EQUITY RESEARCH Consumer | European Food Manufacturing & HPC | 14 January 2011

DANONE Stock Rating 2-EQUAL WEIGHT

from 1-Overweight

Investment in growth limits 2011 upside Sector View 2-NEUTRAL

Unchanged

Price Target EUR 49.50

Investment phase might limit margin upside for longer; downgrade to 2-Equal Weight,
lowered -3% from EUR 51.00
new PT €49.50: Danone is successfully rebuilding its growth strategy away from
premiumisation-driven growth, towards expanding the full spectrum of its leadership
Price (11-Jan-2011) EUR 46.02
position in Fresh Dairy, and in all divisions in faster-growing markets. We expect peer-
Potential Upside/Downside +8%
group leading top-line growth of 6.6% to 7% up to 2015, while Danone’s management Tickers BN FP / DANO.PA
team rightly builds for sustainable growth for the long term. Throughout the extended
investment phase, envisaged to be the next 2-3 years, management expects operating Market Cap (EUR mn) 29814
profit margin expansion to be flat to slightly up (0-10bps, excluding the dilution impact of Shares Outstanding (mn) 647.92
UniMilk), and we think this is less attractive on a 12-month view, as any share price Free Float (%) 88.67
52 Wk Avg Daily Volume (mn) 2.3
upside might be limited during this period. As a result, we trim our price target to €49.50
Dividend Yield (%) 2.6
from €51 and reduce our rating to 2-Equal Weight, from 1-Overweight.
Return on Equity TTM (%) 9.24
Limited margin upside potential triggers rating downgrade: The stock currently trades Current BVPS (EUR) 24.07
Source: FactSet Fundamentals
on 10.4x 2011E EV/EBITDA, and while we think the consolidation of UniMilk will boost
2011E LFL growth, underlying profit momentum is likely to be limited. Following the
Price Performance Exchange-PA
adjustment of momentum estimates, we reduce our price target slightly to EUR49.50 52 Week range EUR 48.50-39.34
from EUR51, which values the stock on 11.1x 2011 EV/EBITDA, and 9.6x 2012E. 52

Adjusting for UniMilk acquisition: We adjust our 2010 EPS estimate by -3% to 48

EUR2.71 to account for an earlier-than-anticipated completion (Dec 1, 2010) of the 44

Unimilk acquisition, diluting group operating margins by 10bps. We had already 40

factored in the dilution effect for 2011, but we now reduce our earnings estimate by
36
another 3% to reflect ongoing high levels of investment into building the business. 01- Apr 01- Jul 01- Oct 01- Jan

Link to Barclays Capital Live for interactive charting

DANO.PA: Financial and Valuation Metrics EUR European Food Manufacturing & HPC
FY Dec 2008 2009 2010 2011 2012 Susanne Seibel
+44 (0)20 3134 3328
EPS 2.59A 2.50A 2.71E 3.02E 3.33E
susanne.seibel@barcap.com
Previous EPS 2.59A 2.50A 2.80E 3.11E 3.53E Barclays Capital, London
FCF Yield 6.1 6.4 7.2
Gabriela Malczynska
EV/EBITDA 11.0 10.4 9.1
+44 (0)20 3134 7625
P/E N/A N/A 17.0 15.2 13.8 gabriela.malczynska@barcap.com
Source: Barclays Capital Barclays Capital, London

