Danones lower Europe sales hit profitability

Danone's lower Europe sales hit profitability

Danone has booked a strong increase in sales from emerging markets, insisting it has not been hit by slowing economies in some of the markets.

The company said this morning (29 July) sales in from its Asia-Pacific, Latin America, Middle East and Africa operations grew 15.9% on a like-for-like basis in the first half. The markets propelled group sales growth of 6% and helped to offset declining sales in Europe.

The global economic crisis has caused emerging economies to slow, resulting in a deceleration of sales growth for a number of Danone's peers, including the likes of Nestle and Unilever. Speaking to analysts at a meeting in London today, chief financial officer Pierre-André Terisse said the company had performed ahead of the pack because of its product portfolio in emerging markets, which spans from the premium to value segments.

He added Danone benefited from the relative youth of its emerging markets businesses. "The nature of our business, the fact that we have been present in these markets for a relatively short time - not 100 years like some of our competitors - puts us in a situation where we have more potential and ranges that are adapted to the current generation... in all these markets we have not seen slowdown." However, he added: "It doesn't mean [the economic slowdown] is not going to impact us at some stage."

Growth in the emerging markets was driven by Danone's infant nutrition and waters businesses, both of which saw double-digit gains.

Investec analyst Martin Deboo said the results were "strong" but sounded a note of caution on the outlook for Danone's infant nutrition business in China, where the company generates 6% of sales.

Responding to an anti-trust investigation launched by Chinese regulators, Danone has agreed to cut the price of its infant formula brands in the country by as much as 20%. "We note caution on... potential sales and margin drag from 20% price cuts to infant formula in China, which are yet to impact the numbers," Deboo wrote in a note to investors.

Danone, meanwhile, also saw growth ahead of the market in North America and CIS countries, where sales gained 9.3%.

"The performance has been good in both markets - CIS and [North America]... overall we have been growing double digit in the second quarter," Terisse said. "We keep building the brands... A lot of the performance has been volume driven, now it is going to be price driven."

While cost inflation means Danone will look to raise prices, Terisse suggested the company is expecting promotional activity to pick up further in North America, particularly in the highly competitive Greek yoghurt category.

In the US it is "difficult to expect a price war" but it is "typical that we will get some promotional intensity", which is what "we have seen in this first half", Terisse commented. "We are likely to see some more promotional intensity in Greek."

Strength in the rest of the world more than offset a 3% drop in sales in western Europe during the half. For the second quarter, group like-for-like sales rose 6.5%, beating top-line consensus expectations of 5.7% growth.

Kepler Cheuvreux analyst Jon Cox said that the performance meant Danone has the distinction of being Europe's "fastest growing" food multiple. "Danone's Q2 underscores the company's status as the fastest growing big food company in Europe and we see room for an upward move in consensus expectations in terms of underlying sales growth," Cox suggested.

However, while Danone's top line result came in ahead of expectations, its margins fell 49 bps in the first-half. Terisse said Danone was investing in Europe to realign its dairy portfolio and reduce organisational complexity. The shift towards in sales generated markets outside of Europe also hit the bottom line, he added.

"When you grow 20%, 15%, when you have brands to develop... you focus less on your working capital because you have many other things to do. We need to focus on [improving margin in] these markets that are growing very fast."

Danone reaffirmed its outlook for a 30-50bps margin decline in the full year.

Sanford C. Bernstein analyst Andrew Wood said the company delivered a margin decline in line with its guidance but said the drop came at the "top end of its range".

"Overall, 2013 would be another fairly poor year for Danone...but given the stock performance YTD, we suspect the market has already started to look out to the potential rebound in 2014. We believe that the top-line over-delivery in Q2, despite the weak margin and EPS growth of H1, is likely to lead to increased optimism for this. We would expect a positive stock reaction to the results, but there are still a large number of risks on the business," Wood emphasised.

Danone's share price was up 3.17%, climbing to EUR59.20 at 11.50 am (BST).