Danone First-Half Earnings Decline 20% on Milk Cost Surge

Danone, the world’s largest yogurt maker, reported a 20 percent decline in first-half earnings and quarterly revenue that missed estimates, adding to pressure on the company to find new avenues for growth.

Trading operating profit fell to 1.18 billion euros ($1.6 billion), the Paris-based company said today, compared with the 1.21 billion-euro average of eight analysts’ estimates compiled by Bloomberg. Second-quarter like-for-like sales advanced 2.3 percent, missing the median 2.6 percent prediction.

The results don’t ease the pressure on Chairman Franck Riboud to reorganize and possibly acquire businesses with better growth prospects, said Patrik Lang, an analyst at Julius Baer Group Ltd. Chief Financial Officer Pierre-Andre Terisse today denied a report that the company had started a portfolio review and declined to comment on possible acquisitions.

“Danone doesn’t have the pricing power that investors would like to see at the moment,” Lang said by phone. “Acquisitions might be a good solution to grow stronger if it doesn’t work organically.”

The Wall Street Journal reported this week that Danone has started a strategic review and is asking top managers to seek out areas for potential expansion.

Terisse said the company’s Danone 2020 plan, which was presented at a June investor seminar in New York, is an internal project aimed at building sustainable profit growth, managing the supply chain and adapting to the current climate.

Baby Food

Terisse also declined to comment on possible divestments. Danone is in discussions to sell its medical-nutrition business to bidders including Nestle, people familiar with the matter said in May. The unit could fetch about 3 billion euros, one of the people said.

Danone shares were almost unchanged at 55.95 euros as of 11:10 a.m. in Paris trading.

The volume of dairy products sold in the second quarter fell 7.4 percent, worsening from the first-quarter’s 3.7 percent drop as Danone imposed additional price increases.

The maker of Actimel yogurt has raised prices to offset an 18 percent increase in milk costs, leading consumers to pare back on dairy purchases. Danone announced plans to cut 325 jobs across Europe last month as it closes factories in the region.

“We operate in a global environment that is still subject to risks and upheavals, and it presents us with challenges every day,” CEO Riboud said today in a statement. “We will stay focused on reaching our 2014 targets.”

Forecast Maintained

Infant-nutrition sales fell 9.2 percent, still hurt by last year’s recall of Fonterra Cooperative Group Ltd. milk powder, which turned out to be a false alert, Danone said today. In January, the company canceled its supply contract with Fonterra and said it’s seeking compensation. The trading operating margin of the unit shrank by 2.7 percentage points.

Danone, which competes with Nestle SA in baby food, is seeking to rebuild its infant-nutrition unit in China after the recall and bribery claims at its Dumex baby-milk business contributed to the first annual earnings decline in more than a decade last year.

Revenue growth and profitability will be stronger in the second half than the first, the company said today. Danone repeated its forecast for full-year like-for-like sales growth of 4.5 percent to 5.5 percent.

The company’s definition of like-for-like excludes currency changes and adjusts for changes in consolidation scope.

In April, Danone forecast this year would be marked by sluggish demand in Europe, higher milk prices and exchange-rate volatility in emerging markets. The full-year operating margin may widen or narrow as much as 0.2 percentage point on a like-for-like basis, the company reiterated today.