UPDATE 2-Danone sees signs of improvement in Europe

Mon Jul 29, 2013 7:11am EDT

* H1 operating margin 13.34 pct vs 13.85 pct in H1 2012

* Q2 like-for-like sales up 6.5 pct vs 5.7 pct consensus

* Keeps 2013 profitability and sales goals (Recasts with CFO call, share reaction, analysts)

By Dominique Vidalon

PARIS, July 29 (Reuters) - French food group Danone posted better than expected sales growth in the second quarter, helped by an improvement at its core dairy business in recession-hit Europe, sending its shares up 3 percent.

The world's largest yoghurt maker kept its full-year forecast for higher sales but weaker profitability as it tries to offset sluggish demand in Europe by expanding in fast-growing emerging markets in Asia and Latin America.

Danone, the maker of Bledina baby food and Volvic water, achieved like-for-like quarterly sales growth of 6.5 percent, above a 5.7 percent average analyst estimate compiled by the company and 5.6 percent growth achieved in the first quarter.

Its operating margin was pulled lower, as expected, by the ongoing weak demand from European consumers and charges for cost cuts in the region - narrowing in the first half by 49 basis points to 13.34 percent.

"The sales beat is encouraging and the company keeping guidance means EBIT margin trends will either stay the same or improve in the second half," said Liberum analyst Pablo Zuanic.

The company maintained its full-year goal for like-for-like sales growth of at least 5 percent and a decline of between 30 and 50 basis points in the operating margin.

Danone, which competes with Nestle and Unilever , is the most exposed among the big food groups to the euro zone crisis and is under pressure from U.S. activist shareholder Nelson Peltz to improve its performance.

That pressure rose by a notch last month when Danone said it had cut prices of baby milk formula in China by up to 20 percent following an investigation by Beijing into possible price-fixing and anti-competitive behaviour in the sector.

The move fuelled fears among some investors that Danone could reduce its profit outlook for the year, concerns the company sought to allay on Monday.

"Price reduction in China will have an impact but a manageable impact. Long term, we see China and Asia as strong growth profiles but we are prepared for ups and downs. We are managing it," Finance Chief Pierre-Andre Terisse told analysts.

EUROPE OPTIMISM

Danone shares were up 3.1 percent at 59.22 euros, among the top gainers on the CAC-40 index of French blue chips

The stock trades at 17.93 times 12-month forward earnings, broadly in line with Unilever's 17.77 times and above Nestle's 16.97 times.

At Danone's dairy division, which includes brands such as Actimel and Activia and makes up nearly 60 percent of revenue, sales grew 2.6 percent in the second quarter, an acceleration from 0.7 percent growth in the first quarter.

Danone said that reflected double-digit sales growth in Russia and North America but also early signs of stabilisation in Europe.

The company has been cautious about prospects for a recovery in the region. It said dairy sales in Europe would not improve before the second half, when new product launches and price cuts in countries such as Spain kick in.

"Our first goal is to stabilise the business and start growing again. Overall for the second half I would not expect to grow business but to stabilise sequentially," Terisse said.

At the baby food division, which makes up 22 percent of Danone's revenue, sales growth was 14 percent, driven by strong sales in Asia-Pacific, notably in China and Hong Kong.

First-half operating profit rose 2.3 percent to 1.475 billion euros ($1.96 billion) on a like-for-like basis, while sales rose 6.0 percent to 11.058 billion euros.

A Thomson Reuters I/B/E/S poll of analysts had given an average estimate of sales of 11.041 billion euros and operating profit of 1.480 billion euros.

Danone, which has unveiled plans to cut costs to cope with the downturn in Southern Europe, said it still aimed to return to "strong, profitable" organic growth from 2014. ($1 = 0.7539 euros) (Editing by Christian Plumb and Tom Pfeiffer)

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