Henkel Says Ukraine, Middle East Conflicts Hurts Profit

Henkel AG, the German maker of Loctite glue and Persil laundry detergent, said earnings growth will slow in the second half as Russia’s dispute with Ukraine and military battles in the Middle East harm business.

“We expect the escalation of the Russian-Ukrainian conflict as well as the persisting political turmoil in the Middle East to have a negative impact on the market environment,” Chief Executive Officer Kasper Rorsted said in a statement today. “We anticipate a slower growth of adjusted earnings per preferred share in the second half.” Henkel dropped the most since Nov. 2011 in Frankfurt trading.

The turmoil in the Middle East and Ukraine poses a threat to Rorsted’s plan to boost revenue at Dusseldorf-based Henkel to 20 billion euros ($26.7 billion) in 2016 from 16.5 billion euros last year, with half of sales coming from emerging markets. Other major European companies, including Nestle SA and Deutsche Lufthansa AG, have also warned that unrest between Russia and Ukraine is dimming prospects for growth as consumers trim spending and suppliers shy away from ordering equipment.

Full-year growth in earnings per share will likely be at the bottom end of the 7 percent to 9 percent target range, Rorsted said in a conference call with journalists.

Political Woes

Henkel has about 2,500 employees at eight plants and an administrative site in Russia, the company’s fourth-biggest market, which generated about 1 billion euros in revenue in 2013. In Ukraine, Henkel has 1,000 employees at four production sites. Henkel generates more than 200 million euros in Ukraine, where revenue shrank by about the same amount Rorsted said it would usually increase in the second quarter.

In Syria, the company has just 144 employees, and Persil is the second-highest selling detergent in the country. The political turmoil in the Middle East, where Henkel has about one billion euros in revenue, is also placing currency burdens on earnings there, even as sales grew 17.5 percent in the first half.

The greatest risk in Russia is that economic growth will slow, Rorsted said on a conference call with analysts. While that isn’t yet the case, earnings have already declined in Ukraine and elsewhere in eastern Europe.

“It would be naive to believe that Russia won’t approach a recession-like environment,” Rorsted said. “We are starting to see signs of a significant slowdown.”

Hurting Demand

Henkel dropped as much as 6.6 percent and was trading down 6.5 percent at 77.14 euros as of 1:11 p.m., valuing the company at 32 billion euros.

Ukraine’s conflict with Russia is also hurting the business of other European companies.

At Bayerische Motoren Werke AG, which produces cars beloved by Russia’s wealthy, “we’re considering what to do to cars earmarked for sale in Russia during the second half of the year,” which may have to be re-directed to other countries because of tumbling demand, Chief Executive Officer Norbert Reithofer said Aug. 5.

At Nestle, the world’s largest food producer, Chief Financial Officer Wan Ling Martello this month warned that “whatever happens going forward will have an impact in terms of consumer demand.” If the situation in Ukraine continues to deteriorate, “it can negatively impact the pace of recovery in Europe,” according to David Cole, chief financial officer of the world’s second-biggest reinsurer, Swiss Re.

Quarterly Earnings

Henkel said it’s still sticking to full-year targets of so-called organic sales growth of 3 percent to 5 percent, which excludes currency shifts and acquisitions or disposals, with earnings before interest and taxes, adjusted for one-time items and reorganization costs, at about 15.5 percent of revenue.

Second-quarter adjusted Ebit rose 2.1 percent to 674 million euros, while sales fell 3.5 percent to 4.1 billion euros. The adjusted Ebit margin was 16.3 percent, with an organic sales gain of 3.3 percent. Revenue on that basis rose 2.1 percent at the beauty care business, less than the 3.7 percent predicted by analysts, and increased 4.2 percent in laundry and home care and 3.7 percent in adhesives.

The organic sales growth “is a little disappointing,” Warren Ackerman, a London-based analyst at Societe Generale who recommends buying Henkel shares, said in a note to clients. “The focus will be on the miss in beauty -- blamed on U.S. promotional intensity and Asia.”

Competitor Unilever, which makes Dove soap and Lipton tea, also reported revenue increases that missed estimates July 24, citing slow growth in developing markets such as Brazil, Argentina and China.

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