News Column

European Economy Dampens Outlook

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Europe's financial flu is giving the rest of the world a cold, and U.S. companies, including those in Virginia, are feeling it.

Six of the 17 nations that use the euro currency are in recession as Europe's debt crisis has worsened in the past few months.

In the U.S., corporate profits have been one of the few bright spots in a lackluster economic recovery and exports had been a strong force in the recovery.

Yet the deteriorating financial condition in Europe has been weighing down some U.S. companies' profits.

Some Richmond-based companies with significant international business, including packaging maker MeadWestvaco Corp. and fuel additives maker NewMarket Corp., have cited softness in the European market as a concern, though their earnings have not been heavily affected.

For instance, MeadWestvaco said demand of folding cartons for personal care products in Europe has slowed.

Virginia has a "moderate risk" from a European recession, according to a report in July from Wells Fargo Securities.

Financial woes in Europe are taking a toll on exports from Virginia to Europe, which fell 7.8 percent in 2012's first quarter from the same period a year ago, according to the Virginia Economic Development Partnership.

"There are some sectors (in Virginia) that are affected" by the international slowdown, said Terry Rephann, regional economist for the Weldon Cooper Center for Public Service at the University of Virginia.

Exports "are one of the pistons that has been driving what has been a slow recovery and, if we lose that, then it could be troublesome."

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Total exports to Europe in the first quarter of 2012 were $1.07 billion, down 7.8 percent from $1.16 billion in the same period of 2011, data from the Virginia Economic Development Partnership show.

About 24 percent of Virginia exports were to the European Union, compared to almost 17 percent to Canada and more than 10 percent to China, according to research by the Federal Reserve Bank of Richmond drawn from sources including the Census Bureau and Haver Analytics. Most of the exports to the EU were to the United Kingdom and Germany.

"Coal is a big export and petrochemicals, computer and electronic equipment and transportation equipment components. There are some manufacturing sectors that would be impacted," Rephann said.

Virginia may be in a better position to weather a slowdown in Europe than many other U.S. states, such as the Midwest, where manufacturing is more export dependent, Rephann said.

"In Virginia, since we are oriented so much toward government and services, we have a much smaller manufacturing economy and we have got less exposure in terms of exports than a lot of other states," he said.

The down quarter came after exports to Europe for all of 2011 rose slightly to $4.39 billion from $4.34 billion in 2010. The figures were lower than the nearly $4.6 billion in exports in 2009 and $6.3 billion in exports in 2008.

The total impact of Virginia's global trade is difficult to measure precisely, because much of what moves through the state's ports originates in other states, blurring the numbers, Rephann said. Also, Virginia businesses provide a lot of professional services globally, which isn't fully reflected in trade data, he said.

The share of Virginia exports that go to Europe started to decline in the end of 2008 and start of 2009, down from around 30 percent to 35 percent of total Virginia exports, the Richmond Fed research showed.

Those exports have never fully recovered from the recession, though Virginia exports are at a reasonably high level.

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The impact from a Eurozone recession on each U.S. state varies considerably, the Wells Fargo Securities report said.

However, the impact could be much larger depending on the extent to which Europe's woes spread to China.

About 1.2 percent of Virginia's gross domestic product is linked to trade with Europe, according to the report. That falls below the average of about 2 percent for U.S. states.

In comparison, about 4.8 percent of South Carolina's GDP is linked to trade with Europe, largely because the state has a BMW auto assembly plant and ships transportation equipment to Europe.

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Corporate profits have been lagging this year because of the deteriorating financial conditions in Europe.

As Europeans buy fewer cars, for instance, profits of American automakers fall.

Ford Motor Co. has said it expects to lose more than $1 billion in Europe this year. General Motors also cited Europe as a factor in its second-quarter profit, which fell 41 percent as sales declined in debt-burdened nations such as Greece, Portugal and Italy.

Europe's slowdown also hurts factories in China, slowing demand for U.S. companies that have operations there.

During recent second-quarter earnings reports from some of the nation's largest companies, one CEO after another told investors and Wall Street analysts that Europe was making them nervous.

"The new reality is that this world is not in a normal growth mode," Dow Chemical CEO Andrew N. Liveris said on a conference call, "and it does not appear that we will see this for at least 12 to 24 months."

Royal Caribbean CEO Richard D. Fain said, "The steady drumbeat of negative news emanating out of Europe is certainly having an impact."

The chief executive officer of German automaker Daimler AG, Dieter Zietsche, referred to "economic clouds in the sky, which are floating especially over Europe."

