Danone sales disappoint as Italy, Spain drag

A general view with a giant jar of yogurt is seen outside the exhibition to mark the 90th anniversary of the French foods company Danone, in Paris April 2, 2009.

PARIS (Reuters) - French food group Danone (DANO.PA) said growth slowed sharply at its dairy division as shoppers in Italy and Spain switched to cheaper alternatives in recession conditions unlikely to ease into next year.

Kicking off the third-quarter reporting season on Wednesday ahead of large food makers like Nestle (NESN.VX) and Unilever (ULVR.L) (UNc.AS), Danone kept its full-year sales outlook as emerging markets remained solid and U.S. business accelerated.

"The environment remains supportive and favorable in all geographies except Europe," Chief Financial Officer Pierre-Andre Terisse told journalists.

Danone, the most exposed among big food groups to the euro zone crisis, with around 35 percent of sales in western Europe, said it saw no change to Europe's economic climate through 2013. It has started cutting prices in Spain.

The world's largest yoghurt maker, whose brands include Actimel and Activia, said third-quarter sales reached 5.26 billion euros ($6.85 billion), with like-for-like sales growth at 5.0 percent, below a Reuters consensus of 5.7 percent.

Terisse said 2012 growth would still be within the forecast 5-7 percent, but probably at the lower end of that range.

By 0859 GMT, Danone shares were off 4.1 percent to 46.77 euros, leading French blue chip decliners .FCHI.

"It is becoming more evident that the fundamental/structural issues that Danone is facing in fresh dairy in Europe are more serious, and could take longer to repair, than previously believed," Sanford C. Bernstein analyst Andrew Wood said in a note

Danone reiterated that it expected its 2012 operating margin to decrease half a percentage point to 14.2 percent. Terisse told analysts it was "difficult to think the margin could be up next year."

DAIRY PAIN

In the dairy division, which accounts for about 60 percent of group sales and nearly 50 percent of profits, revenue growth slowed to 0.7 percent from 2.1 percent in the second quarter, mostly reflecting a 0.7 percent decline in volumes.

"Operations in Europe fell back more sharply this quarter as conditions deteriorated in southern Europe, particularly Spain and Italy, where sales declined by over 10 percent," it said.

In July, Danone warned its profits would be hit by a likely 5-10 percent fall in Spanish sales for the rest of the year.

Danone has started cutting prices to boost consumption in Spain, which accounts for 7 percent of group sales and 12 percent of profits - but where unemployment is 25 percent.

Sales in Latin America, Africa and the Middle East had good growth, while Russia and North America also continued to grow, meanwhile.

The group also said it expected to buy back 500-700 million euros worth of shares over the next four months.

Danone shares are little changed since the start of the year, underperforming the European sector .SX3P, which has gained 19 percent. ($1 = 0.7679 euro) (Reporting by Dominique Vidalon; Editing by James Regan and Robin Pomeroy)