Transitioning: Danone profits soar by 34% as firm outlines €1bn cost-cutting

By Nathan Gray

- Last updated on GMT

Transitioning: Danone profits soar by 34% as firm outlines €1bn cost-cutting

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A 34% rise in net profits for French dairy and nutrition giant Danone was backed up by the announcement of a €1 billion efficiency program as the firm continues its transition over the next four years.

Strong sales growth in medial nutrition (7.4%) and early life nutrition (3.5%) helped the maker of Activia and Actimel to a strong FY16, which saw a 34% rise in net profit to €1.72 bn from €1.28 bn a year ago.

The firm said the results are ‘significant progress’ in strengthening its growth model – but added that 2017 will see Danone enter the next stage of its transition.

“With the upcoming addition of WhiteWave, we will soon start a whole new and exciting chapter of our alimentation revolution journey. While we delivered a robust performance leading to a very strong recurring EPS growth in 2016, the challenges we faced, including a slower turnaround of dairy in Europe and major market volatility, are a clear case to step up in our ability to seize consumer opportunities and improve our efficiency,”​ said CEO Emmanuel Faber. 

The company added that in such a volatile and complex environment it had decided to launch a review of its costs. Indeed, Danone forecasts slower profit growth for 2017 and said it will look to cut €1 bn in costs by the end of the decade as it contends with surges in milk prices and other raw ingredients.

"In a world that continues to be difficult with several markets in transition we have decided to simplify our organization to be more​ agile and closer to our local markets," added CFO Cecile Cabanis.

The company said it will consider reinvesting a part of the savings to fuel growth in the future – adding that it will review financial targets after the completion of its $12 bn acquisition of WhiteWave Foods Co, which it expects to happen in the first quarter after the European Commission cleared the deal in December​.

Financial focus

Danone saw overall 2016 like-for-like sales, rise by 2.9%, signaling a slowdown on the 4.4% growth it witnessed the previous year. The company said the slowdown in growth was a result of issues in Europe, including the relaunch of its Activia yogurt product and weak sales in Spain, coupled with new regulations in China that have reduced baby food sales.

It’s biggest division – Fresh Dairy Products – reported sales up 2% on the previous year on a like-for-like basis after seeing only 0.6% growth in 2015.

According to Danone, the growth came as a result of growth in Russia and North America, while in Europe sales were impacted by Activia’s performance.

“At this stage, Activia’s sales results are below expectations as the relaunch has not delivered the brand’s turnaround,”​ said Danone in its results statement. “Given the ambition of the transformation, this turnaround will take time, local execution plans are being reworked and teams have already started to implement them country by country.”

Danone’s Early Life Nutrition and Medical Nutrition units performed slightly better, with like-for-like sales growth of 3.5% and 7.4%, respectively in 2016.

This was despite a decline in ‘indirect’ sales to China in early life nutrition, it said.

“In China, the transition of the overall indirect channel induced by a fast-changing regulatory environment continued in Q4, leading to further stock adjustments by traders,”​ said Danone. “This transition is likely to continue until the new regulations are fully enforced in 2018, creating volatility.”

“At the same time, Danone is successfully developing its direct distribution model in China. All the initiatives implemented throughout the year to ensure its growing presence and visibility in specialized stores and direct e-commerce have led to another strong rise in Q4 local sales,”​ it added.

In Europe, Danone reported strong gains for medical nutrition in the United Kingdom and Benelux, while strong expansion of medical nutrition was also seen in China and Brazil. 

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