Danone Reports Sales Rise of 6.5% in Q2
29 July 2013 --- Danone has reported that sales were up +6.5% in the second quarter and up +6.0% in the first half of 2013. Trading operating margin for H1 2013 in line with targets at 13.34%. Full-year targets for 2013 confirmed. There was solid growth in H1 2013 sales, up +6.0% like-for-like and +5.6% as reported.
Second-quarter trends confirm a good start to the year, with sales up +6.5% like-for-like and reported sales up +6.7%, reflecting the strongest growth in volume in the past eight quarters. Sales growth held at over +10% in emerging markets/North America as a whole in Q2, while in Europe the decline was lower than in the previous quarter (-3.0%). Trading operating margin of 13.34% in H1 2013, with a decline similar to that observed in 2012 (-49 bps), in line with targets. Underlying fully diluted earnings per share at €1.48, steady like-for-like and down -2.4% from 2012 as reported. Free cash-flow in H1 2013 at €714 million excluding exceptional items. Full-year 2013 targets confirmed: sales growth of at least +5%, trading operating margin down by between -50 and -30 bps, and free cash-flow of around €2 billion excluding exceptional items.
Chairman’s comment “With sales up 6% in the first half, Danone is off to a strong start in 2013 in an economic and consumption context that remains difficult in Europe and in some cases volatile in emerging countries. This performance demonstrates the relevance of our action plans, with our teams doing a good job of executing them around the globe. In Europe, simplifying our model and reducing costs remain a priority. Our organizational adaptation plan is now being deployed, right on schedule, with the first benefits expected from the second semester onwards. Meanwhile, adjustments to our product portfolio are beginning to pay off. In emerging markets and in North America, our profitable growth drivers are fully operational. In these markets, we are continuing to build our brands and our organizations, while at the same time laying the groundwork for future growth. This is the point of our various initiatives in the first half of 2013: the full integration of Central Laitière in Morocco, our partnerships with COFCO and Mengniu to expand the Fresh Dairy Product category in China, our move into the promising organic baby nutrition segment with the acquisition of Happy Family in the United States, as well as the strategic partnership we’ve just finalized with Starbucks. Our teams at Danone are tackling the second half of the year with the same energy, attitude and ambition, focusing on building a Group with strong, sustainable and profitable growth for 2014 and on meeting our 2013 targets.”
Consolidated sales increased +5.6% as reported in the first half of 2013 to total €11,058 million. Excluding the impact of changes in the basis for comparison, which include exchange rates and scope of consolidation, sales were up +6.0%. This organic growth reflects a +3.5% increase in sales volume and a +2.5% increase due to the price/mix effect.
The -2.5% exchange-rate effect reflects unfavorable trends in currencies including the Argentine peso, the Brazilian real and the Indonesian rupee. Changes in the scope of consolidation led to a +2.1% rise in sales that primarily reflected the full consolidation of Centrale Laitière (Morocco) starting in March 2013.
Consolidated sales increased +6.7% as reported to total €5,720 million in the second quarter of 2013. Excluding the impact of changes in the basis for comparison, which include exchange rates and scope of consolidation, sales were up +6.5%. This organic growth reflects a +4.1% increase in sales volume and a +2.4% increase due to the price/mix effect. The -2.6% exchange-rate effect reflects unfavorable trends in currencies including the Argentine peso, the Brazilian real and the Indonesian rupee. Changes in the scope of consolidation led to a +3.0% rise in sales, primarily reflecting full consolidation of Centrale Laitière (Morocco) starting in March 2013.
Fresh Dairy Products division sales were up +2.6% like-for-like in the second quarter of 2013, reflecting a +3.6% rise in volume and a negative price/mix effect of -1.0%. With sales still declining, Europe benefited from a basis for comparison that started to become easier in the second quarter, and showed early signs of stabilization with market share steady since the beginning of the year. The CIS and North America[1] area reported an excellent quarter of double-digit growth, with each of these two regions performing better than in the previous quarter. The CIS reported strong volume growth driven by all of its own regional markets, while in the United States Danone continued to win market share in the Greek yogurt segment. Markets in ALMA[2] remained buoyant, with continued double-digit growth. The negative price/mix effect results primarily from ongoing investments in pricing and promotions in European markets.
The Waters division maintained a solid growth trend and reported solid rise in sales, up +10.5% like-for-like from Q2 2012, driven by volumes up +7.1%. Vigorous growth in emerging countries, particularly in Asia, continued to drive the division. In Europe, sales remained down slightly, impacted—as in the second quarter of 2012—by adverse weather conditions. The positive price/mix effect of growth in aquadrinks continued to be the main driver of value growth.
The Baby Nutrition division reported excellent sales again this quarter, with a like-for-like rise of +13.5% from Q2 2012. Momentum again came from strong sales in the Asia-Pacific region, particularly in China and Hong Kong, while Europe continued to benefit from indirect demand for international baby formula brands in some emerging countries. Growth continued in the rest of the world, with very strong trends in Latin America in particular. As in the past, changes in the division’s product mix made a positive contribution to performance: the growing-up milk segment once again reported double-digit growth and weaning foods lost further ground in Europe.
