Danone is on course to lose €350m in sales as a result of the Fonterra whey recall in August, the French yoghurt giant has revealed in its latest results.
The recall – which turned out to be a false alarm – was initiated after three batches of Fonterra whey protein concentrate tested positive for a strain of bacteria that can cause life-threatening botulism.
Fonterra recalled its products as a precaution, and so did its customers – including Danone – who use the whey protein concentrate to make products such as infant formula. In Danone’s case, the recall was focused on markets in Asia.
Announcing its third-quarter results today, Danone said the recall had “led to significant losses in sales, earnings and cash flow” in its Asian operations, which had forced it to downgrade some of its operational and financial targets for the overall group for 2013.
Its adjusted sales growth target now stands at between 4.5% and 5%, having previously been set at “at least 5%”, its targeted trading operating margin will be down by 80 basis points (bps), and free cash flow is forecast to be between €1.5 and €1.6 billion, excluding exceptional items. Previously, Danone’s target for free cash flow was about €2 billion.
Danone added its baby nutrition division had seen a steep decline in third-quarter sales because of the “false alert issued by Fonterra” which had triggered Danone’s own recall. As a result, the division had lost about €170m in sales during the third quarter, it said.
Danone had put in place “action plans” for the markets affected by the recall and these were starting to show results but only “very gradually,” the company added. The incident would therefore still have a significant impact on Danone’s 2013 full-year results, with losses expected to reach €350m in terms of lost sales, €280m in lost margin and a €300m loss in cash flow.
Earlier this month, Fonterra said it was involved in a dispute resolution process with Danone regarding the recall. Commenting at the time, Fonterra said it “strongly denies any legal liability to Danone in relation to the recall.”
A Fonterra spokesman declined to comment on the estimated losses announced by Danone today.
On 28 August, Fonterra was told by New Zealand’s Ministry for Primary Industries that additional testing had shown no presence of Clostridium botulinum in Fonterra’s whey protein concentrate. “None of the many tests conducted by the group [Danone] both before and after this critical period, showed any contamination whatsoever of its products with Clostridium botulinum,” Danone said.
Overall, Danone reported a 4.2% increase in like-for-like group sales for the third quarter. However, sales for Europe – excluding the Commonwealth of Independent States (CIS) – were down 0.9%, which Danone said confirmed “that we are stabilising our sales and market share”.
In contrast, like-for-like sales were up by 11.1% and 6% respectively in the CIS and North America region, and the Asia-Pacific, Latin America, Middle East and Africa region.
By division, waters saw the highest growth rate, at 16.9%, reflecting a “vigorous performance” in Europe, “amplified” by favourable summer weather, with continued strong growth in emerging markets.