By Noémie Bisserbe, Clemens Bomsdorf and Peter Evans
A swath of European businesses, from banks to brewers, are
taking big hits to their bottom lines caused by the political
uncertainty surrounding Moscow's standoff with the West over
Ukraine and the dwindling Russian economy.
French bank Société Générale SA said Wednesday that a EUR525
million ($731.26 million) write-down on its Russian business pushed
first-quarter net profit down 13%, while Carlsberg A/S and Imperial
Tobacco Group PLC both said that falling sales in Russia and a weak
ruble had cut profit and would weigh on revenue for the remainder
of the year. Brewers and cigarette makers have been hurt in recent
quarters by tighter regulation on beer and tobacco sales, long
before Russia annexed Crimea.
But the political standoff with the West since the crisis has
put further pressure on the ruble and pushed the Russian economy
toward recession. Yet 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.
The worsening Russian economy has clouded revenue and earnings
forecasts for many big European companies, which have recently
relied on the country as an engine of growth.
Société Générale, France's third-largest listed bank by assets,
said first-quarter net profit dropped to EUR315 million from EUR364
million a year earlier. The bank cited growing political
uncertainty, the 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 EUR4 billion building up a 99.4% stake in Rosbank, but
the French bank's efforts have been slow to pay off. Setbacks have
included last year's arrest of Rosbank Chief Executive Vladimir
Golubkov, who was charged with bribery by Russian authorities.
In the first quarter, Société Générale's operating income in
Russia fell to EUR7 million from EUR61 million a year earlier.
The big Danish brewer Carlsberg A/S 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, generating about a third of
revenue--amid a wider bet it placed last decade 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 for
net performance 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
NV, the world's biggest brewer, said Wednesday that 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 NV reported a 37% decline 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 PLC, the world's second-largest consumer-goods maker,
is also among the corporate players blaming the ruble's weakness
for recent struggles. The company recently passed EUR1 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 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 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 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."
Veronica Gulyas in Budapest,
Jens Hansegard
in Stockholm, and
Ruth Bender
and Christina Passariello in Paris 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