Barclays Capital does and seeks to do business with companies covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by research analysts based outside the US
who are not registered/qualified as research analysts with FINRA.
PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 14.
Barclays Capital | Danone
Danone implements a new
growth strategy
Figure 1: Danone organic sales growth and underlying margin expansion 2005-2009
Organic growth rate
Underlying EBIT margin expansion
Source: Company data.
Fresh Dairy growth opportunities
across all price points and in
emerging markets
Further re-investment in the
business required to lay the basis
for future sustainable growth
14 January 2011
Danone returns to superior top-line growth momentum
Historically, Danone’s top-line momentum has been stronger than its peer group’s (7.5%
CAGR 2005-2009), and it has translated into annual underlying profit margin growth of
45bps on average. Danone’s premiumisation-driven growth momentum came to a
screeching halt in 2009 when fresh dairy sales collapsed and the company reported the
lowest growth rate (3.2%) in a decade.
2005 2006 2007 2008 2009 Average
6.7% 9.7% 9.7% 8.4% 3.1% 7.5%
25.0 32.0 59.0 53.0 61.0 46.0
The company subsequently reduced its growth rate expectations to “at least 5%” from its
previous target rate of +8-10%, and has introduced strategic changes which we believe will
put the company back on track for growth. Already at the H1 2010 level, the company felt
comfortable in raising sales growth expectations back up to “at least +6%” p.a.
The return to growth is driven by:
„ Exploiting the full expansion potential of its Fresh Dairy division
„ Exploiting growth opportunities in all divisions in faster-growing markets
Danone is the category leader in Fresh Dairy, with an international presence in both
developed and developing markets. Danone’s definition of developing markets is
unconventional as it is driven by assessing growth opportunities based on still low per
capita consumption ratios, consideration of accessibility and availability and increasing
health awareness; and therefore includes markets such as the US.
Historical growth in Danone’s main division, Fresh Dairy, was driven by premiumisation: the
company launched an impressive number of blockbuster products, such as Actimel and
Activia that gradually, and over time positioned the portfolio at the premium end. The arrival
of the financial crisis and subsequent consumer recession required an immediate re-think of
this strategy. Danone’s management acted swiftly and decisively: the 2009 reset program
resulted in price reductions of 20-30% for the premium-positioned products, bringing
Danone’s portfolio nearly back in line with competitors’ pricing, clearly aiming to regain
market share and “return to everybody’s breakfast table every day”, according to
management.
In the absence of premiumisation-driven growth, management clearly identified growth
opportunities in markets where its Fresh Dairy division offered growth opportunities: Russia
and the US are amongst those. Consequently, Danone has embarked on strengthening its
presence:
„ The acquisition of UniMilk significantly improves sourcing, production and distribution
opportunities in Russia, a market where there is ample opportunity to grow per capita
consumption on the basis of an already established consumption culture of dairy
products, improved distribution through the expansion of modern trade, increased
affordability and raising awareness of health issues.
2
Barclays Capital | Danone
Underlying margin growth will
be subdued, for longer, due to
re-investment
14 January 2011
„ An agreement with WalMart to extend the presence of fresh dairy on its shelves is likely
to increase per-capita consumption in the US, we think. US consumption of yogurt and
related products lags significantly behind that in Western Europe and Canada, but
shows strong growth rates over recent years, supported by health campaigns aiming to
tackle issues such as obesity and osteoporosis.
In emerging markets, Danone “goes the extra mile”, improving the affordability and
availability of products in all its divisions. Examples include the development and marketing
of more easily affordable babyfood brands in Indonesia, and bottled water in remote rural
areas in Latin America.
We believe the strategic change should result in sustainable growth and given its category
presence, Danone is likely to outperform its peers in terms of organic growth rates. Figure 2
below highlights the geographic presence of its single biggest division, fresh dairy, with a
significant presence in faster-growing emerging markets and the “developing” US.
Figure 2: Danone 2009 Fresh Dairy sales by geography worldwide
US
17%
Emerging Markets
42%
Western Europe
41%
Source: Euromonitor, Barclays Capital
Management is frank about the fact that the pursuit of its strategy is likely to result in
continued high investment in the business: not only in terms of potential acquisitions, but also
in improving production and distribution capabilities in various regions. In particular the Fresh
Dairy business, but also bottled water and baby nutrition are local businesses that rely on daily
fresh supply and a well-functioning distribution network. We conclude that the business will
remain in “investment phase” beyond the initial phase of adapting a new strategy.
Short-term, top-line growth is unlikely to be fully reflected in
profit momentum
Clearly, the consolidation of UniMilk is going to dilute 2011 margins (company guidance -70bps
on a group level), but at the same time, the company expects the underlying business not to
exceed operating profit margin expansion of +10bps. While absolute numbers will reflect positive
growth (we estimate reported sales growth ex FX at 22%, EBITDA +13% and EPS +10%) due to
the Unimilk inclusion, the underlying business’ margins and return ratios are unlikely to make
more than limited progress, due to continued re-investment behind the new strategy. The
historical growth rates of operating margin expansion of 45bps on average are “a thing of the
past”, according to the company, at least while the company is building the business aggressively.
3
Barclays Capital | Danone

Cost savings and relief from
2010 input price pressures likely
to be re-invested
Danone has implemented an impressive cost savings program to stem the sharp increases
in milk prices in 2010. As milk prices have peaked in Q3 2010, Danone should see some
benefit in 2011, but this is of course also dependent on external factors such as weather,
etc. and potentially partly mitigated by increases in other key inputs, such as sugar. We
think at this stage investment in the business takes precedence, and we expect savings to
be re-invested in order to generate future growth.

