letter to shareholders - winter 2012

the Letter toShareholderS

Winter 2012

dear Shareholders,

As for what our role should

be, Danone has the same answer for 40 years: a business should be profitable and sustainable.„ Franck Riboud, extract from « Acteurs de l’économie », May 2012

While our roots go back much further, 2012 marks Danone Group’s 40th « official » year in business. Forty is young, yet we already have a long and rich history. A heritage that reflects the personalities of our two visionary founders, Antoine Riboud and Daniel Carasso, as well as the two business cultures —BSN and Gervais Danone— that joined forces to create our Group in 1972.

We still have the intangible riches we inherited from them: the drive to win new territory and build a stronger company. An entrepreneurial spirit, with the culture and instincts that go with it. Strong values. Plus our willingness to meet and overcome adversity— to take on new challenges, to bounce back every time, to innovate and develop brands acclaimed by consumers around the globe. Obviously we have changed a lot in 40 years, but Danone is still Danone. We’ve changed our look, our shape and our size, but we still have the same character and the same DNA. We’re fast on our feet. Our people are confident and empowered. Danone has posted a solid growth in turnover the first nine months of 2012, in line with its annual objectives, thanks to very robust sales throughout the world. Europe is the exception as consumption remains under pressure. In this context, our priorities are clear: continue to deploy our model in growth regions by investing in our product categories, our brands and our people. In Europe, we need to adapt our model to the slump of consumption and to the needs of our consumers, while building new sources of growth. Our teams will pursue these priorities with determination.

For me this is essential, since profitability is not sustainable without conti-nuity, loyalty and rock—solid founding principles. Let’s not forget that 2012 is also the 40th anniversary of Antoine Riboud’s benchmark speech to French business leaders in Marseille during which he formalised the founding principles of our unique culture which still continue to inspire Danone in its quest for performance and growth. We have the responsibility of continuing to develop this culture and this mindset in our subsidiaries, for it is on the basis on this history that we will continue to build and invent the future of this amazing adventure. Let us remember that Danone has always been able to take advantage of current difficulties in order to reinvent itself and become even stronger.

Franck Riboud

02 the Letter to SharehoLderS WINtER 2012

FocuS on

“danone reported solid growth in sales for the first nine months of 2012, in line with full-year targets, thanks to very strong momentum continuing world-wide except in Europe”, stresses Franck Riboud.

Sales for the first nine months of 2012 (+5.6%*) and for the third-quarter (+5.0%*) show a solid overall performance, with contrasts from region to region. Sales grew by over 10%* in emerging markets and North America combined. In Asia, Africa-Middle East and Latin America, operations expanded very rapidly in all product categories. Yet pressure on consumer spending in Europe continued, and the situation deteriorated further in Southern Europe, affecting sales for the business lines most exposed to this region.

Solid growth in sales for the first nine months of 2012 with contrasts from region to region and full-year targets for 2012 reconfirmed

Fresh dairy Products division sales were up +0.7% like-for-like in the third quarter of 2012, reflecting a slight -0.7% easing in volume and a +1.4% increase in value. Sales in Latin America and the Africa-Middle East region remained extreme-ly buoyant with continued double-digit growth, while the CIS region and North America are performing according to plan, with sales growing at a faster pace each quarter.the CIS region has thus continued to grow since the beginning of the year and is on track to meet growth and margin tar-gets. Unimilk’s priority brands continued to report double-digit growth this quarter, fol-lowing the example of Prostokvashino—still the top contributor to growth in this area—as well as the Bio Balance and Tëma brands. Integration of Danone-Unimilk’s operations is moving ahead, with shared systems being deployed and a gradual merger of logistics and sales force resources.Sales have also continued to gather pace in the United States, strengthening Danone’s leading position in a market that has grown more competitive than in the first half. In particular, the Group is winning further market share in the very fast-growing Greek yogurt segment with its Oikos and Light&Fit Greek brands, benefiting from new produc-tion capacity added on July 1.Operations in Europe fell back more sharply this quarter as conditions deteriorated in Southern Europe, particularly Spain and Italy, where sales declined by over -10%.

