UPDATE: Franc Weighs On SGS As First Half Profit Falls 9%

Quality inspection services company SGS SA (SGSN.VX) Friday reported a 9% fall in first-half profit as the soaring Swiss franc took a bigger-than-expected bite out of profit and sales.

The Geneva-based company also warned its margins could be squeezed in the second half compared with 2010, as it steps up investments in development projects.

SGS shares fell on the news, down 5.1% or CHF80 to CHF1498 at 0754 GMT. The stock has lost 5.4% in value since the start of the year.

"The currency impact was bigger than expected," said Jean-Philippe Bertschy, an analyst at Bank Vontobel in Zurich. "I think the stock will react negatively."

On a reported basis, net profit fell 8.9% to CHF246 million in the six months to the end of June, from CHF270million a year earlier "due to the strength of the Swiss Franc," SGS said.

The currency has risen 2.6% against the euro and 10.5% against the dollar during the first six months of 2011 as investors flocked to its safe haven status amid the European debt crisis.

On a constant currency basis, SGS said its profits had increased 6% from CHF232 million in 2010.

Sales also fell slightly, down 0.3% to CHF2.345 billion from CHF2.352 billion in 2010. SGS said the figure represented a 12.8% increase from the CHF2.08 billion figure in constant currencies for 2010.

"Due to the significant appreciation of the Swiss franc against all currencies that SGS operates in around the world, group revenues declined slightly by 0.3% in comparison with the published figures for 2010," the company said.

Kepler Capital Markets said the impact was bigger than expected, and it was disappointed with the results.

"Despite strong organic growth, results came in below expectations," said analyst Bettina Edmondston in a note.

Looking ahead, SGS said the pace of investments in development projects would pick up in the second half of the year, which would reduce margins.

"Therefore margins, while better than the first half, will be negatively impacted compared to the prior year," said Chief Executive Martin Kirk.

For the full year, SGS said it expects "solid top line growth" of more than 10% using constant exchange rates, and for its operating margins to be slightly narrower than in 2010.

Vontobel's Bertschy said the outlook was positive, but said he was concerned about falling margins, and wanted to know how the company would improve them in the second half.

The adjusted operating margin fell from 16.5% in 2010 to 16% in 2011.

"The margins were quite weak in the first half, particularly in system certification, industrial testing, and life science," said Bertschy. "They have made acquisitions of high margin businesses, but the margins have been weak. They will have to explain how they plan to improve them."

-By John Revill, Dow Jones Newswires; +41 43 443 8042 ; john.revill@dowjones.com

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