February 26, 2020 / 7:51 AM / a month ago

UPDATE 2-Danone warns China earnings set for virus hit

* Lowers 2020 sales growth outlook to 2-4% from 4-5%

* Q4 like-for-like sales up 4.1%

* 2019 sales growth slows to 2.6%

* Water brand relaunch in China delayed

* Shares flat, outlook downgrade had been widely expected (Adds CEO and CFO call, shares)

By Dominique Vidalon

PARIS, Feb 26 (Reuters) - Danone on Wednesday warned the coronavirus outbreak would hurt its 2020 earnings and mean a 100 million euro ($109 million) hit to first-quarter sales, mainly in its Mizone water business in China.

Danone generates about 30% of its Early Life Nutrition infant formula sales in China and 10% of its overall sales.

Danone lowered its 2020 like-for-like sales growth target to 2-4% from 4-5% and its operating margin to above 15% from above 16%.

The French firm’s shares were flat following the profit warning, which analysts had been prepared for.

“We start this year under the uncertain clouds of the coronavirus,” CEO Emmanuel Faber said.

Production at its Mizone water plants in China resumed on Feb. 17 with the exception of its factory in Wuhan where the virus first appeared.

A re-launch of the Mizone brand initially scheduled for March in China has been postponed to the second quarter due to the crisis.

There are also delays to the registration of product innovations in its Early Life Nutrition business in China, a situation that could persist for “a couple of quarters”, Faber said.

The maker of Activia yoghurt and Evian water said it would spend 2 billion euros through 2022 to accelerate environment protection initiatives, including 900 million euros on packaging initiatives to tackle plastic waste.

“We need to stay ahead of the curve. We are very clear on why the climate actions we are taking are building our competitive advantage and will drive EPS growth,” Faber said.

Danone, the world’s largest yoghurt maker, employs 8,200 people and operates eight factories in China.

Danone reported a 4.1% rise in fourth-quarter sales driven by a strong performance in baby food in China and a return to positive sales growth in the waters division.

Like-for-like sales for full-year 2019 rose 2.6% to 25.29 billion euros ($27.5 billion) which was near the bottom of an already lowered range of 2.5-3% provided in October. Sales the previous year rose 2.9%.

Its operating margin grew by 76 basis points to 15.21% of sales versus the 15.14% expected by analysts helped by efficiency gains of 900 million euros.

The lowered 2020 outlook deals a blow to CEO Faber’s turnaround efforts, which have centered on diversifying the group’s portfolio into fast-growing products featuring probiotics, protein and plant-based ingredients to mitigate slower growth in dairy. Faber on Wednesday defended his choices. “The acceleration of the fourth quarter is a sign we are in the right direction. The fundamentals are there...We are making the right investments and we have the right product categories.”

In 2017, Danone bought U.S. organic food producer WhiteWave in a $12.5 billion deal, to boost growth and bring the company more into line with healthier eating trends.

$1 = 0.9201 euros Reporting by Dominique Vidalon; editing by Louise Heavens and Jason Neely

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