the third-quarter performance is very much the reflection of the geographicaltransformation of the Group, with on one hand very strong dynamics in our growth markets in Americas, Asia Pacific, CIS, Middle East and Africa, and on the other hand Europe under pressure.„Pierre-André Térisse, Chief Financial Officer

WINtER 2012 the Letter to SharehoLderS 03

FocuS on

Sales by business line and geographical area in the 3rd quarter and first 9 months of 2012

as for the Waters division, it reported strong third-quarter growth, with a +12.3%* increase driven by a +5.4% rise in sales volumes and a +6.9% rise due to the price/mix effect. Strong growth in emerging markets continues to drive the division’s per-formance. In Western Europe, sales benefited from a favorable basis of comparison with Q3 2011, which helped offset adverse weather conditions that prevailed in July 2012. Growth in value continues to benefit from aquadrinks and their positive price/mix effect, and also reflects the strong performance in Western Europe this quarter. the impact of price increases introduced in emerging countries in 2011 is tapering off.

the Baby Nutrition division also reported robust growth in all geo-graphical markets, with sales up +11.5%* in the third quarter of 2012. this includes a +3.6% rise in volume and +7.9% growth in value. Key to the division’s success is a very strong performance in Asia, particularly China, where the Dumex range—Danone’s

Growth in sales in the third quarter *

e

+ 4.9%+ 0.7% + 12.3% + 11.5%

Fresh Dairy Products Baby Nutrition

Waters Medical Nutrition

* Like-for-like

By business line

By geographical area-1.5 % +10.5%

Europe

+18.3%

Asia Rest of the world

Growth in sales in the first 9 months of the year *

+11.4%+2.2% +10.5% +6.0%

Fresh Dairy Products Baby Nutrition

Waters Medical Nutrition

* Like-for-like

-0.6% +11.3%

Europe

+18.2%

Asia Rest of the world

flagship brand for baby nutrition in this coun-try—has been completely revamped. (read p.6)

as for danone Medical Nutrition, sales increased +4.9%* like for like in the third quarter of 2012, driven by volume growth of +5.9%. Slowing growth reflects deteriorating conditions on some markets in Western Europe. In contrast, China, turkey and Brazil maintained their momentum, driving strong growth for keybrands like Nutrison, Nutrini and Neocate.

Given the context, Danone set clear priorities last February: continue to deploy our model in growth regions by investing in our product categories, our brands and our people. In Europe, we need to adapt our model to the slump in consumption and to the needs of our consumers, while building new sources of growth. danone reconfirms its full-year targets for 2012: sales growth at +5-7%*, trading operating margin down 50 bps*, and free cash flow of €2 billion.*like-for-like

€ millions Q3 11 Q3 12 Change[1] Volume growth [1]

9M 11 9M 12 Change[1] Volume growth [1]

By business line

Fresh Dairy Products 2,785 2,910 +0.7% -0.7% 8,457 8,816 +2.2% -0.4%

Waters 816 962 +12.3% +5.4% 2,483 2,817 +10.5% +5.3%

Baby Nutrition 906 1,062 +11.5% +3.6% 2,723 3,152 +11.4% +4.8%

Medical Nutrition 298 323 +4.9% +5.9% 869 948 +6.0% +6.7%

By geographical area

Europe 2,661 2,682 -1.5% -2.6% 8,203 8,231 -0.6% -2.6%

Asia 740 946 +18.3% +8.9% 2,135 2,708 +18.2% +12.4%

Rest of World 1,404 1,629 +10.5% +5.0% 4,194 4,794 +11.3% +4.4%

total 4,805 5,257 +5.0% +1.6% 14,532 15,733 +5.6% +2.0%

1 like-for-like

By business line

By geographical area


GROUP NeWS

Russia became danone’s leading market thanks to its merger with the local dairy

giant, unimilk (2010). Back to the resources invested by the group to accelerate its growth in the country.

