Danone Cuts Profitability Goal on Southern Europe, Costs

Danone Cuts Profitability Goal on Southern Europe, Costs
Danone in April said it expected consumer spending to remain “under pressure” this year in western Europe. Photographer: Chris Ratcliffe/Bloomberg

Danone, the world’s biggest yogurt maker, cut its profitability forecast as Spanish consumers switch to less expensive products and raw-material costs rise. The shares fell the most in three years.

The maker of Actimel yogurt expects its operating margin to drop by 0.5 percentage point in 2012 on a like-for-like basis, it said in a statement. Paris-based Danone previously expected a “stable” margin. The shares fell as much as 7.5 percent, the steepest intraday decline since May 2009.

Danone is losing market share in dairy in Spain, where about one in four people are unemployed, and will take measures such as cutting costs and introducing new products to react. That will reduce profitability in southern Europe, Chief Financial Officer Pierre-Andre Terisse said today.

“The competitive environment in Spain is a lot tougher, so they’re having to invest more in promotion and pricing,” said Martin Dolan, head of equity research at Espirito Santo in London. “This is very Danone-specific rather than sector wide because of milk raw-material costs, and Danone’s exposure to Spain is far greater at about 8 percent than for other big food companies.”

Danone shares were trading 7.2 percent lower at 48.13 euros as of 10:53 a.m. in Paris. Danone will report total sales growth of about five percent in the second quarter as business in France, the company’s biggest market, is “holding up pretty well,” Terisse said.

Milk Prices

Danone expects “mid-to-high single-digit” increase in raw-material costs this year as whey and milk protein prices are gaining 20 percent. Blaming input cost inflation for lower profitability is “very surprising,” according to Andrew Wood, an analyst at Sanford C. Bernstein, who said he expected milk costs would have decelerated and lower crude oil prices should make plastic cheaper.

“Management credibility is likely to take as much, if not more, a hit than its earnings per share following today’s warning,” Wood wrote in a note to investors. He said he’ll probably need to cut his 2012 EPS estimate about 5 percent. Danone said today its earnings per share would be about 3.10 euros, at current rates of exchange.

“Europe is difficult for everybody,” and commodity price volatility won’t end, Unilever Chief Financial Officer Jean-Marc Huet said today at a conference in Paris. Danone’s comments will weigh on Unilever, the maker of Knorr soups, as its margin guidance is also “challenging,” Pierre Tegner, an analyst at Natixis, wrote. Unilever dropped as much as 2.8 percent in Amsterdam trading.

The French yogurt maker in April said it expected consumer spending to remain “under pressure” this year in western Europe. European companies are wrestling with the fallout from a drop in consumer spending as the sovereign debt crisis rocks the region’s economies. Carrefour SA, the biggest European retailer, last week said it would withdraw from Greece and carmaker Fiat SpA said it would cut investment in the region by 500 million euros ($630 million).

Danone remains “very confident” that it can maintain its revenue target of growth of 5 percent to 7 percent for the rest of the year. The company’s growth in other markets, particularly developing ones, is in line with or above its targets, Terisse said.


Before it's here, it's on the Bloomberg Terminal. LEARN MORE