U.S., European Business Take a Hit From Russian Slowdown
Banks, Brewers and Cigarette Makers Report Profits Down and Falling Sales
By NOÉMIE BISSERBE, CLEMENS BOMSDORF and PETER EVANS CONNECT
May 7, 2014 7:17 a.m. ET
Wall Street Journal
Société Générale cited growing political uncertainty in Russia, the sluggish economy and weakness of the ruble for a fall in profits
A swath of European and U.S. businesses, from banks to brewers, are blaming big hits to their bottom lines on the uncertainty surrounding Moscow's standoff with the West over Ukraine and Russia's worsening economy.
French bank Société Générale SA said Wednesday that a €525 million ($731.3 million) write-down on its Russian business pushed first-quarter net profit down 13%, while Carlsberg CARL-A.KO +1.79% A/S and Imperial Tobacco Group IMT.LN +1.27% PLC both said that falling Russian sales and a weak ruble had cut profit and would weigh on revenue for the remainder of the year. Brewers and cigarette makers also have been hurt in recent quarters by the country's tighter regulation on beer and tobacco sales, long before Russia annexed Crimea.
In the U.S., multinational companies that sell to consumers say they are getting hit by the steep drop in the ruble, which cut sales of imported goods ranging from makeup to pharmaceuticals. Hotelkeepers and tour operators that do business in Russia are being hit by cancellations from the U.S. and Europe, and high-end commercial real estate is taking a hit.
Some companies are already affected by the U.S. government's decision to cancel export licenses for shipping certain goods that have military uses to Russia. Maxwell Technologies Inc., MXWL +1.20% which makes chips for satellites that can withstand solar flares, said it could lose $2 million in revenue this year alone on Russian sales. Even if the export licenses are renewed, the company said its long-term Russian clients are likely to go elsewhere.
Satellite operator Iridium Communications Inc. IRDM -5.43% told investors it is working to ensure Russian launches aren't caught up in sanctions, even though some of its satellites are launched there. "There is support for a realization that satellites being shipped to Russia to launch from a Russian launchpad is really not export into Russia, but really, frankly just an export through Russia into space," Iridium Chief Executive Matt Desch said.
European companies have in recent years relied on Russia as a rare engine of growth amid the Continent's economic crisis and fitful recovery, making them more directly exposed to Russia's recent economic woes than many U.S. peers. Those troubles are now being significantly worsened by the political standoff with the West.
Many of the specific pressures—a generally softening economy, a weakening currency and tighter regulations of imports like alcohol—were already in play before the crisis. But the standoff, and threat of further economic sanctions against Russia, is now clouding longer-term revenue and earnings forecasts for many big multinationals from both Europe and the U.S.
More evidence of the decline came on Wednesday, as the HSBC Purchasing Managers' Index, which tracks output of Russia's service providers and manufacturers, contracted in April at its swiftest pace since May 2009.
Société Générale, France's third-largest listed bank by assets, said first-quarter net profit dropped to €315 million from €364 million a year earlier. The bank cited growing political uncertainty, Russia's sluggish economy and weakness of the ruble for the fall.
Growing tensions between the West and Moscow have been a major blow to Société Générale, which owns one of Russia's largest private lenders, Rosbank. Since 2006, Société Générale has spent more than €4 billion building up a 99.4% stake in Rosbank, but the French bank's efforts have been slow to pay off. Setbacks include last year's arrest of Rosbank Chief Executive Vladimir Golubkov, who was charged with bribery by Russian authorities. Mr. Golubkov has denied the allegations.
In the first quarter, Société Générale's operating income in Russia fell to €7 million from €61 million a year earlier.
Jitters have been particularly high in the financial-services sector since the U.S. Treasury Department imposed sanctions in March on Bank Rossiya, which it linked to Mr. Putin and his inner circle.
In the U.S., Visa and MasterCard stopped processing purchases made with cards from Bank Rossiya and its subsidiaries, and Mr. Putin responded by accelerating plans to develop Russia's own national card-payment system. Under new legislation, foreign card processors would have to handle all Russian payments domestically, use a settlement center owned by the central bank, post significant collateral and face potentially large fines.
"At what point do you just throw in the towel on Russia?" William Blair & Co. LLC analyst Bob Napoli asked MasterCard Chief Executive Ajay Banga on a call. Mr. Banga signaled he would stay the course for now in Russia.
"I don't think this is a saber-rattling situation any longer, I think this is going to be tough to work for almost everybody, governments and companies, over the next few months or periods of time—it might last longer than that," Mr. Banga responded.
