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4.1 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Information concerning the Group's operating activities
DANONE
REGISTRATION DOCUMENT 2015
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Note 5.7. Financial risks associated with operating activities
The Group's financial risk policy and its organization are described
in Note 12.1 of the Notes to the consolidated financial statements.
Foreign exchange risk
Due to its international presence, the Group could be exposed to
foreign exchange rate fluctuations in the context of its operating
activities.
Risk identification
The Group mainly operates on a local basis and consequently in the
currency of the country in which it is operating, thereby incurring
no currency risk. However, the location of some of the Group's
production units may result in intercompany billings in foreign
currencies. This applies particularly to the Early Life Nutrition and
Medical Nutrition Divisions and, to a lesser extent, to the Fresh
Dairy Products Division. Similarly, some rawmaterials are billed or
indexed in foreign currencies, in particular as regards the Waters
and Fresh Dairy Products Divisions. Lastly, the Group is also deve-
loping some export activities. The sales and operating margin of
some subsidiaries are therefore exposed to fluctuations of foreign
exchange rates against their functional currency.
Risk monitoring and management
Pursuant to its financial currency risk hedging policy, the Group's
residual exposure (after hedging) is not material.
As of December 31, 2015, the main hedged currencies in terms of
value included the British pound, U.S. dollar, Mexican peso, Brazilian
real, Australian dollar and Russian ruble (see Note 12.3 of the Notes
to the consolidated financial statements).
Commodities risk
Danone's raw materials needs consist mainly of:
•
materials needed to produce food and beverage products, mainly
milk and fruits (the “food rawmaterials”). On a value basis, milk
represents the main raw material purchased by Danone. These
purchases consist mainly of liquid milk, for which the operating
subsidiaries typically enter into agreements with local producers
or cooperatives. Liquidmilk prices are set locally, over contractual
periods that vary from one country to another. The main other
food raw materials are fruit-based preparations and sugar;
•
product packaging materials, in particular plastics and card-
board (“packaging”). Packaging purchases aremanaged through
global and regional purchasing programs making it possible
to optimize skills and volume effects. Prices are influenced by
supply and demand at the global and regional levels, economic
cycles, production capacities and oil prices;
•
energy supplies. They account for only a limited portion of the
Company's overall purchases.
Danone's strategy increasingly relies on the upstream portion of
its activities and in particular its supply of raw materials, not only
to manage its costs but also to make it a genuine source of value
added and differentiation relative to the competition (see section
2.3
Strategic growth areas
).
These upstream activities are now managed as cycles in order to
ensure their sustainability, limit their volatility and gain a genuine
competitive advantage:
•
Regarding the milk cycle, the goal is to ensure a sustainable
long-term supply, continue to improve competitiveness and
reduce the dependency on this raw material by optimizing the
use of all milk components thanks to new technologies and the
pooling of needs among the various business divisions, notably
Fresh Dairy Products and Early Life Nutrition.
•
As for the plastics cycle, the main challenge is to develop new,
100%-recyclable materials, give second life to plastic packaging
that will be distributed in the market, increase the share of
recycled PET from10% to 25% in several countries and ultimately
produce bottlesmade fromsecond-generation, 100%bioplastics.
•
Lastly, Danone's main challenge at the heart of the water cycle
remains protecting its springs.
The price trends of major raw materials may affect the structure
of Danone's results. In that context, the Company manages raw
materials cost volatility through the following measures:
•
continuous productivity gains: Danone strives in particular to
optimize its use of rawmaterials (reductions in production waste,
lighter packaging andmore effective use of milk sub-components
in the Group's various products) and take advantage of pooled
purchasing for its various subsidiaries. In 2013, for example, the
Company established centralized purchasing for the Fresh Dairy
Products Division other than milk;
•
implementation of a purchasing policy (“Market Risk Manage-
ment”) that consists of defining rules for securing the physical
supply and price setting with suppliers and/or on financial
markets when they exist. The monitoring of exposures and the
implementation of this policy are made for each raw materials
category by the Company's central purchasing team. The buyers
typically negotiate forward purchase agreements with suppliers,
since no financial markets exist that would allow full hedging of
the volatility of Danone's main raw materials purchase prices.
Forward purchase agreements are monitored at the Company
level at the end of each year. The information regarding these
future purchasing commitments is presented in Note 5.7 of the
Notes to the consolidated financial statements. Also, with respect
to Danone's two main raw materials categories (milk and dairy
ingredients and plastics including PET), a sensitivity analysis of
the impact of changes in their prices on the Company's annual
purchasing costs (applied simultaneously in all countries where
Danone has a production activity) is presented hereafter.