Danone slashes 2013 targets to cover WPC botulism recall losses

By Mark ASTLEY contact

- Last updated on GMT

Danone slashes 2013 targets to cover WPC botulism recall losses

Related tags: Fresh dairy products, Milk, Clostridium botulinum

Danone has issued a profit warning for 2013 to account for the impact of Fonterra's recent whey protein concentrate (WPC) botulism scare, which the French dairy giant has claimed cost it around €170m ($230m) in sales.

Detailing its financial results for the first nine months of 2013, Paris-based Danone announced a revision of its full-year operating margin, sales growth, and cash flow targets to cover the “adverse impact of events in Asia.”

Danone's Baby Nutrition division experienced a “very steep decline”​ in Q3 sales on the back of the recalls triggered by Fonterra's WPC botulism alert. The segment reported sales of €924m ($1.25bn) for the three months ended 30 September - compared to €1.062bn ($1.44bn) in Q3 2012.

In response, Danone reduced its like-for like sales growth target from 5% to between 4.5% and 5%, its free cash flow excluding items forecast from around €2bn ($2.7bn) to between €1.5bn and €1.6bn ($2.03bn and $2.17bn), and its trading operating margin target to -80 basis points (bps).

€170m in “lost sales”

On 2 August, Fonterra issued a food safety alert to eight customers, including Danone-owned Dumex and Nutricia Australia New Zealand (Nutricia ANZ), over concerns that three batches of WPC potentially contaminated with botulism-causing Clostridium botulinum had entered the supply chain.

Despite no evidence that their products were tainted, Nutricia ANZ recalled 67,000 units of its Karicare brand infant formula in New Zealand, and Dumex pulled products from shelves in Cambodia, Thailand, Hong Kong, China, Malaysia, and Singapore.

Additional tests later revealed that the bacterium found in the three recalled WPC batches was not Clostridium botulinum, but the non-toxic Clostridium sporogenes strain.

In its Q3 financial report, published earlier today, Danone claimed that the false alarm led to “an estimated €170m in lost sales for the full quarter, with the division showing a -8.6% decline in sales growth and volume down -7.3%.”

“As a result, Danone estimates that the incident will have a significant impact on its 2013 results, with full-year lost sales estimated at €50m, lost margin estimated at €280m including €170m booked a non-current items, and an estimated €300m loss in cash-flow,” ​it said.

Plan “to restore sales”

Alongside the revision of its 2013 forecast, Danone revealed that “action plans to restore sales are being deployed in affected markets.”

These actions are “generating results effectively but very gradually,”​ it added.

Beyond these short term developments, the Group is confident in both its ability to recover is positions in affected countries and the strength of its growth model.”

Compensation talks are also on-going between Danone and Fonterra in relation to the false alarm.

Earlier this month, Danone confirmed that it is seeking reparations of around €200m ($270m) from Fonterra to cover “the immediate costs caused by the recall initiated in August in eight markets.”

US, Russian “momentum”

Meanwhile, the company's Fresh Dairy Products division is “building strong momentum” ​on the back of double-digit growth in North America and Russia.

“In North America, Fresh Dairy Products continued to consolidate its category leadership, building on its vigorous growth in the Greek yogurt segment,”​ said the company.

“Driven by the flagship brand Prostokvashino, growth in CIS markets was well balanced between volume and value, integrating competitive price increases introduced during the quarter in response to a very steep rise in milk prices,” ​it added.

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