request bn pa transcript 2009 07 24 t07 30

F I N A L T R A N S C R I P T

BN.PA - Q2 2009 DANONE Earnings Presentation

Event Date/Time: Jul. 24. 2009 / 7:30AM GMT

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C O R P O R A T E P A R T I C I P A N T S

Pierre-Andre TerisseDanone - CFO

Robin JansenDanone - Director, IR

C O N F E R E N C E C A L L P A R T I C I P A N T S

Julian HardwickRoyal Bank of Scotland - Analyst

Pablo ZuanicJPMorgan Chase & Co. - Analyst

David HayesNomura - Analyst

Michael SteibMorgan Stanley - Analyst

Jeremy FialkoRedburn Partners - Analyst

Chris WickhamMainFirst - Analyst

Warren AckermanEvolution - Analyst

Martin DolanExecution Ltd. - Analyst

Harold ThompsonDeutsche Bank - Analyst

Nick Sochovsky- Analyst

Mike DennisMF Global - Analyst

Alan ErskineUBS - Analyst

Jeff StentCitigroup - Analyst

Marco GulpersING - Analyst

Mario MontagnaniCheuvreux - Analyst

Giovanni TrombelloAllianz Global Investors - Analyst

Xavier CroquezExane BNP Paribas - Analyst

Gerard ZaffranMerrill Lynch - Analyst

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Jul. 24. 2009 / 7:30AM, BN.PA - Q2 2009 DANONE Earnings Presentation



P R E S E N T A T I O N

Pierre-Andre Terisse - Danone - CFO

All right, good morning, ladies and gentlemen. This is Pierre-Andre Terisse for Danone speaking. Before I start, a few points.Number one, could you please switch off your telephones in order to avoid any interference and since this conference iswebcasted.

Second thing, I'm here with Robin Jansen, Head of Investor Relations, of course. We have, here, as well, on the first row, twopeople. Marion Casenave, first, she's now -- she's going to become, very shortly, the [QT] Investor Relations. She's coming fromthe Group. She's occupied many positions within the Group. And she will be replacing Laura Palmeiro who is not leaving theGroup, staying within the Group, but taking over other position within Finance. So a quick word to them. And thank you verymuch, Laura, for the contribution, and welcome to Marion.

This being said, I'll be moving to the presentation of the first half, running you through the presentation. And then we'll begoing through questions and answers, taking questions from the floor first and then from the conference.

One -- the results in a nutshell first, with three main elements. The first is about cost reduction which has been very strong forthe semester, and I'll come back on that. The second important element is the progressive reinvestment of these cost reductionswhich we have been proceeding with during the semester and which have gradually resulted in an increase of sales.

The third element is that this recovery or increase of sales has been obtained through volume growth, which have stronglyrebounded from 1.1% during the first quarter to 3.6% during the second quarter. And you can see all that in the figures, ofcourse, with sales increasing 1.6% overall on the semester, again, mainly fuelled by volumes with negative pricing.

And operating income increasing by 8.1%, which is the main factor for the increase of the EPS, and which means, as well, thatthe operating margins have rebounded very strongly at, plus 98 basis points on a like-for-like basis.

This leads us to an increase of the EPS on a like-for-like basis of 6.7% which put us on the right track to achieve the 10.0% fullyear, which is on target and, again, I'll come back on that.

Last word about the free cash flow which has been very strong, at EUR636m, compared to EUR550m last year, which means anincrease of more than 15.0% underlying the quality of our earnings plus additional items.

A word on the sales. So, as I said, we've seen an acceleration within the half of the year. The second quarter, here, shows thatwe've been increasing sales during the second quarter by 2.2%. This is -- this has been further predominantly fuelled by volumesat 3.6%. The value component, which was slightly negative during the first quarter, has become more negative as we haveincreased the speed and a base of reinvestment in different markets and regions.

The currency impact remains negative by 2.8% and the effect of principally emerging currencies being weaker than a year ago,and the scope of consolidation reflects two things. Number one, the disposal of Frucor during the first part of this semester --at the beginning of this semester and, on the other, a divestment of baby food brands a year ago -- about a year ago, sorry, inFrance to Lactalis after -- in the process of integration of Numico.

And this leads us to sales for the second quarter of EUR3,846m. The same analysis on the first half gives very similar effects, with,obviously, less magnitude on the balance between volume and value.

One of the important points to note at this stage is that we have -- we are now at a point where the sales of -- the trend of salesgrowth has inverted after a year 2008, where we have seen very flattish volumes, or even negative sometimes, and a pricingeffect which has been fading away.

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We have the reached bottom of that during the first quarter of this year and we are now back to a positive trend, i.e., anacceleration trend of the sales, but which is fuelled this time by volume as opposed to bad pricing, as it was last year, so anacceleration which is, of course, of a much better quality, especially given the context.

I'm going to move by division before going to the income, page eight, Fresh Dairy Products, which is, of course, the main divisionof the Group. So, again, I think it's important to remind that we keep operating in an environment which remains challenging.This is true in literally all geographies, but this is specifically true this quarter in Spain with some ongoing issues with distributors,which remain very much the same that we have seen in Q1.

With Russia, where we have had a very difficult first quarter of this year, Q2 shows an improvement but the situation remainsdifficult. And Argentina, which, towards the end of this quarter, has become, again, softer in terms of market evolution, as weexpected.

This being said, this is the environment in which we operate and we've been knowing that and anticipating that for a monthnow. And we have, as you know, gradually, from January, taken some initiatives on the price side, on the promotional side, butas well on the marketing side, more generally speaking, adjusting the pack size, putting more advertising support behind thebrands.

And this has resulted in a volume recovery of 2.7%, which is the first positive evolution for the past five months and showingthat what we have invested in is showing positive results.

You remember, as well, that, during the first quarter we explained that we had undertaken these initiatives in some countries,in -- primarily in Poland, Hungary, in Czech Republic, in the US. We have been expanding these initiatives for additional countriesduring the second quarter.

This has been the case of France, and I'll come back on that. It's been the case of Mexico where we have made a global reset ofthe portfolio at the very beginning of May. And this has been the case towards the end of the quarter of Russia where we stillhave some actions to undertake, but which is on the right track from this standpoint.

If we focus on these initiatives, again, we've chosen to show you countries, new countries are the existing one, i.e., the onewe've shown you during the first quarter, have kept delivering positive performance following the rebound. Here you see France,where we have been putting significant means behind the brands. You can see negative pricing which in average for the quarterhas been of approximately 5%. We show you an example of Danette, where we have brought back the index in terms ofpositioning of the price related to the average of the market from 135 to 124.

At the same time we've done some pretty focused campaigns for these products. We've made some new packs for specificchannels of distribution. And, all together, this brand together with others, such as Taillefine, Taillefine as well as Veloute, havecontributed to a rebound of volumes and to an improvement of the market share of the Group, not only in value but in volume,which is probably the first for many, many years.

So we have really adjusted in this completed strategy with a view to recover market shares in volume as well to recover marketdominance. And to do that across the range through core range and through premium product as well which, by the way,continue to perform well.

Mexico has been a slightly different example, maybe more in line with what we have done in Poland, but even different fromthat. As I said, at the very beginning of May we've taken series of initiatives. We show you one on this chart, which is the corerange. We had the core range which was in a yellow bottle under the brand, NutriPLUS, with a premium pricing versus competition.