Danone has celebrated its 20th anniver-sary of operations in Russia. In 1992, the group opened its first store in Moscow. this was the world’s first store dedicated entirely to Danone products. Since then, Danone has established itself as the

that is characterised by both a very strong tradition of consuming dairy products, such as milk or kefir (a tradi-tional drink), as well as strong growth in the so-called “modern” fresh dairy prod-uct segment (yogurt, dairy desserts, etc.). Danone was already the leader in the latter segment, with a market share of over 25%, while Unimilk had a strong presence in the so-called “traditional” dairy product segment (milk, sour cream, cheese, etc.). Finally, the market shows promise in regard to fresh dairy product consumption, which is around

country’s leader in Fresh Dairy Products: a unique position that was supported by the acquisition of Unimilk in December 2010, which was ranked second in the market at the time. thanks to this merger, Danone tripled in size and opened itself up to all of Russia, from Moscow to Novosibirsk. today Danone-Unimilk employs more than 15,000 employees and owns 21 plants in Russia.the key strength of the new danone- unimilk entity is the complementarity of its portfolio of brands adapted to a Russian market

russia:a region of growth for Danone-Unimilk


15kg per person per year (twice fewer as French consumers).to achieve a fully successful inte-gration, the group defined three priority areas of focus: segmentation and sup-port for the brand portfolio, the imple-mentation of Danone standards within production facilities and finally, support for the milk industry. In 2011, the teams focused in particular on optimising the former Unimilk brand portfolio and on providing support for leading brands. Results in 2012 underline the success of the actions carried out during the last two years: three of Unimilk’s main brands experienced double digit growth during the first quarter of 2012 (Prostokvashino, BioBalance and Tyoma). the leading brand, Prostokvashino, was relaunched with a new identity to make it more visi-ble. At the same time, the Danone brands (such as Activia) continued to deliver solid performance. the children’s brand Danonino (Rastishka in Russia) was the focus of a large ‘naturalness’ project with a new formula, with no artificial colour-ing and flavouring, to meet the new expectations of Russian consumers.In the meantime integration con-tinued. In 2011, the group set up a joint management team and merged the core functions and regional teams respec-tively. Production standards were upgraded to comply with those of Danone, particularly in terms of employee safety. All the supply chain, production

Baby Nutrition in russia: another market full of promise

the consumption of infant formula in Russia represents only 18kg per baby, compared to 36kg in Germany or 40kg in Poland, meaning Nutricia is still a long way from achieving its full potential in this vast country. In order to take advantage of the promise of growth in the baby nutrition market in Russia, Nutricia has launched works at a total cost of €50 million at its plant in Istra, near Moscow.After four years of works, the plant recently reopened its doors. the result is modern equipment that complies with European standards for quality and excellence. Starting in 2014, a third production line should be added to the two existing production lines, which have a capacity of 24,000 tons per year. this will increase the total production capacity to 50,000 tons.

and quality processes were also reviewed (or are currently being reviewed). this year, one of Unimilk’s historic plants (Samara) started producing Danone plain yogurt. the distribution resources and networks were streamlined in order to take advantage of the strengths of each: Danone’s expertise in large-scale distri-bution and Unimilk’s solid understanding of local retailers. at the same time, the Group addressed other local challenges such as ensuring the quality of supplies in a country where the milk sector is still under construction. to support and train its 600 partner producers, Danone set a partnership with the Institut de l’Élevage* and opened a training centre in 2012 in the rural region of Lipetsk, 500km from Moscow. On the agenda: theoretical courses and hands-on training on a ‘model’ farm**. danone is approaching 2013 with confidence in russia, even though integration remains a long-term process. the group plans to increase its margin in the country over the coming years by more than 100 basis points per year.

* Partner of the Danone Ecosystem Fund ** Milk Business Academy is a farm school that offers on-site training as well as a strong foundation in agro-nomics in order to ensure the sustainable growth of productivity on Russian farms and guarantee a long-lasting, high-quality sourcing process for Danone-Unimilk.


GrouPNEWS

Medical Nutrition: Souvenaid’s* introduction in four countries

after ten years of clinical study and testing, danone Medical Nutrition launched its new Souvenaid product in Belgium, Brazil, Germany and the Netherlands in September. Souvenaid is a product developed to help manage the nutrition ofpeople suffering from early-stage Alzheimer’s. Scientists have proven that specific nutrients can

have a positive effect on bone and muscle health. Following on from that, Danone’s science has shown that the right food can be beneficial for brain health. Danone Medical Nutrition carried out clinical studies on patients already diagnosed as suffering from various stages of Alzheimer’s. For all the Medical Nutrition division teams, Souvenaid is a unique

innovation. It represents an opportunity to help millions of patients manage their illness in the early stages.

