Top U.S. Companies Feel The Pinch on Sales in Europe

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Date: Tuesday April 30, 2013 07:52:51 am
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    Top U.S. Companies Feel The Pinch on Sales in Europe
    By KATE LINEBAUGH, SAM SCHECHNER and JAMES R. HAGERTY

    Hiding behind the profit gains of America’s biggest companies is a worrying slowdown in sales growth.U.S. companies ranging from International Business Machines Corp. IBM to United Technologies Corp. to 3M Co.  to Xerox Corp. have missed revenue forecasts, hurt by a combination of Europe’s malaise, a stronger dollar and sluggish consumer spending.

    With earnings reports in from more than half the companies in the Standard & Poor’s 500-stock index, first-quarter revenue for the group is expected to shrink 0.3% from a year earlier, according to Thomson Reuters. That would cut short the sales improvement reported at the end of last year and mark the third quarter out of the past four in which revenues have failed to grow by 1% or more.

    The sales figures are a troubling sign that business and consumer demand remain weak nearly four years after the recession. They are also evidence that a soft patch is developing in the U.S. economy, as optimism earlier in the year gives way to more sobering data on growth in gross domestic product, retail sales and manufacturing. In response, many companies are cutting jobs and curbing investments in an effort to prop up profits, moves that could make it harder for demand to recover.

    One big problem for U.S. companies is Europe. Executives weren’t expecting much from the region last quarter. But many found conditions tougher than anticipated. And some of them are increasingly worried that while Southern Europe’s hardest-hit countries may be bottoming out, there is room left for the bigger economies like France and Germany to deteriorate.

    "Demand is not recovering so far" in Europe, Whirlpool Corp. WHR -0.11% Chief Executive Jeff Fettig said in an interview.

    The home-appliance maker, which has production sites in Italy, France, Poland, Slovakia and Sweden, expects flat industrywide sales in Europe this year, compared with growth of 2% to 3% in North America. If demand falls further in Europe, "we’ll have to do something more" to cut costs there, Mr. Fettig said.

    The European Union accounts for about a fifth of the global economy, and Deutsche Bank DBK.XE +6.61% estimates about 17% of the profit and revenue for companies in the S&P 500 comes from Europe. The heavily indebted countries in the continent’s south have long struggled. Now, businesses and consumers in Europe’s healthier economies are coming under more pressure.

    Companies in France are shedding workers, expanding the ranks of the fully unemployed to more than 3.2 million people, a record in absolute terms. In Germany, new-car registrations at the beginning of the year slid 13% from a year earlier.

    "Europe sunk deeper into recession, with Southern Europe remaining particularly weak, while the northern continent and Central Europe worsened," said Air Products & Chemicals Inc. APD +1.11% Chief Financial Officer Scott Crocco.

    The industrial-gases supplier reported its first-quarter sales rose 6% to $2.48 billion, but analysts had expected more. Sales in Europe were down 5%. The company reduced its outlook for the year and said it would look for ways to cut costs.

    General Electric Co. GE +0.27% watched conditions in Europe fall through its forecasts early this year. Orders had risen at the end of last year. But by the middle of the first quarter, they were down 8% from what GE had expected, finance chief Keith Sherin said.

    By the end of the quarter, GE’s revenue from Europe was down 17% from a year earlier. European orders were off 17%, with gas turbines and jet engines about a third, and those for health-care equipment about 5% below.

    "It is broader and worse than we thought," Mr. Sherin said in an interview. "New projects are pushing out. People are spending less."

    GE’s total revenue was flat at $35 billion in the first quarter, as sales from its industrial businesses fell 6%.

    Consumer-products makers haven’t been spared, either. U.S.-based Procter & Gamble Co. PG +0.75% and U.K.-based Unilever ULVR.LN -0.96% PLC both reported weaker-than-expected sales growth for the recent quarter, as business slowed in the U.S. and Europe.

    Companies operating in Europe also are reporting signs of spreading gloom. Advertising giant Omnicom Group Inc.’s OMC -0.58% business slowed in Europe’s healthier core in the first quarter, a sign that European companies may be tightening their purse strings.

    "Our business is stabilized, I would say, in the south," John Wren, Omnicom’s CEO, said on an April 18 earnings conference call. "What we saw in the first quarter were setbacks in France and in Germany."

    Meanwhile, the U.S. economy continues to bump along. GDP grew at an annualized 2.5% in the first three months of 2013, and forecasters say conditions are likely to stay choppy, as federal budget cuts and business caution provide a counterweight to improvement in the housing and stock markets.

    "Although the U.S. economy is poised for growth, it is being restrained somewhat," United Parcel Service Inc. UPS +0.65% CEO Scott Davis said last week. "This will be a drag on 2013 GDP expansion."

    UPS’s sales grew 2.3% in the quarter to $13.4 billion but still fell short of analysts’ expectations.

    Some investors are troubled by the weakness because they view revenue as a better gauge of global economic health than profits. "The lack of revenue growth really doesn’t justify new head count or capital expenditure," said Jim Russell, senior equity strategist at US Bank Wealth Management. "This is one of the reasons we see a stagnating sticky high unemployment rate."

    Big companies have a lot of levers to pull to keep profits up, which has led to some unusual statistics. So far, 52% of the S&P 500 companies that have topped Wall Street’s first-quarter earnings expectations have missed on revenue, according to Thomson Reuters. In a typical quarter, only 31% do.

    They have pulled off that feat by holding down costs. Business spending on equipment and software rose just 3% in the first quarter, down from an increase of 11.8% at the end of 2012, according to the Commerce Department.

    With revenue in Europe declining, more companies are making plans to lay off workers, consolidate offices or close plants. Xerox is planning to accelerate its cost cutting, especially in Europe. Ford Motor Co. F -0.07% plans to close three European factories by 2014. IBM is mulling up to 1,400 job cuts over the next two years in France out of its 10,000 employees there, said a person familiar with the matter.

    Dow Chemical Co. DOW +1.33% CEO Andrew Liveris warned that there are risks to cutting too deeply in Europe, but conceded that Dow wouldn’t be putting a "lot of new money" into Europe over the next few years.

    Dow’s sales volumes in Western Europe fell 12% in the quarter from a year earlier, pulling overall sales down 2.3%. Profit, however, rose 28% to $635 million.

    Ford, which has been battered in Europe, said there may be light at the end of the tunnel, but its expectations appear modest. "We still think there is a possibility of a stabilization of the European economy later in the year," said Ford CFO Bob Shanks.

    Spencer E. Ante and Doug Cameron contributed to this article

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