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We've chosen to give, again, more sense to the core range as we conceive it, building on the Danone brands, on the 90 years,on the yoghurt expertise, bringing the price to 15% below competition, so making this core range in Mexico more affordable,and moving from yellow to blue, which is a major change, of course.

You can see the results which is not only coming from the core range. Our core range has been one of the initiatives, but there'sbeen more. We've worked on Activia where we have diversified the number of packs and we have, for instance, introduced aone kilo pack which means that we are gaining in penetration of the [blockbusters] and making them affordable to othercategories of consumer.

We have, at the same time, launched one product which we will see the page after, which are the Mini Shots of Activia, whichis very focused on the benefit and which is working well. And, all together, this has resulted in a very significant rebound of theperformance of Mexico, which had difficulty competing with Lala until the month of March and which has been improving itsvolumes by 25% in June, sales by 10%. So this, of course, will be -- will need to be followed in the months to come but the resulthas been, frankly speaking, very much in line with the expectations, and give interesting lessons for potentially other markets.

I was mentioning the Activia Mini Shots in Mexico, you see them on the top left. That's a product which, again, is showing verygood result from launch. We are multiplying the initiatives of innovation on different fronts on the benefits and blockbusterproducts, of course.

And, beyond Activia Mini Shots, you can see Densia in Spain for which it's far too early to say whether or not it's going to be areal success. Densia is a product which is a targeting osteoporosis and which has been launched at the very end of June in Spain.We'll be looking at the results knowing that we have other things in the pipe which will be coming in the coming month.

Core range, I've mentioned that.

Danimals Crush Cup is an interesting innovation on the packaging side, which is pleasing, very much, the kids and workingextremely well in the US. So, again, we'll be multiplying initiative, not only in terms of price reduction and promo, but also interms of core range, in terms of packaging initiatives with the Toppers, for instance, and in terms of health benefits, as well. Weplay on these three fronts.

So that's for Dairy which, again, has really changed trends following the implementation of these initiatives.

If we move to Water, now, page 12, that's been an interesting quarter as well, for different reasons. As you know, our businessis split into two different paths; one is emerging countries, the other one is industrialized countries.

Emerging countries have kept a very strong growth base, very much the same as the one we have seen in the previous quarters,around 10%, 10 percentage point, to be precise. We've a still very strong performance in many countries, specifically in Mexicoand in Indonesia.

The other part of the business is, of course, the industrialized countries, which have remained negative during the first -- duringthe second quarter. But we have seen some beginning of an inflection. So, of course, we have to be careful in front of that.

We know, for instance, that the weather condition has probably played a positive role in that this quarter. But we feel as wellsome underlying improvements. We feel that, for instance, in the UK, where we have been for the first quarter in four or fivequarters, positives, both in volume growth and sales growth.

We've taken some specific initiative like playing the Volvic Challenge, which is very much inspired by the Activia Challenge fromthe Dairy division, which is helping the consumer to understand he needs to drink a certain quantity of mineral Water for aweek and for two weeks. And we've seen some improvements, again, in the UK and in France, in particular.

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In this division we are, of course, not staying uncrossed, i.e., we see these improvements as well as a result of initiatives we'vetaken on two fronts. First of all, in the defense of the category, I think we are doing a pretty good job with some of our competitors,in alliance with them in defending the category.

The tone we have seen on bottled Water in the medias have changed. It's not yet at the level we would like it to be but it'simproved, and it probably contributes to the performance. And then we keep innovating and pushing the brands. You'veprobably seen the Evian advertising -- new advertising. If not, I invite you to do so. It's been, I think, the most watched movieon the Web in the past two weeks in most of the countries of Europe. And it's playing again on the role of vitality of Evian forthe babies.

On the right side you see Volvic, which probably has the potential to become the green brand of the Group, the green andwhite brands. Here, you see an example of a launch we are proceeding with at the moment, which is an eight-liter format forthe consumer in France, which we called Eco Reserve. Again, we'll be multiplying that kind of initiative, not necessarily on [bigpacks] but initiatives on our brands going forward.

And then, of course, we keep innovating as well and pushing the brands in emerging countries with the Bonafont platform,which has proven to be successful in Mexico. It's successful now in Brazil and we'll be looking at expanding that in other countriesas well going forward.

So, Water, which needs to be confirmed but, again, it seems that the trends are improving.

Then, we move to --onto a stronger division, Baby Nutrition, with a growth which, frankly, has remained strong at 7.4%, withthree elements to be noticed. Number one, most of the countries that delivered a performance which is still very strong androbust and in line with the one we've delivered in the previous countries.

We have mentioned at the -- during the first quarter that we have seen some softness in Russia. This remains true. In fact, beyondsoftness, we've seen some weakness in the surrounding actors and, in particular, on the distribution side. And, therefore, wehave chosen to be prudent on that side and this has led us to be less pushy on the sales. We are working to strengthening thisenvironment in order to be able to push again.

The second element has to do with China. You remember that following the melamine crisis we had seen exceptional trendsin terms of improvement of the market share. We expected that to normalize. This is happening now. This has happened, infact, for a large part during the second quarter, which means the top market share has come back, not to the previous level,but to a level which is more sustainable at 12%/13% and, therefore, this contributes to the performance of the second quarter.

So Baby overall, which, again, besides these two specific factors is -- remains extremely resilient and on which we are still veryhappy with the performance.

Again, in this division we keep innovating on two fronts; on the milk side and on the Food side. On the milk side one of the keychallenge for us is the rollout of the Bebelac brand. You know that the main brand of the Group is Actimel. Actimel is positionedon the [very] premium and is defending the immunity benefits.

Bebelac is more an every-day food for the Baby and the complete nutrition concept. It's a product which is positioned differently.And we want to have these second products completing the range so we have it in a number of countries. We keep rolling itout in some others and, for instance, this has been launched in Thailand during the second quarter.

On the Food side we are, of course, pushing the development of our products. In many markets we still have a lot of potentialbecause we are under-developed that side. We show you, here, examples in -- on the juice side, on one hand, but, more relevantperhaps, on the jar side with soups in Poland and Czech Republic. And, again, that's going to be an example of initiative we'llbe taking again in the coming quarters in this division.

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The last of our division is Medical Nutrition which continue delivering a very strong performance across the board, with twospecific factors to be mentioned, perhaps. On the one hand, Germany, which keeps being difficult, both from the competitivesituation standpoint and from the point of -- point of view of the pressure on reinvestments. So Germany is a market whichremains tough.

On the other hand, Southern Europe has been delivering excellent performance and we see emergence of a very interestingperformance in emerging countries which remain small at the level of the division for the time being, but which are promising.

In terms of innovation, we are doing the job as well in this division, with two examples here, Fortimel Compact, which you cansee on the right side. So, Fortimel is a product which is addressed mainly to senior people. As you know, very often senior peopledo not have -- are not sufficiently hungry and, therefore, do not take the food they should be taking for -- with respect to theirown needs. Fortimel is a product which is designed to give them the benefit and proteins they need in order to have theirnormal daily intake.

One of the issue we had with the previous product was that the bottle being big, they tended not to finish it. We are comingwith a smaller bottle which was, technically, not very difficult -- it's not very easy, sorry, to put in place but which we havemanaged to do so. And which will be of further benefit for them in the sense that they will finish the bottle. This is a reallypromising product which will be launched very soon in the UK since we have received the approval from the authorities twodays ago.

Infatrini and Nutrini, on the other hand, you probably know that we are a leading Company in the area of -- children growth,i.e., kids having problems of not growing normally. We keep, again, innovating, renovating, expanding the range, and you havethree examples of these products on the chart.

