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Danone says on track despite drop in baby food sales

By Dominique Vidalon

PARIS (Reuters) - Danone (PAR:BN) said it expects to meet group sales targets in the third quarter as well as growth and margin forecasts for 2013 despite a product recall in Asia having a "significant impact" on baby nutrition sales.

Sales of baby food, at 20 percent its No. 2 revenue contributor after dairy, will fall in this quarter, Danone said, after a food scare forced the recall of infant formula products in Asia, where it is trying to offset sluggish demand in Europe.

The world's No. 1 yoghurt maker is expanding in fast-growing markets in Asia, notably China, where previous food-safety scares have boosted demand for foreign baby milk formula.

On Thursday, Danone's Nutricia unit said it was considering legal action against New Zealand's Fonterra (FSF.NZ) after incorrect tests by the maker of Karicare milk formula prompted a global food safety scare and a number of product recalls.

Danone had recalled selected infant formula products as a result of the Fonterra tests from New Zealand, Singapore, Malaysia, China, Hong Kong, Vietnam, Cambodia and Thailand as a precautionary measure. The warning was lifted on August 28.

In Paris, a Danone spokeswoman stressed that Fonterra, which supplies around 16 percent of the milk ingredients of Danone's baby food division, remained an "important" supplier.

Danone's recent woes in China include being one of six companies fined a combined $110 million for price-fixing and anti-competitive behaviour this month.

"I just observe that their China baby milk business is not doing much to help Danone out of their problems. One minute it's going gangbusters and the next minute there's a pricing problem, then a food contamination problem," one analyst said.

Pierre-Andre Terisse, Danone's finance chief, said in a statement that action to restore sales in the affected markets would help it hit third-quarter organic sales growth of about 5 percent and its growth and margin targets for the full year.

Restoring sales and consumer trust would include communication campaigns but it was too early to detail the cost of the recall procedures and efforts to lift sales, Danone said.

By 1328 GMT, Danone shares were down 1.5 percent, underperforming the European sector (.SX3P).

Natixis analyst Pierre Tegner, who forecasts sales growth of 5.8 percent for the third quarter, said the statement was a "warning" which challenged the "premium the stock has built in recent months".

Danone shares have gained 14.7 percent this year compared with 4 percent for the regional food and beverages sector.

(This story corrects seventh paragraph to show $110 million in fines relate to six companies, not only Danone)

(Additional reporting Martinne Geller in London and James Regan in Paris; Editing by Louise Ireland and David Goodman)