Danone Sales Drop in H1; Reiterates Full-Year Outlook

25 Jul 2014 --- Danone has reported that consolidated sales fell back -5.3% in the first half of 2014 to €10,467 million. Excluding the impact of changes in the basis for comparison, which include exchange rates and scope of consolidation, sales were up +2.2%. This organic growth reflects a -3.0% decline in sales volume and a +5.2% increase due to the price/mix effect.

The -8.3% exchange-rate effect reflects unfavorable trends in currencies including the Argentine peso, the Russian ruble and the Indonesian rupiah. The +0.8% impact of the change in scope of consolidation results in large part from full consolidation of Centrale Laitière (Morocco) starting in March 2013.

Consolidated sales declined -5.5% to total €5,406 million in the second quarter of 2014. Excluding the impact of changes in the basis for comparison, which include exchange rates and scope of consolidation, sales were up +2.3%. This organic growth reflects a -3.9% decrease in sales volume and a +6.2% rise in value. The -7.8% exchange-rate effect reflects unfavorable trends in currencies including the Argentine peso, the Russian ruble and the Indonesian rupiah.

Fresh Dairy Products division sales were up +2.4% like-for-like in the second quarter of 2014, reflecting a steep +9.8% rise in value offset by a -7.4% decline in sales volume. The CIS region is the largest contributor to division growth, reporting another rise in sales of more than 10%. This reflects the enhanced value of the product portfolio achieved by both price increases in previous quarters and a positive price/mix effect linked to the strong volume performance of value-added brands. As anticipated, total volumes fell more sharply than in the first quarter, primarily in low value-added segments.

In the United States, where sales slowed in the second quarter, in particular for Greek yogurt, the division nonetheless held onto its market share and continued to expand, with growth driven by its multi-brand Greek yogurt range. As expected, sales in Europe continued to decline. Europe now shows a positive price/mix effect, reflecting efforts to enhance the value of brands and price increases designed to offset rising commodity prices in some countries. This policy has come hand in hand with a volume decline of over -5% for the region as a whole, reflecting contrasts from one country to the next. Sales have stabilized in Iberia (Spain and Portugal), while both Germany and Italy are still difficult markets. The ALMA[1] area remained dynamic on the whole despite volatile conditions in some markets and inflationary pressures, notably in Argentina.

The Waters division turned in an excellent performance this quarter, with sales up +13.1% like-forlike compared with Q2 2013. Growth is balanced with volumes up +7.0% and a price/mix effect contributing +6.1%. The division did very well in Europe this quarter in a dynamic market that saw Danone market shares stable or rising, driven by the success of aquadrinks Volvic Juicy and Font Vella Levité in particular. Strong growth in emerging markets remains the division's prime driver, especially in Asia with gains by the Mizone brand and a very strong showing by Aqua. Growth in value was +6.1% and was once again due largely to the positive price/mix effect generated by aquadrinks.

The Early Life Nutrition division reported quarterly sales down -9.2% (-7.9% in volume), reflecting once again the unfavorable basis for comparison linked to the false safety alert triggered by Fonterra in August 2013. In China, the market most affected by the alert, the division has pursued actions designed to get sales back on track with a multi-brand approach to optimize cover of different distribution channels and different price segments. The Nutrilon brand achieved rapid growth in the ultra-premium segment, while initial results for Dumex fell slightly short of projections. Overall results are in line with expectations. In Europe, Q2 2014 growth was moderate, while division business remained buoyant in the rest of the world, with double-digit growth in Latin America and in the Africa/Middle East region.

The Medical Nutrition division reported Q2 growth of +7.3% like-for-like, driven by a +6.2% rise in sales volume. Main contributors to growth were Brazil, Turkey, China and the United Kingdom, with growth visible across all categories and a stronger contribution from the pediatric care brands.

As anticipated, Danone's trading operating margin fell sharply in the first half, down -159 bps likefor- like to stand at 11.27%. This decline reflects comparison with the very high figure reported in the first half of 2013, before the Group was hit by the steep rise in milk prices and fallout from Fonterra's false safety alert. Therefore, the first half of 2014 was adversely affected by strong inflation in milk prices observed since summer 2013 in all markets. This was particularly true in Russia, where inflation was especially strong. However, in most regions prices headed down at the end of the first half. Part of this inflation was offset by price increases, notably in emerging countries and more specifically in Russia.

Ongoing efforts to optimize raw material, production and logistic costs led to continued productivity gains Group-wide, in line with past years. Moreover, deployment of the Group's cost-cutting program in Europe continued, generating the expected savings. The Group continued to invest in its growth drivers. Apart from its Chinese subsidiary Dumex, hit hard by Fonterra's false safety alert, the Group's H1 spending on marketing, sales and R&D altogether were identical[2] to those made last year. Trading operating margin in H1 2014 was also hit by adverse exchange-rate trends (-12 bps) and the change in scope of consolidation (-35 bps), due in particular to the integration of Centrale Laitière in Morocco, Sirma in Turkey and YoCrunch in the United States.

Chairman Franck Riboud commented: “The first half of the year was particularly eventful, and had all of our teams 100% mobilized. First, we responded to record milk prices with key initiatives in various fields —pricing, mix, cost-cutting measures—, all designed to rebuild margins that had come under serious pressure in the first quarter. And these efforts paid off. We also continued to roll out products with high added-value in all our regional markets and continued to build our strategic business platforms, finalizing our partnership with Mengniu and continuing to grow in Africa, most recently through our tie-up with Brookside. As a result, the first half of 2014 saw a host of achievements, and Danone’s results at the end of June are right where we expected—at a necessary transition point on our way to meeting our targets for the year.”

“We operate in a global environment that is still subject to risks and upheavals, and it presents us with challenges every day. But it holds an equal number of hidden opportunities. This is the mindset that has guided us so far, and it will continue to inspire us. Our agenda for the second half of the year is exactly the same: we will stay focused on reaching our 2014 targets and continue to build strong, profitable, sustainable growth.”