Danone Profits Up But Warns On Raw Material Costs

In view of developments since the beginning of 2011, the Group expects total raw material and packaging costs to increase by 6 to 9% on average over the year, with a steeper increase in the first half reflecting the comparison with figures recorded in 2010.

2/15/2011 --- Danone has reported that consolidated sales rose 13.5% to €17,010 million in 2010. Excluding the impact of changes in exchange rates (+6.0%) and in scope of consolidation (+0.6%), total sales were up 6.9%. This organic growth reflects a +7.6% rise in sales volume and a -0.7% decrease due to price mix. Exchange-rate effects were due primarily to rises in the Brazilian real, the Mexican peso, the US dollar and the Russian ruble. Main changes in the scope of consolidation were the integration of Unimilk (Russia) from December 1, 2010, and, to a lesser extent, the arrival of two new European fruit-drink subsidiaries (Danone-Chiquita and Proviva), partially offset by the sale of Frucor (New Zealand) in February 2009.

In Q4, consolidated sales rose +16.8% to €4,299 million in the fourth quarter of 2010. Excluding exchange-rate effects (+6.7%) and changes in the scope of consolidation (+3.2%), the increase was +6.9%. This like-for-like rise reflects a +4.8% rise in sales volume and a 2.1% increase in sales value.

Sales of the Fresh Dairy division increased by +6.2% on a like-for-like basis in the fourth quarter of 2010, reflecting volume growth of +3.3% and a 2.9% rise in value.

This takes into account a steep +27.1% like-for-like rise at Unimilk in December, reflecting volume growth of +8.9% and a significant rise in average price per kilo due to higher sales prices and improvement in value within the product mix.

Excluding the impact of Unimilk, Fresh Dairy sales continued the trend observed in the previous quarter, rising +5.4% like for like in the fourth quarter of 2010 with a combination of +2.8% volume growth and a positive price effect of +2.6%.

This performance illustrates continued momentum from the Reset program, despite a significantly higher basis for comparison in volume terms for the quarter and a persistently difficult consumer market in southern Europe.

The rise in sales price per kilo in the fourth quarter marks the end of the impact of the Reset program and a return to competitive management of the product portfolio and prices. Growth in sales value was affected by price rises in high-inflation countries (Argentina, Ukraine and Turkey), as well as Russia, where price increases were applied in line with overall market trends and also in response to an exceptional surge in milk prices due notably to adverse weather conditions in summer 2010.

The division’s priority markets, among them the US, Russia and Brazil, continue to drive growth, while Activia is the division’s most dynamic product, accounting for half of overall growth.

The Waters division posted a +5.2% like-for-like rise in sales in the fourth quarter of 2010, in line with average growth over the year. A robust +7.3% rise in volumes confirms trends over the past six quarters, with continued double-digit growth in emerging markets and steadying volumes in mature economies, where France and German were top performers.


The Baby Nutrition division turned in its best quarterly performance of the year, with sales up +9.8% like-for-like and volume growth reaching +6.4%. A +3.4% rise in value reflects a favorable geographical mix and price increases for infant milk in China, in line with market trends. All regions reported growth, with China, Indonesia and the United Kingdom still the main contributors. The milks category continued to deliver double-digit growth, while weaning foods saw a slight rise in the fourth quarter reflecting good performances in France, Poland and Russia.

Medical Nutrition reported a +7.7% like-for-like sales growth in the fourth quarter of 2010, entirely attributable to a rise in volumes (+8.4%). Once again all regions contributed to growth, with Western Europe and new geographies contributing equally. All product categories gained ground, with pediatrics and the gastro-intestinal allergy range again showing above-average growth.

Danone’s trading operating margin (EBIT) rose +3 bps to 15.16% in 2010, which saw a steep rise in raw material prices, particularly milk. The margin evolution was particularly favorable in the second half, with a +78 bps rise like-for-like compared to 2009.

The increase in raw materials was primarily offset by various cost-cutting measures that generated record savings of over €500 million during the year.

Backed by steady growth at the end of the year, Danone is moving into 2011 with confidence. It expects 2010 trends to continue in the months ahead:
•  consumer spending in both the industrialized world and emerging economies shows no sign of either significant improvement or worsening;
•  raw material prices remain on a volatile upward path.

More specifically, in view of developments since the beginning of 2011, the Group expects total raw material and packaging costs to increase by 6 to 9% on average over the year, with a steeper increase in the first half reflecting the comparison with figures recorded in 2010.

Danone will be drawing on its experience of 2010 to manage these increases through consistently high productivity. The Group will also continue to use pricing to maintain competitive edge, benefiting from increased room for maneuver thanks to repositioning in 2009 (Reset program).
Another priority for 2011 will be the integration of Unimilk’s operations in Russia and CIS countries, with sales and cost synergies set to boost Unimilk’s operating margin from the second half on.

Altogether, targets for 2011 include:
•  a 6% to 8% rise in sales[1] on a like-for-like basis[2];
•  an increase of around 0.20% in trading operating margin[2], like-for-like. This will be fueled by all the Group’s activities, but especially by Unimilk and synergies from its integration. As a result, the rise will only take shape in the second half, with first-half trading operating margin down slightly from the same period of 2010;
•  A rise in free cash flow [2] in keeping with the €2 billion target set for 2012.

Franck Riboud Chairman of Danone commented: “Our sales grew by over 6% in 2010, rising from quarter to quarter, with volume and value both making positive contributions in the second half. All of our divisions and all our regions posted gains. Continued high operating margin and a 20% rise in free cash flow are remarkable achievements in a year that saw a steep rise in raw material prices and the end of adjustments to sales prices under our Reset Program, which improved our competitive edge. These robust performances in 2010 testify to the strength of our business model.

Reflecting the growth strategy Danone has pursued for many years, our structure is changing rapidly and emerging economies now represent half of our business. The joint venture uniting Danone and Unimilk since December,1,2010 makes Russia our largest single national market, with France. The move has created a new leader in Fresh Dairy products, with a nation-wide presence and strong brands in each segment. This investment offers exciting growth perspectives with major potential for value creation.

The strength of our Group, businesses, brands and teams, and our exposure to regions with robust growth prospects mean that we can look to 2011 with confidence. We anticipate no major change in consumer demand and in this context, also marked by persistently steep increases in raw material prices, we are placing the emphasis on lasting development of our brands, with a commitment to health, eating pleasure and respect for the environment. We will also be continuing efforts to raise global productivity to underpin our policy of competitive price management.

We will aim to outperform our competitors in organic sales growth, margin, and cash generation.”