Danone Reports Higher Sales for Q3; Confirms Full-Year Outlook

15 Oct 2014 --- Danone SA has reported a 3 percent rise in third-quarter reported sales, and about 7 percent growth organically, reflecting stable sales volumes and a 7.0 percent growth due to the price/mix effect. The company also confirmed its full-year targets. Danone said its sales were driven by solid trends across all businesses, particularly by a favorable basis for comparison in Early Life Nutrition.

Chairman Franck Riboud stated: “Our third-quarter organic growth was nearly 7%, buoyed by a favorable basis for comparison, but above all by solid trends across all Group businesses—in Europe, where we turned in a positive showing; in Russia and the United States, where we are consolidating our existing positions and laying the foundations for future growth; and in emerging markets, where we are continuing to gain ground with double-digit growth. With the world economy affected by volatility and pressures of many kinds, Danone teams are today focused on delivering on our priorities and achieving our full year targets.”

“Working with our Board of Directors, we have just rolled out a stronger, simplified governance structure headed by Emmanuel Faber, and we are turning our attention towards 2015 and the years beyond. Against that backdrop, these third-quarter results confirm the strength of our businesses, our brands and our market positions. Underpinned by the commitment of the men and women at Danone, they give me great confidence in our ability to build the future together.”

In the third quarter of 2014, consolidated sales as reported rose +3.0% to €5,416 million. Excluding the impact of changes in the basis for comparison, which include exchange rates and scope of consolidation, sales were up +6.9%. This organic growth reflects stable sales volumes (-0.1%) and a +7.0% increase due to the price/mix effect. The exchange-rate effect of -3.7% reflects unfavorable trends in some currencies, including the Argentine peso, the Russian ruble and the Indonesian rupiah.

Fresh Dairy Products division sales were up +0.7% like-for-like. This moderate increase reflects a -7.1% fall in sales volume offset by a steep +7.8% rise in value. Business in Europe was on the whole in line with trends observed in the second quarter, with sales down by around -5%. This reflects a continued decline in sales volumes, due partly to overall market trends but also to the division’s more selective approach to promotions and streamlining of some product lines. Together these initiatives, which have been rolled out gradually since the beginning of the year, are aimed at stabilizing margins in Europe by the second half of 2014. The CIS/North America area reported slower growth in sales this quarter. In Russia, growth remains buoyed by continued portfolio enhancement through higher prices and a very positive mix effect; low value-added segments have continued to decline in volume, affecting sales in both the geographical area and the division. For the CIS as a whole, growth has in any case tapered off since the beginning of the year due to the negative performance of Ukraine.

In the United States, the category is leveling off after several years of strong dynamics, particularly in Greek yogurt. Danone has confirmed its leading position, and is launching a range of initiatives focusing on innovation, distribution and partnerships to drive category growth.

The Waters division reported another strong rise in sales of +11.8% like-for-like, driven by a +8.3% increase in volume. These figures reflect both solid performance in European markets and continued strong growth in emerging markets, in particular Asia, fueled by expansion of the Mizone brand and very strong performances by Aqua. Growth in value was +3.5% and was due primarily to the mix effect generated by very strong growth in aquadrinks.

The Early Life Nutrition division saw sales rise +19.2% in the third quarter, driven by +9.9% volume growth. This excellent performance was buoyed by very favorable bases for comparison across all eight Asian markets affected by Fonterra’s false alert starting in August 2013, with sales in most of these markets now back to pre-crisis levels. In China, the market that was hardest hit, Group brands as a whole continued to grow broadly in line with expections. Demand for Nutrilon products rose sharply, particularly in ultra-premium segments and specialized distribution (“mom & baby stores”). The e-commerce boom has been another driver, with a significant impact on Chinese consumer trends, while sales of Dumex brand products continue to lag projections.

In Europe, Q3 sales showed double-digit growth underpinned by Aptamil and Nutrilon products and helped by a stabilization in weaning food products, particularly in France and Italy. Division activities in the rest of the world remained very robust, with double-digit growth in Latin America, Russia and Africa/Middle East.

Buoyed by a very solid performance in Europe, the Medical Nutrition division reported Q3 growth of +10.1% like-for-like, its strongest increase in the past four years. Growth reflected a volume rise of +5.6% and a positive price/mix effect of +4.5%. Main contributors to growth were Turkey, the United Kingdom, Brazil and China, with a stronger contribution from the pediatric care brands that show steady growth. 2014 Outlook (from press release dated February 20, 2014)

The Group assumes that consumer demand will remain similar to 2013, with sluggish trends in Europe, significant carry-over of milk price inflation and persistently high exchange-rate volatility in emerging markets, resulting in higher inflation in those countries.

In response, Danone will continue to deploy action plans already under way in Europe—updating its product portfolio and sharpening its competitive edge—with a view to stabilizing its performances in the region by the end of 2014. The Group will also build on its strong momentum in markets outside Europe to continue growth in emerging countries and North America, and to manage rising inflationary pressures as appropriate. Finally, the Group will focus on rebuilding its Early Life Nutrition positions in Asia, in particular through product launches and brand extensions, favoring solid, lasting growth over speed. Due to this rebuilding effort and to 2013 bases for comparison, organic growth in sales and operating margin will vary widely from one half to the next in 2014. The Group thus anticipates a return to strong, sustainable, profitable growth beginning in the second half.

Danone has set the following targets for full-year 2014:
• like-for-like sales[1] growth of between +4.5% and +5.5%,
• trading operating margin stable within a range of -20 bps and +20 bps, reflecting the flexibility that the Group seeks to manage its operations, in particular for its Early Life Nutrition business in Asia,
• free cash-flow of around €1.5 billion excluding exceptional items.

On September 2, 2014, on the recommendation of Chairman and CEO Franck Riboud, Danone’s Board of Directors voted to separate the functions of Chairman and CEO and to appoint Emmanuel Faber as CEO, with Franck Riboud remaining as Chairman of the Board. As part of this new governance structure, Bernard Hours’ mandate as Co-COO was terminated and the Board thanked him warmly for his contribution to Danone’s success over the past 30 years. This change in governance, which took effect on October 1, 2014, reflects Mr. Riboud’s desire to concentrate on the key strategic issues facing Danone in the medium and long term and to lay the groundwork for a smooth succession. Using the same rationale, the Board of Directors voted to set up its own Strategy Committee, to be headed by the Chairman with the participation of the CEO.