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Danone cuts 2013 goals as China woes hit third-quarter sales

Yoghurt produced by French Dairy Group Danone are displayed on a shelf in a supermarket in Lanton, Southwestern France, August 30, 2013. REUTERS/Regis Duvignau

By Dominique Vidalon

PARIS (Reuters) - Danone (PAR:BN) said on Wednesday that an Asian recall of infant formula had a worse-than-expected impact on its high-margin baby food division in the third quarter and that sales in affected markets would not recover before early next year.

The world's largest yoghurt maker said it was cutting its sales, profitability and free cash flow goals for 2013.

"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 around 5 percent in early trading, the second-biggest losers in the French blue-chip CAC 40 index (.FCHI). The stock fell as low as 50.30 euros, its lowest in nearly eight months.

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 in China 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 (FSF.NZ).

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 an average market expectation for a 3 percent decline.


Danone said the Fonterra recall would cost it 350 million euros (295 million pounds) 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 said.

Elsewhere, growth improved in the 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 like-for-like 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.

In the dairy division, which accounts for about 60 percent of group sales, revenue growth was 4.6 against 2.6 percent in the second quarter, reflecting double-digit growth in Russia and North America and signs of stabilisation in southern Europe, where new product launches and price cuts in countries such as Spain and Portugal are starting to kick in.

At the waters division, sales grew 16.9 percent, helped by the robust performance of "aquadrinks" in emerging markets and hot summer weather in Europe.

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 decrease by 80 basis points against a previous forecast of a decline of between 30 and 50 points. Free cash flow is seen at between 1.5 billion euros and 1.6 billion against an initial forecast of 2 billion.

Before the latest drop, Danone shares traded at around 16.9 times 12-month forward earnings against 17.8 for Nestle (NESN.VX) and 17.1 for Unilever (ULVR.L) (UNc.AS), according to Reuters data.

($1 = 0.7406 euros)

(Editing by David Holmes and Erica Billingham)