REFILE-UPDATE 2-Higher milk prices dampen sales growth at Danone

Wed Apr 16, 2014 1:28pm EDT

(Refiled to correct spelling of 'dampen' in headline)

* Q1 sales 5.061 bln euros, up 2.2 pct like-for-like

* Q1 baby food sales down 7.7 pct vs forecast 9 pct decline

* Maintains like-for-like sales growth forecast of 4.5-5.5 percent

* Shares down 0.5 pct

By Dominique Vidalon

PARIS, April 16 (Reuters) - French food group Danone reported a slowdown in first-quarter sales growth on Wednesday, as sales volumes at its core dairy division were hit by the company passing on higher milk prices and sales in the baby food business also fell, though less sharply than feared.

However, the group maintained its forecasts of like-for-like sales growth this year of 4.5-5.5 percent and an operating margin changing by no more than 0.2 percentage points either way, from 13.19 percent of sales last year, as it was aiming for a return to "strong, sustainable, profitable growth" in the second half.

The world's largest yoghurt maker, whose brands include Actimel and Activia, makes 60 percent of its revenue in dairy, a sector hit by a spike in milk prices.

Danone is also currently trying to rebuild its positions in the high-margin baby food division in China after an infant formula product recall in Asia last year hit sales.

Like-for-like group sales adjusted for currency effects and acquisitions rose 2.2 percent in the first quarter on the same period last year, a slowdown from 2.9 percent growth in the fourth quarter of 2013, Danone said.

HIGHER MILK PRICES

The dairy division posted sales growth of 3.9 percent, which was a slowdown from 4.9 percent in the fourth quarter.

This reflected a 3.7 percent fall in sales volumes offset by a 7.6 percent rise in prices. The volume decline came from price increases that started in the second half of 2013 in response to higher than expected milk prices, particularly in Russia.

Political unrest in Ukraine also hit revenues, although Ukrainian sales represent only 5 percent of CIS regional sales, Chief Financial Officer Pierre-Andre Terisse said.

Elsewhere in Europe, dairy volumes also fell as Danone passed onto customers rising milk prices in some countries but it still aims to stabilise volumes by year-end, Terisse said.

Overall, dairy volumes were expected to continue falling in the coming months though they could start rising in the third and fourth quarter, he said.

CHINESE RE-LAUNCH

China contributes 6 percent of group sales but the maker of Bledina baby food and Evian and Volvic water as well as yoghurts faced a variety of problems there last year.

In August it had to recall infant formula products 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 and Danone is now suing the company for unspecified compensation.

Danone said on Wednesday that baby food sales fell 7.7 percent in the first quarter, which follows a 6.9 percent decline in the fourth quarter of 2013.

However, this was better than the 9 percent decline feared by analysts, according to a company-compiled survey of market forecasts.

In China and New Zealand sales were now back to 30 percent of their pre-crisis levels and were close to their pre-crisis levels in Hong-Kong and Thailand.

In China Danone had now re-launched the Dumex standard infant formula band at a discount to reach more customers. It has also launched an ultra-premium brand under the name Nutrilon Platinum, and in mid-April Dumex International, a range made in Europe specifically for the Chinese market.

"We are seeing some impact from the launch of these products. It's coming progressively," Terisse said.

Shares in Danone were down 0.5 percent at 52.98 euros by 1247 GMT, when the Stoxx Europe 600 food and beverage sector index was down 0.1 percent.

"Danone could move to being the fastest growth big-cap consumer company from H2 2014, but for now is somewhat of a gamble based upon the success of the Chinese infant formula relaunch, which has little visibility thus far," said Jefferies analysts in a note, keeping a "hold" rating on the stock.

Danone shares, which have gained 1.8 percent so far this year, are trading at around 18.80 times forecast earnings, in line with Nestle and slightly below the 19.02 times for Unilever, according to Thomson Reuters data.

Elsewhere in the group, sales at the water division rose 8.9 percent in the first three months of 2014, driven by robust demand in emerging markets and up on the 8.1 percent growth in the previous quarter.

In February it was reported that Danone was considering selling its Medical Nutrition business - which makes feeding tubes and foods and beverages for people with special nutritional needs - even though it has a profit margin above the group average.

Danone has so far declined to comment.

The business posted like-for-like sales growth of 5.2 percent in the first quarter against 6.4 percent growth in the fourth quarter. ($1=0.7234 euros) (Reporting by Dominique Vidalon; Editing by David Goodman and Greg Mahlich)