French yogurt maker Danone said that it is containing costs to be able to adjust to difficult markets such as China and Russia which will lead to better profitability this year.
On a like-for-like basis, Danone said in a statement that operating margins will increase by 50 to 60 basis points for the year, comparable to their previous “solid improvement” target. Danone continues to stand by its previous forecast of a 3 percent to 5 percent sales growth as the company’s first half results are due July 28.
“This is positive news as investors were concerned about Danone’s ability to improve margins and maintain its organic revenue growth rate,” Zurich-based MainFirst analyst Alain Oberhuber said. He was expecting a 30 basis points improvement.
Russia was once the company’s largest market and is currently facing difficulties in the last two years forcing the company to add higher margin products including yogurt with locally grown berries. In China, the company is adjusting to new market regulations for infant formulas.
The growth forecast reflects revenue gains that may be correlated with decelerating economies.
In 2015 the company’s sales rose by 4.4 percent to a margin of 12.91 percent, which is its weakest in six years.
Shares of Danone increased by 0.4 percent to 60.69 euros but went down marginally to 60.51 euros in early morning trading in Paris. The company is 2.2 percent up on the year.
“All the initiatives we’ve set and all the discipline on cost control we put in place are starting to pay off,” according to Chief Financial Officer Cecile Cabanis while on a call with analysts. She added that Danone just finished a quarterly management meeting that evaluated its investments, cash and cost savings when it announced its forecasts.
Danone Chief Executive Officer Emmanuel Faber promised to return the company to “strong profitable and sustainable growth” by 2020 when he took over in 2014.
Faber started to overhaul the company’s dairy division in China following a review of its business there prompting Danone to cut costs and launch new products. The company is currently working on relaunching its popular products, Activia yogurt and Actimel fermented milk products to help increase sales.
Foreign infant formula makers are facing difficulties in Chinese market as the government has tightened its regulations which included a tax loophole that enabled companies to enjoy lower selling prices for goods that are sold through websites operating beyond China’s great wall. Products shipped from foreign makers into the Chinese market will experience an increase in tax of 11.9 percent by April as China concentrates on the gray market.
According to the company, “With fast evolving dynamics in some emerging markets and notably China, we are adjusting the pace of topline refueling for 2016 in these specific geographies.”
Danone’s sale of its Dumex unit in China should increase margins by around 20 percent basis points in addition to like-for-like improvements according to the company in February.
The conservative outlook is similar to competitors, Nestle and Unilever.