Figure 3: Danone costs as % of sales

Packaging EBITDA
14% 18%

Energy
1%
Milk: Liquid
Distribution 9%
8%
Milk: Other
Selling expenses 4%
6% Sugar
3%
Labour etc.
7% Fruit
General Admin Other 2%
R&D A&P 2%
13%
1% 12%

Source: Barclays Capital

Figure 4: Danone main input costs spot price development

300

250

200

150

100

50

0
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Milk (liquid) Sugar Oil (Brent)

Source: Datastream, CLAL

Danone’s share price performance shows a strong correlation to organic sales growth over
the past couple of years, so it is easy to conclude that the company will return to its
premium valuation once a superior top-line growth momentum is re-established. However,
we think this time it’s different, as profit momentum is unlikely to follow at the same pace.

14 January 2011 4
Barclays Capital | Danone

Figure 5 below illustrates the share price performance versus underlying EBIT margin
expansion, as well as organic growth rates. Historically, organic sales growth and EBIT
margin momentum moved in tandem. We believe, however, that over the next years while
Danone’s management puts particular emphasis on expansion into faster growing markets
and into building on its category leading position in fresh dairy, profit margin expansion is
unlikely to return to its historical pace.

Figure 5: Danone share price performance vs margin expansion and organic growth

70 60

EBIT margin expansion (bps)

60
50

Avg share price (€)

50
40 40
30
30
20
10 20
0
10
-10
-20 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
Organic 5.1% 6.0% 7.2% 7.8% 6.7% 9.7% 9.7% 8.4% 3.1% 6.6%
growth
LFL EBIT margin expansion Avg share price

Source: Company data, Barclays Capital

Figure 6 below highlights Danone’s valuation compared to its peer group (12-mth forward
PE), and while Danone has recovered somewhat from the de-rating follow the slowdown in
sales and profit growth in 2008 and 2009, we think for a full recovery to a premium rating,
leading sales growth alone might not be enough.

Figure 6: Consensus 12 month forward PE

26
24
22
20
18
16
14
12
10
8
2001 2002 2004 2005 2007 2008 2010
DANONE NESTLE UNILEVER

Source: Datastream, Barclays Capital

Relative performance of the three leading European names has been remarkably parallel in
2010, with Nestlé showing the strongest performance, followed by Danone and Unilever.

14 January 2011 5
Barclays Capital | Danone

Figure 7: Relative performance

180
160
140
120
100
80
60
40
20
0
2001 2002 2003 2004 2005 2006 2007 2008 2008 2009 2010

Danone Nestlé Unilever

Source: Datastream, Barclays Capital

Compared to the market, the Food sector continues to trade on a premium and while this
might reflect investor preference for defensive stocks, we think Food stocks’ valuation has
benefited from the fact that the multi-national players generate between one third and half
of revenues in faster-growing, emerging markets. This is going to support the sector’s
valuation premium for longer, we think.

Figure 8: European food average against the market (MSCI Europe)

2.0 22
1.8
20
1.6
1.4 18
1.2 16
1.0
0.8 14

0.6 12
0.4
10
0.2
0.0 8
2001 2002 2004 2005 2007 2008 2010
Food Rel PE Food 10y Avg Avg Food PE

Source: Datastream, Barclays Capital

14 January 2011 6
Barclays Capital | Danone

Business transformation enables
future sustainable growth
Great stock for the long term, limited upside for the short term
Over the past 14 years, Danone has not only transformed the business from a holding
company with activities including containers, beer and biscuits to a business focused on fresh
dairy, bottled water, baby food and medical nutrition, but has also changed the geographic
scope of the company, with 48% of sales now coming from emerging markets. We believe
this provides the foundations for continued strong growth, in particular as Danone
strengthens its portfolio in these markets, as evidenced by the acquisition of UniMilk.

Figures 9 and 10 below highlight the transformation of the company over the last 15 years.

Figure 9: Danone group sales by geography 1996 Figure 10: Danone group sales by geography 1H 2010 (pro
forma Unimilk)
North
Emerging North
America Japan + ANZ
Markets America
6% 2%
17% 10%

Emerging
Markets
48%
Western
Europe
40%

Western
Europe
77%
Source: Company data, Barclays Capital Source: Company data, Barclays Capital

Figure 11: Danone group sales by product 1996 Figure 12: Danone group sales by product 2009

Baby Food Medical

Pasta
Sauces 3% Nutrition
3%
5% Fresh Dairy Baby 6%
Glass 26% Nutrition
Container
20%
7%
Beer
8%

Italian Fresh Dairy

Cheese 57%
9% Waters
Biscuits
17%
Prepared 20%
Food Waters
9% 10%

Source: Company data, Barclays Capital Source: Company data, Barclays Capital

14 January 2011 7
Barclays Capital | Danone

We think Danone’s mid and long-term growth potential can return to historical growth
rates, in a sustainable way, and potentially exceed the 2005 to 2009 CAGR, when average
growth was 7.5%, as demonstrated in Figure 13 below.

