China challenges weigh on Danone third-quarter sales

By Dominique Vidalon

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

The world's largest yoghurt maker kept its full-year guidance, however, and said it was confident about its goal to stabilise dairy sales in Europe, while adding its medical nutrition business was strong.

"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 told a call with journalists.

"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," she added.

Danone said third-quarter sales reached 5.54 billion euros (5.06 billion pounds), with like-for-like growth of 2.1 percent against 4.1 percent in the second quarter.

The performance came below the company-compiled average of analyst estimates of 2.2 percent growth in group sales.

Baby food sales rose 1.7 percent like-for-like, a sharp slowdown from second quarter's 7.2 percent growth.

In July, Danone had flagged that in Europe indirect demand from Chinese consumers buying baby formula online was declining due to changes in the Chinese regulatory environment.

"The impact of the indirect channel transition will continue until the new regulations are fully enforced," Danone said.

Danone also said slowing consumption in China hit sales in its waters division, which fell in the quarter.

Sales of its Mizone drink continued to suffer from high year-go comparables while floods also created some disruption.

Overall like-for-like sales of dairy, which make up the bulk of Danone's business, rose 2.2 percent, as a 4.5 percent rise in prices offset a 2.3 percent decline in volumes.

"We remain confident on our ability to sequentially improve and stabilise dairy sales in Europe in line with our target," Cabanis said

For 2016, Danone kept its targets of 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

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.

(Reporting by Dominique Vidalon; Editing by Mathieu Rosemain and Mark Potter)