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Danone losses to Fonterra milk scare top forecasts

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Danone warned of higher-than-expected losses to the scare over botulism in milk which has provoked a legal battle with Fonterra, as the dairy giant unveiled a fall in profits for 2013 and cautioned over a potentially soft start to 2014.

The French-based group, the world's biggest yoghurt maker, said that it had lost E370m in sales to the scare in August over tainted milk powder supplied in Asia by Fonterra, used largely in making infant formula for the huge Chinese market.

Although Fonterra, the world's top dairy exporter, found that type a bacterium found in some milk powder was not, after all, the type which can cause botulism, the all-clear came too late to prevent damage to sales of infant formula supplied by Danone, and many rivals.

Danone - which has accused Fonterra of "serious failings" and is suing for compensation - also said that it had lost E305m in operating profits to the scare, E26m more than initialled expected.

"Costs include product recall and destruction, the restructuring and recovery plan deployed in response to the crisis, and costs related to suspensions of business in China as a result of the crisis," Danone said.

Year of two halves

The group said it would this year "focus on rebuilding" its Asian sales of infant foods, "in particular through product launches and brand extensions".

Danone also said it would continue with a plan to boost its performance in Europe, where economic weakness has undermined dairy markets, while attempting to extend its "strong momentum in markets outside Europe".

However, against a backdrop of "sluggish trends" in Europe, of a "significant carryover of milk price inflation" prompted by soaring demand, with emerging markets expected to seee "persistently high exchange rate volatility", Danone prepared investors for a slower start to the year.

"Organic growth in sales and operating margin will vary widely from one half to the next in 2014," it said, also highlighting comparisons with the weaker performance following the milk tainting furore.

"The group thus anticipates a return to strong, sustainable, profitable growth beginning in the second half."

Profits fall

Danone forecast like-for-like sales growth of 4.5-5.5% for 2014, with an operating margin of between -20 and +20 basis points, and underlying free cash flow of E1.5bn.

The forecasts compare with like-for-like sales growth of 4.8% in 2013, for which Danone reported sales of E21.30bn.

Sales growth slowed to 2.9% in the October-to-December quarter, sapped by a slowdown in Asian sales following the milk powder scare, besides by a continued, if waning, drop in European takings.

Nonetheless, a 4.5% fall to E1.64bn in full year earnings was a less steep decline than expected by investors, who had forecast after-tax profits of E1.62bn.

Danone shares stood 2.1% higher at E52.03 in morning deals in Paris.

By Agrimoney.com

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