Strong European currencies eat into company profits

Thu Apr 17, 2014 9:42am EDT

* Companies' Q1 sales show impact of strong currencies

* Some executives say can live with current exchange rates

* Others want European Central Bank to act

By Tom Bergin and Martinne Geller

LONDON, April 17 (Reuters) - As European policymakers consider action to stop a strong euro holding back jobs growth, companies across the continent say the currency's strength is already eating into their profits.

Some of Europe's largest companies including Danone , SAP AG and L'Oreal have posted buoyant first-quarter sales volumes in the past week thanks largely to strong demand in emerging markets such as Brazil and in North America.

But when converted into euros, revenue has often fallen suggesting it will be hard for firms to sustain the strong profit growth of 2013 that helped drive the region's tentative recovery.

Some executives say their companies can live with current exchange rates but others are not so sanguine and are looking to European Central Bank President Mario Draghi for action.

"A strong euro is clearly hurting our business, but it's not a given that the trend for 2014 will be the same we saw last year... it will depend on what Draghi will do," Valerio Battista, chief executive of Italian cable maker Prysmian said on the sidelines of a shareholder meeting on Wednesday.

Draghi has said a euro that was too strong was not good for growth and could warrant further monetary easing.

Even before Draghi's most recent comments, analysts polled by Reuters earlier this month said they expected the euro to drop sharply in 2014. However, forecasters have been wrong-footed for a year by the euro, which was 2013's best performing currency. [ID: nL5N0MU1QF]

European leaders including France's President Francois Hollande have also said they are concerned about the strength of the euro, which makes exports more expensive, thereby putting companies which sell their goods and services overseas at a competitive disadvantage.

Germany's SAP, a major exporter of software, warned on Thursday that the impact of currency moves was worsening and would shave 5 percent off 2014 operating profit.

It also means profits earned overseas are worth less when brought home.

French supermarket chain Casino posted an 8.3 percent rise in first-quarter sales on a constant-currency basis but a 3.3 percent drop in actual euro revenue.

Some companies are looking to cut costs to help offset currency losses.

Finnish retailer Stockmann said on Tuesday it would cut up to 330 jobs, as it sees no improvement in the country's economic performance.

But analysts say there are risks to reacting to foreign- exchange movements, which are generally beyond companies' control and may reverse themselves quickly.

"Most companies realize that FX is something you just have to live with," said Societe Generale analyst Chas Manso. "If you want to succeed long-term, you just have to keep on going as best you can. If you take your foot off the pedal, for sure there will be someone else who doesn't and you will lose market share and profits."

British companies including fashion group Burberry and engineer Smiths Group Plc, also reported pressure from the strong pound, although UK policymakers seem to be more comfortable with the currency's level because the country is not a major exporter and the current exchange rate helps dampen inflation.

FORECASTS CUT

Analysts knew the firm euro and pound, which have risen against the U.S. dollar, Japanese yen and various emerging market currencies over the past year, would weigh on earnings, but some have been surprised by the extent.

The double-digit profit growth needed this year to justify current high share prices is looking increasingly precarious, analysts say.

"The market had underestimated the FX headwind which was significant," Alex Howson, equity analyst at Jefferies said of yoghurt and baby milk producer Danone, in a note to clients. He added the larger-than-expected currency impact could prompt the brokerage to cut its earnings forecasts for the French company.

Analysts have been cutting their estimates for earnings in recent weeks. In the past 90 days, there has been a net 5.0 percent cut in estimates of earnings for companies in the DJ Stoxx 600 index of major European companies, based on 8,416 revisions to individual company forecasts, Thomson Reuters data shows. The trend has continued in the past month and week.

Some investors believe earnings estimates may need to be revised down further.

"I met many company managers last week and most of them criticised the sell-side analysts over the forex issue saying their euro-dollar forecasts are wrong If it's true it means the analysts are overestimating companies' results and this could cause some disappointment in the market," a Paris-based asset manager said. (Additional reporting by Alistair and Smout Ben Hirschler in London, Alexandre Boksenbaum-Granier and Dominique Vidalon in Paris, Silke Koltrowitz in Zurich and Massimo Gaia in Milan; Editing by Erica Billingham)

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