Food group Danone targets cost cuts amid pressures at dairy arm and China

By Dominique Vidalon

PARIS (Reuters) - Food group Danone (DANO.PA) unveiled a 1 billion euros (848.62 million pounds) cost cutting plan over three years, saying the turnaround of its European dairy division was taking longer than expected while tough conditions in China would endure in 2017.

The world's largest yoghurt maker said that in an economic environment that would stay volatile this year, it had decided to review its costs and re-invest savings to fuel future growth.

"It consists in spending better, buying better and reinvesting part of these savings in growth initiatives to achieve our 2020 profitable growth ambition," chief financial officer Cecile Cabanis told a conference call with journalists.

Danone was cautious about 2017.

It did not provide sales or operating profit margin growth targets, saying it would review its financial goals for 2017 after closing its acquisition of U.S. organic food group WhiteWave, which is slated for the first quarter.

It had targeted 2017 recurring earnings per share growth of above 5 percent on a like for like basis, excluding elements related to WhiteWave. It achieved EPS growth of 9.3 percent in 2016.

Emmanuel Faber, who took over as CEO in October 2014, has vowed to return Danone to "strong profitable and sustainable growth" by 2020. He is reviewing its business in China and overhauling its dairy division, where it has cut costs and launched new products.

The company is in the process of completing the purchase of WhiteWave Foods Co (WWAV.N) for $10.4 billion, a move that it should double the size of its U.S. business.

Danone, which makes Activia yoghurt, Evian water and Bledina babyfood, said like-for-like sales in 2016 rose 2.9 percent to 21.94 billion euros ($23.22 billion), in line with analysts' expectations of 2.9 percent growth for 2016, which was a slowdown from 4.4 percent growth in 2015.

The slowdown reflected tough market conditions in Spain and problems with the relaunch of its Activia brand in Europe, which held back dairy sales growth in the final quarter, while pressures in the Chinese market weighed on baby food sales.

Danone had flagged the European dairy problem in December, warning its 2016 sales growth would come below its original target of 3-5 percent.

Its operating margin rose by 70 basis points to 13.77 percent, in line with analysts' expectations of 13.71 percent.

Sales volumes in Danone's fresh dairy business were down 2.6 percent in full year 2016. Activia, one of its key brands, has faced increasing competition and had to drop some claims about the health benefits of its yogurts after these were challenged.

Baby food sales rose 0.6 percent on a like-for-like basis in the fourth quarter, slowing from 1.7 percent growth in the third quarter, which Danone blamed partly on pressures in China.

($1 = 0.9451 euros)

(Reporting by Dominique Vidalon; Editing by Sudip Kar-Gupta)