Danone: First Half Results 2008

25 July 2008

• Danone sales increased by 8.0% in Q2 and 9.6% in H1 08[1]
• Trading operating margin improved 35 bps to 15.3% in H1 08[1]
• Underlying fully-diluted EPS increases 16.6% to € 1.47 in H1 08[2]
• Free cash flow amounts to € 550 million in H1 08
• FY 08 sales and EPS targets reconfirmed
• Full year 08 EBIT margin target raised to improve in the range of +40 bps to +50 bps[1]

Chairman’s comment

Commenting on the results in the first half of 2008, Franck Riboud, Chairman and CEO of Groupe DANONE said”:

“The 9.6% sales growth, the solid margin improvement of +35 bps and the strong EPS growth of 16.6% in the first half of 2008 are a clear testimony to Danone’s ability to deliver superior and profitable growth in a challenging environment.  In those markets where we have recently started to witness softness in consumer spending, our teams have already put all the necessary wheels in motion to be able to make the necessary adjustments and accelerate innovations programmed to ensure and strengthen the competitive advantage of the Group and its brands.  As a result, we reconfirm our sales and EPS targets for the year, and upgrade our margin target for this year to a range of 40 to 50 bps.”

Financial highlights first half 2008

               [1]  like-for-like = at constant scope of consolidation and exchange rates
               [2]  versus pro forma 2007

Sales by business line and geographical area for the second quarter and first half of 2008

       [1] : like-for-like = at constant scope of consolidation and exchange rates

Overview of sales performance

In the second quarter 2008, consolidated reported sales increased by 17.6% to € 3,1251 million. Excluding the effects of changes in exchange rates (-4.6%) and in scope of consolidation (+14.2%), total sales increased by +8.0% on a like-for-like basis.  This like-for-like sales growth was driven by a +2.0% rise in volume and a +6.0% rise in value. 

In the first half of 2008, consolidated reported sales increased by 18.2% to € 7,691 million. Excluding the effects of changes in exchange rates (-4.6%) and in scope of consolidation (+13.2%), total sales increased by +9.6% on a like-for-like basis.  This like-for-like sales growth was driven by a +2.5% rise in volume and a +7.1% rise in value. 

Sales performance by division

Fresh Dairy
In the second quarter, the Fresh Dairy division continued to deliver high-single digit sales growth (+8.7%) despite the negative volume effect that resulted from price increases and the challenging market dynamics in a select number of markets.  This quarter’s organic growth consisted of slightly negative volume growth of -1.5% and +10.2% value growth.  The blockbuster brands continued to drive the growth of the division, growing at mid-teen level and with volume growth which is substantially better than the divisional average.  The latter being a clear testimony to the health blockbuster strategy that delivers superior growth throughout the cycle.

The overall market conditions in France further deteriorated at the back end of the second quarter, thereby negatively impacting the volume and sales growth performance of the division.  Excluding France, the division’s volume and sales growth were +0.7% and +11.0%, respectively in Q2 08.  The rest of Europe generated relatively solid growth, with particularly strong performances coming from the UK, Russia and Turkey.  Latin America continued its growth path in the mid-teens.  North America continued to do well on the back of very strong performance of Stonyfield and Activia and the introduction of Danactive (Actimel) in 2007.

Waters
The performance of the Waters division reflects a number of factors that negatively impacted results in the second quarter of 2008.  Sales declined by -0.8% based on a solid volume growth of +5.1% which was offset by a negative value effect of -5.9%.  This disappointing performance was mainly driven by the difficult overall market situation in France, Spain and the UK and bad weather conditions across Europe.  This led to negative volume growth in Europe, thereby negatively impacting value growth.  The markets outside Western Europe – which account for roughly 60% of the division’s sales – held up well with continued mid- to high-teens sales growth in Asia and Latin America, respectively, driven by outstanding performance in Indonesia, Mexico and Argentina.

Baby Nutrition
Baby Nutrition delivered another outstanding quarter at +16.2% sales growth despite a high comparable and the unprecedented price increases that were put though in the preceding three quarters.  The strong value effect (+10.6%) results from these price increases that were taken to offset the pressure from rising milk prices.  The resilient volume performance (+5.6%) clearly reflects the strength of our brands and the loyalty of our customers.  All categories and geographies continued to contribute to this performance.  Western Europe continued its acceleration which is mainly driven by the UK, Germany and the Netherlands.  Asia and Eastern Europe also continued their excellent performances, driven by strong growth in Indonesia, China, Poland and Russia.

Medical Nutrition
Medical Nutrition continued its excellent growth track with a sales growth of +12.4% despite a high comparable in the second quarter of 2007.  Sales growth was entirely driven by a volume growth of +13.1%.  Growth was supported by all regions with particularly strong performance coming from Southern Europe.  In addition, all product categories contributed to the growth with above-average growth coming from Gastro Intestinal Allergy and Pediatrics.

Trading operating margin improved +35 bps on a like for like basis

       [1] : like-for-like = at constant scope of consolidation and exchange rates

Margin development per division
Danone’s trading operating margin improved by +35 bps to 15.30%, on a like-for-like basis, in the first half of 2008.  This improvement was partly driven by a faster than anticipated achievement of cost synergies relating to the integration of Numico, which is reflected in the margin improvement of both Baby and Medical Nutrition.  The margin of the Waters division remained – on a like-for-like basis – below the level of the first half of 2007, due to cost inflation and lower fixed cost absorption, but did improve compared to the margin in the second half of 2007.  The margin improvement of the Dairy division reflects – inter alia – increased operational efficiencies and leverage, while A&P spend as a percentage of sales remained close to levels of the first half of 2007.

Underlying fully diluted EPS increased by +16.6% to € 1.47 in the first half of 2008

Underlying net income from continuing activities increased by +15.8% to € 701 million in the first half of 2008, based on a constant scope of consolidation.  Underlying fully diluted earnings per share from continuing activities grew by +16.6% to € 1.47 in the first half of 2008.

Other operating items of € (57) mln in the first half of 2008 are mainly explained by costs that are related to legal proceedings which are not of structural nature.

The underlying tax rate in the first half of 2008 was 24.6% compared to 27.9% in the first half of 2007.  The decrease is mainly explained by a lowering of the tax rates in markets where Danone has a significant presence and a positive country mix.

Net result of discontinued activities of € 255 mln is entirely related to the last portion of the final proceeds of the disposal of the Biscuits division that was announced in 2007.

The decrease of the net result attributable to minority interest is mainly related to the change to the equity accounting method of the group’s Wahaha joint-venture.

Free cash flow from operations

Free cash flow from operations amounted to € 550 mln in the first half of 2008, compared to € 571 mln in the same period last year.  For the full year 2008, the group expects the free cash flow from operations to reach a level of between 7 and 8% of sales.

Capital expenditure was € 281 million, or 3.7% of sales, in the first half of 2008.  The company continues to expect that the total capital expenditure level for 2008 will be 5 - 6% of sales.

Outlook 2008

Based on the inherent strengths of its business model and the strong long-term potential of the markets in which it operates, the Group reconfirms its targets for 2008:

• like-for-like sales growth between +8% and +10%
• underlying fully diluted earnings per share growth of at least 15% (vs pro forma 2007). 

Based on the strong margin performance in the first half of 2008, the Group is raising its trading operating (EBIT) margin target for 2008, now set to a range of +40 bps and +50 bps on a like-for-like basis.