* Nutritional product that meets the specific medical needs in the diet of a person suffering from early-stage Alzheimer’s. Souvenaid must be only used under medical supervision.

a strong focus of the new Baby Nutrition strategy is to support both babies and mothers by responding to the latter’s specific needs. this strategy has already paid off in China, where Dumex’s revamp in 2012 has fostered a two digits growth for the range between April and September 2012 in comparison to the same period in 2011.What are the reasons behind this success? Entirely redesigned products and marketing tailored to the specific needs of Chinese mothers, eager for help in order to become “the best mothers possible”. For these mothers, Dumex developed in August 2012, a tailored offer focused on two areas: products and services. Products: the range was repositioned and the formulas were revamped in products with targeted benefits for specific ages. Services: the 1,000 days* programme was redesigned to be available on all digital devices (website, mobile app and social networks), providing useful information and advice. Hard work by the teams enabled us to reach 74,000 health professionals, 48,000 retailers. Furthermore, the 360-degree marketing campaign (tVC, internet, social networks and print) reached nearly 30 million mothers.

* In 2011, Baby Nutrition launched a support programme for Chinese mothers. this program is primarily provided through nutritional advice centres during the baby’s first 1,000 days (birth to 3 years).

dumex china,standing by babies as well as by mothers

Yolado, an innova-tion between yogurt and icecream

danone has broken new ground in Spain with Yolado. With its exclusive formula, it has no equal: a dairy product with a fresh milk yogurt base, no preservatives, no colouring agents, enjoyed frozen. With less than 100 kcal in each cup (half the calories of traditional icecream), the result combines the enjoyment of icecream with the goodness of yogurt. Yolado comes straight from the new “Innovation and New Business” department created in Spain two years ago to promote innovation. With its multi- disciplinary approach and clear focus on product development, this unit has encouraged the creation of a new product category and from that a new way to eat yogurt. Available since May in Barcelona, Spain, Yolado comes in five flavours and two sizes: 125ml (plain, strawberry and lemon) and 500 ml (blackcurrant and stracciatella).

Light & Fit Greek, the light Greek yogurt melting the hearts of Americans

Greek yogurt is the first segment in value in the uS market and is continuing to win followers in america. So much so that light yogurt consumers had already started to switch to this protein-rich, creamy-textured product. the only thing lacking, to meet their needs, was a low calorie product. But no longer: Dannon US launched Light&Fit Greek in July 2012. this 0% fat Greek yogurt has twice more protein than classic light yogurt and only 80 calories per cup. Available in strawberry, vanilla, blackcurrant and cherry, Light&Fit Greek met with instant success. With its 740,000 Facebook fans, Light&Fit is now one of Danone’s favorite brands for American consumers. to secure production, Dannon has stepped up investment in two of its factories: Minster in Ohio and West Jordan in Utah.


GrouPNEWS

La Salvetat: still sparkling at twenty! twenty years after its launch, La Salvetat sparkling mineral water became the leading mineral water consumed by the French in 2011. Despite being discovered in 1848, it was only in 1990 that Danone, convinced of the properties of the Rieumajou spring (the spring’s original name), invested in it with an industrial facility.

La Salvetat is famed for its low sodium content and calcium richness. It posted a double digit growth in volume between 2011 and 2012 in a dynamic French sparkling water market. to meet this demand and boost the bottling line’s capacity of the factory, €6 million were invested last year.

La Salvetat industrial site figures> No. 1 employer in the town with 70 employees in 2012 compared to some 10 employees twenty years ago

> 1 fully automated production line

> 34,000 bottles per hour production capacity

> 2.5-3 million bottles leave the site every week

> 98% of factory waste is recovered

Innovation: Danone ranked 3rd on the European Forbes list

on track to €2 billion in free cash flow

Pepenadores Project: a better life for Mexican waste pickers

danone was ranked 3rd on the european list of top 100 innovative companies published by Forbes Magazine in September 2012. Forbes focused on the innovative poten-tial and popularity of companies as seen by investors, who were asked to evaluate the compa-nies’ capacity to develop beyond their current business activities. With Danone, the Forbes ranking rewarded the following notable innovations: the new “Kiss” yogurt cups (Keep it simple and safe), inspired by Danone’s early 20th century porcelain cups, and the Blackshelves project (in France and Spain, in 2011, Danone experimented new shelves to promote the fresh dairy product section which had remained unchanged for 40 years). We were also rewarded for our “Bringing health through food to as many people as possi-ble” project, adapting our prod-ucts to populations’ needs in emerging countries.

