Danone : Acceleration of sales growth by +4.7% in the third quarter 2017

Press release - Paris, October 17, 2017

• Consolidated sales up by +16.6% on a reported basis to €6,454 million

• Accelerated sales growth as expected: +4.7%2 "like-for-like New Danone"3 , with volumes up +0.4%

• Very strong performance in Specialized Nutrition; exceptional growth in Early Life Nutrition China

• Strong acceleration in Waters with return to growth in China

• Gradual improvement in EDP Noram; WhiteWave integration on track

• EDP International recovery negatively impacted by adverse market conditions in Brazil

• 2017 guidance confirmed in more detail: recurring EPS growth to exceed +12% at constant exchange rate

  Danone today announced third-quarter sales. Consolidated sales were €6,454 million, a +4.7% "like-for-like New Danone" increase, reflecting a +0.4% increase in volume and +4.3% increase in value. Reported sales were up

  +16.6%. For the first nine months, consolidated sales stood at €18,582 million, up +2.1% on a "like-for-like New Danone" basis while reported sales were up +12.0%. Danone reaffirmed expectations that it will deliver full-year double-digit recurring earnings-per-share growth at constant exchange rates, above +12%.

  € million except %	Q3 2016	Q3 2017	Reported LFL New Change Danone3	Volume Growth	9M 2016	9M 2017	Reported Change	LFL New Danone3	Volume Growth
  BY REPORTING LINE

  2017 Third quarter sales

  EDP International	2,055	2,048	-0.3%	-2.3%	-7.4%	6,154	6,340	+3.0%	-1.6%	-6.0%
  EDP Noram	627	1,290	+105.7%	-2.2%	-2.7%	1,904	3,281	+72.3%	-2.6%	-1.5%
  Specialized Nutrition	1,618	1,844	+13.9%	+17.8%	+9.0%	4,900	5,305	+8.3%	+9.5%	+3.7%
  Waters	1,237	1,272	+2.8%	+7.6%	+6.2%	3,630	3,657	+0.7%	+3.2%	+0.4%

  BY GEOGRAPHICAL AREA

  Europe & Noram4	2,735	3,532	+29.2%	-0.2%	-0.7%	8,294	9,807	+18.2%	-1.4%	-1.0%
  Rest of the World	2,802	2,921	+4.3%	+11.1%	+2.0%	8,295	8,775	+5.8%	+6.3%	-1.2%

  Total

  5,537

  6,454

  +16.6%

  +4.7%

  +0.4%

  16,589

  18,582

  +12.0%

  +2.1%

  -1.3%

  1 Like for Like New Danone - See footnote 3

  2 Including +0.5 percentage point benefit from the end of special treatment of over-inflation in Argentina - see page 6 and 7 3All references in this document to" like-for-like New Danone" changes, recurring operating income and margin, recurring net income, recurring income tax rate, recurring EPS, free cash-flow, free cash-flow excl. exceptional items, net financial debt, ROIC and Ebitda correspond to financial indicators not defined in IFRS that are used by Danone. Their definitions, as well as their reconciliation with financial statements, are listed on pages 6 to 9 of the Press Release or on pages 9-10 of the 2017 interim financial report

  4 North America (Noram): United States and Canada

  CEO Emmanuel Faber's comments

  Commenting on the third quarter of 2017, Emmanuel Faber, Chief Executive Officer, said:

  "As expected, Danone has posted accelerated sales growth in the third quarter. This reflects the strength of our portfolio of cohesive consumer health-focused brands and a solid execution against our strategy, with a step-up in innovation and activation plans. The increase in like-for-like sales has been underpinned by the allocation of additional resources to serve rising demand in Specialized Nutrition, especially in China. Strong headwinds remain in Brazil which continue to impact EDP International negatively. The integration of WhiteWave is on track and starting to deliver results.

  Our increased resource-allocation ability, served by an adaptive organization, will enable us to pursue our decoupled growth and efficiency agendas to generate profitable growth in the coming periods. This confirms my confidence in meeting our objectives for the year, delivering solid shareholder returns and positioning the Company for long-term sustainable growth, fully embracing the opportunities of the ongoing Alimentation Revolution".

