On the money: Danone downbeat on dairy in Europe

Danone has warned analysts the performance of its dairy division in parts of Europe will continue to be weak for the rest of the year amid challenging conditions on the continent.

The French food giant's fresh dairy volumes fell 0.1% in the first three months of 2012 amid "deteriorated conditions" in southern Europe.

The result continued a run of falling volumes from Danone's fresh dairy business, although quarter-on-quarter, the rate of decline slowed. In 2011, Danone's fresh dairy volumes fell 0.1% after a 1.7% drop in the fourth quarter of the year.

Sales revenues from Danone's fresh dairy unit increased 3.8% on a like-for-like basis in the first quarter of this year thanks to price increases and signs of recovery in the US and Russia. The figure came in ahead of analyst consensus.

However, Sanford Bernstein analyst Andrew Wood said the level of growth remained "subdued", even if it beat his forecasts.

Danone's baby food business grew in the UK, a market where its bottled water sales also increased. The company also saw a rise in bottled water sales in Germany.

However, speaking after Danone reported its first-quarter sales, CFO Pierre-André Terisse admitted the company's performance in Europe "looks a bit disappointing".

"There are basically two reasons, one is deep pressure in markets where spending is impacting our business, particularly in Spain, but this has had an impact overall in Europe," Terisse said.

He added: "I don't want to be too precise, but I think it is fair to assume that western Europe will continue being weak ... as we said at the beginning of the year, we are not expecting a collapse of Western Europe. Can it get worse? Yes. A little bit better? Probably as well, but we are assuming it is going to remain under pressure as it is today."

Despite the recent weak performance from the business, Terrise pointed to the attributes of Danone's fresh dairy unit in Europe.

"Given market conditions it is reasonable to invest behind brands. We have a tradition of very good quality [brands]. Western Europe is really the core of the business of Danone and to some extent is providing innovation and ideas for the rest of the group. There are lot of reasons to defend Western Europe and to keep it under control."

Terrise, meanwhile, pointed to Danone's struggles in Spain, adding that the country was facing "pressure" in all divisions.

"All four [Spanish] businesses are negative. It is definitely, more than anything else, a macro issue. The first element is additional tax pressure from the state ... we are seeing pensions being cut and other similar measures which are clearly not helping. The second point is that unemployment has been very high for several quarters now. There are things to be done in this country, it is clear that there is not going to be growth very soon but I think we have to keep going with innovation and when we find the right theme we can at least limit the negative impact."

Looking at other markets, Terrise was upbeat about the rest of the year pointing out growth areas for the group from the emerging markets, the US and Russia.

"Quarter one is basically confirmation of all of our assumptions," he told analysts. "Russia and the US are in the right trajectory. Emerging markets continue delivering a very steady performance. The geographic base of our growth is very much in line with that of the fourth quarter of last year."

Reflecting on the results as a whole, Wood said organic growth for Danone in the quarter was "strong" and ahead of expectations.

"In our view, investors are likely to view the Q1 results positively given improving trends in fresh dairy and continued strength in waters and baby nutrition, and we would expect a positive stock reaction to the results."

Danone shares were up 2.21% at EUR52.72 at 15:55 CET today.