European Business News (EBN), 97-02-13

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From: The European Business News Server at <http://www.ebn.co.uk/>

Page last updated February 13 1720 CET

CONTENTS

[01] Shell profit gains 26% as oil prices offset weak chemicals

[02] Philips swings to a loss as restructuring charges take a big bite out of '96 earnings

[03] US retail sales jump back in January after weak December

[04] UK inflation climbs to highest rate in a year

[05] Siemens expects steady earnings for fiscal 1997

[06] DASA says '96 results improved and expects growth to continue

[07] EU Commission says moderate economic turnaround won't ease unemployment

[08] Nokia's '96 earnings drop 21%, but fall is cushioned by a strong fourth quarter

[09] Willis Corroon shows 83% leap in 1996 pre-tax profit

[10] Pearson to take big charge over improper accounting in US

[11] Corporate and Economic Briefs

[01] Shell profit gains 26% as oil prices offset weak chemicals

Shell shares in London jumped to a new peak after the results and share split news, touching 1,110 pence before easing a bit.

The oil giant said net profit on a current cost basis rose to £5.3 billion ($8.8 billion), as higher oil prices and increased production offset as a drop in chemicals earnings.

Net income on a historical cost basis rose 30% to a record £5.69 billion.

Shell also announced changes in top management at both its Dutch and British units. The Shell Transport unit in Britain said John Jennings will retire as chairman on June 30, to be replaced by Mark Moody-Stuart. At Royal Dutch, Jeroen van der Veer has been appointed as a managing director. Shell is 60% owned by Royal Dutch Petroleum and 40% by Shell Transport and Trading.

Royal Dutch said it is to split its shares on a four-for-one basis, while Shell Transport will issue two new shares for every one held.

Shell said exploration and production earnings jumped £1.4 billion last year because of higher oil prices, increased production and sales of natural gas. But the company warned that crude oil prices - which have fallen back recently - could show some renewed weakness due to the resumption of exports from Iraq and continued expansion of non-OPEC production.

Earnings from oil refining and marketing also rose considerably, despite pressure on margins. But chemicals earnings were substantially down and Shell said it expected chemical industry margins and profitability to remain weak throughout 1997.

[02] Philips swings to a loss as restructuring charges take a big bite out of '96 earnings

Philips announced that it swung to a net loss of 590 million guilders ($312 million) in 1996 from net profit of 2.52-billion the year before. Net income from normal operations deteriorated to 723 million guilders from 2.68 billion guilders.

Several one-time costs were largely responsible for the drop, but sluggish sales and price erosion also affected the company, hitting both the consumer-electronics division and Philips' generally successful lighting and semiconductor activities.

And while financial markets anticipated some news of strategic changes, Chief Executive Officer Cor Boonstra disappointed them. Responding to repeated questions from journalists, Boonstra said he will make no major announcement on strategy before year end.

Boonstra said he plans to organise Philips into 100 business units and that he will continue to consider pruning activities from among the group's businesses, but added that he would not speed up the process just because people are impatient.

'The process of building these business units will be finalised at the end of this year,' Boonstra said.

Boonstra also said Philips has no plans to change its relationships with either the Sound & Vision consumer-electronics division or PolyGram and that he was pleased to see that PolyGram's film division swung into the black in the second half of 1996.

Despite the market expectations, some analysts said they weren't surprised by the lack of strategic news.

Indeed, many said in recent weeks that they expected poor results and big restructuring charges and that they were taking a wait-and-see attitude until the second half of 1997, when the benefits of the restructuring announced last year will start to kick in. '1997 will be the year of restructuring,' said Paul van Doorn, an analyst with merchant bank Kempen & Co.

But the market-watchers said they were waiting to see what Boonstra will do in addition to cutting costs.

'They are doing a lot in terms of restructuring, and doing it very quickly, ' said Susan Anthony, an analyst with Schroders Securities in London. 'But the other side is how they can ensure profitable growth in the future. We are still, in my view, taking them on faith.'

Boonstra said Thursday that he was in talks with Philips' product- development unit and that he has plans to introduce more digital products, but declined to provide details.

Regarding Philips' other activities, Chief Financial Officer Dudley Eustace said he believes sales of semiconductors, traditionally the engine for profit growth, will pick up in 1997 because world demand seems to have bottomed. (Anya Schiffrin, AP-Dow Jones)

[03] US retail sales jump back in January after weak December

Total retail sales grew by 0.6% last month to a seasonally adjusted $209.1 billion after a steeply revised 0.3% gain in December. The government previously said sales in December had risen much more strongly by 0.6%.