The big Danish brewer Carlsberg cited the weak ruble and uncertainty in Russia as reasons it swung to an adjusted net loss during the first quarter and forecast a bleaker outlook for the remainder of 2014.
The world's No. 4 brewer has built up a significant exposure to Russia—its largest single market and where it generates about a fifth of its revenue—amid a wider bet it has placed on Eastern Europe. The company reported a 14% net-revenue decline in Eastern Europe in the first quarter compared with the same period year ago, and the company's overall operating profit fell by about a third.
On Wednesday, the company downgraded its full-year outlook to reflect Russia's fragile economic situation, saying it now expects net profit to grow by a low-single-digit percentage in 2014, instead of the mid-single-digit percentage it previously expected. The ruble's weakness against the euro, along with currency headwinds in some other markets, is a key reason behind the downgrade.
Carlsberg CEO Jørgen Buhl Rasmussen said Wednesday that the company now assumes Russian gross domestic product will be flat for the year on average, "where going into the year we assumed a GDP growth of 1% or 1.5%."
Even before the current crisis in Ukraine, brewers were struggling because of regulatory changes and other factors that pulled the overall Russian beer market down. Anheuser-Busch InBev BUD +1.75% NV, the world's biggest brewer, said Wednesday that sales in terms of volume in Russia fell 10% in the most recent quarter, compared with a 4.5% increase for the group as a whole. Last month, Dutch brewer Heineken HEINY +2.61% NV reported a 37% dip in first-quarter net profit, citing "challenging beer-market conditions in Russia," among other factors.
U.K.-based cigarette giant Imperial Tobacco said Wednesday that Russia—usually one of its fastest-growing markets, where around 40% of the population are smokers—had dragged down first-half earnings. In the past year, the Russian government has banned smoking in many public places, prohibited cigarette sales from street kiosks and raised excise on tobacco products by up to 40%.
"Things are progressing very rapidly in Russia," said Alison Cooper, Imperial's chief executive. Imperial's cigarette volume in Russia declined 7% in the six months ended March 31, and Ms. Cooper said she expects volume to be down around 10% over the full year.
Unilever ULVR.LN +0.19% PLC, the world's second-largest consumer-goods maker, is among the corporate players blaming the ruble's weakness for recent struggles. The company recently surpassed €1 billion in sales in Russia, having entered the country in 1992, but has seen many of its gains in the past year wiped out by the ruble's slide. Sales in Unilever's most recent quarter fell 6.3%.
Oriflame Cosmetics SA ORI-SDB.SK -1.23% of Sweden said Wednesday that local-currency sales in Russia dropped by 8%. "With sharply devaluating currencies and challenges of exceptional nature in our two largest markets, Russia and Ukraine, there is no doubt the company is facing very tough conditions," Oriflame said. "The exceptional situation in Ukraine had a substantial negative impact on consumer sentiment which clearly affected sales during the quarter."
Different Russian factors dragged on French consumer-goods company Danone SA BN.FR -2.24% in the first three months of the year. Danone said sales volumes fell in Russia—the company's largest market by sales—as the firm had to raise prices for its dairy products to compensate for sharp increases in milk prices.
Milk prices have jumped 30% in Russia recently, Danone Chief Financial Officer Pierre-André Terisse said on a conference call last month, leading Danone to increase its prices by 15% in the past year. The two latest price increases came into effect in February and March. Danone said its entry-level products have taken the biggest hit, with sales volume down more than 10% in the first quarter. Mr. Terisse added that he expects sales volume to continue to decline for "the coming few quarters."
In Ukraine's neighbor Hungary, leading pharmaceutical company Gedeon Richter RICHTER.BU +3.50% Nyrt. expects a drop in Ukrainian and Russian sales this year as a result of the continuing political crises, its chief executive said Wednesday.
CEO Erik Bogsch said the company's sales in Ukraine likely will drop by 35% in U.S.-dollar terms, versus revenue of $95 million last year.
"The local currency has devalued and prices have shot up; sales have dropped already," Mr. Bogsch said at a news conference. "Wholesalers don't dare to keep large inventories, and all actors are very careful."
—Veronika Gulyas, Jens Hansegard, Ruth Bender
and Christina Passariello contributed to this article.
