Asia recall holding Danone back
FRENCH food group Danone said yesterday it was taking longer than expected to recover from an Asian recall of infant formula, and it had cut its sales, profitability and cash flow goals.
FRENCH food group Danone said yesterday it was taking longer than expected to recover from an Asian recall of high-margin infant formula and it had cut its sales, profitability and cash flow goals for this year.
The world’s largest yoghurt maker said the recall hit its baby food division more than anticipated in the third quarter and that sales in affected markets would not recover before early next year as inventories were still high.
“Our priority is to get back on track for strong and sustainable growth in this region (Asia) as early as possible in 2014,” chief financial officer Pierre-Andre Terisse said.
Danone shares were down 3.9% early yesterday, one of the biggest falls by a European blue-chip stock. The stock fell as low as €50.30, its lowest in nearly eight months.
“Assuming the business is not partially or irreparably damaged by the scandal, which is still to be decided, it should rebound in 2014-15 ... benefiting from an easy compare base,” Bernstein analyst Andrew Wood said.
To counter weakness in Europe, the maker of Bledina baby food and Volvic water has been expanding in fast-growing markets in Asia, notably China, where previous foodsafety scares have lifted demand for foreign baby milk formula.
China is an important market for Danone’s baby food division, which accounts for 20% of group sales, making it the number two contributor after dairy products. But Danone has faced a variety of problems there this year.
In July it was hit by a fine and had to cut prices in China after a milkpowder price-fixing probe. Then in August it had to recall infant formula products in Asia due to an unfounded health scare stemming from New Zealand-based supplier Fonterra.
Most recently, two of its units — Dumex in baby food and Nutricia in medical nutrition — faced bribery allegations in China, which the units are investigating.
Danone said that as a result of the Fonterra recall its baby food sales fell 8.6% in the third quarter, reversing a 15.2% rise in the first half. This compares with analysts’ average forecast for a 3% decline.
Danone has said it is seeking full compensation from Fonterra for damages caused by the recall and Mr Terisse said that process was “continuing”. Danone did not discuss the size of the compensation sought.
Danone said the Fonterra recall would cost it €350m in lost 2013 sales, €280m in lost margin and €300m in lost cash.
“We are not yet seeing a recovery in our sales (in the affected markets),” Mr Terisse said.
Sales to consumers in these markets last month represented only 40% of pre-crisis levels in July, he said. Actions to drive up revenue included reducing inventories, which Danone hoped would be back to normalised levels by the end of the year, and a communication campaign to reassure customers the brand was safe.
Mr Terisse said while he did not expect the group’s operating margin to decline next year, the first half of the year would see “pressure on top line and margins” while the second half would be “very strong for top line and margins”.
Growth improved in the third quarter at Danone’s core dairy division, while its water business benefited from a hot European summer. Danone said third-quarter group sales rose 4.2% on a like-for-like basis to €5.26bn, a slowdown from 6.5% growth in the second quarter. This was below the average estimate of 4.8% in a Reuters poll of six analysts and in the company-compiled consensus of analysts.
Danone said it now expected likefor-like sales growth of between 4.5% and 5% for this year. It previously eyed sales growth of at least 5%.