October 18, 2016 / 7:00 AM / a year ago

Danone reassures on margin as China challenges weigh on sales

PARIS (Reuters) - French food group Danone (DANO.PA) reported a worse than expected slowdown in quarterly sales growth on Tuesday as difficulties in China hurt its baby food and water divisions.

The world’s largest yogurt maker reaffirmed full-year guidance, however, and its finance chief said that margin growth would be at the high end of the forecast range.

Danone, which relaunched its key Activia yogurt brand last month, also declared confidence in its ability to stabilize dairy sales in Europe this year and that its medical nutrition business is performing well.

“Even if the China transition weighs on the growth of the quarter, the rest of our platforms continue to feed solid growth, fully in line with our agenda,” Chief Financial Officer Cecile Cabanis said on a conference call.

Emmanuel Faber, who took over as CEO in October 2014, has vowed to return the French company to “strong profitable and sustainable growth” by 2020, reviewing its business in China and overhauling its dairy division, where it has cut costs and launched new products.

“We are in an environment that remains uncertain, with a lasting transition in China. We are not looking for short-term growth at any price. We look to strengthen our model and increase our margin before we re-accelerate growth,” CFO Cabanis said.


For 2016, Danone is targeting like-for-like sales growth of 3-5 percent and a rise in operating margin of 50-60 basis points from 12.91 percent in 2015.

Cabanis told analysts that Danone would be “in the lower end of the range for its top line (revenue) and at the high end for margin”.

Shares in the company were up 0.3 percent at 64 euros by 0951 GMT (0551 EDT), reversing opening losses of more than 2 percent.

Bryan Garnier analyst Virginie Roumage said the margin comment was driving the bounce.

Danone reported third-quarter sales of 5.54 billion euros ($6.2 billion), with like-for-like growth of 2.1 percent. That was below the 4.1 percent in the second quarter and the 2.2 percent average of analyst estimates compiled by the company.

    Baby food sales rose 1.7 percent on a like-for-like basis, sharply lower than the previous quarter’s 7.2 percent growth.

    Danone had flagged in July that indirect European demand from Chinese consumers buying baby formula online was declining because of changes in the Chinese regulatory environment.

    These indirect sales, which represent 50 percent of Danone’s baby food business in China, fell 25 percent in the quarter.

    Danone said the decline would continue in coming quarters and that it will strive to build up direct distribution in China, where slowing consumption also hit sales in its waters division.

    Overall like-for-like sales income from dairy products, which make up the bulk of Danone’s business, rose 2.2 percent, with a 4.5 percent rise in prices offsetting a 2.3 percent decline in volumes.

    ($1 = 0.8928 euros)

    Additional reporting by Noele Mennella; Editing by Mark Potter and David Goodman

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