SGSOY SGS SA (PK)

The chief executive of Swiss testing group SGS SA (SGSN.VX) Friday blamed the soaring Swiss franc after his company reported a 9% dip in first-half profit.

"The forex impact on sales was 13.1%, that's a big number," Chief Executive Chris Kirk told Dow Jones Newswires.

SGS hedges its large contracts, which are worth CHF4 million to CHF5 million, but it has hundreds of thousands of smaller ones which it cannot hedge, he said.

"We operate in 140 countries and with 92 currencies, and not one has strengthened against the franc. That must be a record," Kirk said, adding, "there is an impact, we have had very good results, but it has hit the results and given a negative perception."

The news hit SGS shares. At 1112 GMT, they were down 7.7% or CHF122 at CHF1457.

SGS said net profit fell 8.9% to CHF246 million in the six months to the end of June, from CHF270million a year earlier, while sales were down 0.3% to CHF2.345 billion.

On a constant currency basis, removing the impact of forex fluctuations, sales were up 12.8% and profit up 6% compared with a year earlier, the company said.

Kirk said he did not know if the franc, which has risen 2.6% against the euro and 10.5% against the dollar this year, would be a factor in the second half, but assumed it would be. He defended the company's fall in operating margin, which dropped from 16.5% in the first half of 2010 to 16% in 2011, saying SGS has invested to reach its plan of CHF8 billion sales and profit margin of 20% by the end of 2014, he said.

"We have a plan for 2014, and to get there we have to make some investments now. There is no contagion in the group, we are doing remarkably well all around," he said.

Without these investments, the operating margin would have been 0.5% higher, Kirk said, adding that the company had opened four new automotive testing laboratories.

Overall margins will get better, with incremental improvements from the laboratories and more efficient back office functions, Kirk said.

"We don't need to restructure. What we are doing is investing for the future now."

SGS is expecting revenue growth on a constant currency basis of more than 10% for the full year.

"I think the second half looks good, with key businesses like mineral and industrial testing continuing to grow. We are expecting growth virtually everywhere, and most of the business is weighted towards the second half."

SGS will also continue its M&A shopping spree after buying nine business in the first half.

"We have several deals in the pipeline. In the next months the spend will be greater, it will be a multiple of the CHF19 million."

He declined to identify the targets but said they were in mineral, industrial and agricultural testing.

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

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