The downward revision in December sales suggests the economy may have entered 1997 with somewhat less momentum than previously thought. Consumer purchases of goods and services account for about two-thirds of national economic activity.

The weak report is unlikely to give the Federal Reserve any incentive to raise rates. Although sales growth was moderate and broad-based in January, it was still below expectations. And the gains came on a lower level in December than originally estimated.

A Dow Jones News Services' survey of 21 economists published this week forecast retail sales to be up by 0.7%. Retail sales, excluding autos, was forecast to be up by 0.6%.

The overall increase was led a 1.2% rise in auto sales. Retail sales, excluding autos, rose by 0.4%.

Durable goods sales, which includes auto sales, rose by 0.7% for the month after rising by 0.2% in December. Sales of nondurables rose by 0.5% in January after rising by 0.3% the previous month.

Within the nondurable goods category, general merchandise sales were up by 1.3% in January. Food sales were unchanged for the month while clothing sales fell by 0.9%

[04] UK inflation climbs to highest rate in a year

The rise was larger than the headline rate of 2.6% that economists had expected. The markets had also forecast an underlying rate of 3%.

The government has committed itself to holding underlying inflation to 2.5%. In its inflation report Wednesday, the Bank of England said that a ''moderate'' increase in interest rates is needed if the government is to meet its inflation target in two years' time.

The office said the rise in all-items inflation was largely due to housing costs as a significant rise in mortgage rates contrasted with a fall in the same month last year. There were also smaller upward effects from food prices, particularly seasonal food, and from motoring costs.

Household goods prices fell 3.6% in January from December, the largest monthly fall since comparable records began in 1956 while a fall of 5.8% in clothing and footwear prices over the month was the largest since 1947.

Economic Secretary Angela Knight said 'serious commentators, including the Bank of England in its Inflation Report, expect inflation to fall back over the coming months.'

'The strength of sterling and this week's excellent producer price figures show inflation remains under control,' she added.

[05] Siemens expects steady earnings for fiscal 1997

Siemens had expected sales for fiscal 1997 to be flat with fiscal 1996's 2.49 billion Deutsche mark level, excluding a 500-million-Deutsche mark gain.

''The present favourable currency situation and the low interest rate level are largely responsible for this unforeseen growth,'' von Pierer said.

In the 1997 fiscal year, Siemens will again achieve the ''high level'' of net profit posted in the 1996 fiscal year, von Pierer said. In fiscal 1996, Siemens recorded a net profit of 2.5 billion Deutsche marks ($1.48 billion) plus a 500 million mark extraordinary gain.

The company plans a further increase in net profit for the 1998 fiscal year, von Pierer added.

To remain competitive, Siemens will continue to divest units in which it can't gain competitive advantages, von Pierer said. The company plans to divest a sales volume of about 3 billion marks ''in the foreseeable future, '' he said.

Siemens' international business accounted for 62% of its total in fiscal year 1996, von Pierer said, adding that the figure would increase in the future.

However, despite the need for globalisation, ''Germany is - and will remain - the basis'' of the company, he said.

[06] DASA says '96 results improved and expects growth to continue

The aerospace unit of Germany's Daimler-Benz also conceded that it will face strong competition from the merged Boeing and McDonnell Douglas and that it is anxious to push ahead will developing larger Airbus jetliners and bring in partners for the projects.

The company said last year's results were bolstered by cost-cutting and efficiency measures, but it didn't provide any specific figures.

DASA said it expects sales this year to grow 6% to 14 billion Deutsche marks ($8.3 billion).

DASA chairman Manfred Bischoff said he also expects the 1997 earnings to improve from 1996. He noted that there had been a clear upturn in business in the second half of 1996, which was continuing into 1997.

'We notice a significant stimulation of our business activities. Our efforts to increase cost efficiency, which can be directly applied to price policy, were much appreciated by our customers,' Bischoff said Thursday at a news conference.

Regarding 1996, DASA said its increase in turnover was due mostly to improved activities in the aeroengine and space sectors.

Bischoff noted that DASA will face strong competition from the recent merger of US-based Boeing and McDonnell Douglas. He said the combined annual sales of the two companies was more than all the European aircraft makers put together.

The chairman added that Airbus would like to have a US partner to help build its proposed A3XX large air carrier, which is expected to seat 500 to 600 passengers, and is planned for production in 2003. A final decision on whether or not to build the aircraft will be made in 1999.

Bischoff suggested that because of the size and market weight of the merged Boeing and McDonnell Douglas companies, US suppliers to McDonnell Douglas might hesitate to work with Europe.

