Danone Organic Sales Growth Lowest Since `09 on Baby Milk

Danone (BN) cut its full-year forecasts after posting the slowest quarterly sales growth since 2009 as a product-safety scare exacerbated regulatory problems in China.

Like-for-like sales gained 4.2 percent from a year earlier, the Paris-based owner of Activia yogurt said in a statement, missing the median of 15 analysts’ estimates of 4.8 percent. Baby-nutrition sales dropped 8.6 percent by that measure.

Danone shares fell as much as 5.2 percent, the most in about a year, after the company also lowered its forecast for organic sales growth to 4.5 percent to 5 percent, from at least 5 percent previously. Baby-nutrition sales, representing about 20 percent of revenue, were hurt by a recall of infant formula in eight markets that subsequently proved to be a false alarm.

“While we expected that Danone would warn before February, we didn’t expect it now,” Jeff Stent, an analyst at Exane BNP Paribas, said in an e-mailed statement. “But I guess better to get real sooner rather than later.”

Danone slumped as much as 2.74 euros to 50.30 euros in Paris trading and was down 4.4 percent as of 9:10 a.m.

“Our priority is to get back on track for strong and sustainable growth in this region as early as possible in 2014,” Chief Executive Officer Franck Riboud said in the statement.

The maker of Evian bottled-water is claiming at least 200 million euros ($272 million) in compensation from Fonterra Cooperative Group Ltd. after a warning of tainted ingredients in some products supplied by the New Zealand-based company.

Growth Priority

Baby-food sales to consumers in September represented 40 percent of the July level in the eight markets affected by the Fonterra recalls, Chief Financial Officer Pierre-Andre Terisse said on a conference call today. Danone’s priorities are diminishing high levels of stock, “continuing to reassure consumers” and improve Danone brands’ positioning.

Terisse said the recalls hit growth by 3.2 percentage points in the third quarter and will have an impact of about 3 percentage points in final three months of 2013 for those products. He estimates an impact of 1.5 percentage points for the full year. Operational costs of recalls, margin losses and action plans to revive sales will amount 280 million euros this year, he estimates.

Danone also narrowed its 2013 trading operating-margin forecast today, saying it now sees a level 80 basis points below last year, compared with a previous range of 30 basis points to 50 basis points lower.

China Prices

Third-quarter sales were little changed at 5.26 billion euros, missing the 5.4 billion-euro average estimate of 13 analysts compiled by Bloomberg. Danone cut its full-year forecast for free cashflow to 1.5 billion euros to 1.6 billion euros, excluding exceptional items, from previously around 2 billion euros.

In July, Danone said it would reduce prices for its main infant-formula products in China by as much as 20 percent after local government started a price-fixing probe.

Danone has also had to deal with bribery claims at its Dumex baby-milk business in China. The unit paid medical workers in the northern city of Tianjin to promote its infant formula, local government said on Oct. 14. An official investigation found that health-care staff had accepted payments from the French formula maker, prompting Dumex to take disciplinary measures and strengthen governance in China.

Danone’s Asian baby-nutrition troubles were offset by like-for-like growth of 17 percent at the company’s water business, amid demand in emerging markets and favorable weather in Europe, and 4.6 percent like-for-like growth at its dairy unit as people ate more Oikos Greek yogurt in the U.S. and the market started to stabilize in southern Europe.

Danone shares fell 0.8 percent in Paris yesterday, giving the company a market value of 33.5 billion euros.

Organic sales growth is adjusted for acquisitions, divestments and currency swings.

(Source: Bloomberg)