saying for quite some time they will be hit by the Australian dollar, he argues now we are seeing evidence that the dollar is now becoming a real issue for struggling companies.

“We are worried that if this continues, we are going to see companies pushed to the edge of what they can do. Many could reach the stage where they will just get out of exporting altogether,” he says.

“The areas most badly affected are obviously education and training, along with tourism. But we are seeing the agribusiness industry hurt very badly as well, because they have no imported product to offset their costs, and small manufacturers.”

Murray also points out the pressure on exporters is only going to get worse, with interest rates set to rise, putting pressure on the dollar for longer. Yesterday, Access Economics predicted the Australian dollar would remain strong, likely above US90c, during 2011.

“Many exporters are worried about interest rates. Those and the dollar will be very difficult for them to handle. They can cut costs, but it’s affecting their profits, and they’re getting to a point where they just can’t cut costs any longer.”

“Our concern is that the Government has cut back on funding for the Export Market Development Grant just at a time when things are getting bad. We urge the Government to support the EMDG scheme to help exporters.”