Figure 13: Danone- historic growth rates and mid-term market growth outlook
% of group sales 2009 Danone organic CAGR 2005-09 Euromonitor mid-term market growth rate

Western Europe 25% 1-2%

US 10% 3-4%
Emerging Markets 22% 7-8%
Fresh Dairy 57% 7.6% 5-6%

Western Europe 11% 1-2%

Emerging Markets 9% 11-12%
Baby Nutrition 20% 11.3% 8-9%

Developed Markets 7% 0-2%

Emerging Markets 10% 6-10%
Waters 17% 6.2% 4-6%

Medical Nutrition 6% 12.1% 7-10%

Danone 100% 7.5% 6-8%

Source: Company data, Euromonitor, Barclays Capital

FY results are due on February, 15th

Results unlikely to be a catalyst,
we think; profit guidance will be
FY2010 results will be published on February, 15th. We don’t think the results themselves
will be a surprise as the company has guided consistently throughout the year. In the
outlook statement for 2011 we’d expect further expression of confidence on top-line
growth, with a small positive contribution from pricing (est close to +1%) and continued
robust volume growth (est at +6%). We also expect a decisive dedication to further building
the business and consequently, cautious guidance for margin upside.

For Q4, we expect 5.7% organic sales growth, with Fresh Dairy up 6%, primarily driven by
volume growth, and flat or slightly up pricing.

UniMilk will be consolidated as of Dec 1st, adding cEUR100mn revenues, but diluting FY2010
group margins by approximately 10bps on the back of accounting adjustments and the fact that
December tends to be a weak month. Fresh dairy margins for FY2010 are estimated at 14.1% (-
40bps), for H2 up 20bps. We expect Waters to continue to grow strongly in volumes and with a
negative price/mix effect due to the strong growth momentum in emerging markets versus
developed markets. We expect baby nutrition and Medical nutrition to continue similar growth
momentum (7% and 8% LFL growth respectively) as at the 9M stage.

The company has reached a final agreement with the FTC in the US on its marketing claims
for Activia and Danactiv (Actimel’s brand name in the US), resulting in a one-off charge of
$21mn. The settlement stipulates that Danone can continue its claims in the sense that it
can say that Activia helps to regulate the digestive system and that Actimel helps support
the immune system. However, advertising has to include that the desired effect for Activia

14 January 2011 8
Barclays Capital | Danone

requires consumption of three portions per day and advertising for Danactiv/Actimel can
not include claims that its consumption would help to defend against cold and flu.

Risks to our assumptions

Our now more cautious view on margin upside of the underlying business could be too
conservative if:

„ Pricing recovers faster and more sharply than anticipated in 2011 (our estimate +0.7-1%).

„ There is a further relaxation of input prices (milk costs peaked in Q3 2010), which could
provide cost advantages.

„ Management adapts a slower pace in expanding its business.

14 January 2011 9
Barclays Capital | Danone

Global Food Valuation

Avg BarCap Cons
EV/EBITDA, x P/E, x FCF yield, % Div yield, %
Target Price Up/(Down) 5y EPS EPS Difference,
Company Rating Price 12-Jan side, % C10F C11F C12F C10F C11F C12F P/E C10F C11F C10F C11F F1Y FW F1Y FW %

