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Rise in Chinese births to 20-year high spawns Danone sales growth

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Danone underlined the growth in China's infant formula market, a key source of demand for dairy, as the group unveiled a bigger-than-expected rise in sales, sending its shares to a record high.

Danone stock touched an all-time high of E71.00 in early deals in Paris before easing back to E70.14 in afternoon trading, a gain of 1.1% on the day.

The rise followed the announcement by the French dairy-to-water group of sales growth of 4.7% to E5.54bn in the July-to-September quarter, on a like-for-like basis, above market expectations of a 2.8% rise, and well ahead of the 0.2% expansion reported for the April-to-June period.

Danone refined to "more than 12%", from a "double-digit growth", its forecast for earnings-per-share growth this year at constant exchange rates, despite restating an expectation of a "steep rise in milk prices".

Milk prices were seen rising at a "mid to high-single digit" percentage rate in Europe and the US, and at a "strong" rate in emerging markets such as the former Soviet Union and Latin America.

'Births at 20-year high'

The forecast-beating performance in the latest quarter was led by the specialised nutrition division, which produces the likes of medically-designed foods and infant formula, and which lifted sales by 17.8%, with growth coming half from increased sales volumes and half from raised prices.

Infant formula products proved especially strong, growing by more than 20%, with sales in China soaring by more than 50%, as a drive by Danone to improve its retail and online marketing added to the boost of underlying market growth.

In fact, China's infant formula market, responsible for about 40% of the global total, had accelerated growth to 10% so far this year, from 1% over 2016, Danone said, citing too research from Euromonitor.

China's infant formula market growth "has accelerated, helped by rising birth rates", Danone said.

Cecile Cabanis, the Danone finance director, flagged "strong fundamentals, which includes supportive demographics, with the number of births [reaching a] a 20-year high, but also a secular trend like continued affluence, middle class and urbanisation".

'Will trigger a restocking'

The comments come a key time for China's infant formula market, which is a huge consumer of dairy products, largely imported from countries such as New Zealand.

However, this source of demand has been undermined by the knock-on effects of a registration drive by the China Food and Drug Administration, following food safety scandals, which has prompted significant destocking over fears that some brands may not be cleared by the regulator.

Rabobank noted two weeks ago that infant formula sellers in China were "finally receiving some clarity, with the Chinese steadily announcing approved brands and formulas since the start of August.

"Distributors have been maintaining lower inventory levels to mitigate risk from the pending product registration, but approval announcements will trigger a restocking of successful brands."

Ms Cabanis said that all of the infant formula brands Danone intended to use in China had been cleared by officials.

Brazil slide

Danone's strong growth in China's infant formula market contrasted with a weak performance in Brazil, where the group reported a "double-digit fall in sales", attributed to "very sluggish consumer demand".

Ms Cabanis said that "the market remains very fragile, declining by more than 15% in volume, in this country, affected by both inflation and devaluation.

"What is important in order to turn around the business, is really to readdress the totality of our portfolio in terms of price positioning, in terms of making sure that we are aligned with the new reality of the consumer of today in Brazil," with distribution being reviewed too.

By Mike Verdin

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