To finish with the sales, a look -- a quick look at the geographical growth. What you can see is that we've been growing -- we'vebeen accelerating the growth in all geographies. Growth remains negative in Europe, but it's improved by one point. It's improvedas well in the Rest of the World by one point in Q2 versus Q1 and, obviously, faster in Asia which remains the area of the worldwhere we see the best dynamics in terms of consumption.

I'll now move to the margins, page 19, starting with the breakdown of income. So the operating income has been reachingEUR1,411m this quarter. This is made of two different components; trading operating income, which is a recurring part, andother operating items, which is non-recurring for EUR205m. I'll come back on that.

Taking this EUR1,206m of trading operating income, this means that we have improved the margins, which have stood at 16.03%during this first half of the year, representing a 73 basis points increase versus the same figure of last year.

How does this 73 basis points increase break down, page 20? Of course, we have some negative impacts as well on this sidefrom the scope of consolidation and translation of -- and translation effect for the very same reason as the one I've explainedbefore. On a like-for-like basis the margins have, indeed, improved by 98 basis points.

This improvement is, of course, driven by two main factors. One is the decrease of the costs which amounts to 197 basis pointthis semester. This decrease of the cost, again, is driven by two factors. On the one hand, input costs -- the price of input costs,which have decreased both on the milk and on the packaging sides. But in addition to that, and for approximately one third ofthat, productivity which has generated as well substantial savings all together.

The second part of the equation is obviously the level of reinvestment which plays on the sales and price, and which plays aswell on the leverage. And you can see that on the right, i.e., the effect of the reinvestment and the margin have been 87 basispoints, which reflects the fact that we have been gradually putting in place these initiatives across the semester.

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If you move to the second semester and you go -- and you look at that in terms of dynamic, we obviously expect, over time, theinputs costs to be at the same level or maybe slightly lower, since we'll be entering into the first anniversary of the decreasetowards the end of last year and, at the same time, an impact from the initiatives which will be gradually increasing so that weshould have, during the second semester, a very balanced equation on that side.

If we look at these margins from a divisional standpoint, obviously, most of the improvement comes from two division, whichare Fresh Dairy and Baby Nutrition, for the reasons that the impact of both productivity and the reduction of input cost isimpacting these two division. This is even more the case in Baby Nutrition since we have taken less initiatives than in Dairy andwe have the end of the synergies of the Numico acquisition, the cost synergies, which we had -- which we have completed now.

If you go to Medical Nutrition there is a big number of minus 139 basis points but which, in reality, is a small number in millioneuro, and which reflects two things. On the one hand, phasing in tax of the expenses, which means that this is going to bereverted during the second semester and, on the other hand, some one-off costs with respect to some reorganization in somecountries.

Waters is -- has a level of margin which is almost flat but, again, reflecting different factors. On the one hand, the continuingdecrease of the sales even at -- even though at a lower pace, a continuing decrease of the sales in industrialized countries isbringing some negative leverage impacts. But this has -- is almost fully compensated by the evolution of the cost of raw material,as well as by what is now a positive mix between emerging countries and industrialized countries.

If you look at the geography there's nothing specific to mention. The improvement has been across all geographies even more,of course, in the past, which have been growing faster.

I'll now move to the bridge from operating income to net income. So we start again from the EUR1,411m on -- in the columnin the middle. So just for you -- to re-explain, to remind you the structure of the table. You have so on this page 22, on the leftthe reported number for 2008. Then next to it the reported number for 2009. You have the non-current items which are developedtheir impact at the various lines at the various levels which are developed, and then the underlying performance.

So let me just focus for two minutes on the non-current items. You see an amount of EUR205m at the level of other operatingitems, which is reflecting two things; number one, the capital gain from the disposal of Frucor, our beverage operation, at thebeginning of the year and, on the other hand, the investment in our Ecosystem, investment in Ecosystem in France, which hasbeen announced at the beginning of the year and approved by the shareholders' meeting in the month of April.

On the financial expenses level you have EUR20m positive which, again, is reflecting two things; number one, the gain ondisposal of our biscuit operation in India and, on the other hand, some negative one-off exceptional financial items with respectto hedging. So the total of that gives you a positive EUR210m.

I'm now moving, therefore, to the underlying items and to financial expenses which have been of EUR225m. This was EUR200mlast year. This is hiding different factors. Last year we had, as you remember, a positive mark-to-market of approximately EUR20mon the financial expenses, which we don't have this year. This means that the number have been pretty comparable excludingthis impact, and is reflecting -- sorry, on the one hand, an improvement of the average cost of the debt and of the average debtand, on the other, slightly higher costs of the hedging in emerging countries.

All that, and I'll come back on the tax in the following page, is giving us a net income which has (inaudible) that EUR798m beforeminority interests, and to EUR722m after minority interests.

One word about the tax. We have tax rates underlying of 22.5%. The same was 24% during the first semester of last year. It wasslightly in excess of 23% during the second semester of 2008. We remain on the tax rate which, in a sustainable manner, is inthe range of 23.5%/23%. The difference with the 22.5% is on exceptional tax benefits which we have had this semester.

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This leads us, therefore, to the underlying EPS which, with a net income of EUR722m, has amounted to EUR1.50 per share. Thenumber of shares has increased not at all as a result of the capital increase, which closing has taken place on June 25, so thereis no impact for this semester. But, as a result of the distribution of the dividend in shares, which has created, all together, 11mshares, and 3m shares in -- on a pro rata temporis basis for this quarter.

This EUR1.50 compares to EUR1.47 on the reported basis last year, which is driven by two factors. Currency and scope on onehand, with a currency impact which is slightly higher than the one we have seen at the top line level. It was EUR2.8, I remindyou. And the scope in line -- and the scope -- thank you very much -- in line. And the like-for-like -- sorry, growth of the EPS,which has stood at 6.7%, again, very much in the right direction considering our target of 10% for the full year.

A word on the cash flow, which has been driven by two main factors; operating cash flow from operating activities has beenstrong at EUR846m, from EUR821m the previous year and, on the other hand, the phasing of the CapEx has been favorable thisfirst half, since we have had 4.1% of sales going forward. We still expect the run rate for the full year to be around 4.5%, asopposed to 4.1%, and therefore slightly higher for the second half.

This cash flow, then net, the free cash flow from operation of EUR600m has been one of the free elements contributing to thereduction of the debt. The two others are, of course, the capital increase for an amount very close to EUR3b on a net basis, andthen the net proceeds from the disposals of our two businesses in Australasia and in India in beverage and biscuits.

And all together this has resulted in a reduction of the debt of EUR4b, which means that we have now a balance sheet whichwe consider much more balanced and robust, with the net debt reduced to slightly below EUR7b and other parts of the balancesheet which has not been moving very significantly.

I'll end up with the outlook for the rest of the year. So we confirm our guidance of underlying EPS growth of 10%. The driver toachieve this 10% underlying EPS growth remain the same; sales and EBIT margin.

It's obvious that in the second semester we expect the contribution from margins to be far less contributing that it has beenduring the first semester, as we will be reinvesting gradually in different countries and divisions more and more of the costsdecrease we have seen. And, on the contrary, we obviously expect, during the second semester, an acceleration of the salesgrowth as we take, as I said, more and more initiatives in our different geographies and division.

This is the end of my presentation. I now propose that we move to questions, and Robin and myself will be very happy to takethem.