Food - Europe 2-Neu

Danone 1-OW 49.5 46.0 7.6 11.0 10.4 9.1 17.0 15.2 13.8 17.5 5.8 6.4 2.9 3.2 2.71 2.72 -0.3
Nestlé 1-OW 63.5 53.7 18.4 10.2 9.4 8.6 16.5 16.0 14.5 15.6 6.1 6.4 3.3 3.5 3.26 3.19 2.0
Unilever 2-EW 23.0 23.1 -0.5 10.0 9.0 8.0 14.4 13.2 11.9 14.5 6.0 7.3 3.7 3.9 1.60 1.48 8.4
Average 7.6 10.2 9.4 8.6 16.5 15.2 13.8 15.6 6.0 6.4 3.3 3.5
Food - US 2-Neu
B&G Foods 1-OW 12.0 13.8 -12.9 8.4 na na 17.3 15.5 na 13.4 8.6 na 4.9 na 0.79 0.81 -2.0
Campbell Soup 2-EW 33.0 34.9 -5.4 8.9 na na 14.1 13.7 na 15.8 7.2 na 3.2 na 2.47 2.51 -1.5
Conagra Foods 2-EW 25.0 23.2 7.7 7.8 na na 13.3 12.9 na 14.7 7.3 na 3.6 na 1.74 1.75 -0.4
Diamond Foods 2-EW 47.0 53.8 -12.7 14.1 na na 24.7 18.8 na 19.6 6.5 na 0.3 na 2.50 2.51 -0.4
General Mills 1-OW 38.5 36.7 5.0 9.6 na na 15.2 14.1 na 15.5 6.0 na 2.9 na 2.49 2.48 0.4
Hain Celestial 1-OW 27.0 26.9 0.5 12.4 na na 22.7 19.8 na 17.4 3.2 na na na 1.31 1.27 3.1
Heinz 2-EW 47.0 48.7 -3.4 10.4 na na 16.6 14.8 na 15.6 7.4 na 3.9 na 3.10 3.09 0.3
Kellogg 1-OW 56.0 51.1 9.6 10.2 na na 15.6 14.9 na 16.2 5.1 na 3.1 na 3.27 3.29 -0.6
Kraft Foods 1-OW 35.0 31.5 11.1 9.8 8.5 na 15.6 13.5 na 15.1 5.9 8.6 3.7 3.7 2.02 2.03 -0.5
McCormick & Co 2-EW 42.0 45.9 -8.5 11.3 na na 18.1 16.6 na 15.0 5.3 na 1.9 na 2.54 2.61 -2.8
Ralcorp 1-OW 66.0 64.6 2.2 7.9 na na 13.1 11.3 na 14.8 11.0 na na na 5.59 5.44 2.7
Sara Lee 2-EW 14.0 18.2 -23.0 9.8 na na 17.6 16.8 na 14.4 6.2 na 2.5 na 0.96 0.93 3.4
Hershey 2-EW 48.0 48.8 -1.6 9.9 na na 19.0 17.2 na 18.9 7.5 na 2.6 na 2.57 2.55 0.8
The JM Smucker Co 2-EW 68.0 64.2 6.0 7.4 na na 13.7 12.9 na 14.6 7.9 na 2.4 na 4.70 4.66 0.8
Treehouse Foods 1-OW 53.0 49.9 6.2 7.9 6.6 na 17.9 15.6 na 18.1 5.6 7.5 na na 2.78 2.77 0.5
Dean Foods* na na 9.8 na 7.8 7.4 na 12.5 12.3 9.9 14.5 0.3 na na na na 0.79 na
Average 0.5 9.7 7.4 na 16.1 14.8 na 15.3 6.4 na 3.0 na
Food - Israel 1-Pos
Strauss Group 1-OW 60.0 59.1 1.5 7.0 6.0 5.2 25.9 23.0 19.1 17.4 3.7 7.0 3.2 3.3 2.28 2.51 -9.0
Food - Hong Kong/China 3-Neg
Tingyi Holdings 2-EW 19.3 20.7 -6.8 16.0 13.4 na 37.2 30.9 na 17.1 18.5 20.2 1.3 1.6 0.07 0.08 -10.6
Food average 1.0 9.8 8.8 8.3 16.6 15.2 13.8 15.6 6.1 7.3 3.1 3.4
Source: Com pany data, Datastream, Barclays Capital.
* - IBES Conse nsus, company not cov ered by Barclay s Capital

For European Food we use weighted combination of the individual discounted cash flow and EV/EBITDA multiple. For US Food we use, PE relative. For Israel we use DCF and
SOTP. Prices are as at close of 12/01/2011.

