Danone chairman and CEO Franck Riboud believes margins will rise in 2011

Danone chairman and CEO Franck Riboud believes margins will rise in 2011

Danone has insisted that it expects to improve margins during 2011, despite the spectre of rising commodity costs.

The French yoghurt-to-baby food maker said that commodity prices were on a "volatile upward path" and revealed that it expected input costs to increase by between 6% and 9% this year. Milk prices, Danone's largest raw material expense, are expected to grow by 5-8%, the company added.

Nevertheless, Danone expects price increases and cost saving initiatives to compensate for higher raw matterials expenses.

Speaking during a conference call with investors after the publication of Danone's 2010 results, chairman and CEO Frank Riboud projected that the group would increase its margins by 20 basis points this year.

Riboud said that the company would be able to push through further cost savings on the back of the EUR500m (US$675.5m) cost cuts achieved last year. The group said that these cuts would be made throughout the company, but would focus in particular on its Russian joint venture, Unimilk. The merger of Danone and Unimilk operations in Russia afforded the opportunity to strip out duplicated functions, the French group revealed.

Profitability at Unimilk is already improving thanks in part to a "significant rise" in dairy prices pushed through in December, management added.

Riboud said that Danone had increased its ability to push through price hikes over the past two years through its 'Reset' programme of discounting. The company would therefore be able to exploit this "increased room for manoeuvre", despite the volatile consumer environment, Riboud insisted.

"We anticipate no major change in consumer demand and in this context, also marked by persistently steep increases in raw material prices, we are placing the emphasis on lasting development of our brands, with a commitment to health, eating pleasure and respect for the environment," Riboud said.

The French group is therefore confident about its prospects for top line growth, Riboud said. Danone revised its medium-term guidance of "at least 5%" to a target of 6-8% for fiscal 2011.

Danone's upbeat tone has been generally well received by the market, with shares up 3.5% to EUR45.47 at 12:37 GMT.

"Guidance for 2011 was ahead of our expectations," Bernstein analyst Andrew Wood wrote in a note to investors.