RPT-UPDATE 3-Danone cuts 2013 goals on Asian infant formula recall

Wed Oct 16, 2013 7:16am EDT

(Repeats to fix formatting. No change to text.)

* Q3 like-for-like sales up 4.2 pct vs Rtrs poll avg 4.8 pct

* L-f-l baby food sales down 8.6 pct vs -3 pct f'cast

* Cuts 2013 sales, margin, cash flow goals

* No upturn seen in affected Asian markets before early 2014

* Shares down 4 pct, hit near eight-month low (Adds more CFO, analyst comments, detail, background, updates shares)

By Dominique Vidalon

PARIS, Oct 16 (Reuters) - French food group Danone said it was taking longer than expected to recover from an Asian recall of high-margin infant formula and cut its sales, profitability and free cash flow goals for 2013.

The world's largest yoghurt maker said on Wednesday the recall hit its baby food division more than anticipated in the third quarter and that sales in affected markets would not recover before early next year as inventories were still high.

"Our priority is to get back on track for strong and sustainable growth in this region (Asia) as early as possible in 2014," Chief Financial Officer Pierre-Andre Terisse told journalists.

Danone shares were down 3.9 percent at 1050 GMT, one of the biggest falls by a European blue-chip stock. The stock fell as low as 50.30 euros, its lowest in nearly eight months.

"Assuming the business is not partially or irreparably damaged by the scandal, which is still to be decided, it should rebound in 2014/2015 ... benefiting from an easy compare base," said Bernstein analyst Andrew Wood.

To counter weakness in Europe, the maker of Bledina baby food and Volvic water has been expanding in fast-growing markets in Asia, notably China, where previous food-safety scares have boosted demand for foreign baby milk formula.

China is an important market for Danone's baby food division, which accounts for 20 percent of group sales, making it the No. 2 contributor after dairy. But Danone has faced a variety of problems there this year.

In July it was hit by a fine and had to cut prices in China after a milk-powder price-fixing probe. Then in August it had to recall infant formula products in Asia due to an unfounded health scare stemming from New Zealand-based supplier Fonterra .

Most recently, two of its units - Dumex in baby food and Nutricia in medical nutrition - faced bribery allegations in China, which the units are investigating.

Danone said that as a result of the Fonterra recall its baby food sales fell 8.6 percent in the third quarter, reversing a 15.2 percent rise in the first half. This compares with analysts' average forecast for a 3 percent decline.

Danone has said it is seeking full compensation from Fonterra for damages caused by the recall and Terisse said that process was "continuing". He did not discuss the size of the compensation Danone was seeking.

LOST SALES

Danone said the Fonterra recall would cost it 350 million euros ($473 million) in lost 2013 sales, 280 million in lost margin and 300 million in lost cash.

"We are not yet seeing a recovery in our sales (in the affected markets)," Terisse said.

Sales to consumers in these markets last month represented only 40 percent of their pre-crisis level in July, he added.

Actions to drive up revenues in affected Asian regions included trying to reduce inventories which Danone hoped would be back to normalised levels by the end of 2013 and a communication campaign to reassure customers the brand was safe.

Terisse told analysts that while he did not expect the group's operating margin to decline next year, the first half of the year would see "pressure on top line and margins" while the second half would be "very strong for top line and margins".

"From the second half of 2014 we expect to be back to a strong sustainable growth model," he said.

Elsewhere, growth improved in the third quarter at Danone's core dairy division, while its water business benefited from a hot summer in Europe.

Danone said third-quarter group sales rose 4.2 percent on a like-for-like basis to 5.26 billion euros, a slowdown from 6.5 percent growth in the second quarter.

This was below the average estimate of 4.8 percent in a Reuters poll of six analysts and in the company-compiled consensus of analysts.

For 2013, Danone said it now expected 2013 like-for-like sales growth of between 4.5 percent and 5 percent. It previously eyed 2013 sales growth of at least 5 percent.

It also now expects its full-year operating margin to drop by 80 basis points against a decline of between 30 and 50 points previously. Free cash flow is seen at between 1.5 billion euros and 1.6 billion against an initial forecast of 2 billion.

($1 = 0.7406 euros) (Editing by Erica Billingham and Mark Potter)

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