Danone warns of profit hit from Spain
PARIS, June 19 – French food group Danone warned of a hit to its profits this year after Spanish consumers switched to cheaper yoghurts and as milk prices rose, causing growth at the Actimel and Activia maker to stall.
The world’s largest yoghurt maker said demand had fallen sharply in Spain and southern Europe as the euro zone debt crisis deepened, and it is moving to cut prices to boost consumption in the Iberian nation where nearly one in four are unemployed.
Chief Financial Officer Pierre-Andre Terisse warned the pain in Spain will cut the group’s 2012 operating profit margin by 0.5 points to 14.2 per cent after a previous stable forecast, and slow its underlying sales growth in the second quarter to around 5 per cent from the first quarter’s 6.9 per cent.
He added today that Danone’s Spanish dairy sales had fallen since April-May, hit by rising unemployment and higher taxes in what is one of Danone’s top worldwide markets, accounting for 7 per cent of group sales and 12 per cent of profits.
“Consumers are looking for cheaper products,” Terisse said, adding that Danone would respond with price cuts.
He also warned milk and packaging costs for its range of yoghurts and baby milk formulas were greater than expected since the start of the year, putting more pressure on margins.
Danone, which also sells Evian and Volvic waters, joins other European companies warning of a battle to cope with a slump in demand in Europe’s most indebted countries, which also include Greece, Italy, Portugal and Ireland.
Europe’s largest retailer Carrefour said last week it was pulling out of Greece and world No 2 truck maker Volvo said it was looking at abandoning planned increases in production in Europe..
Danone’s shares fell 7.2 per cent to €48.11 (RM192.13), effectively wiping out market capital of €2 billion or spilling 3.1 billion bottles of Evian water.
The warning also pulled Swiss food peer Nestle down 0.5 per cent and Unilever down 1.8 per cent by 1210 GMT.
“We knew that 2012 was going to be difficult and this will be accelerated by the consumption crisis in southern Europe. It raises questions over 2012 and 2013 as earnings growth will be weaker-than-expected,” CM-CIC analyst Francis Pretre said.
Analyst Andrew Wood at brokers Bernstein said Danone’s warning raised questions over the credibility of its forecasts after a number of surprises such as the hefty price it paid for Dutch baby food maker Numico in 2007, and its 2009 shock rights issue and price cuts.
“Clearly management credibility is likely to take as much, if not more, of a hit than its EPS following today’s warning,” he said, adding that the warning would represent about a 5 per cent cut to his 2012 forecast.
Wood did not expect similar warnings at Unilever and Nestle due to the former’s higher exposure to fast-growing emerging markets and the latter’s wider spread of global businesses.
Danone said demand outside Western Europe in Asia, America, Africa, Russia and the Middle East remained robust while business in France was holding up rather well.
The group is expecting raw material inflation for 2012 to rise by a mid-to-high single-digit percentage from a previous low-to-mid single digit forecast, while it is holding steady its 5-7 per cent like-for-like 2012 sales growth target and forecast of free cash flow of €2 billion for 2012. – Reuters