Q U E S T I O N S A N D A N S W E R S

Robin Jansen - Danone - Director, IR

Please go ahead. And you choose!


Okay. And we'll start with (inaudible).

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Julian Hardwick - Royal Bank of Scotland - Analyst

It's Julian Hardwick at RBS. A couple of questions. One on the guidance, the 10% underlying EPS growth. You've excluded impactof disposals, currency and the rights issue from that. All of those are quite material factors that are going to influence theoutcome. Can you just tell us, as we sit here today, what do you expect the impact of each of those three factors to be on EPS?

And, secondly, I'm a bit puzzled by your EPS calculation for the first half because you seem to have completely ignored therights issue and made no adjustment in terms of the bonus element of the rights issue, which should result in a restatementdown in both the historic EPS and in the EPS for this year. So I was just wondering if you could just explain how you're treatingthe rights issue in your EPS calculations.


Well, on that side, in fact, we are treating it in accordance with the IAS, I believe it's 33 norms, which gives precise guidance forthe adjustments. Perhaps the reason why you didn't see any impact on the first semester is, as I said, the fact that we havecompleted the transaction on June 25 and we are in accordance with this norm, therefore, treating that on a pro rata temporisbasis, which absolutely explain the fact that you have no adjustment and no significant impact for the first half.

You obviously will have impact for the second half. And this is what we have tried to show on the chart you see on the screen,which is page 25 for the webcast. We've two elements, which are the TERP adjustment and the capital increase itself. So duringthe roadshows for the capital increase we've been very specific about these impacts, saying that we expected the TERP adjustment-- we know the TERP adjustment will be of 94%, which means an impact of minus 6% when this is basically what you will seewhen we come to see you on the full year in the first N/S column on the screen.

For the capital increase we've said as well that we expected the dilution to be 12%. We just restate that. In terms of the way toimpact S2 of this year and S1 of next year, we expect this to be slightly de-balanced with a [7.5] as opposed to a [6.6] and,therefore, we expect the minus 7% on this table as we go to the second semester.

As for the currency, so we are showing minus 3.2%. We've made, as we had done during the -- sorry, during the first quarterwe've made an estimation, again, based on the spot at the end of June. And if you take these spots for the second semester,we will find the total impacts of minus 4%.

You could tell me -- you should tell me that this is a bit strange considering that a number of country -- of currencies in emergingcountries have improved. This is true for part of them, but not all of them. On the other hand, we are entering into a base ofcomparison versus last year which is very different with respect to some currencies.

I have two in mind. The US, on one hand, and the yuan, more specifically, on the other, which means that if we were taking thespots at the end of June, we will find an impact of four points instead of three points for the second semester. Now -- for thesecond semester, yes, sorry.

This being said, we have to see how -- what's going to be the real impact. One of the reasons why we've chosen to communicatein like-for-like EPS this year is precisely because of the relativity of currency, and we'll be monitoring this impact but focusingon the real performance.

Pablo Zuanic - JPMorgan Chase & Co. - Analyst

Good morning, Pablo Zuanic, JPMorgan. A couple of questions.

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First, can you give us more color at the regional level for the Dairy business and maybe for Baby Nutrition? In particular, in theuse of Dairy, what happened with volumes in Western Europe quarter-on-quarter in terms of growth, the US and emergingmarkets? You have a delta of about four points, right, from minus one in the first to plus 2.7, but what drove that?

And if you can also comment, just some color on Baby Nutrition volumes within developed markets and emerging markets.And then I have a follow on.


Okay, on Dairy, to give you a bit more color, there's been pluses and minuses. Argentina is probably the main minus. Russia isstill being difficult, as I said, but has been recovering a bit compared to Q1.

Then most of the improvement we've seen has been coming from the countries I've mentioned, the countries in which we'vetaken initiatives, which are Poland, Czech Republic, Hungary, Slovakia, which have had a full year -- a full quarter impact in Q2where they had only a limited impact in Q1.

Mexico, which has had an impact for half of the quarter. France, which has had higher impact during Q2 versus Q1. And thenwe have countries which remain very solid, in which we are taking initiatives but not to the same extent as the one we've shownfor these countries. This is the UK, this is Italy, this is Brazil, in which the volume progression has been still very strong for thepast quarters, including this one. So we are -- that's, I guess, the picture in geographical terms.

If you think about Baby, fundamentally, we have three areas, Western Europe, Eastern Europe, Asia. I've mentioned Asia. In Asia,I've mentioned China, which is a specific situation. Indonesia has been very much on the same basis as Q1, perhaps with someimprovement even.

The rest of Eastern Europe -- sorry, Eastern Europe, Turkey and Russia have been soft and maybe even more than in the firstquarter, as I've mentioned, specifically in Russia and in Turkey. The rest of Eastern Europe has been very much in line with Q1and Western Europe has been very much in line with Q1.


Thank you. And just to follow on, I know it's very sensitive to talk about your Dairy cost benefits when we see on TV all thesefarmers protesting in Switzerland and France. But I have to be honest, your saying 200 basis points of input cost benefits in firsthalf on a consolidated revenue base of EUR7.5b, that's roughly only EUR150m of cost benefits. And I [have] aboutEUR500m/EUR600m.

If it's as low as EUR150m, it just sounds to me like you don't have a lot of ammunition to cut prices in the second half, unlessyou are guiding for margins to fall in the second half year-on-year. I know you've said that margins are going to be down -- upless in the second half, but just more color on those input cost benefits. They just seem very low to me in terms of the numberyou're giving us.


Okay, and you're probably the only one in this room on that. They are what they are and, again, even in the EUR150m youmention, as per your calculation, there is, as part of that, a part of productivity which is accounting for approximately one third.So the real impact of the rest of the input cost is even lower than what you mention, which reflects the fact, indeed, that wehave seen some improvement on the cost of raw material.

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But we have always said for the -- since the last quarter of this year that we did not expect the improvement on raw materialscosts to make us come back to the previous level because we know that there are some, let's put it this way, resistance, thereare some breaks to coming back to previous levels, depending on the geographies. So we're not -- we do not feel surprised bythat.


And one last one, if I may, on the cash flow front. You said net debt the first half below EUR7b, free cash flow of EUR600m in thefirst half, so should we assume, what, 6.3%/6.4% by the end of the year in cash and net debt, roughly?


I'm not going to guide on that, sorry.


David?

David Hayes - Nomura - Analyst

Thank you. Hi, David Hayes from Nomura. Just to follow up on that, could you be a bit more specific about what those productivitysavings involve and whether it's ongoing when we see that coming through in the second half, another EUR50m benefit, ormore, potentially?

Just to clarify on the input cost, I think you said that it'll be flat to maybe a slight benefit in the second half. Is that the rightunderstanding from what you said earlier?


Sorry, can you repeat this?


Yes. I think you said earlier that the second half input cost benefit, I guess in terms of the pricing proactivity, will be flat, it maybeof slight benefit. Is that the (multiple speakers]?


No, I've said it will be slightly lower than the one we have observed during the first semester.


Slightly lower than it was in the first semester, okay.

And then, just on the productivity side, what's involved there and is that an ongoing project that'll continue to benefit an equalamount into the second half (inaudible).

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There's no real imbalance now on the recurring aspect of this productivity. We make -- year after year we make productivity forthe Group, so that's -- part of that is very much a recurring side of the exercise we are doing.

