SGS Earnings Decline on Weak Mining Market, Strong Franc

SGS SA, the world’s largest product-inspection company, reported lower first-half earnings as the mining-services market worsened and the strength of the Swiss franc reduced the value of sales from abroad. The stock fell the most in a year.

Adjusted operating profit fell 4.2 percent to 420 million francs ($468 million), the Geneva-based company said in a statement today. Excluding currency shifts, profit on that basis rose 4.9 percent. SGS shares declined as much as 3.3 percent in Zurich trading, the most since July 2013.

SGS is a gauge of the broader economy as it sells verification and testing services for industries ranging from automotive to commodities and medical devices. First-half sales fell 1.8 percent to 2.81 billion francs, missing the 2.84 billion-franc estimate of 11 analysts surveyed by Bloomberg. Excluding currency effects, revenue rose 5.3 percent.

“Currency effects were much more negative than we thought -- about 2 percent more negative -- and margin development was definitely a disappointment,” Daniel Buerki, an analyst at Zuercher Kantonalbank said by telephone. “Organic sales growth was fine -- exactly what we estimated.”

Sales Goal

Chief Executive Office Chris Kirk warned in June that the company, which checks the quality of commodities from oil to rapeseed to zinc, would not meet its full-year revenue target of 6.9 billion francs as currency effects hurt sales. Analysts expect full-year sales of 5.98 billion francs, according to the average of 19 estimates.

The stock traded 2.8 percent lower at 2,075 francs at 10:11 a.m. in Zurich.

The company’s operating margin narrowed to 15 percent from 15.4 percent in the same period last year because of the strong Swiss franc, SGS said.

SGS said it will maintain its dividend policy and expects organic revenue growth of 6 percent for the year, the low end of the company’s 6 percent to 9 percent forecast.

Buerki said he will probably reduce his earnings estimates for SGS. He said it “could be tricky”for the company to achieve the organic revenue growth target without an improvement in minerals.

Revenue in the company’s mineral services division fell 17 percent as mining firms in Canada, Australia, South Africa and South America cut spending. Excluding currency shifts, the unit’s sales fell 6 percent.

This is the last time Chief Financial Officer Geraldine Matchett reports earnings, as she leaves to join Dutch chemical maker Royal DSM NV Aug. 1.

SGS said a replacement for Matchett will be announced in due course.

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