×

UPDATE 2-China's appetite for baby food gives Danone a sales boost

* Q3 like-for-like sales up 4.7 pct vs estimate 2.8 pct

* Chinese Q3 lfl baby food sales up over 50 pct

* Expects 2017 recurring EPS growth to exceed 12 pct

* Shares rise to record highs (Recasts with CFO comments on China, shares, analyst comment)

PARIS, Oct 17 (Reuters) - Danone's sales of baby milk formula in China rose strongly in the third quarter which helped the French food company to beat forecasts, sending its shares to a record high.

Danone, facing fierce competition in the China baby food market from rivals Nestle and Reckitt Benckiser, said it was gaining market share in the country.

The company is also the latest consumer goods company to come under investor pressure to improve results and it needs to deliver on a profit margin target it recently set.

Danone's chairman Franck Riboud is to stand down and hand over to chief executive Emmanuel Faber, who will become both chairman and CEO, Le Monde reported on Tuesday. Danone declined to comment on the report.

In China, the world's largest market for infant milk formula, consumers are extremely quality conscious since a 2008 safety scandal killed several babies. Profit margins are high and Danone and its rivals are all trying to boost their market presence.

Nestle is the global market leader in infant formula, and new CEO Ulf Mark Schneider recently identified infant nutrition as one of the company's key focus areas. Reckitt Benckiser recently jumped into the business by buying Enfamil maker Mead Johnson.

Danone finance chief Cecile Cabanis said there was strong Chinese demand for Danone's high-end formula brands such as Aptamil and Nutrilon, and that it was also benefiting from its strategy of developing direct distribution.

Strong sales in China contributed to a 4.7 percent rise in underlying third-quarter like-for-like sales, far above analysts' average expectation of 2.8 percent, and the 0.2 percent growth it reported in the second quarter.

"Danone is successfully harnessing demand in e-commerce and specialised Mom & Baby store channels, possibly at the expense of Mead/Reckitt in this period, we think," Investec analysts said in a note.

Danone shares, which rose to a record-high of 71 euros, were up 0.40 percent by 0903 GMT.

"This is a good set of results, what we are not sure about is how sustainable it is," RBC Capital Markets analysts said in a note.

Danone has suffered slower growth than its rivals, which include Unilever, largely due to weakness in its dairy business in Europe which has had to contend with sluggish demand and private label competition.

Its dairy business was hit by a relatively unsuccessful Activia re-launch in Europe, while in China its baby food and waters businesses have had regulatory issues.

Sales at its 'Specialised Nutrition' business, which now includes baby food and medical nutrition products, rose 17.8 percent in the third quarter, accelerating from 5.5 percent in the second quarter.

The company said the growth reflected a more than 50 percent increase in demand for infant formula in China where the market was now growing by 10 percent.

This has been helped by a sharp rise in birth rates tied to the end of the one-child policy, growth of urbanisation and the affluent middle class. The performance was also helped by a favourable year-on-year comparison.

But Danone, also the world's largest yoghurt maker with brands Actimel and Activia, said challenging conditions had impacted its dairy business in recession-hit Brazil, where sales fell by a double-digit rate and Danone was currently restructuring its product portfolio.

The dairy business slightly improved in north America, where Danone is integrating the U.S. organic food group Whitewave it just acquired, though it said sales remained negative amid challenging market conditions. It was confident sales in the region would turn positive in the fourth quarter, Cabanis said.

Danone reiterated its full-year guidance and said it now expected 2017 recurring earnings per share growth to exceed 12 percent at constant exchange rates, having previously forecast double-digit growth.

Third-quarter sales reached 6.454 billion euros ($7.60 billion).

($1 = 0.8490 euros)

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