Danisco to review ingredients strategy ahead of split

By Jess Halliday

- Last updated on GMT

Related tags: Milk

Danisco has said it is reviewing the strategic direction and
priorities of its core ingredients business, as a result of its
decision to de-merge its sugar and ingredients operations.

The Danish company unveiled plans to split off its two divisions in September, although this is not expected to happen for one to two years, until the dust has settled on European sugar reform. The rationale behind the split is that the two companies would have the best development opportunities in their discrete areas of activity, while shareholders would have the choice on whether to back sugar or ingredients. But in Danisco's first half financial results statement, published today, CEO Tom Knutsen said that the plan comes with a certain amount of scrutiny for ingredients. "As a result of our decision to de-merge sugar, we are currently also reviewing the strategic direction and priorities of our core ingredients business, including a review of our capital structure." ​ The results statement did not give many details on the review, but the future capital structure is dependent on ownership of sugar. However Knutsen said that the current ingredients focus on value creation is to continue. The most recent quarter ended October was the sixth consecutive one of EBIT margin expansion for ingredients (by 7 per cent to DKK 13.6m, around €1.8m), despite the challenge of rising ingredients costs and the weak US dollar. Sales for the division were up only 1.2 per cent to DKK 3002m (€402.3m). At the moment, however, the company is prioritising margins over short-term volumes, as a result of higher input costs. While costs of vegetable oils and milk products are a burden on direct costs, these also have a negative effect on underlying demand, sugar as cheese cultures, for instance. Perversely, the company has turned the current food commodity price rise to something of an advantage, since it has developed some ingredients that are actually aimed at helping food manufacturers reduce their own raw material costs. These include a new range of emulsifiers unveiled in July. "In some respects we see the current raw material market as a window of opportunity,"​ it said. The main growth driver for ingredients year-to-date have been bio ingredients and texturants and sweeteners. Danisco has also increased its R&D spend this year, with "encouraging"​ launches coming out of cultures and texturants and sweeteners. These have been primarily targeted at health and nutrition, including October's launch of HOWRU Protect probiotic found to reduce cold and flu symptoms in children. It also launched Texel NatuRed for food protection under its Care4U line, intended to be an all-natural alternative to nitrite salts. However cheese cultures saw "limited growth"​ as a result of a declining global cheese market. Some customers are prioritising other dairy segments over cheese as a result of the general milk shortage. R&D remains a key focus, and the new research centre in Shanghai is expected to swing into action in early 2008. In texturants and sweeteners, Danisco has seen the main margin improvement coming from the termination of some large but low-margin contracts for Litesse, which has improved the sales mix. This year the company sold its flavours division to Firmenich, but has a partnership in place with the buyer that is already operational. "Cross sales have already started to take place in parts of the organisation,"​ said Danisco. As for sugar, the start to the year was said to be good as a result of cost containment and improved sales mix. Revenue for the year-to-date was DKK 3311m (€443.7m), compared to DKK 3623m (€485.5m), and EBIT margin DKK 9.8m (€1.3m), up from DKK 9.1m (€1.2m). Following EU amendments to sugar reform introduced in September, Danisco announced its intention to reduce its quota by up to 13.5 per cent, and buy up quota in Sweden and Denmark. The idea is to ensure optimum production volumes at the most efficient factories.

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