European financial crisis hits close to home

  • Article by: DEE DEPASS , Star Tribune
  • Updated: June 2, 2010 - 2:56 PM

As the euro falls, Minnesota's global manufacturers watch and worry about consumer demand and profits in Europe.

In a meeting with Wall Street analysts earlier this month, 3M Co. Chief Financial Officer Patrick Campbell tried to soothe concerns about how the financial crisis in Europe will affect the $23 billion conglomerate that makes Scotch tape, Post-it Notes and thousands of other products.

"We have our eyes wide open as to what is going on in Europe, and we are monitoring the situation," Campbell said. Currently the company is expecting an impact to earnings of about $36 million, or 5 cents a share, from the weakened euro.

For Minnesota's global corporations, Europe's monetary crisis has hit close to home. 3M, Polaris, Pentair, Donaldson, Graco and others are tackling questions from shareholders and assessing the fallout from Europe's stunning debacle. It is a mess that came to a head this month, requiring a $1 trillion bailout for Greece courtesy of the European Union and International Monetary Fund.

The value of the 16-nation euro has plummeted 10 percent in recent weeks, sending stock markets diving, the U.S. dollar soaring and export projections askew. Economists warn that companies may become rattled by Europe's turmoil and delay the very things needed to keep the U.S. economy moving forward -- such as adding shifts, hiring and buying equipment.

Factories just recovering from the Great Recession "may go back in the foxhole," said Jim Paulsen, Wells Fargo's chief investment strategist at Wells Capital Management. "If everyone does that, then the economy will begin to slow. That is the bigger concern."

U.S. fabricators like 3M face a potential double whammy. They export U.S. made goods to Europe and pound out products in Europe. So the rising dollar and negative currency exchanges can hurt pricing, stall sales and make bankers queasy about lending, Paulsen said.

The euro's downfall has produced "an ugly contest of the euro vs. the dollar," said Creighton University economics Prof. Ernest Goss. "Right now the euro is uglier than the dollar."

That's prompted Germany and other European governments to dump their European debt. "Now they want to buy our Treasury bonds ... and that pushes up the value of the dollar and ... with the value of the dollar up, 3M and other U.S. manufacturers find it even more difficult to sell products in Europe. It makes those goods more expensive," Goss said. "It's definitely going to hurt U.S. manufacturers."

But the pain won't show up right away, said Fred Zimmerman, a manufacturing expert and former University of St. Thomas professor. "The decline in the value of the euro will no doubt decrease the earnings of some [firms] like 3M. ... But I don't think that will be a big deal. It will be somewhere in 2011 that we will be pissing and moaning about this," he said.

He cited a St. Thomas study that showed it takes about 18 months before the impact of a currency devaluation shows up. That's because companies usually hedge against negative currency changes by locking in prices on future supplies.

So for companies, "there are so many things in the pipeline that are based on historical prices," Zimmerman said.

But that won't help if anxious Europeans are in no mood to buy goods, said Goss. The projected economic growth rate for the 16 nations that use the euro is only 0.2 percent this year, Goss noted. That compares with estimates that the U.S. economy will grow by 3.5 to 4 percent. "That means they won't be buying as many of our manufacturing and farm products," he said.

That's not good. 3M's sales from its region that includes Europe, the Middle East, and Africa already fell nearly $1 billion from 2008 to $5.9 billion last year. Now officials are trying to predict results for this year but insist the sky isn't falling.

3M "went into the year not expecting much growth out of Europe. We thought Western Europe specifically was going to be the ... growth region of overall operations, and it's not turned out to be that way," said CFO Campbell. "We are monitoring the situation in that we are a short-cycle business [so] we'll see it maybe before some others do. But thus far we have not seen any crack in the armor" of European sales.

The weakening of the euro's foreign exchange rate "has impacted us to some degree, maybe to the magnitude of 5 cents for the year," he said, referring to the company's per-share earnings estimates of between $5.40 and $5.60.

Medina-based Polaris, which boasts $300 million in ATV and snowmobile sales in Europe, has distributors in Greece and Spain, and major operations in Norway and Sweeden. A new regional headquarters is slated for Switzerland. Europe's earnings rose nearly 40 percent during the first quarter, said CEO Scott Wine.

"It's an extremely important region for us ... and is tremendously well performing, so we are very concerned about what is going on there," he said.

Wine expects to lose some sales just because of the drop in the euro. "But because the components we purchase there are also coming over at a lower cost, that provides a natural [hedge] on the profit side of things," Wine said. "So we are very confident that we can handle the initial fallout of the euro. We are more concerned about overall demand. It's certainly something we are watching extremely closely."

Rich Sheffer, assistant treasurer of Bloomington-based air filtration equipment firm Donaldson Cos., said Europe's financial woes "have not impacted" sales to date. Donaldson makes about 30 percent or $500 million of its sales from Germany and other West European nations. Germany incorporates lots of Donaldson equipment in its industrial products and exports them.

"Germany is a big exporter to the rest of the world. So actually a weaker euro makes their products more competitive on a global basis. So this [crisis] could help," boost sales there, Sheffer said. So far, there's only one downside. "When we translate our euro financial results back to U.S. dollars we will probably see a 3 percent impact because the euro is weakened."

He's also monitoring it closely. "From an industrial company standpoint, the thing we have to watch for is the financial system in Europe is still somewhat fragile," he said. "The bigger issue for everybody operating in the region [is] will the banks remain healthy enough that business activity can continue."

Minnesota Trade Office Director Ed Dieter said other Minnesota exporters may have hedged against Europe's risks another way. Several turned their attention toward Asia's bustling economy a long time ago. "We've been hearing from companies for awhile that Asia was coming back faster than Europe," he said. "So companies doing [lots of] business in Asia will find themselves less affected by Europe. Still, there is a psychological effect to these things and I don't know whether that has a long-term effect. It's awfully hard to know how these things will play out."

Dee DePass • 612-673-7725

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