Obviously, in market conditions and context as the one we are seeing we are trying to accelerate everything we can, and that'swhat we have been doing this year. Which means that, yes, this is sustainable, i.e., these are not one-off savings but these arethings which will be repeated over time.


And (inaudible) just --.


Then, I'm not going to comment on what level of productivities we'll have in the years to come. We'll see. But what we are doingthis year is both very much in line with what we normally do, but in an accelerated manner.


And can you give an example of what -- it's quite a big number, EUR50m, but what kind of thing would contribute to that, whatkind of actions (multiple speakers)?


It's about purchasing, it's about efficiencies, it's about better staffing the teams, it's about changing the recipes, the packagingand so on. It's about all that.


Okay, thanks. Yes.

Michael Steib - Morgan Stanley - Analyst

Michael Steib from Morgan Stanley. Good morning.

In the first half the underlying EPS on a like-for-like basis was up 6.5%. Your guidance for the full year of 10% leads to imply yousee a significant acceleration of second half of the year, with margin contributing significantly less in the second half. What sortof volume recovery are you budgeting for having to get to that number?


We've on purpose choosing not to be more precise on the guidance. As I said, we feel we are in front of market which remainextremely dynamics and difficult. We just want to have the flexibility to adapt further.

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What we know is that as we move into the year we'd have the full effects of what we have already been doing in the first semesterand will have a full impact on the second semester. We know that we'll probably have the ability to implement further initiativesin some countries but, again, we are staying very close to the ground and close to the market in order to make these decisionsand, therefore, I'm not really able to comment on that.

Again, I'm repeating what we've been saying since the beginning of the year. We know there are several ways to achieve this10% EPS. We are obviously trying as much as possible to do that through volume growth and sales growth because we thinkthis is what is sustainable. But, again, we don't want to be led to do stupid things because of that, so we take it month aftermonth and country by country.

Michael Steib - Morgan Stanley - Analyst

Okay. Could I have just one more question? In the past you've given us within Dairy a breakdown between the blockbusterbrand performance and the core range. You haven't done that today. Can you give us maybe some color on that, please?


Yes, the -- to be -- I'll answer through the mix effect, the product mix effect in Dairy, which remains positive, although it hasbeen slightly lower than what we have seen in the first quarter. So it was 1% during the first quarter. It's around 0.5% for thesecond quarter. So it means that the blockbusters keep progressing faster than the rest of the range. But as we rebalance thefocus on the whole portfolio there is less of a difference, as we speak, during this period of reinvestments.

Jeremy Fialko - Redburn Partners - Analyst

It's Jeremy Fialko at Redburn Partners. I've got two questions, the first one on the prospects of the Nutrition divisions in thesecond half.

Obviously, you've got this very, very tough comparison in China in the final quarter of the year, so if you could talk a little bitmore about that. And, also whether you think you'll see any sort of pickup in clinical nutrition.

And then the second question is on your Dairy volumes and whether you can give a little bit more detail on this. Obviously,volume consists of two things. It is selling more units of yoghurt and there's just putting more yoghurt in a particular pack.Could you talk a little bit about the balance of the two, because that would be quite helpful? Thanks.


Frankly, I don't have the breakdown of your question. What is very clear is that it's really a combination of both. There's obviouslya component of [more volumes in -- bigger units being sold and that's illustrated, for instance, with the one kilo pot which weare selling in Mexico. But, at the same time, we are increasing the penetration. So we're not yet at the stage to share any KPIwith you on that. We are working on it and will be at some stage. But, clearly, we're doing both. And it's both a matter of someelements of bigger content but, as well, increased penetration. And I would say, the majority, increased penetration.

On your first question, I think it was about Baby as opposed to clinical, since you mention China. Clearly, we've been sayingfrom the very beginning that this unfortunate melamine crisis in China was creating some temporary effects but was going atsome stage to normalize. We did not know exactly when. We've seen that happening during the course of Q2 and we just haveto keep monitoring it.

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But we think most of the normalization has taken place already, which means that part of the negatives which you see in theperformance of Q2, which come from this normalization and market share normalizing to previous level, is a one-off for thequarter.

And going forward, just a word up on Baby, we expect Baby again to remain resilient. We've always said that. But we equallyalways said that we did not expect Baby to be fully immune from any evolution of the economic environment, hence, as well,the initiatives we are taking, for instance, in Bebelac, which aims at completing the range in order to make it more comprehensiveand more solid, with a second proposition to the consumer.

Chris Wickham - MainFirst - Analyst

Yes. Hi, Chris Wickham from MainFirst. I'm just intrigued by this point where you say in part of your text, you say growth will be"mainly driven by our leading brands". Because it's very hard if you're changing tack from being heavily driven by pricing toswitch to being driven by volume? Our assumption really is that those leading brands will be basically those blockbuster brands.

So it's very hard, I think to say growth is going to be mainly driven by those leading brands because, clearly, you have to switchback in terms of what those brands stand for. But if they're not sold at premium price they effectively lose that element of beingyour leading brands. I was wondering if perhaps you could just clarify how this goes, because I think it's quite hard to do thatif you then change your emphasis to volume.


Yes. Sorry, Robin is telling me that the question -- it's clear to me, but it's not been clear to probably the Web audience sinceyou were far away from the microphone. So can you just summarize it in -- okay, sorry, I will repeat the question.

The question is about the sustainability of what we are doing and that fact that we have been having a strategy of improvingsales through blockbusters in the past and we now have a strategy which is more volume based and less mix based.

I think you have to -- we have to distinguish really two things; the strategy of the Group and the adjustment we are doing atthe moment. The strategy of the Group is, remains, focused on delivering value-added products to the consumer and delivering,among other things, health benefits and good products to the consumer which can be valued, then, because they have thesebenefits and the superior quality, at a higher price than the average of the market. So that was true, that is true today, that willbe true tomorrow and there's nothing changed in that.

But then we are in the middle of the management of two very significant elements which are, number one, the ups and downson the milk side, and number two, the general economic slowdown which change or require us to adapt to the consumerbehavior. So what you can see principally in the figures today is the impact of these adjustments.

It doesn't mean at all that we are de-focusing from the blockbusters. We are just working as well on the range. We arestrengthening -- the core range. We are strengthening the core range. We are taking a number of initiatives. We are loweringprices. We are pushing promotions. We are doing all that. But at the same time we are not de-focusing from blockbusters, whichremain a priority.

And, in fact, when I gave you the example of Mexico, I said that there were three elements in what we do. There is an elementwe changed, that's completing the core range. That's absolutely undeniable. But at the same time we are, number one, expandingthe benefits through bigger formats. But expanding the benefit through bigger formats also means that we are making theseblockbusters at a relatively higher price to new customers which we did not reach before, which are consumers with lesspurchasing power.

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And we are launching the Mini Shots which are absolutely in line with what we have been doing for years, which are theseblockbusters. So we are acting on several fronts. I think what you read into the numbers is a reflection of the combination ofthe strategy and the adjustment we are putting, but we are still very clear that the focus is to grow the blockbusters.

Chris Wickham - MainFirst - Analyst

So is it too simplistic, therefore, to say that basically when people are willing to spend a lot of money on yoghurt and other freshDairy products you grow at 8%, and when people aren't willing to spend that amount of money you grow somewhere closerto 4%?


Yes, I think it's far too simplistic. You're right. No, no. The fact that we adapt it not -- is really the consequence of the two shots.Don't forget that we have increased prices by 10% last year. We have increased prices by 10% when we have seen increase ofthe cost of milk.

