FY sales outlook increased to at least +6%; margin and FCF outlook reconfirmed

Sales increased 6.9% in Q2 and 7.0% in H1 10[1]
Volume growth of 8.9% in Q2 and 9.8% in H1 10[1]
Trading operating margin, at 15.30%, in line with the margin of FY 09
Underlying fully-diluted EPS increased 7.7% to € 1.38 in H1 10[1,2]
FCF from operations increased 34.9% to € 858 mln in H1 10
FY sales outlook increased to at least +6%[1], margin and FCF outlook reconfirmed[3]
Chairman’s comment

“Our results in the first half of this year confirm our strong start in 2010. We continue to invest in countries, products and brands with a strong potential: baby nutrition in Asia, dairy products in the US, in Brazil as well as in Russia where the Danone-Unimilk alliance provides us with significant long term growth opportunities. In the Waters and Medical Nutrition divisions we continue to identify new growth opportunities in emerging markets as well as new business models. We simultaneously continue to focus on productivity, which is critical in light of the volatile raw material prices. Lastly, our cash-flow generation keeps increasing steadily. Investments, productivity and cash flow are essential as they build the performance of today, but also the Danone of tomorrow, more global, more efficient, stronger, at the service of its mission and of value creation.

Our mid-year performance allows us to increase our outlook for 2010, targeting a sales growth of at least 6%, a stable operating margin and a free cash flow growth of at least 10%.”

Financial highlights first half year 2010
Key figures H1 09 H1 10 Change
Sales (€ mln) 7,520 8,364 +7.0%[1]
Trading operating income (€ mln) 1,206 1,280 +2.0%[1]
Trading operating margin 16.03% 15.30% -74 bps[1]
Underlying net income (€ mln) 722 848 +10.1%[1,2]
Underlying fully diluted EPS (€) 1.50 1.38 +7.7%[1,2]
Free cash flow from operations (€ mln) 636 858 +34.9%

[1] like-for-like = at constant scope of consolidation and constant exchange rates
[2] excl. impact of rights issue [3] please refer to page 5 for more details

Overview of sales performance – H1 2010

Consolidated reported sales increased by 11.2% to € 8,364 mln in the first half year of 2010. Excluding the effects of changes in exchange rates (+4.7%) and in scope of consolidation
(-0.5%), total sales increased by 7.0% on a like-for-like basis. This like-for-like sales growth was driven by a 9.8% rise in volume and a 2.8% decline in value. The aforementioned effects of changes in exchange rates were mainly driven by the Indonesian rupiah, the Brazilian real, the Mexican peso and the Russian ruble. The change in the scope of consolidation was mainly driven by the divestiture of Frucor, a beverage-based business based in Australia and New Zealand which was deconsolidated as of February 2009.

Overview of sales performance – Q2 2010

Consolidated reported sales increased by 14.0% to € 4,386 mln. Excluding the effects of changes in exchange rates (+7.0%) and in scope of consolidation (+0.1%), total sales increased by 6.9% on a like-for-like basis. This like-for-like sales growth was driven by a 8.9% rise in volume and a
2.0% decline in value.

Fresh Dairy
Sales of the Fresh Dairy division increased by 6.6% in the second quarter of 2010, on a like-for-like basis. This performance was driven by a broad-based volume growth of 9.3%, to which all regions contributed with at least mid-single digit growth or more. As anticipated, the negative value effect of -2.7% was significantly lower than in the preceding quarter, as the anniversary of the Reset program is lapsed in several countries. Particular strong growth momentum was shown in the US, Brazil, Mexico, Argentina and Japan, while Spain remained affected by a particularly challenging environment.

Waters
The Waters divisionposted solid sales growth of 4.8% like-for-like, thereby continuing the underlying improvement observed since mid-2009. Volume growth of 7.8% was offset by a value effect (mainly country mix) of -3.0%. While volume growth continued to be mainly driven by the emerging markets (54% of the sales of the division), Western Europe delivered positive volume growth with relatively strong performances in France and Germany. The environment remained very challenging in Japan and Spain, thus having a continued negative effect on value (mainly country mix) growth.

Baby Nutrition
The Baby Nutrition division continued to deliver high-single digit growth (+8.7%) on a like-for-like basis, with all regions contributing and volume growth (+8.4%) remaining the main growth driver. The division gained market shares in most markets, notably in the UK, Argentina, Brazil, France and Turkey. The Milks category continued to deliver double-digit growth while the weaning food category remained stable, thereby negatively impacting the growth pace in southern Europe. China, Indonesia, the UK and Poland remained the top contributors to growth, while the performance in Russia continued to improve.

Medical Nutrition
Medical Nutrition continued to perform well with a sales growth of 10.8%, on a like-for-like basis, which continued to be entirely driven by volume growth (+10.5%). All regions contributed to the growth, with particularly strong performance in Eastern Europe and Latin America. Growth was supported by all product categories with paediatrics and the gastro intestinal allergy product range still outgrowing the divisional average.

Cash flow and debt position
Free cash flow from operations increased 34.9% to € 858 mln, or 10.3% of sales, in the first half of 2010, compared to € 636 mln, or 8.5% of sales, in the same period last year. Capital expenditure was € 275 mln, or 3.3% of sales which is below the anticipated capex level of between 4 and 5% of sales for FY 2010 due to timing.

Debt position
The cash payment of the full year dividend resulted in an increase of the net financial debt (excluding the put options granted to minority interests of € 3,180 mln at 30 June 2010) of € 57 mln to € 3,551 mln in the first half of 2010.

Outlook 2010

Danone assumes that the financial, economic and social crises will continue to weigh on consumption trends in Europe, while emerging markets are expected to keep developing well overall.

In this context, Danone will continue to focus on, and invest in, growth opportunities in key categories and geographies, on the strength of its competitive positions and on the development of its brands. Productivity gains as well as the growth of free cash flow will continue to be key priorities.

For full year 2010, Danone targets the following:

A like-for-like sales growth of at least 6%;
A stable trading operating (EBIT) margin versus 2009 on a like-for-like basis;
An increase of the free cash flow from operations of at least 10% versus 2009 on a reported basis.