July 25, 2019 / 6:27 AM / 2 months ago

UPDATE 2-Danone Q2 sales beat expectations as China baby food demand improves

* Shares rise

* Q2 sales up 2.5% l-f-l vs 2.2% expectations

* H1 operating margin 14.69% vs 14.27% in H1 2018

* China baby food back to growth faster than expected

* Danone keeps 2019 and 2020 goals, shares up 1.5 pct (Recasts with CFO call, shares, analyst)

By Dominique Vidalon

PARIS, July 25 (Reuters) - French food group Danone said sales growth accelerated in the second quarter, beating forecasts as baby food products sales in China rebounded earlier-than-expected, and affirmed its financial targets for 2019 and 2020.

Danone, which is the world’s largest yoghurt maker and has brands such as Actimel and Activia, also had higher than expected first-half operating profit.

China is an important region for Danone, contributing about 30% of sales to the ‘Early Life Nutrition’ (ELN) business, which makes infant formula and general baby food products.

Danone had been expecting the ELN business in China to return to growth in the second half of the year, having suffered a slump in the first quarter partly due to lower birth rates.

The group predicted that sales growth would continue to accelerate in the second half of the year.

“The first half results is a story of a strong level of execution that allowed us to drive profit growth and enables us to be on track with our roadmap,” said Chief Financial Officer Cecile Cabanis.

“We close the first-half completely in line with our expectations and enter the second-half with confidence,” she added.

Danone is targeting group like-for-like sales growth of around 3% and an operating margin above 15% for 2019, putting it on track for its 2020 goals of an operating margin above 16% and like-for-like sales growth of 4-5%.

Its shares rose 1.5% in early trading.

“We expect another year of solid progress towards the group’s trading margin and returns objectives despite the headwinds at Specialised Nutrition resulting from a contraction in China baby food,” wrote brokerage Liberum.

PREMIUM PRODUCTS

Sales of Danone’s ELN products in China were helped by a focus on more premium products, which more than offset a decline in volumes tied to a lower birth rate. Expansion toward lower-tier cities and an increase of sales via E-commerce also helped.

The recovery in China followed declines of 15% in the first quarter of 2019 and 10% in the fourth quarter of 2018.

Cabanis said the business in China should be back to strong growth in the second half.

First-half operating profit reached 1.858 billion euros ($2.1 billion), marking a like-for-like rise of 6.4%, slightly above a company-compiled analyst forecast for 1.847 billion.

This translated into a margin of 14.69% of sales against 14.27% a year-ago.

Second-quarter like-for-like sales, rose 2.5% - also above analysts’ expectations for 2.2% growth.

This marked an acceleration from 0.8% growth in the first quarter when sales were hit by the weaker demand for infant formula products in China and a consumer boycott in Morocco.

Danone’s ‘Essential Dairy & Plant’-based division reported sales growth of 2.2%, with a stabilisation of dairy activities and high-single digit growth in the plant-based business. Overall the division is expected to grow sales by around 3% in the second half.

Europe delivered slightly positive growth as France and Spain stabilised for the first time in the last seven years.

Morocco also posted dairy sales growth of around 10% as its Centrale Danone unit won back market share following the consumer boycott. Cabanis said sales in Morocco should continue to grow around 10% for the rest of the year.

$1 = 0.8981 euros Reporting by Dominique Vidalon; Editing by Sudip Kar-Gupta and Emelia Sithole-Matarise

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