Now that we see the level of the cost of raw milk normalizing, it's absolutely legitimate to try and compensate the shock whichthe consumer has been going through and which he's been going through, furthermore, in an environment which makes hislife even more difficult, and in a situation where, part of the strategy as well, to come back with the comment from Jeremy, isto increase penetration.

So I think the reality is a bit more complex than that. And it's really the combination of these two effects, i.e., the strategy whichremains in place and works well, and the adjustments we are doing to it.

Warren Ackerman - Evolution - Analyst

Hi, it's Warren Ackerman at Evolution. A couple of things. Could we get your outlook for Dairy costs, the first question? It lookslike the pricing's been very, very weak. Any kind of rebound that people were expecting in H2 '09 may be -- has it been pushedout to 2010? Your views on Dairy costs.

And, secondly, what kind of price cuts are you having to put through in Dairy? I know Robin in the past has given the exampleof Activia in Spain where you've taken a 33% price cut. Was it Actimel? Okay. 33% price cut to get a big volume improvement.Can you give some examples of the quantum of the price cuts in some of your bigger markets? What kind of elasticity are youseeing on these, or volume pickup? Do you need to cut prices double digit to drive volumes?

And then -- I'll leave it there.


It's very -- it's very variable. It's, first of all, because we don't do it the same way in all markets, number two, because you shouldnot forget at all that we are not only doing price exercise, but the combination of price promo and a number of actions.

In some markets, like France, you see that the average level of reinvestment is around 5%. And the level of reinvestments onthe products in which we are taking the actions is 8%, for instance, in the case of Danette. So it goes from that kind of magnitudeto, on the other hand, countries like the one mentioned by Robin, or Poland, for instance, where for Actimel in Q1 where wehave decreased the price by a very significant number, which is indeed 30%.

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But, again, it's really a factor of the dynamics we see in a particular country, the position we have in this particular country, theproduct we choose to push and the reading we have about the consumer attitude at this very point in time. But I would saysaying from 5% to 30% is probably a good range, with very significant difference from one country, one product to the other.

And as for your first question, I would just say that there's no fundamental difference between what I said about the cost andmargins of the Group in the second half, and the same for Dairy.


(Inaudible) again, to come back to Chris' point, are you concerned about the eroding price mix in the business? I thinkpremiumization has been a key part of the Danone investment case over the years. And it just seems right now that consumersare less willing to pay a premium for health benefits in -- certainly in the developed market.


Yes. And what is your question? Are we concerned by that? No, we are not concerned. We're just moving. The reality, the worldand the market is changing, changing on the many sides, on the two sides I've mentioned before. Frankly, our worries is twice,two-fold.

Number one, to make sure that the strategy of delivering benefit to the consumer which can be valued is still in place, and theanswer to that is very clear. It's, yes, it's still in place. And, number two, to adapt my Group to the current situation and to makesure that we are not trapped in what you call the premiumization, because there is a high cost to losing volumes at the end.

You cannot -- we don't believe you can run a portfolio of product which would be completely premium without any core range,without -- that's also the lesson of 2008. Our problem is very simple. It's verify the strategy, that the strategy we had in place isstill in place, and the answer is yes. And, number two, make sure that we catch the opportunities we see in the market as muchas we can.


I guess what I'm trying to get at is, it's okay cutting prices when your Dairy costs are coming down by 5% to 30%, but whathappens when you go into 2010 and Dairy costs will start rising again? You haven't got the same amount of ammunition to cutprices.


Yes, that's why it's an equation which needs to be dynamically adjusted. But, frankly, what is done on price -- what is done oncost is done, you're right, but then what is done on price is done as well.

Martin Dolan - Execution Ltd. - Analyst

It's Martin Dolan, Execution. Just a quick technical question. The EUR339m non-cash reversal in the operating cash flow, is thatall Frucor or is there something else in there?


I'm sorry, I didn't get your question.

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Yes, there's a EUR339m non-cash reversal in the operating cash flow. Is that all Frucor or is there something else in there?


Yes, I'll look into it and I will come back to you in a minute. It's predominantly Frucor, the bulk.


Sorry, I didn't understand Frucor. Yes, it's Frucor.


Thanks.

Harold Thompson - Deutsche Bank - Analyst

Thank you. Harold Thompson, Deutsche Bank. I've just got two questions. You gave us a quantum of input cost, 200 basis pointsdown in the first half. Could you give us an idea of where Dairy stands versus that down 200? Is it substantially more or fairlysimilar?

And, secondly, in the markets where you have invested, you've mentioned France and Mexico, is the margins up or down?Thank you.


I'll take the second. Robin will take the first. The margin is either up or stable, to answer this question. And that's one of thereasons why we are not taking any global initiatives. We take initiative depending on the situation of every country becausewe want, by doing -- by taking this [gradual] initiative, to do it in relation with the margin -- in relation with the margin as well.


Sorry, and to go back to your first question, your question was about how much of the overall tailwind we got from milk wasrelated to Dairy?

Harold Thompson - Deutsche Bank - Analyst

Or maybe so you know, at the Group level input cost relief is about 200 basis points in the first half. If we just look at the Dairydivision, just to give an idea, do you know if it's a lot more than 200 basis points or fairly similar?


Okay. We haven't calculated in basis points, but the majority is driven by -- the thing is if you look at overall tailwind from milk,it's bigger than the total amount that we showed. But because you also have some headwind in the overall raw material costdevelopment. But because Dairy is the biggest part, and in terms of the level of milk it uses, it's driven by Dairy.

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Nick Sochovsky - - Analyst

Yes, hi, there. Again, can you just actually give us what the organic growth rate for the blockbuster brands were in Q2? Andthen can you just run through some key market shares in the US Dairy market?

And then across Infant Nutrition in Western Europe, what was the organic growth rate? And, again, can you just give us somemarket share evolution in UK, France and Italy?


By day, per month or per hour?


Just the quarter would be great, thanks.


I leave it to Robin.


To me. When you were talking about organic growth for the blockbusters, were you thinking about volumes or were you thinkingabout sales?


Both, if you've got it.


I should have known that one. In terms of sales, it's positive. It's positive growth, low single digit. And in terms of volumes it is-- I think, because I have to do a bit of a calculation here, it's probably about mid single digit. And that's Q2.

Mike Dennis - MF Global - Analyst

Mike Dennis from MF Global. Just a quick question about NPD. You put a lot of slides up on innovation there, but didn't quantifywhat that was to your actual sales figures. Could you talk a bit about the innovations and how they're actually building yoursales for you and, going forward, whether you expect bigger innovations in the second half to build your sales faster?


Again, we don't have any KPI ready to be shared with the public. That's something we are working on. But today I cannot answerthis question, except to say that they are contributing positively. But I cannot say some more than that.

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Just to come back, to be fair to Nick at least, to say which answers we are willing or not willing to give. You wanted to get a bitof flavor on market shares?


Yes.


For countries, I presume?


Yes.


In general we see -- let me see. We see a mixed bag in Europe, mainly flattish markets here. Some of them are a bit down. Butwe also see some markets going up like, for instance, Italy and slightly in Germany, Switzerland, Greece. Austria is up as well.Czech Republic is up. Hungary is up. And then you have a slight soft market share performance in countries like Romania, Russia,Belgium, The Netherlands. In the Rest of the World, China is doing well with the new Activia introduction. Japan is doing well.Argentina is up. A softer performance in Mexico, as we explained, and the US almost flat.


