UPDATE 2-Danone says European dairy recovery to feed profit momentum

Thu Feb 20, 2014 8:32am EST

* Q4 like-for-like baby food sales decline slows to 6.9 pct

* Eyes 2014 like-for-like sales growth of 4.5-5.5 pct

* Sees stable operating margin plus or minus 0.2 pct

* Asia infant formula inventories back to normal levels -CFO (Adds details from CEO call, analysts)

By Dominique Vidalon

PARIS, Feb 20 (Reuters) - French food group Danone said group sales growth would accelerate in 2014 as a recovery in European dairy gathers momentum and that it aimed to return to strong profitable growth from the second half of the year.

The world's largest yoghurt maker also said it was confident about prospects in China despite accusations there of bribery and overpricing, and it hopes to rebuild its baby food business in Asia after an infant formula recall dented profits.

To reduce its dependence on lower-growth Europe, Danone has been expanding in emerging markets, notably in China, where previous food-safety scares have boosted demand for foreign baby milk formula. China now accounts for 20 percent of its baby food sales, making it the No. 2 contributor after dairy.

"Our priorities for 2014 are to continue the recovery in Europe, aiming to stabilise the top line of dairy products in Europe, expand in emerging markets and rebuild positions in baby food in Asia," Chief Financial Officer Pierre-Andre Terisse told a conference call with journalists.

For this year, Danone set a goal of underlying sales growth of 4.5 percent to 5.5 percent. It also said its 2014 operating margin would be stable within a range of 20 basis points lower to 20 basis points higher.

"Danone's reporting/guidance was slightly disappointing but it was not a disaster which, after a couple of years of more significant disappointments, is probably good news for Danone," Bernstein analyst Andrew Wood said.

By 1243 GMT Danone shares were up 1.7 percent, among the top gainers on the CAC-40 index of French blue chips.

GRADUAL CHINA RECOVERY

China contributes six percent of group sales but the maker of Bledina baby food, Evian and Volvic water and Activia and Actimel yoghurt faced a variety of problems there last year.

In July 2013 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 a health scare that began with concerns raised by New Zealand-based supplier Fonterra. A bacteria found by Fonterra turned out to be less harmful than feared. Danone is now suing the company for unspecified compensation.

Danone said on Thursday the recall in Asia cost the group 370 million euros in lost sales last year and shaved 26 basis points from its operating profit margin.

In the fourth quarter alone the recall cut 200 million euros ($275 million) off the baby food division's sales.

Danone said that baby food sales fell 6.9 percent in the fourth quarter after falling 8.6 percent in the third quarter. This compared with analysts' average forecast for an 8.7 percent decline in a company-compiled consensus.

Infant formula inventories were however now back to normal and recovery plans to get sales back on track were being deployed in the countries affected and had some impact with the pace of recovery varying from market to market.

Chairman and Chief Executive Franck Riboud told analysts, "The fundamentals of China are still good. Families are still looking for the best products for their child... We can even look to upgrade our product range in China."

In China and in Australia New Zealand, the trend was very gradual, the statement said

Danone's market share in China, which had fallen to 12 percent in October 2013 after the Fonterra recall from 19 percent in July 2013, was now at 14 percent.

Last week Danone said it was spending 486 million euros to lift its stake in China's top dairy firm, aiming to tap into booming local demand and secure greater control over supply quality in a region often hit by food safety scares.

"We will not have the time nor the money to fight alone in China. I think it is a really good idea to link with local players," Riboud said.

SILENT ON MEDICAL NUTRITION

Danone said on Thursday that its 2013 operating margin fell by 81 basis points to 13.19 percent in 2013, in line with a company-compiled consensus of analysts.

Lower sales in Europe combined with a higher-than-expected rise in milk and dairy ingredient prices hit margins, it said.

Underlying sales stripping out acquisitions, divestments and currency effects grew 4.8 percent to 21.298 billion euros in 2013, above analysts estimates of 4.7 percent growth.

The drivers were the strong performance of the waters division and the robust performance of dairies. Dairy products account for 60 percent of group sales.

This was in line with Danone's 4.5-5 percent forecast range given in October and topped the 4.6 percent achieved by Swiss rival Nestle.

The Medical Nutrition business showed 6.4 percent growth in the fourth quarter after a 5.6 percent growth in the third.

Reuters reported last week that Danone was mulling its sale as it expands its dairy business in higher-growth emerging markets. Terisse declined to comment on Thursday. .

The stock trades at 17.57 times 12-month forward earnings, against 18.75 times for Nestle and 17.42 times for Unilever. ($1 = 0.7271 euros) (Editing by Louise Ireland)