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Testing group SGS may revise 2014 goals after earnings shortfall
July 17, 2013 / 11:53 AM / 4 years ago

Testing group SGS may revise 2014 goals after earnings shortfall

ZURICH/GENEVA (Reuters) - SGS SA SGSN.VX, the world’s biggest testing and inspection company, has warned it may fall short of its ambitious growth forecasts because of a slowdown in key European markets.

“There has been a distinct slowdown in Europe ... and that’s influenced a number of our businesses with a large European presence,” Chief Executive Chris Kirk told a news conference, adding the company may have to revisit its 2014 targets.

Shares in the group, whose activities range from food safety to testing London’s black cabs, were down 2 percent at 2,092 francs by 1107 GMT after falling as low as 2,055. The stock has already dropped from a year’s high of 2,450 set in March.

SGS, which has over 80,000 employees, launched a strategic plan in 2010 to increase revenue to 8 billion Swiss francs ($8.5 billion) by next year. It also targeted operating income of 1.6 billion and earnings per share of about 140 francs.

Since then, testing and inspection companies like as SGS and peers Intertek (ITRK.L) and Bureau Veritas (BVI.PA), which are benefiting from increasing regulation in many sectors, have been hit by the sluggish European economy and weak global demand for minerals testing amid a downturn in the mining sector.

“When we looked originally at 2014 one of the premises on which the plan was built was that there would be no economic downturn, but guess what?,” Kirk said.

“With the slowdown in Europe, it’s going to require some serious thinking whether we can actually achieve that goal and we have to revisit that with the board, probably towards the end of the year,” he added.

His comments came after SGS missed expectations for first-half net profit, hit by a restructuring charge and slack demand in its minerals services operations.

RESTRUCTURING

Net profit rose 10 percent to 265 million francs but missed average forecasts for 293 million in a Reuters poll. The net figure included one-off expenses of 12 million francs resulting from restructuring measures, mainly job cuts, “in response to the deteriorating market conditions in Europe”.

The company did not say how many jobs had been cut but said steps taken to rein in costs in the minerals unit should bear fruit in the second half. It said it would take further measures if the market does not pick up.

Kirk estimated that additional restructuring costs could amount to between 6 million francs and 8 million.

Revenue at SGS rose 7.2 percent to 2.86 billion francs, against 15.1 percent growth in last year’s first half.

“The organic revenue decline in the minerals services division was more severe than expected,” J.Safra Sarasin analyst Patrick Hasenboehler said. “A further pullback of the share price could be a contrarian buying opportunity for the market leader in a structural growth industry.”

Sales at the minerals division - its fourth-biggest unit behind oil, gas and chemicals, consumer testing and industrial services - fell by 3 percent.

“There’s going to be further price pressure as our customers are squeezing us to reduce prices and our competitors have spare capacity and can therefore reduce prices,” said Kirk. He added that around 800 people had already been made redundant in the sector.

SGS also said agricultural services had made a slow start to the year because of lower grain export volumes from eastern Europe, although growth is expected to improve in the second half with upcoming harvests in the northern hemisphere.

Britain’s Intertek said in May that a sharper than expected decline in demand for its minerals business, particularly in Australia, Brazil and the Philippines, would drag on its profit margin this year.

Editing by David Goodman and David Holmes

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