Beiersdorf Profit Hit by Economic Downturn -- 2nd Update

By Neetha Mahadevan

FRANKFURT--German personal care company Beiersdorf AG (BEI.XE) on Thursday reported a drop in third quarter net profit, reflecting partly a write-down in its Chinese hair care business, and said conditions in some emerging markets will remain tough.

Net profit for the quarter ended Sept. 30 fell 22% to 111 million euros ($138.72 million), compared with EUR143 million a year earlier. Sales edged up 2.6% to EUR1.55 billion from EUR1.51 billion.

Earnings before interest and taxes, a figure closely watched by analysts, fell 28% to EUR156 million from EUR216 million. Its operating profit includes a special charge of EUR63 million related to "an adjustment to the long-term sales and earnings outlook for the Chinese hair-care business." Following an impairment test, Beiersdorf wrote down its hair care brands by EUR66 million.

"Impairment for the Chinese hair care business is disappointing but not a real surprise given that Beiersdorf had already highlighted a heavy deterioration of market growth in China in 2Q and competitors have also experienced a slowdown in China," DZ Bank analyst Thomas Maul said.

But, shares didn't reflect the disappointing quarter, rising 6.3% against an overall negative DAX, as the personal care products maker stuck to its targets despite warnings of weakness in the cosmetics market and disappointing results from peers L'Oreal SA and Unilever.

Earlier this week, L'Oreal reported sluggish revenue growth in the third quarter, dragged down by weakness in Western Europe, but confirmed its outlook for this year. The company said this year will be the weakest since 2009. Its comments matched Dove-maker Unilever's, which said demand was slowing from Europe to Asia.

Beiersdorf Chief Executive Stefan Heidenreich disagreed, saying "our results for the first nine months show that Beiersdorf is well positioned and weatherproofed even for stormier periods."

Analysts were positively surprised by encouraging statements particularly on the consumer sector in Russia Mr. Heidenreich made during the conference call.

While most companies are struggling to cope with sanctions against Russia, Beiersdorf reported growth of 5.1% in Eastern Europe "mainly driven by the healthy trend in Russia, which recorded a rise in both sales and market share," it said. Russia generates 4% of company sales.

"We've done our homework in Russia and we are growing strongly," Mr. Heidenreich said in a conference call.

On Wednesday, car parts manufacturer ElringKlinger said sanctions against Russia were hurting its business, reporting a sharp drop in vehicle sales in the region. On Thursday Adidas slowed its expansion plans in Russia further, saying it plans to open only 30 stores in the region this year and next, instead of its previously forecast 80 stores per year. Adidas cited reduced spending by Russian consumers amid an unstable economic and political backdrop.

Beiersdorf chief Mr. Heidenreich was more optimistic, saying "we have had big problems there, but now the foundations are laid for the years to come."

Looking ahead, the company, which sells skin care brands like Nivea, Eucerin and La Prairie, said it expects growth rates in Russia to be only slightly higher compared with 2013. But a "potential further escalation of the political situation in the conflict with Ukraine and the effect of the sanctions against Russia are sources of uncertainty," it added.

Beiersdorf has forecast economic weakness for the rest of the year in many markets, but stuck to its targets for the full-year on the back of growth in the first nine months.

Beiersdorf expects European markets to be dominated by uncertainty over economic growth, in France and Italy in particular. But, Germany is expected to perform better than the rest of Europe. Beiersdorf isn't so optimistic about China, where fiscal policy and the uncertain effects of the social and environmental reforms are adding to uncertainty, while "conditions in the remaining emerging markets will probably be less favorable," it said.

The company still expects a slight improvement in its EBIT margin, with sales growth of 4% to 6% for the full-year.

"Our business strategy, the Blue Agenda, is working--even in a more difficult market environment. This applies to the continuous strengthening of our brands, our focus on expanding our presence in the emerging markets," Mr. Heidenreich said.

Blue agenda was an efficiency program that Beiersdorf launched in 2012, called so in reference to the color of Nivea's packaging.

Write to Neetha Mahadevan at [e-mail]

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