Question-and-Answer Session
Unidentified Participant
You discussed the growth and stability of your income statement dollars, could you talk (inaudible) we are seeing the net flow after the effects of foreign currency fluctuations, could you describe what you're doing to, what you could do to dampen these fluctuations which have had a major impact as well as cost structure to try to match those more closely or to reduce those as the translation effect occurs? Thank you.
Andrea Jung
John?
John Owen
Okay, there is a series of -- there is a lot of questions embedded in that one question. I think one of the biggest impacts on our business, I'm going to go the cost side first, and that is what we call transaction where our cost don't move relative to the moment in our revenues. And there, the program really is, what you do to mitigate, how do you handle your sourcing of components, how do you look at material substitutions, how do you write efficiencies in the facilities, it is all, it is things that take time to evolve.
I think when you look at our manufacturing productivity initiatives, and the amount of costs that we have been able to actually substitute the productivity gains that we have seen, we have made good progress in a relatively short period of time. I think it isn't going to be a structural change or it is hard to believe it will be a structural change because we know currencies, they go up and they go down. I am not a big believer in hedging. And the reason I'm not a big believer in hedging on the cost is because when you do hedge, you can pay the premium to hedge, you can take a little bit of the volatility out, but the following year, you not only have to make up for the premium in that hedge, but the further movement the currencies might have, and that is a circle. It could become almost a circle of doom if currencies don't move back in your favor.
I think on the translation side, it really is starts at the top and it is really with the revenue line, and there we know that when we've had significant evaluations, inflation does follow or the pendulum has gone too far and there is a rebalancing of currencies. And I think if you think about Brazil, gosh, the real was at 160 last year, at one point of time, it was all the way up to 240, it is back down now to the high 170s, that is something you can't chase. I think our strategy overall is when there is evaluation that is that significant, there will be inflation opportunity, we will lag it a little bit intentionally. We will lag it because we believe that we can gain market share and be more advantaged as we did take prices. And I think a great example of that is what is happening in Russia and Ukraine right now, where there have been significant evaluations, and we are just now starting to get the pricing.
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