having free cash flow is key, especially in economically uncertain times. three years ago, in order to ensure it has sufficient internal funds to invest in the group’s future growth, Danone fixed itself the ambitious target of generating €2 billion in free cash flow in 2012. Cash flow improvement has long been part of Danone’s teams’ expertise: initially gained in the Fresh Dairy Product division due to the very short product life cycles, this skill has subsequently been spread to the other divisions.this year, a major effort has been made to accelerate the sharing of best practices between divisions and countries. All areas have been mobilised to help free up the targeted €2 billion and strengthen the group’s ability to generate solid free cash flow.

the Pepenadores* project was launched by Bonafont Mexico with financing from the danone ecosystem Fund. In 2010, Bonafont Mexico was the group’s first business unit to put a 100% rPet** bottle on the market. the aim was to improve work conditions and income for waste pickers who carry out 90% of recycling in Mexico under very difficult working and living conditions while guaranteing Bonafont rPEt supplies. By building a recycling centre close to Mexico City landfills, efficiency was improved (by 15 to 50%), thanks to the right equipment and infrastructure put in place, and, as a result, the Pepenadores’ income rose. In this way, the recycling centre can prohibit the very prevalent Pepenadores child labour (some 10% of workers) without affecting families’ income. In addition, the project also provides Pepenadores families with basic services such as medical treatment and education. to date, the project has recycled 2,250 tons of PEt and aims to reach 5,000 tons in 2013. thanks to this project, 400 Pepenadores already benefit from better living and working conditions in Mexico.

*Spanish word for scavengers. **PEt: Polyethylene terephthalate (recycled plastic used for bottles).


SharehoLder InForMaTIonS Important dates

> 19 February 2013:2012 Final Audited Results> 16 april 2013:2013 First Quarter Sales> 25 april 2013 2 :30 p.m.:Shareholder’s Annual Meeting at the Carrousel du Louvre (Paris)> 29 July 2013:2013 First Half Sales and Results> 16 october 2013:2013 Nine months Sales

the Letter to SharehoLderS is a publication of Danone: 15, rue du Helder, 75009 Paris. Publication management: Sabrina Schneider, Chief editor: Sandrine Fossard,

Design and production: Photography: Eric Manas, Laurent Vautrin, Danone DR.+33 1 55 34 46 00 (ref. LAAC 212)

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danone shares> NUMBER OF SHARES on June 30, 2012: 643 162 000> NOMINAL VALUE: 0.25 euros per share> QUOTED STOCK MARKETS: company shares are quoted on the NYSE Euronext Paris, on the Swiss Stock exchange and are quoted under American Depository Shares/Receipts (ADS/ADR) on the Over-the-Counter (OtC) market in the United States with the ratio:1 current share = 5 ADS.

Share buy back> On the basis of steady debt ratios and taking into account its robust generation of free cash flow, Danone expects to buy back from €500 million to €700 million worth of shares between October 2012 and January 2013.

danone share price compared with international indices 31 december 2011 to 28 november 2012(Base 100 at 31/12/2011)

other information:the sustainibility report on www.danone.com the 2011 annual report is on www.danone.com and http://danone11.danone.com

contactsYou may opt to automatically receive Danone financial information by e-mail.to choose your options for e-mail notification, please enter your e-mail address on http://finance.danone.fr by mail:BNP Paribas Security Services (BP2S)Relations Actionnaires Danone Grands Moulins de Pantin Corporate trust Services, 9, rue du Débarcadère 93761 Pantin Cedex by email: [email protected] or [email protected]

by phone:

N°: 0 800 320 323 or +33 (0) 1 58 16 71 75 If you wish to receive a print version of your letter, please address a mailing request to the Investor Relations direction at the following address: 15 rue du Helder, 75439 Paris Cedex 09.

letter to shareholders - winter 2012

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