Danone Operating Margin Falls Amid Milk Price Inflation

The Tip Desk · June 30, 2014 · 2 min read

The food company reported a current operating margin of 11.27% for the first half of 2014.

The food company reported a current operating margin of 11.27% for the first half of 2014, a decline of -159 basis points in comparable data. Danone attributed the drop to a high comparison base from the first half of 2013, significant increases in milk prices, and a false alert involving Fonterra.

Milk price inflation since the summer of 2013 impacted all markets, with particularly marked inflation in Russia. The company said it offset some of these costs through price increases, specifically in emerging countries and Russia.

Net sales fell 5.3% to 10,467 million euros in historical data. However, the company said net sales grew 2.2% in comparable data. Performance varied by business segment, with the Fresh Dairy pole seeing its current operating margin fall to 7.8% from 9.9% in the prior year. The Infant Nutrition pole saw its margin decline to 17.4% from 20.5%. In contrast, the Water pole maintained a margin of 12.5%.

Geographic performance also diverged. The current operating margin in Europe excluding CIS rose to 14.6% from 14.3%. In the ALMA region, the margin fell to 10.1% from 14.6%. The company noted that the first half was further penalized by the weakness of emerging market currencies.

Financial results for the period included a diluted current net profit of 1.16 euro a share, which represents a decrease of 11.1% in comparable data. Free cash-flow excluding exceptional items stood at 286 million euros. Net debt increased to 8,678 million euros as of June 30, 2014.

To regain competitiveness in Europe, the company is implementing a cost-saving plan. This included the planned closure of factories in Budapest, Hagenow, and Casale Cremasco. The company also reported that it ended its current contract with Fonterra on January 8, 2014, and initiated arbitration in Singapore.

Danone confirmed its full-year 2014 objectives, targeting comparable sales growth between +4.5% and +5.5%. The company expects a stable operating margin, within plus or minus 20 basis points in comparable data, and a free cash-flow of approximately 1.5 billion euros excluding exceptional items. The company intends to rebuild its Infant Nutrition positions in Asia by prioritizing solidity over speed.