Danone targets cost cuts amid pressures at dairy arm

Food group Danone unveiled a €1 billion cost-cutting plan over three years, saying the turnaround of its European dairy division was taking longer than expected while tough conditions in China would endure in 2017.

The world's largest yoghurt maker said that in an economic environment that would stay volatile this year, it had decided to review its costs and re-invest savings to fuel future growth. "It consists in spending better, buying better and reinvesting part of these savings in growth initiatives to achieve our 2020 profitable growth ambition," chief financial officer Cecile Cabanis told a conference call with journalists. Danone was cautious about 2017.

It did not provide sales or operating profit margin growth targets, saying it would review its financial goals for 2017 after closing its acquisition of US organic food group WhiteWave, which is slated for the first quarter. It had targeted 2017 recurring earnings per share growth of above 5 per cent on a like-for-like basis, excluding elements related to WhiteWave.

It achieved EPS growth of 9.3 per cent in 2016. Emmanuel Faber, who took over as chief executive in October 2014, has vowed to return Danone to "strong profitable and sustainable growth" by 2020. He is reviewing its business in China and overhauling its dairy division, where it has cut costs and launched new products.

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US business doubles

The company is in the process of completing the purchase of WhiteWave Foods Co for $10.4 billion, a move that should double the size of its US business. Danone, which makes Activia yoghurt, Evian water and Blédina baby food, said like-for-like sales in 2016 rose 2.9 per cent to €21.94 billion, in line with analysts' expectations of 2.9 per cent growth for 2016, which was a slowdown from 4.4 per cent growth in 2015.

The slowdown reflected tough market conditions in Spain and problems with the relaunch of its Activia brand in Europe, which held back dairy sales growth in the final quarter, while pressures in the Chinese market weighed on baby food sales.

Danone had flagged the European dairy problem in December, warning its 2016 sales growth would come below its original target of 3-5 per cent. Its operating margin rose by 70 basis points to 13.77 per cent, in line with analysts’ expectations of 13.71 per cent. Sales volumes in Danone’s fresh dairy business were down 2.6 per cent in full year 2016.

Activia, one of its key brands, has faced increasing competition and had to drop some claims about the health benefits of its yogurts after these were challenged. Baby food sales rose 0.6 per cent on a like-for-like basis in the fourth quarter, slowing from 1.7 per cent growth in the third quarter, which Danone blamed partly on pressures in China.

Reuters