A cautious Danone said today (16 April) the market would have to wait until the second half of 2013 to see a “noticeable” upturn from its dairy business in Europe – but revealed it was seeing some signs of improvement.
Danone is trying to revitalise its European dairy business after a year of falling sales and margins. Product launches, changed recipes, promotions and a management restructure are all being used to boost the performance of the business amid some trying trading conditions, particularly in southern Europe.
The Activia owner’s said this morning its fresh dairy product sales were up 0.7% on a like-for-like basis in the first quarter of the year. However, growth in Danone’s emerging dairy markets, which also includes North America, boosted the results. Europe remained “difficult”, with investment in pricing and promotions leading to “a negative price/mix effect”.
Speaking on Danone’s conference call with analysts to discuss the numbers, CFO Pierre-Andre Terisse said: “We see the same trends in Europe, with southern Europe under pressure and France on the other hand resisting well.”
Danone’s dairy performance were below some analyst expectations. Sanford Bernstein, for example, forecast a 1.6% increase in like-for-like sales.
However, Terisse revealed Danone had seen the trend in its market share in Spain, a major and recently problematic European market for the company, start to improve.
“We have stabilised our market share sequentially,” he said. “That’s not yet the place we would like to be. We would like to a rediscover a positive dynamic but the fact we have stabilised market share sequentially is an interesting signal. That’s true for some of the other markets as well. It will take more than a few more weeks or months to get a trend reversal but this trend is reassuring.”
Terisse said Danone’s moves in Portugal to rejig its product portfolio and introduce more value-oriented lines had paid off. Volumes, he said, had increased – and growth had come not only from a focus on price but broader initiatives.
“Portugal has shown some interesting improvements since the revamping of the portfolio. That gives an interesting signal for the rest of the year and the rest of the countries,” he said. “I don’t want to create over-expectation based on that because many countries are different. That said, it’s one of the first tangible signs we have seen from a full restructuring of the portfolio that is giving results. The Portugal example shows real improvement comes when you combine new product introductions, product renovation, some adjustments in value that comes from price, promo and mix, as well as revamping recipes and packs.”
The Danone executive, however, was keen to underline that more work needs to be done across Europe. “The comps will make it difficult to see any noticeable improvement on dairy in Europe before the second half – but these signs underline to us the direction we have taken – which is to take several directions in Europe, price, promotion, but also improvements in products, innovation, renovation and so on – to rebuild the top line.”
Shares in Danone rose after the announcement of its first-quarter sales, which were above expectations thanks in the main to the performance of its baby food business in Asia and in emerging markets in Europe.
Danone, however, maintained its forecast for annual like-for-like sales to increase by “at least 5%”. It also kept its outlook for a 30-50 basis point fall in trading operating margin.
The company was among the first major food groups to report numbers for the first quarter of 2013. Some analysts are watching what companies say about the outlook for commodity costs after recent volatility.
Redburn analyst Jeremy Fialko cited the recent rise in milk powder prices and asked Danone what impact the spike could have on its results.
Terisse said the increase would have little impact on Danone this year but was likely to affect the price of milk in the rest of the market. “It is not so much impacting us directly. In terms of the impact on baby food, most of it will impact us forward and not this year – but it is likely to have some direct effect on the cost of milk in the rest of the world.”
He said Danone had expected its input costs to increase by the “low- to mid-single digits” in 2013 and it was sticking to that outlook. “Net, we consider it is slightly worse than we had assumed but in fact it is within the range we had taken as an assumption. It remains consistent with our guidance. We feel we can live with it.”