On the money: Danone predicts continued weakness in Europe

By Michelle Russell | 17 October 2012

Sales of dairy products slid more than 10% in both Spain and Italy in the third quarter

Sales of dairy products slid more than 10% in both Spain and Italy in the third quarter

French food giant Danone said it expects the same weaknesses it has seen in its European dairy division this quarter to continue through into the fourth.

Danone, which cut its profit forecast in June, said today (17 October) it has faced a "swift deterioration in consumption" in Southern Europe "that has proven steeper than anticipated".

Sales of dairy products slid more than 10% in both Spain and Italy in the third quarter. As a result, Danone's stock fell 3.45% to EUR47.08 in early morning trading.

Speaking on a conference call with analysts today, CFO Pierre- Andre Terisse said the climate in Europe will "not be very different in 2013" to what it was in 2012.

"I would expect the same kind of weakness we have seen in both dairy and medical" in the fourth quarter, Terisse said on the call. The environment in Spain is "at the higher end of what we expected in terms of difficulties," he added.

"We do not expect a change in trends for the coming months. The environment remains supportive and favourable in all geographies except Europe."

The situation in Italy was "very similar" to Spain, he told analysts, adding that the company is working on managing price points and looking at ways to reduce the cost base in Italy.

"Southern Europe is clearly under pressure," he said, but sounded an upbeat note. "This is not something that will be fixed in a matter of weeks, but it is neither a fatality. It means we need to address the problem and we have started doing so. We have started innovations with more active price management and more productivity. Results will not come in one day but they will come."

Terisse said recovery in Europe will require Danone growing the top line and lowering costs.

"We first need top line growth ... and then it's about price management and value efforts. We need to be more efficient and being more efficient means keep doing what we are doing but to a greater extent. It's about [improving] productivity."

Terisse highlighted Spain as a region of particular weakness, where a VAT increase during the summer has weighed heavily on many firms, which are already suffering amid the Euro-zone's debt crisis as consumers are forced to tighten their belts.

The CFO said Danone said price adjustments made in Spain mean the region is "going in the right direction".

"The kind of price adjustments we have made are really to grow and look for price points. When we look at the evolution of our price points in Spain, sequentially we are down but when we look at the impact on market share, it has stabilized, so the lesson we get is that it is having an impact and it is going in the right direction. It is sequential so it's going to be a while before you can see that in the figures."

Sanford Bernstein analyst Andrew Wood, however, was less optimistic about Danone's European outlook.

"It is becoming more evident that the fundamental/structural issues that Danone is facing in fresh dairy in Europe are more serious, and could take longer to repair, than previously believed.

"It is going to take time for Danone to recover its fresh dairy growth back to reasonable levels and probably even longer for management to regain the credibility it has lost over recent quarters/years."

Danone's share price was down 4.1% at EUR46.77 at 14:20 BST today.

Sectors: Baby food, Dairy, Financials

Companies: Danone

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