Write to Noémie Bisserbe at noemie.bisserbe@wsj.com, Clemens Bomsdorf at clemens.bomsdorf@wsj.com and Peter Evans at peter.evans@wsj.com
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| Areas in eastern Ukraine where people have rose up against the fascist regime in Kiev. |
By NOÉMIE BISSERBE, CLEMENS BOMSDORF and PETER EVANS CONNECT
May 7, 2014 7:17 a.m. ET
Wall Street Journal
Société Générale cited growing political uncertainty in Russia, the sluggish economy and weakness of the ruble for a fall in profits
A swath of European and U.S. businesses, from banks to brewers, are blaming big hits to their bottom lines on the uncertainty surrounding Moscow's standoff with the West over Ukraine and Russia's worsening economy.
French bank Société Générale SA said Wednesday that a €525 million ($731.3 million) write-down on its Russian business pushed first-quarter net profit down 13%, while Carlsberg CARL-A.KO +1.79% A/S and Imperial Tobacco Group IMT.LN +1.27% PLC both said that falling Russian sales and a weak ruble had cut profit and would weigh on revenue for the remainder of the year. Brewers and cigarette makers also have been hurt in recent quarters by the country's tighter regulation on beer and tobacco sales, long before Russia annexed Crimea.
In the U.S., multinational companies that sell to consumers say they are getting hit by the steep drop in the ruble, which cut sales of imported goods ranging from makeup to pharmaceuticals. Hotelkeepers and tour operators that do business in Russia are being hit by cancellations from the U.S. and Europe, and high-end commercial real estate is taking a hit.
Some companies are already affected by the U.S. government's decision to cancel export licenses for shipping certain goods that have military uses to Russia. Maxwell Technologies Inc., MXWL +1.20% which makes chips for satellites that can withstand solar flares, said it could lose $2 million in revenue this year alone on Russian sales. Even if the export licenses are renewed, the company said its long-term Russian clients are likely to go elsewhere.
Satellite operator Iridium Communications Inc. IRDM -5.43% told investors it is working to ensure Russian launches aren't caught up in sanctions, even though some of its satellites are launched there. "There is support for a realization that satellites being shipped to Russia to launch from a Russian launchpad is really not export into Russia, but really, frankly just an export through Russia into space," Iridium Chief Executive Matt Desch said.
European companies have in recent years relied on Russia as a rare engine of growth amid the Continent's economic crisis and fitful recovery, making them more directly exposed to Russia's recent economic woes than many U.S. peers. Those troubles are now being significantly worsened by the political standoff with the West.
Many of the specific pressures—a generally softening economy, a weakening currency and tighter regulations of imports like alcohol—were already in play before the crisis. But the standoff, and threat of further economic sanctions against Russia, is now clouding longer-term revenue and earnings forecasts for many big multinationals from both Europe and the U.S.
More evidence of the decline came on Wednesday, as the HSBC Purchasing Managers' Index, which tracks output of Russia's service providers and manufacturers, contracted in April at its swiftest pace since May 2009.
Société Générale, France's third-largest listed bank by assets, said first-quarter net profit dropped to €315 million from €364 million a year earlier. The bank cited growing political uncertainty, Russia's sluggish economy and weakness of the ruble for the fall.
Growing tensions between the West and Moscow have been a major blow to Société Générale, which owns one of Russia's largest private lenders, Rosbank. Since 2006, Société Générale has spent more than €4 billion building up a 99.4% stake in Rosbank, but the French bank's efforts have been slow to pay off. Setbacks include last year's arrest of Rosbank Chief Executive Vladimir Golubkov, who was charged with bribery by Russian authorities. Mr. Golubkov has denied the allegations.
In the first quarter, Société Générale's operating income in Russia fell to €7 million from €61 million a year earlier.
Jitters have been particularly high in the financial-services sector since the U.S. Treasury Department imposed sanctions in March on Bank Rossiya, which it linked to Mr. Putin and his inner circle.
In the U.S., Visa and MasterCard stopped processing purchases made with cards from Bank Rossiya and its subsidiaries, and Mr. Putin responded by accelerating plans to develop Russia's own national card-payment system. Under new legislation, foreign card processors would have to handle all Russian payments domestically, use a settlement center owned by the central bank, post significant collateral and face potentially large fines.
"At what point do you just throw in the towel on Russia?" William Blair & Co. LLC analyst Bob Napoli asked MasterCard Chief Executive Ajay Banga on a call. Mr. Banga signaled he would stay the course for now in Russia.
"I don't think this is a saber-rattling situation any longer, I think this is going to be tough to work for almost everybody, governments and companies, over the next few months or periods of time—it might last longer than that," Mr. Banga responded.
