UPDATE 3-Strong demand for baby food in China lifts Danone sales

Tue Apr 16, 2013 8:36am EDT

* Q1 sales 5.34 bln euros, up 5.6 pct like-for-like

* Sees no improvement in European dairy before H2

* Keeps 2013 target of sales growth of at least 5 pct

* Shares up 3.5 pct, hit highest level since early 2008 (Adds CFO comments, updates shares)

By Dominique Vidalon

PARIS, April 16 (Reuters) - Danone reported strong first quarter sales growth on Tuesday, supported by a boom in demand for baby food in Asia, particularly in China, which made up for weakness in southern Europe.

The world's largest yoghurt maker, with brands such as Actimel and Activia, is the most exposed among big food groups to the euro zone crisis. The jump in Danone's baby food sales in Asia provides more evidence of how emerging markets are helping big food firms to offset a consumer spending squeeze in Europe.

Danone, which competes with Nestle and Unilever , achieved like-for-like sales growth of 5.6 percent in the quarter, beating a forecast of 4.2 percent based on a company-compiled average of analysts' estimates.

At the baby food division, which makes up 22 percent of group revenue, sales growth was 17.1 percent.

The company said the jump in sales in China was due partly to the New Year's celebrations, which started in February, one month later than in 2012. The Chinese stocked up on baby food in January prior to the holiday when most stores are closed.

Finance chief Pierre Andre Terisse said the company planned to beef up its baby nutrition activities in Asia.

"Demand is strong," he said. "We have to address that demand and we need to build a portfolio as strong as possible."

The robust first quarter sales helped push Danone's shares up sharply. By 0950 GMT, they were 3.25 percent higher, leading gainers on the CAC-40 index of French blue-chips. The stock touched 56.67 euros, its highest level since early 2008.

The shares trade at 17.4 times estimated 2013 earnings, at a discount to Unilever's 18.9 times and Nestle's 18.4 times.

The company is under pressure from U.S. activist shareholder Nelson Peltz to improve its performance.

WEAK DAIRY

Danone was cautious about prospects for a recovery in Europe. Terisse said dairy sales in Europe would not improve before the second half when new product launches and price cuts in countries such as Spain would kick in.

He said there were some reassuring signs in southern Europe as dairy volumes in Portugal had returned to growth and market share had stabilised in Spain in terms of value from the fourth quarter.

"Q1 sales remain fragile, particularly on dairy products," CM-CIC Securities analyst Francis Pretre said in a note. "Baby food saved the quarter. We remain very cautious about the recovery expected by the management from H2 and particularly for 2014."

Danone has said it will cut around 900 jobs to cope with the downturn in southern Europe that is hurting its core dairy business.

It is also focusing on product innovation, such as improving recipes or launching new packaging such as the Ecolean light-weight milk pouch in Portugal, to justify the premium its dairy products command over private labels.

At Danone's dairy division, which makes up nearly 60 percent of revenue, sales grew 0.7 percent in the quarter, a slowdown from 1.3 percent growth in the fourth quarter of 2012.

This reflected a 0.5 rise in sales volumes and one less day in the quarter when compared with the year-earlier period. Conditions in Europe, where sales fell 5.1 percent, remained difficult in the quarter, with trends similar to the fourth.

This included the effects of price cuts and promotions to cope with falling demand, notably in Spain.

Total sales, which include the effects of foreign exchange fluctuations, reached 5.34 billion euros ($6.99 billion), a reported rise of 4.3 percent.

Danone kept its 2013 target for like-for-like sales growth of at least 5 percent and for a decline of between 30 and 50 basis points in operating margin. It also reiterated it aimed to return to strong, profitable organic growth next year.

The company, whose global brands also include Bledina baby food and Evian and Volvic waters, kicks off the reporting season for European food manufacturers, with Nestle reporting on April 18 and Unilever on April 25.

Trian Fund Management, Peltz's U.S. investment firm owning 1 percent of Danone, could not be immediately reached for comment. ($1 = 0.7643 euros) (Editing by David Holmes and Jane Merriman)

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