* Danone sees 4-5 percent underlying sales growth in 2015
* Expects slight rise in margins forecast
* Says economic conditions to stay difficult this year
* Weak dairy, cautious outlook disappoint analysts (Recasts with CEO comments, analysts, updates shares)
By Dominique Vidalon
PARIS, Feb 20 (Reuters) - French food group Danone predicted underlying sales growth of no higher than five percent this year and only a slight rise in operating margin, held back by deflation in Europe and difficulties in Russia, its top market.
The maker of Activia and Actimel yoghurt expects to benefit from cost cutting at its European dairy business. It also sees a recovery in baby food sales and profit in Asia, where an infant formula recall weighed last year.
But economic conditions are likely to remain difficult, with “fragile or even deflationary” consumer trends in Europe and currency volatility in emerging markets, the company said on Friday.
In Russia, which accounted for 11 percent of Danone’s sales in 2013, a tumbling rouble has further increased milk prices which were already up due to tight global supplies. The company gets 60 percent of its revenue from dairy products.
Danone, which also has the Evian water and Bledina baby food brands, said it expected underlying sales to rise between 4 and 5 percent this year. They grew 4.7 percent to 21.4 billion euros ($24.4 billion) last year, down slightly from 4.8 percent in the year before.
One of its main competitors, the world’s largest packaged foods maker Nestle, has also forecast sales growth of around five percent this year in the face of a tough economic climate.
Danone predicted that its 2015 operating margin would rise slightly, having fallen 60 basis points to 12.59 percent in 2014.
The guidance was below analysts’ expectations of a 5.6 percent sales growth for 2015 and an operating margin at 13.06 percent of sales.
“I am confident we will be able to build profitable growth and reinvest in our brands and sales force, preparing for 2016. 2015 will be profitable but we want it to be sustainable,” Emmanuel Faber, who took over as CEO in October, told a news conference.
Bernstein analyst Andrew Wood called the guidance “more cautious” than expected, adding that weak dairy sales were also taking a toll on the company’s valuation.
Sales of dairy products fell one percent in the fourth quarter, lagging market expectations of a one percent rise, after growing 0.7 percent in the previous three months.
“There is absolutely no reason why dairy in three years’ time should not grow close to mid-single digit. We need to get European dairy back to positive growth,” Faber said.
By 1355 GMT Danone shares were up 0.44 percent, recovering from earlier losses of over two percent. ($1 = 0.8804 euros) (Editing by Leigh Thomas, Keith Weir and Liisa Tuhkanen)