Danone's profit falls 10% as sales, costs rise

Danone's profit falls 10% as sales, costs rise

French dairy firm Danone has reported a 10% fall in first-half net profit, as higher commodity costs weighed on operating margins, though sales rose and the group lifted its forecast for 2010.

French dairy firm Danone has reported a 10% fall in first-half net profit, as higher commodity costs weighed on operating margins, though sales rose and the group lifted its forecast for 2010.

Net profit attributable to Danone (FR:BN 44.78, -1.54, -3.32%) shareholders in the first half of the year fell 10% to €838 million ($1.09 billion) from €932 million in the same period a year ago.

On a fully diluted per-share basis, profit was €1.38 against €1.50. Operating profit increased slightly to €1.28 billion against €1.21 billion in the year-ago period, while sales rose to €8.36 billion from €7.52 billion.

In the second quarter, sales increased to €4.37 billion from €3.84 billion.

A poll of analysts at Thomson Reuters StarMine Smart Estimates showed expectations for first-half operating profit of €1.27 billion and sales of €8.26 billion.

Shares of Danone fell 2.5% in Paris trading.

The company said operating margin fell 74 basis points in the first half of the year, to 15.3%, reflecting the negative impact of its Reset program that began last year to lower milk prices and higher raw materials prices.

Still, first-half performance prompted Danone to lift its comparable sales growth target to at least 6%, from a prior target of 5%. The group sees a stable trading operation (earnings before interest and taxation) versus 2009 on a comparable basis, and increase of free cash flow operations of at least 10% against 2009 on a reported basis.

The global economy remains a factor looking ahead. "Danone assumes that the financial, economic and social crises will continue to weigh on consumption trends in Europe, while emerging markets are expected to keep developing well overall," the company said in a statement.

Danone said it would continue to focus on areas with strong potential, such as baby nutrition in Asia, dairy products in the U.S., Brazil and Russia, and waters and medical nutrition in emerging markets.

The company is also focusing on productivity, "which is critical in light of the volatile raw material prices," said Chairman Franck Riboud in a statement.

Volumes for Danone increased 8.9% in the period, and across all of its divisions. Medical Nutrition saw the strongest sales, up 10.1% on a comparable basis, and driven by all regions with Eastern Europe and Latin America strongest. In June, Danone bought Medical Nutrition USA -- an expert in liquid protein supplements for older people -- for $62 million.

Its Baby Nutrition division saw a 8.6% rise in comparable sales, with sales strong in China, Indonesia, the U.K. and Poland. Its Fresh Dairy unit experienced a 7.1% rise in sales -- strongest in the U.S. and Latin America and Japan, but weak in Spain.

Sales of Waters rose 3.7%, with the company noting a still difficult environment in Japan and Spain.

Geographically, European sales lagged, with a 1.7% rise in the first half, while Asia sales rose 13.8% and the rest of the world, including Latin America, saw sales rise 16%.

That tantalizing possibility comes on the interpretation of none other than Richard Russell, editor of Dow Theory Letters.

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