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Emerging markets and health lift Danisco H1 results

17-Dec-2003

Set against the backdrop of difficult trading conditions for branded food manufacturers, raw material prices and a negative currency impact played down first half figures for ingredients giant Danisco.

Coming in at market expectations - Goldman Sachs anticipated second quarter sales of DK2,182 million for ingredients and sweeteners - Danisco saw the quarter ending on DK2,165 million (€290m), a 3 per cent drop on the same period in 2002.

Earnings were hit by the strong euro, with the company feeling the impact of negative currency. Group EBITA for the period fell nearly 6 per cent to DK1,194 million.

Despite the flat results, Alf Duch-Pedersen, CEO, Danisco remained upbeat on Tuesday. "We feel that arriving at DK8,251 million [group sales] in the first half is well done when considering the lower sugar quotas, the currency effect and the unfavourable raw material prices in the ingredients and sweeteners business," he said .

For Goldman Sachs, the need for acquisitions becomes more pressing for Danisco as underlying market growth in ingredients, the key growth driver of the company, has slowed down considerably over the past three years.

In the absence of any acquisitions, the company has confirmed it will continue buying back shares.

Looking to emerging markets - principally Asia and Latin America - for growth opportunities, in the second quarter Danisco entered the xanthan gum market through its texturant division, linking up with one of the largest xanthan gum suppliers in China, the Henan Tianguan group.

Currently dominated by hydrocolloid leader CP Kelco, the Danish group is hoping to win the lion's share of a market valued in the range of €230 million with growth rates coming in at the higher end - 5 per cent - of the generally lacklustre growth figures in the food ingredients industry.

But competition is on the up. US agribusiness group Cargill said this week that it will expand its gum manufacturing capabilities in China. Working with joint venture partner Shandong Huanghelong group, in the first phase of expanison, the company will increase production capacity to more than 5,000 metric tons by mid-2004 at its Zibo production facility.

Texturant products for Danisco - emulsifiers, textural ingredients and functional systems - recorded organic growth of 4 per cent for the six month slot, but fell 4 per cent on the year before to DK1,994 million, down from DK2,079 million in 2002.

The rising popularity of sweeteners in finished products, including new product launches, drove organic growth to 8 per cent for the sweeteners division. Sales figures rose by nearly 4 per cent for the first half in 2003 to DK793 million, from DK790 million in 2002.

The west's increasing desire for health products and fad low-carb diets saw demand from manufacturers pushing demand for Danisco's lactitol and litesse products. In North America volume growth hit 8 per cent for sweeteners. But the fall in the USD rate impacted adversely by 14 per cent, dragging sales down to a 6 per cent fall.

Staying with the sweeteners division, once again, emerging markets bore hope with sales of the company's xylitol doing particularly well in Asia, said the company, despite fierce pricing competition from this product in Asia from Chinese companies.

Flavours, with more than 5 per cent organic growth, in the speciality products division continue to lift results which actually fell 4 per cent in the first half to DK1,639 million from DK1,617 million in 2002.

Methods to tackle rising raw material prices, rising across the board and touching all ingredients players operating in today's climate, include establishing fixed price contracts with suppliers.

"We need to plan our sourcing basically and carefully," Duch-Pederson told FoodNavigator.com

In the flavours division such contracts, vanilla for example, helped stabilise and improve the results for the division. Production synergies related to the acquisition of Perlarom last year also helped the bottom line.

As expected, sales fell 8 per cent in the sugar division to DK3,922 million due to Europe's move to reduce the quota of sugar, that cut last year's quota by 5.4 per cent. Results were not helped by low prices for molasses and sugar on the world market.

But the full impact of the Commisson's cut in sugar quota is yet to be felt by Danisco as full proposals for the sugar regime after 2006 - aiming to liberalise the sugar market in Europe - have still to come from Brussels.

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