Analysis & Opinion

Europe's Food Groups Look to Volume-Led Growth

Europe's top food makers are set to report solid 2009 sales growth this month, coupled with outlooks for the coming year dominated by prospects for volume-lead growth as economies slowly recover.

Three of the world's biggest food groups Unilever, Danone and Nestle report 2009 results over the next three weeks and analysts see growth being driven by volumes after key commodity prices have fallen, leading to price cuts or much slimmed-down price rises.

Investors will look for any comments on prices of inputs such as milk and vegetable oils, but expect outlooks to be cautious as economies come out of recession and amid concern some commodity prices may be on the way up again.

Anglo-Dutch Unilever is set to report on Feb. 4 with Chief Executive Paul Polman's strategy of spending more and cutting prices set to deliver a third successive quarter of volume growth and a rise in margins from lower input costs.

Analysts say Unilever started 2009 with declining volumes, marketing spending cuts and commodity prices soaring, but Polman since he began at the start of 2009 has turned around prospects for the Knorr soup, Hellmann's mayonnaise and Lipton tea maker.

"He has consistently indicated flattish margins in 2009, but it is feasible with an input cost tailwind in Q4 that Unilever could deliver better than that," said UBS analyst Alan Erskine.

A relatively low consensus forecast for 1.4 percent underlying sales growth in the fourth quarter reflects one-off factors such as fewer trading days in western Europe and a systems change in Canada, with analysts looking for 3.4 percent growth for the full year and then 4.2 percent in 2010.

Paris-based Danone cut the price of its yoghurts early last year to drive growth of its brands like Activia and Actimel as it passed back a fall in milk prices to the consumer, but some analysts are concerned about a possible rebound in milk prices.

HIGHER VOLUME

Dairy makes up nearly 60 percent of annual sales and will be the key unit when the French group reports on Feb. 11, with analysts seeing 2009 underlying sales growth of 3.2 percent.

"Danone's price-reset strategy and its impact on volumes has been impressive and delivered a far faster and higher volume performance than most could have hoped for," said analyst Harold Thompson at Deutsche Bank.

Last November, the world's biggest yoghurt maker trimmed its medium-term annual underlying sales growth target to at least 5 percent from a previous 8 to 10 percent, reflecting an expectation of more difficult trading conditions.

The world's largest food group Nestle reports on Feb. 19 with underlying sales growth seen at 4 percent in 2009 helped by strong growth of 5 percent in the fourth-quarter, and investors looking for comments on input costs and dividends.

Last month, Nestle sold its remaining stake in Alcon for $28 billion and launched a new 10 billion Swiss franc share buyback, but many will look to see if it opts for a special dividend to return further money to its shareholders.

Attention will focus on Nestle's views on input costs and in particular milk, and whether it will reinstate its Nestle-model target of 5 to 6 percent underlying annual growth target.

"We believe that reiterating the 5 to 6 percent target for 2010 as well would send a strong signal to investors, demonstrating management's confidence" said analyst Andreas von Arx at Helvea.

Last week, U.S. consumer goods groups Procter & Gamble and Colgate-Palmolive beat earnings forecasts and both showed strong underlying quarterly sales growth of 5 percent and 6.5 percent, reflecting tentative signs of a recovery in U.S. consumer spending.

In Europe, Germany's Henkel released 2009 results early showing fourth-quarter earnings ahead of forecasts due to cost cutting with underlying sales up just 0.6 percent.

CONSENSUS ANALYST FORECASTS

Underlying sales 2009 Previous Q4 Previous Nestle 4.0 8.3 5.0 - Danone 2.8 8.4 4.1 6.0 Unilever 3.4 7.4 1.4 7.3 NOTE - figures in percentage terms Sources - Company-conducted surveys of analysts

In a Reuters poll of 10 analysts, the forecast for Unilever's mean fourth-quarter underlying sales growth was 1.3 percent within an range of 0.1 to 3.1 percent and the 2009 forecast mean was 3.4 percent within a range of 3.0 to 4.2 percent.

Earnings/share Mean High Low Previous No of Estimates Nestle 2.89 3.05 2.65 2.82 37 (Swiss francs) Danone 2.58 3.94 2.18 2.74 31 (Euros) Unilever NV 1.29 1.57 1.09 1.79 38 (Euros)

Source: Reuters