Procter & Gamble, maker of Tide detergent and other consumer products, said currencies could reduce its profits by $1.4 billion this year.
Procter & Gamble, maker of Tide detergent and other consumer products, said currencies could reduce its profits by $1.4 billion this year. PHOTO: DANIEL ACKER/BLOOMBERG NEWS
By PAUL ZIOBRO And THEO FRANCIS
Jan. 27, 2015 2:23 p.m. ET
The stronger dollar is suppressing sales and profits at America’s big companies, prompting them to put renewed emphasis on cost cutting and adding pressure on the broader U.S. economy.
The currency effects are hitting a wide swath of companies that had expanded aggressively overseas in search of growth and hurting stocks and rattling investors. The Dow Jones Industrial Average was down 203 points, or 1.1%, midday at 17475.
Consumer-products giant Procter & Gamble Co. was hammered as currencies in its markets around the world weakened against the dollar, pushing its profit down 31% and its sales down 4%. The company said currencies could reduce its profits by $1.4 billion this year, a hit it will try to offset with a cost cutting program that includes layoffs and cuts to its huge marketing budget.
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Pharmaceuticals company Pfizer Inc. said unfavorable moves in currencies over the last year will take a $2.8 billion bite out of its 2015 revenue. Heavy equipment maker Caterpillar Inc., already wrestling with the plunge in oil markets and weaker prices for copper, coal and iron ore, said a stronger dollar is adding another weight on sales and promised further cost cutting in 2015.
The dollar also led Microsoft Corp. to issue a financial forecast that was weaker than analysts had expected, sending the company’s stock down nearly 10% midday and wiping out more than $30 billion in market value.
“The rising dollar will not be good for U.S. manufacturing or the U.S. economy,” Doug Oberhelman , chief executive of Caterpillar Inc., told analysts.
Expectations for the quarter, already low among investors and analysts, have worsened as the results have rolled in. Analysts now expect companies in the S&P 500 index to post a scant 0.5% in sales growth, with per-share profit gains of 3.3%, according to financial data firm Thomson Reuters. The figures reflect actual results for 119 companies and analysts’ estimates for the rest of the index’s members. As recently as Jan. 1, analysts were expecting sales growth of 1.3% and earnings growth of about 4.2%.
The bad news on the earnings front comes as economists are grappling with mixed signals about the health of the U.S. economy. While broad data on economic growth and jobs creation were strong going into the end of the year, more recent data has been less certain.
Demand for big-ticket manufactured goods tumbled by 3.4% last month, the Commerce Department reported Tuesday, a sign U.S. businesses remain cautious about spending despite the economy’s recent momentum. Factories are getting a boost from higher demand for cars and other consumer items, but orders for nondefense capital goods excluding aircraft—a proxy for business spending on equipment and software—dropped 0.6% from November.
Retail sales also fell in December, posting a 0.9% drop that underscored the limits of relying on cheaper gasoline to fuel growth in spending. Wall Street will be watching closely as earnings reports arrive.
“We have nearly 140 companies to get through this week,” said Gina Martin Adams, equity strategist for Wells Fargo . “We’ll have a much better idea as to how things are going at the end of this week.”
The strong dollar can hurt U.S. companies in a variety of ways. The most typical is the so-called translation effect: Companies’ sales in overseas markets may keep growing in local terms, but they look smaller when converted back into stronger dollars. It also can lead to big mismatches between costs and revenues and make it harder for export oriented companies to compete.
P&G fell victim to a number of those impacts. The company, for instance, is heavily exposed to Russia, where it sells razors and blades that are made at its Gillette plant in Germany. The slumping ruble means it has to jack up prices in Russia to cover the spread, but prices aren’t increasing fast enough to cover the difference. Meanwhile, the Russian unit’s bills for those razors get bigger while they are in transit, which will force the company to make adjustments to its balance sheet, Chief Financial Officer Jon Moeller told analysts Tuesday.
The company is also exposed to the soaring Swiss franc. P&G’s headquarters for Europe, the Middle East and Africa is in Geneva. As such it is a large employer in Switzerland, leaving its costs in the country much bigger than its sales there.
