Bloomberg News

Daimler Joins France Telecom in Profit Drop as Debt Crisis Bites

October 27, 2011

Oct. 27 (Bloomberg) -- As Europe’s leaders rallied to keep the sovereign debt crisis within boundaries, the region’s companies are already feeling the pain.

Daimler AG, the maker of Mercedes cars, reported its first quarterly profit decline since 2009. ABB Ltd., the world’s largest maker of power-transmission gear, reported the smallest profit increase in a year and missed estimates; France Telecom SA said earnings fell 6.2 percent because a decline in its domestic market overshadowed growth overseas. BASF SE, the world’s largest chemicals company, lowered its economic outlook.

The dimming growth prospects that threaten to swell the region’s jobless lines, squeeze customers’ finances and crimp consumer spending are prompting companies to deepen cost cuts. PSA Peugeot Citroen yesterday said it will eliminate 3,500 full- time jobs, adding to 2,000 at Swiss drugmaker Novartis AG and 2,000 cuts at Svenska Cellulosa AB, Europe’s biggest tissue maker, announced this week.

“We are more flexible than ever before, so that we can react quickly to future developments,” Daimler Chief Executive Officer Dieter Zetsche said today.

European leaders reached an agreement today on Greek debt losses after 10 hours of crisis talks, responding to global pressure to step up the fight against the financial crisis. Last-ditch talks with bank representatives led to the debt- relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from ravaging the euro zone and wreaking global economic havoc.

Stocks Rally

“Let’s hope that this was the decisive breakthrough that everybody was waiting for and that it will help restore some faith in the future,” BASF CEO Kurt Bock told journalists on a call.

The accord sparked a rally in European stocks, sending the benchmark index to the highest in 12 weeks. The Stoxx Europe 600 Index advanced 2.5 percent and Standard & Poor’s 500 Index futures added 1.6 percent. The 17-nation euro climbed 0.9 percent to $1.4033.

“The agreement is a large step,” said Anja Mikus, head of portfolio management at Union Investment in Frankfurt. “But uncertainty and volatility will remain in equity and bond markets.”

The Stoxx 600 Index has retreated 11 percent this year as gauges of banks and basic-resources companies head for the biggest annual declines since 2008 amid concern the region’s debt crisis will harm the economy. The Standard & Poor’s 500 Index of U.S. equities has slipped 1.2 percent in the period.

Skepticism

With 92 out of 324 European companies reporting third- quarter results, earnings per share has dropped 11 percent on average, with 44 positive surprises and 41 negative surprises. In the U.S. almost half of S&P 500 companies have reported, with EPS increasing an average 15 percent. U.S. companies announced 162 positive surprises to 48 negative.

European confidence in the economic outlook dropped to the lowest in almost two years in October, the European Commission in Brussels said today. Services and manufacturing output contracted at the fastest pace in more than two years in October and euro-area consumer sentiment is at the weakest since 2009.

“That skepticism was rife, and has been probably for a couple of months now, and probably still is there to a degree.” said James Hughes, a senior market analyst at Alpari Ltd. in London.

Lowered Outlook

BASF, based in Ludwigshafen in Germany, lowered its forecast for global gross domestic product to 2.5 percent to 3 percent growth this year, from as much as 4 percent. Bock said it’s “healthier” to be cautious than keep producing at full speed as the risk of an economic slowdown looms.

Deutsche Lufthansa AG, Europe’s second-biggest airline, said today third-quarter earnings dropped 27 percent to 575 million euros, missing estimates, as bookings dropped.

“Fears of a recession and concerns about the effects of the debt crises in Europe and the U.S. have already had a clear effect,” Chief Executive Officer Christoph Franz said. The Cologne, Germany-based company’s stock has slumped 38 percent this year and bigger rival Air France-KLM Group has lost 60 percent of its market value.

Finnair Oyj, Finland’s biggest airline, also reported profit for the quarter that missed estimates as passenger travel slowed. Business travel hasn’t developed in the same way after the summer break as last year, and uncertainty in the economic environment is causing issues for us and airlines generally,’’ CEO Mika Vehvilainen said.

Healthy Caution

Nexans SA, a French maker of cables and wires, is bracing for a slowdown curbing inventories and being more cautious on hiring and investments, the chief executive officer said.

“Since Sept. 1, we’ve introduced precautionary measures,” Frederic Vincent said yesterday in an interview. “We’ve asked staff to be extremely vigilant” on spending, hiring and working capital, he said.

BASF and rival Bayer AG bucked the trend with third-quarter profit that beat analyst estimates. Bayer’s profit was boosted by emerging-market sales as government cost-cutting hampered growth at its pharmaceutical division. BASF benefited from acquisitions and said it managed to push through higher prices.

Germany’s auto industry has been one of Europe’s bright spots thanks to surging demand for luxury cars from China and the U.S. Volkswagen AG, Europe’s largest carmarker, today reported quarterly profit that beat analyst estimates on demand for its Audi high-end vehicles.

Sluggish Market

Daimler, based in Stuttgart, predicted higher fourth- quarter profit on gains at its trucks and vans divisions, easing concerns after the automaker posted the profit drop. Earnings before interest and taxes will likely “significantly exceed” the previous year’s figure, the company said today.

Companies more reliant on the European economy are struggling. France Telecom’s earnings before interest, taxes, depreciation and amortization dropped to 4 billion euros ($5.6 billion) from a restated 4.26 billion euros a year earlier, France’s largest telephone company said today.

Chief Executive Officer Stephane Richard, who took over in 2010, is seeking to reduce Paris-based France Telecom’s dependence on sluggish European markets through asset sales on the continent and acquisitions in Africa.

ABB Chief Executive Joe Hogan said investors cheering the European accord with Greece may turn less enthusiastic once the details of the agreement become widely available.

“When these thing come out, people tend to be a little more optimistic and when the details come out, people tend to get a little more muted,” Hogan told journalists today. “We sound a bit more cautious, but I say we’d be crazy if we weren’t.”

--With assistance from Richard Weiss, Alex Webb and Sheenagh Matthews in Frankfurt, Chris Reiter and Andreas Cremer in Berlin, Sara Marley, Maryam Nemazee and Owen Thomas in London, Ola Kinnander in Stockholm and Armorel Kenna in Milan. Editors: Benedikt Kammel, Celeste Perri

To contact the reporter on this story: Heather Harris in London at hharris5@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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