Medical Nutrition division sales rose +4.7% like-for-like in Q2 2013, with a volume rise of +3.6%. The division’s performance is still impacted by overall pressure on healthcare spending. China, Brazil, Turkey, the United States and the United Kingdom were the main contributors to growth, and the Pediatrics category continued to expand at a robust pace.
Danone’s trading operating margin stood at 13.34% in the first half of 2013, down -49 bps like-forlike. As in 2012, lower sales in Europe continued to cut significantly into Group profitability, while outside Europe margin as a whole continued to rise. Raw material prices increased substantially once again, albeit more moderately than in the first half of 2012, with inflation on milk and dairy ingredients rising faster than anticipated. Negative exchange-rate fluctuations also came into play.
Ongoing cost-cutting measures once again helped generate robust productivity of €254 million, partly offsetting the rise in raw material, production and distribution costs. A&P outlays increased slightly from the first half of 2012. Danone also continued to invest heavily in other growth drivers, beefing up its sales forces and spending on R&D. Outlays in these areas rose by around 10%.
Other operating income and expense items stood at - €291 million, impacted primarily by the portion of costs related to the Group’s cost reduction and organizational adaptation plan in Europe booked in the first half of the year (- €233 million). Cost of net debt was up due to higher net financial debt[1] in this half compared to the first half of 2012. Notable factors driving this rise are acquisitions made since July 1, 2012, in particular the buyout of some minority interests in Danone Spain and the increased interest in Centrale Laitière, as well as buybacks by the Group of 16.4 million[2] of its own shares since that date. Together these transactions have a positive impact on net earnings per share. The increase in “Other financial income and expense” resulted primarily from capital gains (booked as non-current) on the sale of Danone Group’s interest in SNI, as part of its increased shareholding in Centrale Laitière.
The underlying tax rate for the first half of 2013 was 30.3%, a steep rise of over 3 points on 2012 that reflects an overall increase in fiscal pressure, and, particularly, in France, the ceiling on deductibility of financial interests, and the tax on dividends. The sharp increase in “Net income of affiliated companies” (representing €226 million, booked as non-current) reflects the revaluation of Danone’s historic 29.2% interest in Centrale Laitière. This was recognized as a result of the Group’s takeover of this company, in accordance with IFRS.
Underlying net income came to €873 million in the first half of 2013, down -1.3% like-for-like and down -4.2% as reported when compared with 2012. Underlying fully diluted EPS totaled €1.48, which is steady like-for-like[1] and down -2.4% as reported compared with the first half of 2012.
Free cash-flow totaled €675 million in H1 2013, hit by expenses of €39 million linked to the Group’s cost reduction and organizational adaptation plan in Europe. Free cash-flow excluding exceptional items[1] was €714 million (6.5% of sales), down -19.8% from H1 2012. In addition to the impact of reduced trading operating margin[1], this decline reflects the unfavorable geographical mix effect of growth on the Group’s working capital. Capital expenditure rose significantly, up +9.1% from the first half of 2012, to total €454 million or 4.1% of sales. At June 30, 2013, the Group’s net debt stood at €8,238 million, including €3,149 million in put options granted to minority shareholders.
The value of these put options has declined since December 31, 2012, due primarily to Danone’s purchase in early 2013 of 1,550,315 Danone Spain shares subject to put options (at June 30, 2013, the Group held 75.6% of this subsidiary’s equity). The impact of these purchases was partially offset by booking the put options granted on 26.75% of Centrale Laitière’s capital in the first half of the year. Excluding the put options granted to minority shareholders, the Group’s net financial debt[1] stood at €5,089 million, up €2,068 million from December 31, 2012. This rise is linked for the most part to acquisitions made by Danone in 2013: in addition to buying out some minority interests in Danone Spain and raising its stake in Centrale Laitière, first-half transactions included the takeovers of Sirma in Turkey and Happy Family in the United States, and the acquisition of a strategic interest in Mengniu in China. In addition, since January 1, 2013 Danone has bought back 8.3 million of its own shares.
The Group assumes that trends in consumer demand will continue to show contrasts region to region, with overall trends negative in Europe—assuming, however, no major political or economic upheavals—and favorable in the rest of the world. The Group also expects the cost of its major raw materials and packaging materials to remain high, with moderate growth. This being the case, the Group will continue to adapt its model in Europe, stepping up the pace of updates to its product ranges to meet consumers’ changing needs, and at the same time adapting its structures and costs to achieve €200 million in savings by the end of 2014. In the rest of the world, Danone will continue to expand its product categories, build its brands and grow its market share in a profitable and lasting way.
Through these actions, Danone plans to get back on track to strong, profitable organic growth as of 2014.
For 2013, which will remain a year of transition, the Group has set the following targets:
• a like-for-like sales[1] growth of at least +5%
• a decline in trading operating margin, by between -50 bps and -30 bps like-for-like[2]
• free cash-flow of around €2 billion, excluding exceptional items.