  2017 THIRD QUARTER SALES

  In the third quarter 2017, consolidated sales stood at €6,454 million, up +4.7% on a "like-for-like New Danone" basis. Growth reflects a 0.4% increase in volume and a 4.3% rise in value. Reported sales were up +16.6%, including (i) the base effect1 related to the consolidation of WhiteWave from April 12, 2017 (+17.0%); (ii) changes in exchange rates (-3.7%) reflecting notably an unfavorable impact of the US Dollar, the Argentine Peso and the Turkish Lira; (iii) other changes in the scope of consolidation (-1.4%), resulting primarily from the sale of Stonyfield in August 2017, and the deconsolidation of Fresh Dairy Products operations in Columbia and Chile in Q4 2016 and Q1 2017 respectively.

  ESSENTIAL DAIRY AND PLANT-BASED (EDP) INTERNATIONAL

  Essential Dairy & Plant-Based (EDP) International reported sales down -2.3% in Q3 2017 on a "like- for-like New Danone" basis, reflecting a -7.4% decrease in volumes and a +5.1% increase in value. This was due primarily to a steep double-digit fall in sales in Brazil, which continues to be impacted by adverse market conditions in a fragile economy. Excluding Brazil, the division's sales were broadly flat.

  In Europe - excluding Alpro, sales growth improved slightly compared to Q2 2017 but remained negative. Danone continued to adjust its execution plans around the Activia brand, rolling out new packaging. New advertising campaigns were also unveiled in three countries -Spain, France and the UK- to support the distribution of recently launched new products. Early results have been encouraging, with Activia Wecereal in France and Italy, and Activia double zero in the UK.

  The Alpro brand continued to deliver strong momentum in Q3, driven by robust growth in non-soy drinks and plant-based alternatives to yogurt, as well as further innovation to extend the brand. Alpro is growing in all nine countries where it is sold.

  In Latin America, despite a good performance in Mexico, the overall performance was impacted by a steep decline in sales in Brazil, a market that remains fragile. In this country, Danone has entered into a major transformation program aimed at restructuring its product portfolio, its distribution networks, and its organization.

  In the CIS region, Danone generated solid growth, reflecting its ongoing efforts to enhance brand portfolio valorization and generate positive mix-price effect, offsetting declining volumes in low value-added segments.

  While restoring fundamentals to stabilize global brands, Danone continued to successfully expand young and local-heritage brands.

  1

  WhiteWave base effect corresponds to the contribution of WhiteWave over the period from July 1 to September 30, 2016

  ESSENTIAL DAIRY AND PLANT-BASED (EDP) NORAM

  Essential Dairy & Plant-Based (EDP) Noram reported sales down -2.2% in Q3 2017 on a "like-for- like New Danone" basis, including a -2.7% decrease in volumes and a +0.5% change in value.

  Yogurt demonstrated resilience within the U.S retail channel with further market share gains in the quarter, despite increased competitive activity. Emerging segments such as plant-based yogurts, Greek yogurts, and yogurts tailored toward smart calories and family nutrition posted strong growth.

  Coffee Creamers and Beverages posted robust growth in the quarter driven by an acceleration of the portfolio's seasonal flavored creamers, plant-based creamers and the continued expansion of Stok cold-brew iced coffee beverages. Danone continued to gain market share in the refrigerated Coffee Creamers category. Innovations launched in Q3 2017 are performing ahead of expectations.

  Plant-based Foods and Beverages delivered positive growth driven by improved plant-based beverage velocities and a very strong sales performance from Vega and So Delicious frozen desserts. In the U.S. retail channel, plant- based beverages category growth accelerated in Q3 2017, driven by nut-based beverages. Danone's market share in the plant-based beverages category stabilized over the period and the Company remains market leader in this category.

  Premium Dairy is still pressured by industry oversupply of organic milk in the U.S. driven by historically low conventional milk prices softening demand. The Company is taking steps to reduce its organic milk supply and reallocate it into other emerging areas of the portfolio such as organic yogurts, cheese and creamers. The Company also continues to seek opportunities to spur demand in organic milk by launching innovations such as extended shelf-life gallons, milk with 50% more vitamin-D than other dairy milks, and expanding the distribution of single-serve high protein beverages. Danone remains the market share leader in the organic milk category.

  Lastly, Danone has continued to work on the turnaround of Fresh Foods.

