Venezuela Devaluation Hits US, European Companies

Venezuela's President Hugo Chavez
AP Photo - Fernando Llano
Venezuela's President Hugo Chavez

Venezuela's latest currency devaluation will hurt a range of U.S. and European companies that sell to consumers in the country, as state-imposed price controls make it more difficult for those companies to protect their profits.

On Friday, Venezuela devalued the bolivar by 32 percent, its fifth such move in a decade. For U.S. companies that do substantial business in the country, such as Colgate-Palmolive, Avon Products, Procter & Gamble and Kimberly-Clark, that means their earnings in bolivars are now worth less when converted back to dollars.

Colgate-Palmolive warned on Monday it would take a one-time charge of $120 million in the first quarter to re-measure its balance sheet at the new rate. Its shares were flat on Monday after falling 1.5 percent on Friday.

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Irish packaging group Smurfit Kappa, which just last week reported its second-best profit in the last five years, said it would lower its net asset value to 142 million euros as a result of the bolivar devaluation. Smurfit shares fell 2.71 percent.

Edenred, the French company that makes vouchers and pre-paid cards, said the devaluation would cut earnings before interest and tax by more than 2 percent. Its shares fell 1.63 percent

Analysts said this latest devaluation could hurt companies more than previous moves because the prices of thousands of products, ranging from bottled water and meat to soap, deodorant and toothpaste, were capped under a 2011 Venezuelan law meant to fight inflation. The law calls for periodic revisions, nominally yearly, but which were avoided in 2012.

"The impact of currency devaluation in Venezuela has historically been partly offset by price increases, which may take longer to realize with Friday's devaluation given price controls implemented by the government to regulate corresponding pricing actions," Stifel analyst Mark Astrachan said in a note.

Colgate, best known for its namesake toothpaste, makes more of the staple-type goods subject to price controls than many other companies. It warned the revaluation would cut earnings by as much as 7 cents per share per quarter. BMO Capital Markets analyst Connie Maneaty said the move could slice forecast 2013 earnings per share growth in half, to 5 percent over 2012.

"We think most investors had been bracing for a devaluation, although we think that price controls limit (Colgate's) ability to manage through this devaluation relative to past ones," said Ian Gordon, an analyst at S&P Capital IQ.

Colgate could try to raise prices in larger markets, such as Mexico and Brazil, to mitigate the impact of being unable to raise prices in Venezuela, said Consumer Edge Research analyst Javier Escalante.

Shares of Spanish companies with Venezuelan exposure also edged lower on Monday, among them the telecoms heavyweight Telefonica, banking group BBVA and insurer Mapfre. In all three cases analysts expected an earnings hit on the order of 3 percent or less.

Raise Prices Elsewhere

Analysts said that while the latest devaluation was expected and necessary, it still did not bring the official exchange rate anywhere close to the black market, meaning yet another round of devaluations was likely before long.

Trade experts say the problems are one result of Venezuelan President Hugo Chavez's drive toward socialism, a condition that should persist even after the cancer-stricken leader dies or steps down.

"Until there's a change in the nature of the regime in Venezuela, not just the person but the nature, we're going to likely see the value of the currency continue to fall," said Peter Morici, a professor at the University of Maryland and former top official with the International Trade Commission.

Cosmetics direct-selling leader Avon is one of the most exposed Western countries to a devaluation, though it is not subject to the same levels of price controls as Colgate.

Avon, which reports its fourth-quarter results on Tuesday, got 5 percent of its revenues in Venezuela in the first nine months of 2012, but 11 percent of its operating profit. The company did not immediately respond to a request for comment.

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Venezuela is one of Avon's fastest growing markets, with revenues excluding the impact of currency up 18 percent. At the same time sales in Brazil and Russia, two of its top markets, have been uneven, and the U.S. market has been declining.

In its last quarterly filing Avon said it had "monetary net assets" (which it did not define) of $222 million denominated in the Venezuelan currency. Avon's shares fell 2.5 percent on Friday but recovered on Monday.

Economists have been calling for a devaluation of the bolivar, and a number of companies that do business in Venezuela had made it clear that they expected it to come this year.

Last week, Clorox said it was increasing its contingency for just such an event in the current fiscal year, which ends in June.

Ford Motor has a South America business that is a small fraction of its North American operations, but it warned in January that earnings there would be flat this year on currency risks, pointing to Venezuela and Argentina.

Venezuela inflation is already at double digits and expected to rise further, and the price controls imposed will only hurt revenue further.

"If price controls remain in place, this could impact top line growth over the next few years, after hitting margins this year. Furthermore, most analysts feel that even the new exchange rate is unsustainable, meaning that we could go through this again soon," said J.P. Morgan consumer products analyst John Faucher in a note Monday.