Danone Plans Cost Clampdown as Profit Growth Set to Slow

Danone forecast slower profit growth this year and said it will seek to cut 1 billion euros ($1.1 billion) in costs by the end of the decade as the world’s largest yogurt maker grapples with an expected surge in milk prices.

The maker of Activia and Actimel said Wednesday it’s targeting earnings per share growth of more than 5 percent, which would be the slowest in three years. Last year, the profit measure rose 9.3 percent.

The forecast illustrates the necessity of buying WhiteWave Foods Co., a deal that will catapult Danone to the position of global leader in organic food and drinks. The French company said it will review its 2017 target after completing the $10 billion acquisition of the U.S. soy-milk maker, which most likely will happen in the first quarter. A new efficiency program, dubbed Protein, will aim to cut back on expenses in areas including marketing, the company said.

“With the material WhiteWave transaction that has yet to close, Danone is being more prudent about guidance,” said Robert Waldschmidt, an analyst at Liberum Capital. “Investors will be happy with the cost-savings program.”

Danone shares were little changed at 59.97 euros at 11:07 a.m. in Paris.

The company said economic conditions will remain particularly volatile and uncertain in 2017, with “persistently fragile or even deflationary consumer trends in Europe.” A steep rise in milk prices is expected to fuel a mid single-digit increase in raw material costs, it said.

Danone’s comments echo those of Reckitt Benckiser Group Plc, which said this week that revenue advanced at the slowest pace in more than five years amid tough conditions in Europe and emerging markets like Brazil. Nestle SA is expected to report the slowest sales growth in at least a decade when it publishes results on Thursday.

‘No Magic Bullet’

Danone’s like-for-like sales increased 2.9 percent in 2016, the slowest pace in nearly 20 years. Volume at the fresh-dairy unit -- the source of almost half of company sales -- fell 3.9 percent in the fourth quarter. The results of a revamp of the Activia brand are below expectations, Danone said, adding that weak demand in Spain also weighed on sales.

To reignite growth at the unit, Chief Executive Officer Emmanuel Faber has started modifying its Danonino, Actimel and Activia dairy brands. On Wednesday, Danone said the environment for yogurt will be more challenging in the U.S. this year.

“I don’t have a magic bullet,” Faber said of the fresh-dairy unit on a conference call. “Other than doing tactical allocations that will boost sales, we don’t. Dairy Europe will continue to be negative for some time.” 

The cost program will include savings on corporate travel and product transportation, the CEO said. Instead of using 34 travel agencies around the world, Danone now has just one, he said. The company is sharing 300 primary transportation routes in Europe to maximize the use of space on trucks, saving 10 million euros a year.

The program “is unexpected and never has Danone had such mindset or kind of initiatives at this level,” Pierre Tegner, an analyst at Natixis, said in a note.

Danone’s profit forecast refers to recurring earnings per share on a like-for-like basis.