And this is last year?


Yes.


And then on -- just on the Infant side, if you have some European growth?


The European growth is mid to high single digits.


Yes.

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(Inaudible - microphone inaccessible).


For the UK -- the UK is one of the driving forces within Western Europe. We gained market share in virtually every market. There'sonly one or two countries where we lose a bit of market share; important country like Romania, for instance. And for the restit's stable or up. We're actually gaining market share across the board. Alan?


Two last questions?


Alan?

Alan Erskine - UBS - Analyst

Alan Erskine from UBS. Just two questions. Firstly, you've talked about a more challenging environment in northern Europe inthe Medical Nutrition side because of the economic slowdown. And I'm just wondering if we look into 2010 with the level of(technical difficulty) -- is that going to continue to be challenged in --


Sorry, with a number of? The mic was off.

Alan Erskine - UBS - Analyst

Sorry, I was just saying with -- when we look into 2010 with the level of government borrowing likely to lead to more pressureon healthcare spending, how challenging do you think 2010 is going to be for the Medical Nutrition business, just qualitatively?

Second, a small quantitative question, which is could you give us an actual indication as to what sales in China Baby Food didin the quarter, quarter on comparable quarter?

And, finally, just an observation back to the number of shares in issue. I grant you that you haven't had the rights issue in thisperiod, but your share price is adjusted for the bonus element in the rights issue so, strictly speaking, the EUR1.50 is not,comparing apples to apples, (technical difficulty) share price. Thank you.


On the last point I -- there is indeed [certainly] some merits in discussing the accounting treatment but, at the end of the day,we brought in IAS33 which is tough to follow that. But I agree that some things will be debated. We are just again followingthe norms. The auditors do not leave us room of maneuver on that side either.

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On the two other elements, Medical, yes, we see some pressure and on (inaudible) that there could be increasing pressure inthe coming month and quarters. This is one of the reason why we are trying to expand as fast as we can to countries where weanticipate there is less pressure.

To emerging countries, that's one of the example, but also to different products with -- under a new reinvestment model insome of the countries. So we anticipate there will be more pressure. We see that only slightly and in one country for the timebeing. But we are getting prepared to face more indeed. It doesn't make us particularly worried on the overall performance andresilience of this division.

Then, on Baby China, my only comments would be that we've grown far less fast as a result of destabilization of market share,but we have grown.


Jeff?

Jeff Stent - Citigroup - Analyst

Good morning. Just reading the full-year annual report, In that you make a statement saying with respect to the put optionsthat no financial investment is currently being considered as probable in the short term. That seems to be missing from thehalf-year report. And I'm just wondering whether there's any particular reason for that.


No.

Jeff Stent - Citigroup - Analyst

Thank you.


There's no reason. Maybe one question from the website?


No, we'll take the last one from Nick and then we'll go to the --

Unidentified Audience Member

Sorry, within the Clinical Nutrition margin, can you just quantify what the one-off hits were and what the margin would havebeen without those one-off hits?


Let's put -- there's two factors, phasing and one off, which explain the totality of the margin erosion.

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We'll now take questions from the call.

Operator

Thank you. We're now moving to Marco Gulpers from ING. Please go ahead.

Marco Gulpers - ING - Analyst

Yes, good morning, all. I have two follow-up questions. The first is on China again. Maybe you can help us understand on theDairy rollout and provide us with an update on China there. And maybe also share your plans, if you have them, that you canshare on India for Dairy.

And the second question is just for the record. Could you confirm to us again that you have no big acquisition plans at themoment? Thank you.


Okay. On the last point, which is pretty similar to the previous questions, I consider I've answered already. We are not going toconfirm every quarter that we have no legal positions for acquisition plans in the pipe. I just confirmed that there is -- there hasbeen no change and no reason whatsoever explaining the absence of statement or the presence of statements since the capitalincrease. So the position is the same.

And then, let's be clear on that. I'm not going further. I'm not going to comment or answer any more that kind of question. Notbecause we have things in the pipe, but because we don't want to be in the situation where we systematically answer orcomment that kind of question. But then the answer is, no, there is nothing.

Then, coming back to Dairy China, India Dairy, India Dairy I think it is a bit early days. One of the first thing we are studying isentering the country with an affordable, what we call, internally bottom of the pyramid initiatives, which will be leveraging andthe experience we have in Bangladesh and trying out of this experience to make a real business model, but on the businessside with India. So that's going to be the first one.

Again, it's a bit preliminary to comment on it because it's in the process of being implemented. But that would be the first wayof re-entrance and then there will probably be others going forward but, again, too early to talk about that.

On the Dairy side, what we have said and seen in Q1 is basically continuing. In other words, we are growing fast, we've becomenumber two in Shanghai in modern trade and the growth is basically continuing well with Activia, so with a blockbuster


Could you put a number on that growth already? Or you think it's too early?


Too early.

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All right. Thank you.


You're welcome.


Next question, sorry, from the --


From the call.


From the call.

Operator

Thank you very much. Our next question is from Mario Montagnani from Cheuvreux.

Mario Montagnani - Cheuvreux - Analyst

Yes, good morning, everyone. Just a follow up on your comments you made in terms of margin expansion for the second halfof year. I was wondering if you are working on that specific scenario for better prices to basically project such a modest expansionfor the second half. Thank you.


No, we are not too -- we're half year now so we have some visibility of what the milk is going to be in the second half. We don'texpect any major change going forward, but we -- but this works both ways. We don't expect any further improvement. Wedon't expect, either, to have a very significant increase of the cost.

About the medium term, we are clear on the fact that there is probably no longer any upside on the level we have seen today.And we think, on the contrary, that there could be some limited downside going forward, but manageable, as they have beenfor many, many years up until 2006/2007.


The other question that I have for you was regarding your Baby Nutrition business. The easing pace of growth we saw in Q2,which is rather marginal, is that true or it fair to assume that was basically mostly on the back of very demanding comps youhad in 2008? Or is there any specific reason for this slowdown? Thank you.

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No, Mario, it's basically in line with what we indicated when we were discussing the sales performance of Baby in one of thepreceding slides. We saw a bit of softness in China, which was just a rebound of all the good performance that we saw in Q4and Q1. And, as we flagged, we expected some of the local players to come back quite quickly and, therefore it's morereadjustment than anything else. Once the dust has settled down, there's no reason to believe why China will not continue itsgrowth path that it has been on in 2008.

We've also flagged up Russia remains a difficult market. That doesn't mean that it's a very difficult performance, but it's softerthan we were used to.

Thirdly, Eastern Europe as a whole is a bit soft and, again, nothing very significant but it's still -- for the overall equation it playsa role.

And then, lastly, I'm forgetting one, which is Weaning Food. We've clearly indicated that within our portfolio we know that it'smore resilient than most other Food categories. But within Baby Food there is a part which is, relatively speaking, a bit moresusceptible to an economic downturn, and that's weaning food, because there is a substitute possible in terms of going to amodest kitchen or preparing the food yourself.

And that's what we see, not across the boards, but in certain markets like Turkey and, again, Russia. We see that the WeaningFood business is a bit softer than what you would see in a normal macro economic environment.


Terrific, that's very helpful. Thank you so much, Robin. Thank you, Pierre.


Last -- sorry, you're taking a call from the -- sorry, a question from the call?

Operator

Thank you. We're now moving to Giovanni Trombello from Allianz Global Investors. Please go ahead.

