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CSM considers selling sugar confectionery unit

30-Aug-2004

CSM, the Dutch food ingredients company, is considering the sale of its sugar confectionery unit in order to concentrate on its core bakery supplies and sugar operations - despite a very poor performance from the bakery unit in the first half of the year.

CSM last week reported a 22 per cent drop in first half net profits to €67.3 million, due in part to a one-off gain registered a year earlier but primarily to a 34 per cent drop in operating profits at the European bakery supplies business.

Yet it is these business-to-business activities (bakery ingredients and products, biochemicals and sugar ingredients) which are likely to form the core of the CSM business in the future, with the direct-to-consumer sugar confectionery arm seen as an increasingly poor fit.

The confectionery unit had a torrid time during the half, with sales dropping by 4 per cent to €348.5 million. With global ingredients prices so high during the first half, there was significant price pressure on some of the company's lower quality brands, and while there was some margin improvement following higher sales of pastilles and chewing gum in Scandinavia and the Benelux, it was an improved return on advertising and marketing by the company's various confectionery brands which helped keep operating profits ahead of last year at €25.9 million.

With most of its non-profitable businesses already sold and CSM content to maintain its product portfolio at its current manageable limits -the business includes the Chewits brand in the UK, Malaco in Scandinavia and Venco and Red Band in the Netherlands - the chances of finding a prospective buyer are perhaps higher for this part of the CSM business than for any other.

But with overheads still high, and little likelihood of a major upswing in the European confectionery market in the immediate future, a sale will still not be easy to negotiate, and no major candidates to buy the business spring immediately to mind.

Selling the business will at least allow the company to focus on areas where growth is perhaps more likely in the longer term, according to Jaap Vink, CSM chairman. He stressed that the biochemicals division in particular would benefit from this new focus.

This unit, which covers a wide range of products such as lactic acids and food preservatives sold mainly under the Purac brand, saw a slight drop in turnover for the half to €138.9 million, although like-for-like growth would have been a more impressive 18 per cent - highlighting why the company wants to focus increasingly on this particular market segment.

But the US focus of the business - and continued pressure on dairy derivative prices - will curb growth in the second half, despite a predicted 14 per cent increase in volume sales, highlighting the need to focus on more high-margin products in the longer term.

But it will be bakery supplies which will benefit the most from the changes, should the confectionery arm be sold. European profits were badly affected by very poor conditions in key markets during the half - ingredient prices rose sharply and the artisanal bread sector in Germany took a major tumble as a result - and a new cost-cutting programme has already been put in place to help redress the balance.

Indeed, two non-core units are to be sold: Dreidoppel in Germany will be bought by compatriot Ireks and the loss-making Lachaise unit in France will be bought out by its current management. CSM said it expected to see a one-off gain of around €10 million from the sales.

Although sales at the European bakery supplies arm (which operates under the BakeMark and Caravan Brill brands, among others) rose in the first half to €554.0 million, this was largely due to the effect of acquisitions (€21.3 million). On a like-for-like basis, sales dropped by 2.1 per cent as the poor showings from the artisanal sector in Germany and the in-store segment in France took their toll.

In North America, the situation was even worse, with sales down from €542 million to €509 million, mainly due to the worsening exchange rate: at constant rates, sales would have been some 6.3 per cent higher at €558 million. But the poor performance was not entirely due to currency movements: a reorganisation at the BakeMark East unit during kept back profit growth, although the benefits are likely to be felt in the second half.

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