D.E Master Blenders Profit Falls on Costs, Brazil Accounting

D.E Master Blenders 1753 NV (DE), the coffee and tea company spun off by Sara Lee Corp., reported a 56 percent decline in full-year profit, burdened by increased costs and accounting irregularities in Brazil.

Net income in the 12 months through June fell to 118 million euros ($147 million) from 267 million euros a year earlier, the Amsterdam-based company said today in an e-mailed statement.

The maker of Senseo coffee forecast sales growth in this fiscal year as it expands its Nespresso-compatible capsule business, revamps the Senseo system and introduces products such as a machine that makes coffee from beans.

“The premiumization strategy that they have embarked on is bearing fruit,” said Jon Cox, an analyst at Kepler Capital Markets in Zurich.

Master Blenders said it expects revenue to increase by 3 percent to 5 percent in the year through June 2013, while its earnings before interest and taxation margin is expected to increase by as much as 2 percentage points.

The maker of Douwe Egberts coffee said Aug. 1 it would restate earnings because of the accounting irregularities and tax provisions in Brazil. The adjustments reduced shareholders’ equity by as much as 95 million euros. Selling, general and administrative expenses partly stemming from its shift to an independent company rose about 39 percent. Revenue during the fourth quarter on a like-for-like basis increased 6.5 percent.

Nespresso Capsules

Master Blenders sees “upward potential” for its L’OR Espresso coffee capsules that work with Nestle SA (NESN)’s Nespresso system, Chief Executive Officer Michiel Herkemij said. L’OR Espresso has about 25 percent of the market in Spain for Nespresso-compatible capsules. In France it has a 10 percent share and in the Netherlands about 13 percent, according to the company.

Master Blenders has said it plans to invest heavily in marketing its Senseo coffee brand, the remaining half of which it bought back from Royal Philips Electronics NV (PHIA) this year. The company also plans to expand into new regions.

“Market shares in our key countries the Netherlands, France and Spain continued to hold up well and consumer prices as well as our competitive price positions remained virtually unchanged,” Herkemij said in the statement.

Master Blenders shares increased as much as 3.5 percent to 9.34 euros in Amsterdam trading. The stock traded up 2.5 percent at 12:35 p.m.

Sarista System

Demand from business customers for the new Sarista coffee machine has been twice what Master Blenders had been expecting, according to Herkemij. The machine, which uses whole beans and is aimed at coffee aficionados, will be introduced in the Netherlands in October, according to the company.

Full-year revenue from Master Blenders’s retail business in western Europe gained 12 percent on a like-for-like basis. Master Blenders gets about three quarters of its revenue from retail sales, about half of which come from roast and ground coffee, according to Pablo Zuanic, an analyst at Liberum Capital. Retail sales from the rest of the world increased 16 percent.

Master Blenders’ business in western Europe is “strong”, with an increase in market share in France and the company’s share in the Netherlands “keeping up well,” Herkemij said in a Cantos interview.

The company said a cost-savings program is “well on track” to reach 25 million euros to 30 million euros in full- year 2013. Total annualized savings are expected to be at the upper end of a 55 million-euro to 75 million-euro range by full- year 2015.

Revenue from Master Blenders’s out-of-home business dipped 0.3 percent on a like-for-like basis. The company said today it plans to restructure the unit.

Master Blenders will focus over the coming 12 months on organic growth, though “if something materializes in the meantime, we will have a close look at it,” Herkemij said on a conference call.

To contact the reporter on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

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