Richmond-based NewMarket, which produces additives that make engines run smoother, also has seen softness in Western Europe, said David Fiorenza, the company's vice president and chief financial officer.

"People are still having to maintain their vehicles, but there is definitely a change in the slope of the curve" in demand, he said. "General economic conditions are slower. We are not immune to that. But Europe will come back."

NewMarket hasn't lost ground overall. The company still posted record revenue so far this year, with profit rising 6 percent for the second quarter and 20 percent for the first six months of 2012.

MeadWestvaco CEO John A. Luke cited slower growth around the world, especially in Europe, as "a headwind for the business" in the April-June quarter.

"We not only had lower demand in some markets, including food and personal care, but we also had nearly $55 million of negative impact on the top line from the depreciation of the (Brazilian) real and euro compared to this period last year," Luke said in the company's earnings conference call.

However, he said, "While growth is slower, it is still growth."

In the second quarter, MeadWestvaco said it experienced lower demand of folding cartons for personal care products in Europe. The market for health care-related packaging, however, has held up internationally, including Europe, with growth rates in high-single digits.

Declines in the value of the euro and other currencies against the dollar can also hurt U.S. firms doing business overseas. It means their sales in Europe translate into fewer dollars here.

MeadWestvaco said unfavorable foreign exchange rates reduced sales growth by 4 percent and operating margins by 140 basis points year-over-year in the second quarter.

The Brink's Co., a Henrico County-based global provider of secure transportation, also noted in its second-quarter earnings that foreign currency exchange had a negative impact. The company's revenue in its European and Mideast region was down 6 percent due to unfavorable currency impact. But the company did say it had organic growth in France.

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Not every company is glum about Europe.

Heavy construction equipment manufacturer Caterpillar reported blockbuster earnings in July, driven in part by companies' long-term programs to upgrade aging machines.

For Virginia firms, success depends a lot on what part of Europe a company does business in.

The most difficult markets are in the so-called PIGS nations -- Portugal, Italy, Greece and Spain -- that have felt the worst of the fiscal crisis.

"I think we are fortunate that we do very little business in Spain, only a limited amount in Italy and we don't do any in Greece," said Scott Seyler, export salesman for Northland Forest Products, a Fluvanna County-based maker of kiln-dried hardwoods that has seen growth in Europe and Asia.

"We have been fortunate that our focus has been on the central and northern markets of Europe and that has allowed us to have continued success," Seyler said. "Exports have been a very important component of our business and we run about 50-50 in terms of export versus domestic business."

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The slowdown hasn't stopped some Virginia companies from making acquisitions or investments in Europe.

In July, Richmond-based AMF Bakery Systems acquired Tromp Bakery Equipment B.V., a Dutch-based maker of baking equipment.

That deal had more to do with growing demand in emerging markets than in Europe, said Ken Newsome, AMF Bakery's president.

"The biggest thing for us with the Tromp acquisition is that while the company is located in Europe, it actually services the global market," Newsome said. "So the strength of the company's sales are not based on its location in Europe, but its coverage of Asia and Africa and Russia."

AMF makes bakery equipment for companies that supply fast-food restaurants and demand for that has continued to grow, Newsome said. "We have just built a Burger King bakery in Turkey and we have just taken on an order for a local fast-food company in Saudi Arabia," he said.

Hanover County-based Owens & Minor Inc., a Fortune 500 medical supplies distributor, took a major step into the international market in July by acquiring Movianto Group, a European-based third-party logistics firm for pharmaceutical and medical device manufacturers, for $158 million.

Craig Smith, Owens & Minor's chief executive officer, said the acquisition "will open a very big door for us in Europe." Movianto serves about 600 pharmaceutical and medical device customers in 11 European countries from 23 logistics centers.

"As for the operating environment in Europe, we feel that this is an opportune time for this transaction,' Smith said in a conference call with analysts.

"The majority of Movianto's revenues today are generated in the United Kingdom, Germany and France. Movianto is a solid strategic, cultural and operational fit for Owens & Minor and the European health care market offers attractive demographics."

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While Europe's economy has been teetering, the Richmond region has seen what might be called a minisurge in investments from European-based companies.

For example, BGB Technology, a U.K.-based maker of electrical and optical slip ring assemblies for rotary applications, announced in April it would invest more than $2 million in Chesterfield County and hire about 15 people.

One of the region's fastest-growing small companies is Henrico-based Elephant Insurance, a subsidiary of a U.K.-based company.