Giovanni Trombello - Allianz Global Investors - Analyst

Yes, good morning. I would just be interested in a bit more color on the different blockbusters. Thanks for giving the volumeand organic growth numbers, but maybe you can give a bit more color on different blockbusters. Where do you see positivesigns and where do you see negative developments?


Yes, I'll do that. Activia is still very strong and, to be clear, higher than when it was that -- sorry, higher than the performancewe've delivered in Q1 on this product. It's still very strong and with the right direction.

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Actimel, as you know, has been the product which has suffered most for the past, I would say, 12 months. This is as well one ofthe products on which we have reinvested efforts by a few initiatives, in Poland in particular. And we see the performance ofActimel improving gradually. It's not yet at the level we would like it to be, but it's really improved, and quite significantly.

Danonino is very much in line with the previous quarters, i.e., not as strong as we would like it to be and not as strong as thepotential we see for this product. So, as was the case for Actimel in the past quarters, we have -- we know we have some workto do on Danonino because that's a brand which can -- which really has a lot of potential.

And the last one is Vitalinea, which was weak and is weak. And we know Vitalinea is as -- one of the issues of Vitalinea is a kindof cannibalization with Activia. That was true. That remains true. We are coming with initiative and innovation in order to betterdifferentiate Vitalinea from Activia. We still have results to see in order to be able to confirm that we are on the right path forthis product. So positive Activia, Actimel, to be improved on Danonino and, Vitalinea, we still have to find and confirm thesolution.


Thank you.


And, sorry, I will add another one because I tend to forget it, which is Danacol. And Danacol is the same the same speed ofgrowth as in the past quarter. The only difference is that we are talking -- we are working on a different base, but it's growingvery fast.


Thank you.


We'll take the last two questions from Pablo and from Gerard, and from Xavier.

Xavier Croquez - Exane BNP Paribas - Analyst

Hi, Xavier Croquez, Exane BNP Paribas. Just one point of clarification regarding the famous third of productivity gains in rawmaterials. There is no synergy of joint blending Numico and Danone milk purchases in this?


No.

Xavier Croquez - Exane BNP Paribas - Analyst

So it's cleaner for the synergies? Okay.

Two questions building on the previous one. We understand it's not easy to clarify what is elasticity of price on volumes, whatis unit versus extra volumes and so on and so forth. But on our side it would be very helpful if you could provide us with a few

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examples of price cuts that are already six months back, so the consumer has forgotten them, and what are the resilience ofvolume trends once the price cuts are forgotten? So if you have a few examples.

And the second one is in Germany, in Clinical Nutrition, what's really going on there? Why is it in Germany to start with? Andwhat is actually going on in Germany from a competitive point of view in Clinical Nutrition? Thank you.


Two elements. On the examples, I think we have to turn back to the countries we've mentioned during the first quarter becausethese are the ones from which we have the bigger look. And basically what we had observed was that the volume rebound wasexceeding the price decrease, so that the sales result was positive.

That remains true and that remains true, not only throughout Q2, but even in June if you talk about June. So we have performanceswhich are maybe slightly up from what you've seen the first month, but which are very much in line with what we expected,and lasting. And that's true for the four countries which we mentioned at that time, which is Poland, Czech Republic, Slovakia,and I think the last one was Hungary.

In the case of the US we are obviously not in the same case because what we have been pushing is more promotions and,therefore, you can't tell the same assessment as the one you are talking about. But, yes, we see resilience in the effect of theactions we have taken and, indeed, that's very important. That's the first thing to look at.

With respect to Medical in Germany, as I said, it's a combination of pressure on reinvestment and on competition, with one keyplayer being in front of us, which name is Fresenius, and which is competing very hard with price with us on that side. I think,in addition to that, it's fair to say that we had some management issues which we have been fixing and we expect, therefore --we have action plans in place to progressively improve the situation, but it's too early to see that in figures now.


Gerard?

Gerard Zaffran - Merrill Lynch - Analyst

Merrill Lynch. Your top line medium-term guidance remains 8% to 10%. I was wondering what you actually call medium term?And if you could give us the detail of the assumptions you make by division to get to these numbers?


So, yes, you're right, it remains 8% to 10%. I won't qualify the medium term for the very same reason than the one I've explainedfor the past -- we have explained for the past six months, i.e., the environment in which we are living, the adjustments we aredoing, the change of consumption trends, the effect of the economy crisis, a stabilization of the price of milk and so on. All thatis putting us in an equation where we have to adjust the model, and we don't know how much time this is going to take.

And, particularly, we never give guidance for the following year before November of the previous year. We are not going tostart giving them earlier this particular year, where we know that the economic situation is -- I would qualify it as unstable and,therefore, we need to see more.

As for the breakdown, it's fundamentally around the same number for Dairy, higher for Medical and Baby and a wider rangefor Water which we expect to be more between 5% and 10% than between 8% and 10%. So there's no change on that.

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Sorry, last question from Pablo. No, sorry, it's Pablo in the corner.


Thanks for taking the follow up. Look, maybe this question is more for Franck Riboud, but I have to say, back in November inthe Investor Day he said, "one day we'll be 100% blockbusters". And, to be honest, I don't think that makes sense, okay?

And when we are talking about growing in the core portfolio I want to understand really, these things about Danette, the growthin the core portfolio now, is this just tactical, or is there a seismic significant change in strategy in which Danone is going to bestart looking at innovating in what I would call value added, maybe easier to copy, core products?

And what I mean by that, there's a number of segments on there you guys are not fully serving. Total Fage is cornering themarket for thick natural yoghurt. You have a Hispanic brand in the US running about 30%. You have people launching moreindulgence type of products. And the list goes on and on. And I'm just trying to understand, has there been a change, or is itstill what Frank wants, 100% blockbusters? Thanks.


Again, to me you -- it's very important not to mix up the strategy which remains essentially the same and the adjustment weneed to make to the specific situation. What's changed? I think it's easy. You just need to look around you to see the level ofgrowth of the economy this year, the growth of the unemployment, the effect on the consumption. I think it's pretty clear.

What's changed as well is that we have seen last year, in the US for instance, that by being 100% focused on blockbusters werun the risk to face some volume leak on the core range. And we know that volume leak in the core range is making us enterinto a negative equation because it reduce the leverage.

So that's what we are trying to fix, so adapt to the current economic environment, adapt to the current consumption pattern,avoid that we enter into an equation where we would put pressure on the blockbusters through the core range, and that's whywe are re-launching core ranges in some geographies like Mexico, for instance.

But again, I repeat, the priority remains -- the blockbusters -- the priority remains to deliver health through food to the biggernumber of people possible. The priority remains to add value. I've said many times, only I can repeat it, that if we were to choosecompeting on price only, we will be dead at the end of the day. Because if you want to find people who can produce cheaper,you will always find them; people dumping, people playing on (inaudible) as well. So it's a question of balance.

Yes, we have to be competitive. Yes, we have to produce cheap. Yes, we have to make sure that we don't lose ground on thecore range. It doesn't prevent us at the same time to have, as a priority, Activia, Actimel and the others. But if instead of focusing,of spending 100% of your time on energy, on Activia, you go to an equation where you spend 70% to 80% on your time onblockbusters and 20% to 30% on the core range, to me, that's reasonable balance, and certainly not a change of focus andstrategy, adjusting adjustments.

We have to stop here, unfortunately. I want to thank you very much for your attendance and wish you a very good holidayseason, for those who can benefit from it. Thank you.

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