Danone Yogurt Business Gains Ground, Boosting Sales Growth

(Bloomberg) -- Danone’s long-suffering yogurt business is finally showing signs of a turnaround.

The Paris-based company’s revenue climbed 4.9 percent on a like-for-like basis in the first three months, the fastest first-quarter growth in five years and above analyst expectations. The gains were bolstered by an improvement in Danone’s dairy arm, which has been a drag on growth as infant-formula sales raced ahead. The shares rose as much as 3.8 percent.

The company’s essential dairy and plant-based unit outside North America returned to growth as a revamp of its Activia line showed its first results. In Europe, the business is still in decline, though it’s getting better, Chief Financial Officer Cecile Cabanis said.

“We’re seeing consistent sequential progress in Europe,” she told reporters on a call. “This year we confirm the stabilization of this part of the business and region.”

In China, infant-formula sales surged more than 50 percent. Demand has been ramping up amid higher birth rates and a growing middle class looking for foreign-made products. Danone is still benefiting from the peak of births in 2016, though that will slow down throughout the year as market demand normalizes, especially in the second half, Cabanis said.

“The dairy and plant-based business is gradually improving just as baby-food growth is expected to slow,” said Alain Oberhuber, an analyst at MainFirst Bank AG. “If dairy continues to go well in Europe and North America, it could help offset that slowdown.”

In addition to the revenue growth, volume gained 1.1 percent in the quarter, beating estimates that called for a decline. The performance gives Danone a boost after the company was said to have been targeted last year by activist fund Corvex Management.

Danone turned in “a very positive set of figures driven by its peerless position in China infant nutrition,” said Jon Cox, an analyst at Kepler Cheuvreux.

WhiteWave Deal

The company acquired soy-milk maker WhiteWave for $10 billion last year in an effort to branch out into faster-growing organic food and drinks after years of weakness in Danone’s largest business line, yogurt and fresh dairy.

Cabanis said the company may look at strategic options for the struggling fresh-food business it acquired in the WhiteWave deal, adding that its priority is a revamp of the unit. While fresh food has strategic value, the company would consider whether it’s the best operator of the unit, she said.

“We felt that there was the clearest hint yet that Earthbound Foods from WhiteWave could be sold,” Warren Ackerman, an analyst at Societe Generale, wrote in a note. He added it’s probably losing money and that Danone’s short-term focus is to rebuild profitability.

Danone sold about two-thirds of its stake in Japan’s Yakult for about $1.6 billion last month and will use the proceeds to reduce its debt ratio and invest to accelerate organic growth. The company reiterated its forecast for earnings per share to rise at a double-digit pace at constant currencies this year.

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