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Danone ups guidance for 2011 but warns of commodity price hike

By Guy Montague-Jones , 15-Feb-2011
Last updated on 16-Feb-2011 at 13:00 GMT

Danone has upped its sales revenue guidance for 2011, encouraged by a positive pricing performance in the last quarter. But the French dairy giant warned of a 6-9 per cent hike in raw material costs.

For the final quarter of 2010, Danone said like-for-like sales were up 6.9 per cent to €4,299m. Strong pricing drove the increase as volume growth came in slightly below analyst expectations.

Encouraged by the pricing performance and buoyed by the acquisition of Unimilk, which grew 27.1 per cent in December, Danone increased its guidance for 2011.

Higher than expected guidance

Instead of the previous medium term target of at least 5 per cent growth, the company is predicting 6 to 8 per cent growth for the coming year.

Commenting on the guidance, Bernstein analyst Andrew Wood said: “We are surprised by management’s confidence so early in the year, but the level of pricing plus including Unimilk certainly helps.”

Wood added that there is still some uncertainty about the market strength of the dairy division. “The jury is still out on the Fresh Dairy boom-bust because volumes did come in below expectations, but pricing was much stronger than we expected driving like-for-like growth higher.”

Commodity price warning

And looking forward to 2011, there is the added concern of higher commodity costs and their impact on profits.

In its earnings release, Danone said: “In view of developments since the beginning of 2011, the group expects total raw material and packaging costs to increase by 6 to 9 per cent on average over the year.” A steeper increase compared to 2010 figures is expected in the first half of the year.

Despite the anticipated commodity spike, management is targeting a 0.2 percentage point increase in like-for-like operating margin. The bulk of this improvement is expected to be fueled by Unimilk and synergies from its integration that are expected to take shape on the income sheet in the second half of the year.

The joint venture uniting Danone and Unimilk in December last year makes Russia the largest single national market for Danone with France,

Commenting on the strategy for the coming year, Danone chairman Franck Riboud said: “We anticipate no major change in consumer demand and in this context, also marked by persistently steep increases in raw material prices, we are placing the emphasis on lasting development of our brands.”

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