14 January 2011 10
Barclays Capital | Danone

Figure 14: Danone P&L

2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Net revenues 15,220 14,982 16,756 19,414 20,798 22,247 23,801 25,468
% change 19.1% -1.6% 11.8% 15.9% 7.1% 7.0% 7.0% 7.0%
LFL 8.4% 3.1% 6.7% 6.6% 7.1% 7.0% 7.0% 7.0%
Gross profit 8,048 8,029 8,969 10,290 11,036 11,842 12,712 13,656
Gross Margin, % 52.9% 53.6% 53.5% 53.0% 53.1% 53.2% 53.4% 53.6%
Adjusted EBIT 2,270 2,294 2,548 2,861 3,086 3,344 3,627 3,940
Adjusted EBIT Margin, % 14.9% 15.3% 15.2% 14.7% 14.8% 15.0% 15.2% 15.5%
Depreciation 463 488 510 591 633 677 724 775
Amortisation 62 61 68 79 85 91 97 104
Adjusted EBITDA 2,795 2,843 3,126 3,531 3,803 4,111 4,448 4,818
Adjusted EBITDA Margin, % 18.4% 19.0% 18.7% 18.2% 18.3% 18.5% 18.7% 18.9%
Net financing costs -584 -489 -222 -227 -230 -211 -187 -165
Pretax profit 1,603 2,022 2,290 2,635 2,856 3,133 3,440 3,775
Taxes -443 -424 -572 -706 -771 -846 -929 -1,019
Tax % 27.6% 21.0% 25.0% 26.8% 27.0% 27.0% 27.0% 27.0%
Share of results of associates 62 -77 85 88 92 96 99 103
Profit after tax 1,222 1,521 1,802 2,017 2,177 2,383 2,610 2,859
Minority interest 178 160 167 197 211 224 237 251
Profit after minority interest 1,044 1,361 1,635 1,820 1,965 2,159 2,373 2,608
Net Profit Margin, % 6.9% 9.1% 9.8% 9.4% 9.5% 9.7% 10.0% 10.2%
Adjusted Net Income 1,104 978 1,663 1,820 1,965 2,159 2,373 2,608
Adjusted net income margin 7.3% 6.5% 9.9% 9.4% 9.5% 9.7% 10.0% 10.2%
DPS 1.25 1.20 1.32 1.45 1.60 1.76 1.93 2.13
% chg 47.2% -4.1% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Adjusted Diluted EPS 2.59 2.50 2.71 3.02 3.33 3.65 4.02 4.41
% chg 25.2% -3.5% 8.5% 13.3% 10.0% 9.8% 9.9% 9.9%
Source: Company data, Barclays Capital

14 January 2011 11
Barclays Capital | Danone

Figure 15: Danone balance sheet

2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Current Assets
Inventories 795 765 857 1,004 1,074 1,145 1,220 1,300
Trade and notes receivables 1,534 1,682 1,881 2,180 2,335 2,498 2,672 2,859
Other receivables 950 645 645 645 645 645 645 645
Marketable securities 441 454 454 454 454 454 454 454
Cash and cash equivalents 591 644 745 167 163 259 751 1,431
Others 572 217 217 217 217 217 217 217
Total Current Assets 4,883 4,407 4,799 4,666 4,888 5,217 5,959 6,905

Non-current Assets
Property, plant and equipment 3,083 3,180 3,452 4,847 4,885 5,246 5,633 6,046
Intangibles 4,226 4,258 4,190 4,631 4,546 4,455 4,358 4,255
Goodwill 12,320 12,927 12,927 13,727 13,727 13,727 13,727 13,727
Investments in Associates 1,267 805 805 805 805 805 805 805
Investments in non-consolidated cos 237 521 521 521 521 521 521 521
LT Loans 73 27 27 27 27 27 27 27
Other 776 748 748 748 748 748 748 748
Total Non-current Assets 21,982 22,466 22,670 25,306 25,259 25,529 25,819 26,129
Total Assets 26,865 26,873 27,469 29,972 30,147 30,747 31,778 33,034
Current Liabilities
Short-term Debt 652 1,702 1,702 2,152 1,852 1,852 1,852 1,852
Trade payables, other curr liabs 2,189 1,981 2,219 2,600 2,781 2,965 3,159 3,365
Accrued expenses 1,810 1,993 1,993 1,993 1,993 1,993 1,993 1,993
Taxes payable 214 180 180 180 180 180 180 180
Others 33 0 0 0 0 0 0 0
Total Current Liabilities 4,898 5,856 6,094 6,925 6,806 6,990 7,184 7,390
Non-current liabilities
Long-term Debt 11,435 5,958 5,458 6,458 6,158 5,358 4,858 4,440
Deferred taxes 1,109 937 937 937 937 937 937 937
Pensions and similar 208 219 219 219 219 219 219 219
Other non-curr liabs 515 594 594 594 594 594 594 594
Total Non-current Liabilities 13,267 7,708 7,208 8,208 7,908 7,108 6,608 6,190
Shareholders' Equity 8,644 13,255 14,114 14,625 15,218 16,435 17,772 19,240
Minority interests 56 54 54 214 214 214 214 214
Total shareholders' Equity 8,700 13,309 14,168 14,839 15,432 16,649 17,986 19,454
Total Liabilities 26,865 26,873 27,469 29,972 30,147 30,747 31,778 33,034
Source: Company data, Barclays Capital

