21 / 364
Overview of activities, risk factors
2.5 Other elements related to Danone's activity and organization
DANONE
REGISTRATION DOCUMENT 2015
21
Production during the year and main production sites
Year ended December 31, 2015
Division's largest sites
(a)
Production
(b)
Location
Division's share of
production
(b)
Fresh Dairy Products
7 million tons
Mexico, Brazil
11%
Waters
26 billion liters
France, Indonesia
12%
Early Life Nutrition
1 million tons
Ireland
16%
Medical Nutrition
210 million liters
Netherlands
49%
(a) The two largest sites for the Fresh Dairy Products andWaters Divisions, and the single largest site for the Early Life Nutrition and Medical Nutrition Divisions.
(b) For the year.
Raw materials purchasing
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 re-
cycled PET from 10% 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 Company'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 RiskManagement”)
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 ne-
gotiate forward purchase agreements with suppliers, since no
financial markets exist that would allow full hedging of the vola-
tility 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 section 3.4.
Balance
sheet and financial security review
. 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 in Note 5.7 of the Notes to the
consolidated financial statements.