The big Danish brewer Carlsberg cited the weak ruble and uncertainty in Russia as reasons it swung to an adjusted net loss during the first quarter and forecast a bleaker outlook for the remainder of 2014.
The world's No. 4 brewer has built up a significant exposure to Russia—its largest single market and where it generates about a fifth of its revenue—amid a wider bet it has placed on Eastern Europe. The company reported a 14% net-revenue decline in Eastern Europe in the first quarter compared with the same period year ago, and the company's overall operating profit fell by about a third.
On Wednesday, the company downgraded its full-year outlook to reflect Russia's fragile economic situation, saying it now expects net profit to grow by a low-single-digit percentage in 2014, instead of the mid-single-digit percentage it previously expected. The ruble's weakness against the euro, along with currency headwinds in some other markets, is a key reason behind the downgrade.
Carlsberg CEO Jørgen Buhl Rasmussen said Wednesday that the company now assumes Russian gross domestic product will be flat for the year on average, "where going into the year we assumed a GDP growth of 1% or 1.5%."
Even before the current crisis in Ukraine, brewers were struggling because of regulatory changes and other factors that pulled the overall Russian beer market down. Anheuser-Busch InBev BUD +1.75% NV, the world's biggest brewer, said Wednesday that sales in terms of volume in Russia fell 10% in the most recent quarter, compared with a 4.5% increase for the group as a whole. Last month, Dutch brewer Heineken HEINY +2.61% NV reported a 37% dip in first-quarter net profit, citing "challenging beer-market conditions in Russia," among other factors.
U.K.-based cigarette giant Imperial Tobacco said Wednesday that Russia—usually one of its fastest-growing markets, where around 40% of the population are smokers—had dragged down first-half earnings. In the past year, the Russian government has banned smoking in many public places, prohibited cigarette sales from street kiosks and raised excise on tobacco products by up to 40%.
"Things are progressing very rapidly in Russia," said Alison Cooper, Imperial's chief executive. Imperial's cigarette volume in Russia declined 7% in the six months ended March 31, and Ms. Cooper said she expects volume to be down around 10% over the full year.
Unilever ULVR.LN +0.19% PLC, the world's second-largest consumer-goods maker, is among the corporate players blaming the ruble's weakness for recent struggles. The company recently surpassed €1 billion in sales in Russia, having entered the country in 1992, but has seen many of its gains in the past year wiped out by the ruble's slide. Sales in Unilever's most recent quarter fell 6.3%.
Oriflame Cosmetics SA ORI-SDB.SK -1.23% of Sweden said Wednesday that local-currency sales in Russia dropped by 8%. "With sharply devaluating currencies and challenges of exceptional nature in our two largest markets, Russia and Ukraine, there is no doubt the company is facing very tough conditions," Oriflame said. "The exceptional situation in Ukraine had a substantial negative impact on consumer sentiment which clearly affected sales during the quarter."
Different Russian factors dragged on French consumer-goods company Danone SA BN.FR -2.24% in the first three months of the year. Danone said sales volumes fell in Russia—the company's largest market by sales—as the firm had to raise prices for its dairy products to compensate for sharp increases in milk prices.
Milk prices have jumped 30% in Russia recently, Danone Chief Financial Officer Pierre-André Terisse said on a conference call last month, leading Danone to increase its prices by 15% in the past year. The two latest price increases came into effect in February and March. Danone said its entry-level products have taken the biggest hit, with sales volume down more than 10% in the first quarter. Mr. Terisse added that he expects sales volume to continue to decline for "the coming few quarters."
In Ukraine's neighbor Hungary, leading pharmaceutical company Gedeon Richter RICHTER.BU +3.50% Nyrt. expects a drop in Ukrainian and Russian sales this year as a result of the continuing political crises, its chief executive said Wednesday.
CEO Erik Bogsch said the company's sales in Ukraine likely will drop by 35% in U.S.-dollar terms, versus revenue of $95 million last year.
"The local currency has devalued and prices have shot up; sales have dropped already," Mr. Bogsch said at a news conference. "Wholesalers don't dare to keep large inventories, and all actors are very careful."
—Veronika Gulyas, Jens Hansegard, Ruth Bender
and Christina Passariello contributed to this article.
Write to Noémie Bisserbe at noemie.bisserbe@wsj.com, Clemens Bomsdorf at clemens.bomsdorf@wsj.com and Peter Evans at peter.evans@wsj.com
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