P&G said currencies will reduce its sales by 5% in the year that ends in June and its profit by 12%. The impact is largely concentrated in six countries: Russia, Ukraine, Venezuela, Argentina, Japan and Switzerland. The decline in the Russian ruble alone is projected to account for a $550 million hit to the company’s annual profit.
The blow from currency is an outgrowth of P&G’s successful expansion into overseas markets over the years. The company sells more than $8.8 billion in products in those six troubled countries.
To offset the impact, the maker of Gillette razors and Pampers diapers is relying on cost cuts, including reduced headcount and cutbacks in spending on marketing. That will involve shifting more of advertising to digital channels, which already account for more than 30% of the total.
Pfizer said unfavorable moves in currencies over the last year will take a $2.8 billion bite out of its 2015 revenue. Above, multivitamins on the packaging line at the Pfizer plant in Montreal. ENLARGE
Pfizer said unfavorable moves in currencies over the last year will take a $2.8 billion bite out of its 2015 revenue. Above, multivitamins on the packaging line at the Pfizer plant in Montreal. PHOTO: GRAHAM HUGHES/ASSOCIATED PRESS
The company is also raising prices and building about 20 new manufacturing plants, largely concentrated in the faster growing markets, to more closely match its costs and sales. The moves take time, however.
“We have many things at our disposal, which we are obviously engaged in,” P&G’s Mr. Moeller said on conference call with the media. But, he added, “most of them come with some time lag.”
One area where it has more control is with job cuts. P&G’s long running plan to slim down called for reducing non-manufacturing jobs between 16% and 22%. Through the end of January, the company was at 18%. Mr. Moeller said cuts will likely be closer to the top of that range by the end of this fiscal year in June.
Other companies are feeling the effects as well. DuPont Co. gave a disappointing outlook for 2015, warning its profit would take a significant hit from the strengthening U.S. dollar and weakness in its agricultural-seed business. The company said it would reach its goal to cut $1 billion in costs well ahead schedule.
Late Monday, Microsoft Chief Financial Officer Amy Hood said hiccups in Japan and China, as well as the U.S. dollar’s growing strength compared to foreign currencies, depressed revenue from Microsoft’s commercial-software products. Microsoft said the strong dollar would carve four percentage points off its revenue growth rate for the quarter ending in March.
Also late Monday, United Technologies Corp. cut its 2015 sales and profit forecasts, blaming currencies. The company said 62% of its sales are overseas, leaving it very exposed to a sudden change in the value of the U.S. dollar.
Some industrial manufacturers cut 2015 forecasts because of the strengthening dollar. W.W. Grainger Inc., which makes everything from generators to power tools, lowered its 2015 sales and earnings forecasts that were made in November, citing further weakening of the Canadian and Japanese currencies. Danaher Corp. , which makes dental equipment and disinfection systems, also lowered its full year forecasts citing the strengthening of the U.S. dollar since December. The company has tried to offset that drag with productivity improvements.
Emerson Electric Co. , a maker of factory automation equipment and heating and cooling systems, said orders in the three months through December fell from a year ago in part because of the stronger dollar. The company forecast a drop in sales of four to five percentage points this year because of the dollar’s strength.
“The global economies are clearly in a transition period with a significantly lower cost of oil, a stronger U.S. dollar and continued weakness in Europe,” the company said Monday.
Meanwhile 3M Co. , maker of Scotch tape and Post-it notes, reinforced its reputation as a steady performer in turbulent times by posting a 6.9% increase in profit for the fourth quarter and promising further growth in 2015.
The decline of the euro, yen and other currencies is hurting results at the St. Paul, Minn.-based industrial conglomerate in dollar terms. But the company is gaining from lower raw material costs, especially on plastics and other oil-derived materials used in making 3M’s adhesives and films.
The company said it will look for opportunities to buy materials from suppliers in countries whose currencies have weakened. 3M may also export more products from factories in Europe that make medical and industrial supplies.
—Kate Linebaugh, James R. Hagerty and Shira Ovide contributed to this article.
Write to Paul Ziobro at Paul.Ziobro@wsj.com and Theo Francis at firstname.lastname@example.org