Danone reported a further slowdown in full-year sales growth today (15 February) as European dairy sales continued to perform below expectations and Chinese infant formula revenue was hit by ongoing stock adjustments.

Danone full-year group results

Source: Danone

Danone's sales decreased by 2.1% to EUR21.94bn (US$23.16bn) in 2016. The drop was driven by a negative impact from currency exchange, which reduced the top line by 5.5%. Danone was, however, able to strengthen its operating profit, with rose by 4.5%. 

Danone full-year organic growth

Source: Danone

Danone's like-for-like growth rate - stripping out currency exchange and other factors impacting comparability - slowed to 2.9% compared to a growth rate north of 4% in the preceding two years. The organic growth Danone did secure was largely supported by pricing and the company revealed 2016 sales volumes decreased by 0.2% on a group-wide basis. 

Danone FY segment data - sales

Source: Danone

In Danone's dairy segment, sales dropped 2.9% in the year. The company, which in December lowered its forecast for annual sales in part due to its European dairy business, confirmed the challenge with that side of the business today. "Activia's sales results are below expectations as the relaunch has not delivered the brand's turnaround," Danone noted. The company said "given the ambition of the transformation" the turnaround "will take time". Jefferies analyst Martin Deboo noted: "Disappointing results from the Activia relaunch have clearly hurt." However, weakness in European dairy was offset by a more robust performance elsewhere - with "solid" growth in the US and "strong" sales from Danone's combined Asia-Pacific, Latin America, Middle East, Africa (ALMA) division. 

At Danone's early life nutrition business, sales growth slowed to 0.5% this year, compared to 13.7% in 2015. The company stressed growth stood at 3.5% on a like-for-like basis excluding forex. In Europe sales were flat but in ALMA, excluding China, sales were "very strong". In China, Danone said the "transition" of the indirect channel - induced by a "fast-changing regulatory environment" - saw traders continue to make stock adjustments. Danone warned the volatility will likely continue until the Chinese government's new regulations are fully enforced in 2018. Despite this issue, Danone said its direct sales were "strong" and revealed it is growing its presence through e-commerce and specialist stores. 

Danone full-year operating profit margin

Source: Danone

Despite pressure on sales volumes, Danone was able to increase its trading operating profit margin by 87 basis points in 2016. The company attributed gains to "disciplined resource allocation, efficiency gains and cost optimisation". The company's operating performance was supported by favourable commodity costs, mix management and the lapping of one-time costs that weighed on last year's result. 

Danone FY segment data - trading operating profit margin

Source: Danone

Margin improvements were reported at both Danone's early life nutrition and dairy businesses. In particular, early life nutrition booked a strong increase in operating margin - rising to 29.91% versus 19.31% in the prior year. This reflects the "positive impact of a favourable basis of comparison" at the unit. Danone noted: "The first half of 2015 was hit by the costs associated with Dumex's adaptation plan and costs linked to a fire in a production plant in the Netherlands."

Outlook

Looking to 2017, Danone said it expects economic conditions to "remain particularly volatile and uncertain" with possible deflation in Europe and challenges in other markets, including Brazil, the CIS and China. The group also predicted a mid-single digit increase in commodity costs for 2017 including a "steep rise" in milk prices. 

"In this context, Danone will continue to give priority this year to improving margins and strengthen its growth model," Danone said.  

The company announced an EUR1bn cost-saving initiative and said it is targeting earnings per share growth of 5%, excluding the impact of its planned WhiteWave acquisition. 

Sanford Bernstein analyst Andrew Wood described Danone's 2017 guidance as "strangely non-existent" and suggested the EPS target is "not particularly aggressive".