  SPECIALIZED NUTRITION

  Specialized Nutrition sales were up +17.8% in Q3 2017 on a "like-for-like New Danone" basis, with a +9.0% change in volume and an +8.8% change in value. This very strong performance reflects accelerating growth in China as well as progress in Danone's strategic priorities, such as the expansion of Tailored Nutrition products, which grew at a mid-teen percentage in Q3. The organization is leveraging an integrated portfolio in "one-allergy", with the allergy segment growing at more than 10% this quarter across a broad set of geographies.

  Early Life Nutrition generated growth of over 20%, driven by exceptionally high growth of demand for Danone's brands in China (above +50%), where infant formula category has accelerated, helped by rising birth rates, confirming the rebound of the market observed in Q2 2017. This performance also reflects the successful execution of plans to build a sustainable distribution model. Activity included the nationwide launch of Aptamil Platinum, which strengthens the positioning of the brand in the ultra-premium segment. The performance was also driven by a favorable year-on-year comparison.

  Early Life Nutrition also reported a solid performance across all of its geographical platforms. Latin America performed well, with sales accelerating sharply over Q2 2017. In Europe, sales trends were up, driven by the United Kingdom, Germany, Poland and other key markets. Finally, in North America, the Happy Family brand continued to gain market share, posting growth of over 20%.

  Advanced Medical Nutrition generated high single-digit growth, supported by robust growth platforms in Europe and the rest of the world, and especially in the fast-growing Chinese market, which now accounts for nearly 15% of this business. All segments (pediatrics and adult care) contributed to this overall performance. Advanced Medical Nutrition continued to deliver a solid pipeline of innovation with patient-centered products (e.g. Neocate Splash range and Syneo).

  WATERS

  As anticipated, Waters posted a strong acceleration in sales growth in Q3 2017, with "like-for-like New Danone" rising +7.6% (+6.2% increase in volume and +1.4% increase in value). This very good performance reflects both a return to growth in China, following the destocking transition period, and continued growth momentum on all other platforms.

  Plain waters were up at mid-single digit percentages, supported by positive trends across regions, as well as efficient brand activation plans aimed at building premium and meaningful brands that are part of consumer lives. After six years of construction and transformation, the upgraded evian bottling facility was inaugurated in September 2017 as Danone's first production site to achieve carbon neutrality. In parallel, Aquadrinks stepped up at double-digit driven by successful innovations such as Naranjadas for Villa del Sur Levite brand in Argentina and Sirma in Turkey.

  In China, Waters reported double-digit growth against a low basis of comparison last year, and benefited from the gradual recovery of its category, and successful brand activation plans to rejuvenate the Mizone core brand. Promising results from new products launched at the end of the second quarter, in particular Mizone Pro, give Danone confidence in future growth prospects.

  2017 OUTLOOK

  For 2017, Danone expects to deliver double-digit recurring EPS growth of more than 12%, at constant exchange rate (compared to the €3.10 recurring EPS reported in 2016).

  This guidance is based on a:

  • Moderate "Like-for-like New Danone" sales growth;

  • Sustained recurring operating margin improvement on a "like-for-like New Danone" basis.

Cécile Cabanis, Chief Financial Officer, said: "Our trading performance in the first nine months illustrates the progress of our growth and efficiency agendas, which enables us to confirm our guidance for 2017".

While there are improving fundamentals in several parts of the business, Danone assumes that economic conditions will remain volatile and uncertain overall, with persistently fragile consumer trends or even deflationary consumer trends in Europe, and specific contextual difficulties in a few major markets, including the CIS and Brazil.

As previously reported, Danone anticipates a year-on-year mid-single digit rise in the costs of its strategic raw materials. In this context, the Company will continue to strengthen the resilience of its model through a range of initiatives aimed at offsetting inflation and limiting its exposure to volatility in some raw materials while ensuring the competitiveness of its products.

More specifically, Danone now anticipates a year-on-year steep rise in milk prices, with variations from one geographical area to the next:

• A mid to high-single digit increase in Europe and the United States, and

• A strong rise in emerging countries, such as the CIS, and Latin America.

Regarding other raw materials, including plastics, sugar and fruits, Danone also anticipates inflationary conditions overall.

Given this outlook, Danone will continue to prioritize initiatives and resources to accelerate growth, improve margins and strengthen its growth model.

"We will continue to be agile and disciplined in our resource-allocation process to ensure short term delivery, transformation for the long term and sustainable value," added Cécile Cabanis. "This will be aligned with our continued and disciplined resource allocation to promote strategic growth opportunities over short term tactical allocation".