14 January 2011 12
Barclays Capital | Danone

Figure 16: Danone cash flow

2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

EBIT 2,187 2,294 2,511 2,861 3,086 3,344 3,627 3,940

Operating Cash Flow 1,754 2,000 2,160 2,425 2,639 2,876 3,139 3,426
Interest paid and received -433 -383 -123 -173 -175 -153 -127 -102
Dividends from Assoc. 29 174 85 88 92 96 99 103
Minority Dividends -178 -160 -167 -197 -211 -224 -237 -251
Taxation -221 -448 -572 -706 -771 -846 -929 -1,019
Cash flow from interest, tax, dividends -625 -657 -777 -988 -1,065 -1,127 -1,193 -1,270
Proceeds from asset sales 67 36 0 0 0 0 0 0
Purchase of intangible assets 0 0 0 -1,320 0 0 0 0
Purchase of PP&E -706 -699 -782 -906 -970 -1,038 -1,110 -1,188
Acquisitions -259 -147 0 -900 0 0 0 0
Disposals 329 1,024 0 0 0 0 0 0
Cash flow from Investing -569 214 -782 -3,126 -970 -1,038 -1,110 -1,188
Dividends paid -705 -451 -776 -808 -873 -942 -1,036 -1,140
Share buy-back 0 0 0 -500 -500 0 0 0
Other (change in marketable securities) 63 -214 0 0 0 0 0 0
Cash flow from Financing -1,111 -2,169 -1,276 122 -1,673 -1,742 -1,536 -1,558
Net Cash Flow 74 45 101 -579 -4 96 492 679
Source: Company data, Barclays Capital

14 January 2011 13
Barclays Capital | Danone

ANALYST(S) CERTIFICATION(S)
We, Susanne Seibel and Gabriela Malczynska, hereby certify (1) that the views expressed in this research report accurately reflect our personal
views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report,
please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to
http://publicresearch.barcap.com or call 1-212-526-1072.
The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total
revenues, a portion of which is generated by investment banking activities.
Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.
These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE
Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account.
On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment
management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.
Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative
analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other
types of research products, whether as a result of differing time horizons, methodologies, or otherwise.
Primary Stocks (Ticker, Date, Price)
Danone (DANO.PA, 11-Jan-2011, EUR 46.02), 2-Equal Weight/2-Neutral
Materially Mentioned Stocks (Ticker, Date, Price)
B&G Foods (BGS, 11-Jan-2011, USD 13.55), 1-Overweight/2-Neutral
Campbell Soup (CPB, 11-Jan-2011, USD 34.55), 2-Equal Weight/2-Neutral
ConAgra Foods (CAG, 11-Jan-2011, USD 22.67), 2-Equal Weight/2-Neutral
Diamond Foods Inc. (DMND, 11-Jan-2011, USD 51.91), 2-Equal Weight/2-Neutral
General Mills (GIS, 11-Jan-2011, USD 36.06), 1-Overweight/2-Neutral
Hain Celestial (HAIN, 11-Jan-2011, USD 26.31), 1-Overweight/2-Neutral
Heinz, H.J. Co. (HNZ, 11-Jan-2011, USD 48.32), 2-Equal Weight/2-Neutral
Kellogg Co. (K, 11-Jan-2011, USD 50.92), 1-Overweight/2-Neutral
Kraft Foods (KFT, 11-Jan-2011, USD 31.29), 1-Overweight/2-Neutral
McCormick & Co. (MKC, 11-Jan-2011, USD 45.71), 2-Equal Weight/2-Neutral
Nestle SA (NESN.VX, 11-Jan-2011, CHF 53.85), 1-Overweight/2-Neutral
Ralcorp Holdings (RAH, 11-Jan-2011, USD 64.54), 1-Overweight/2-Neutral
Sara Lee Corp. (SLE, 11-Jan-2011, USD 18.01), 2-Equal Weight/2-Neutral
Strauss Group Ltd. (STRS.TA, 11-Jan-2011, ILS 58.81), 1-Overweight/1-Positive
The Hershey Company (HSY, 11-Jan-2011, USD 48.36), 2-Equal Weight/2-Neutral
The J.M. Smucker Company (SJM, 11-Jan-2011, USD 63.77), 2-Equal Weight/2-Neutral
Tingyi Holdings Corp. (0322.HK, 11-Jan-2011, HKD 20.35), 2-Equal Weight/3-Negative
TreeHouse Foods (THS, 11-Jan-2011, USD 49.51), 1-Overweight/2-Neutral
Unilever NV (UNc.AS, 11-Jan-2011, EUR 23.09), 2-Equal Weight/2-Neutral
Guide to the Barclays Capital Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions
below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sector
coverage universe”).
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-
Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors
should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month