[07] EU Commission says moderate economic turnaround won't ease unemployment

The Commission's annual economic report, a review of recent performance in the 15 EU member states, said its latest forecasts published in November still hold true: EU-wide growth should rise to 2.3% this year and 2.8% in 1998, from 1.6% in 1996.

However, the EU executive warned that overall levels of joblessness 'will remain high,' challenging member country governments that are under pressure to create new opportunities for increasingly disgruntled citizens. The Commission argues that slack investment rates are limiting growth potential, and hence the possibilities for job creation.

At the same time, the Commission warned governments not to cut corners on their stated deficit-cutting goals this year unless they want to risk a credibility crisis in the financial markets.

'If budgetary outcomes were to disappoint relative to stated objectives, this could lead to renewed pressure on interest rates and exchange rates,' the Commission said, adding that this could have 'potentially damaging effects' on output and employment.

On deficits, the Commission again sought to dispel notions that the mad dash to slash budget spending ahead of the launch of a single currency on Jan. 1, 1999, will crimp the EU's growth potential.

Rather, member states are encouraged to sustain a 'virtuous circle' whereby reduced budget gaps generate lower interest rates, which boost investment and hence growth and employment. This will be most effective if fiscal authorities stick to cutting expenditure rather than raising taxes to keep their budgets in line, according to the Commission.

In a section of the report analysing recent developments country-by-country, the Commission doesn't shy away from subtle barbs against those countries relying too heavily on tax increases or one-time measures instead of structural adjustment for deficit reduction.

The section on Italy, for example, notes that revenue measures account for 40% of the government's 1997 deficit-reduction plan.

Among them is the so-called 'Eurotax,' a levy that may in fact be reimbursed later on. The tax currently is under scrutiny by the EU's statistical experts, and a judgement on its compliance with accounting standards is expected as soon as next week. (Peter Goldstein, AP-Dow Jones)

[08] Nokia's '96 earnings drop 21%, but fall is cushioned by a strong fourth quarter

The Finnish telecommunications company said that for the year, pre-tax profit fell to 3.90 billion markkaa, in line with market expectations.

The company had struggled in the first half and issued a profit warning, but prospects began to improve, and for the fourth quarter operating profit jumped 70% to 1.74 billion markkaa. Operating margins improved to 14% from 9.3% in the same period in 1995.

Chief Executive Jorma Ollila said 'We have every reason to be pleased with the group's improved financial position, which provides us with a very solid foundation for future years.

'I'm particularly pleased to announce that we were able to improve our market position in both digital cellular systems and digital mobile phones, ' Ollila said.

Europe accounted for 59% of the group's sales in 1996, while Asia contributed 22%, North and South America 16% and other countries 3%.

The improvement in net sales towards the end of 1996 follows the discontinuation of Nokia's television operation and further streamlining of operations to focus on its core telecommunications businesses.

The telecommunications division showed positive growth in order inflows in the last three months of the year.

The operating profit for the Mobile Phone division fell to 1.43 billion markkaa in 1996 from 1.75 billion markkaa, due to lower profitability in the first half of the year. Operating margins fell to 6.6% from 10.9% in 1995.

[09] Willis Corroon shows 83% leap in 1996 pre-tax profit

The international insurance broker said pre-tax profit in 1996 jumped to £91.6 million pounds from the year before. Profit from continuing operations rose 13% to £89.1 million.

Willis said that insurance rates continue to decline almost universally, with particularly sharp reductions in sectors served by its London-based global speciality businesses, and competition in the US retail market was intensifying.

The recent rise in sterling, if sustained, would also hit 1997 results, it said, and profits from its Lloyd's members agency were unlikely to be repeated at the 1996 level.

However, the group said it expects to benefit from the clear strategies and targets now established for each business unit and a change programme designed to enhance performance and competitiveness.

Willis executive chairman John Reeve said the company is now 'focused on its core operation, following a programme of disposal, profitability has been improved and the balance sheet has been significantly strengthened.'

[10] Pearson to take big charge over improper accounting in US

Pearson blamed the charge on unauthorised discounts, dating back to 1991, given to customers in return for early payments. Shares in Pearson plunged 7.0% after the announcement, but have since recovered somewhat.

Pearson said that the discounts were not correctly recognised within Penguin USA accounts. It noted that they did not take place at any other Penguin companies outside the US.

'The profits of Penguin will not be restated and Pearson has not changed its 1997 profit expectations for the company,' Pearson said.

The media group said it has launched an independent investigation by outside counsel and by its recently appointed auditors, Price Waterhouse.

'We have moved quickly to implement a detailed plan of action to address these unauthorised practices,' said Chief Executive Marjorie Scardino.

[11] Corporate and Economic Briefs

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