Danone Results Affected by Fonterra Recall, Lowers Forecast

16 Oct 2013 --- Danone has reported that in the third quarter of 2013, consolidated sales as reported were steady (+0.0%) at €5,259 million. Excluding the impact of changes in the basis for comparison, which includes exchange rates and scope of consolidation, sales were up +4.2%. This organic growth reflects a +1.6% increase in sales volume and a +2.6% increase due to the price/mix effect.

The negative -7.2% exchange-rate effect reflects a marked Q3 decline in certain emerging-market currencies, including the Argentine peso, the Indonesian rupee and the Brazilian real. Changes in the scope of consolidation led to a +3.0% rise in sales, due primarily to full consolidation of Centrale Laitière (Morocco) and the integration of other recent acquisitions including Sirma (Turkey), YoCrunch and Happy Family (USA), and Wockhardt (India).

The Fresh Dairy Products division reported sales up +4.6% like-for-like, the highest increase in the past nine quarters. Growth was balanced, with a +1.7% increase in volumes and a positive price/mix effect of +2.9%. While sales continue to decline, Europe confirmed signs of stabilization observed in the second quarter, with a clear shift in Southern Europe driven by Spain and Portugal. The CIS / North America area reported an excellent quarter of double-digit growth, with each of these two regions outperforming the previous quarter once again. In North America, Fresh Dairy Products continued to consolidate its category leadership, building on its vigorous growth in the Greek yogurt segment. Driven by the flagship brand Prostokvashino, growth in CIS markets was well balanced between volume and value, integrating competitive price increases introduced during the quarter in response to a very steep rise in milk prices. Markets in ALMA remained buoyant, with continued double-digit growth.

The Waters division reported an exceptional +16.9% like-for-like rise in sales, driven by a +9.4% increase in volume. These figures reflect both a vigorous performance in Europe, amplified by favorable summer weather, and continued strong growth in emerging markets. The positive price/mix effect was once again due primarily to robust growth in aquadrinks, buoyed this quarter by the good performance of European markets.

The Baby Nutrition division saw a very steep decline in Q3 sales due to the false alert issued by Fonterra, which triggered a recall of selected infant formula products in eight Asian markets. This led to an estimated €170 million in lost sales for the full quarter, with the division showing a -8.6% decline in sales growth and volume down -7.3%. Action plans to restore sales are being deployed in affected markets and are generating results effectively but very gradually. As a result, Danone estimates that the incident will have a significant impact on its 2013 results, with full-year lost sales estimated at €350 million, lost margin estimated at €280 million including €170 million booked as non-current items, and an estimated €300 million loss in cash-flow. The negative price/mix effect reflects the adverse impact of events in Asia on the division’s product mix.

Medical Nutrition division sales rose +5.8% like-for-like in Q3 2013, with a volume rise of +7.4%. The division’s performance is still affected by overall pressure on healthcare spending. The United Kingdom, Turkey, the United States, China and Brazil were the main contributors to growth, and the Pediatrics category continued to expand at a robust pace.
In February this year, Danone set clear priorities for 2013: first, continuing to adapt its model in Europe by stepping up the pace of updates to its product ranges, while at the same time adapting its structures and costs to achieve €200 million in savings between now and the end of 2014; and second, continuing to expand its product categories and build its brands profitably and sustainably. In the third quarter, the false alert issued by Fonterra concerning ingredients supplied to Danone triggered the recall of selected infant formula products and led to significant losses in sales, earnings and cash-flow. Action plans to restore sales are being deployed in affected markets and are generating results effectively but very gradually.

As a result, the Group is revising its 2013 targets as follows:
• like-for-like sales growth[1] of between +4.5% and +5%
• a -80 bps like-for-like decline in trading operating margin
• free cash-flow of between €1.5-€1.6 billion excluding exceptional items.
Beyond these short-term developments, the Group is confident in both its ability to recover its positions in affected countries and the strength of its growth model.

Chairman’s comment “Our Group’s third-quarter performance reflects fallout from the Fonterra affair in Asia, but also strong underlying dynamics in the rest of our operations. In Fresh Dairy Products, we are building strong momentum: in North America, Dannon is consolidating its number one position with a very strong showing in Greek yogurt; Danone Russia confirms double-digit growth driven by its flagship brand Prostokvashino; and figures for Europe confirm that we are stabilizing our sales and market share. Our Waters division turned in yet another remarkable performance, especially in emerging countries and in aquadrinks, buoyed this quarter by very good weather in Europe. Last but not least, we have continued to invest in our profitable growth drivers and to build new sources of growth. In the midst of these positive trends, we had to address the false alert issued by Fonterra in early August, triggering the recall of selected infant formula products in eight Asian markets. We are now able to measure fallout from that event clearly, including both the short-term financial impact and the resources and time required to recover our positions. In the short term, this will weigh on our sales, our operating margin and our cash-flow, which has led us to adjust our full-year 2013 targets. Our priority is to get back on track for strong and sustainable growth in this region as early as possible in 2014.”