14 January 2011 14
Barclays Capital | Danone

IMPORTANT DISCLOSURES CONTINUED

investment horizon.
2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-
month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month
investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or
to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory
capacity in a merger or strategic transaction involving the company.
Sector View
1-Positive - sector coverage universe fundamentals/valuations are improving.
2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the "sector coverage universe":

European Food Manufacturing & HPC

Associated British Foods (ABF.L) Beiersdorf AG (BEIG.DE) Danone (DANO.PA)
Henkel (HNKG_p.DE) L'Oreal (OREP.PA) Nestle SA (NESN.VX)
Reckitt Benckiser (RB.L) Suedzucker AG (SZUG.DE) Tate & Lyle PLC (TATE.L)
Unilever NV (UNc.AS)
Hong Kong/China Food, Beverages & Personal Care
Hengan International Group Co., Ltd. (1044.HK) Tingyi Holdings Corp. (0322.HK) Tsingtao Brewery Co., Ltd. (0168.HK)
Israel Chemicals & Food
Frutarom (FRUT.TA) Israel Chemicals Ltd. (ICL.TA) MA Industries (MAIN.TA)
Strauss Group Ltd. (STRS.TA)
U.S. Food
B&G Foods (BGS) Campbell Soup (CPB) ConAgra Foods (CAG)
Diamond Foods Inc. (DMND) General Mills (GIS) Hain Celestial (HAIN)
Heinz, H.J. Co. (HNZ) Kellogg Co. (K) Kraft Foods (KFT)
McCormick & Co. (MKC) Ralcorp Holdings (RAH) Sara Lee Corp. (SLE)
The Hershey Company (HSY) The J.M. Smucker Company (SJM) TreeHouse Foods (THS)

Distribution of Ratings:
Barclays Capital Inc. Equity Research has 1737 companies under coverage.
42% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 53% of
companies with this rating are investment banking clients of the Firm.
43% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 45% of
companies with this rating are investment banking clients of the Firm.
12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 39% of
companies with this rating are investment banking clients of the Firm.
Barclays Capital offices involved in the production of equity research:
London
Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)
New York
Barclays Capital Inc. (BCI, New York)
Tokyo
Barclays Capital Japan Limited (BCJL, Tokyo)
São Paulo
Banco Barclays S.A. (BBSA, São Paulo)
Hong Kong

14 January 2011 15
Barclays Capital | Danone

IMPORTANT DISCLOSURES CONTINUED

Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)
Toronto
Barclays Capital Canada Inc. (BCC, Toronto)
Johannesburg
Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)

14 January 2011 16
Barclays Capital | Danone

IMPORTANT DISCLOSURES CONTINUED

Danone (BN FP / DANO.PA) Stock Rating Sector View
EUR 46.02 (11-Jan-2011) 2-EQUAL WEIGHT 2-NEUTRAL
Rating and Price Target Chart - EUR (as of 11-Jan-2011) Currency=EUR

54
Date Closing Price Rating Price Target
03-Feb-2010 42.11 1-Overweight 51.00
51

48

45

42

39

36

33

30

27
Jul- 08 Jan- 09 Jul- 09 Jan- 10 Jul- 10 Jan- 11

Closing Price Target Price Rating Change

Link to Barclays Capital Live for interactive charting

Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Danone in the past 12 months.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Danone.
Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Danone within the past 12 months.
Danone is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
Danone is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an
affiliate.
Valuation Methodology: We believe the company's pro-active and entrepreneurial approach to re-accelerate its growth profile should result in
superior top-line growth. While the company is expanding its presence in faster growing markets and its leadership position in Fresh Dairy, re-
investment of cash flow in the business will high and underlying earnings momemtum should reflect this. Our share price target of EUR49.5
values the stock on 2011E EV/EBITDA of 11.1x and PE of 16.4x.
Risks which May Impede the Achievement of the Price Target: Danone's main division, fresh dairy is exposed to changes in the cost for its main
raw material, fresh milk. Commodity costs in the fresh dairy category have been particularly volatile over the last 18 months and could impact
margin progress should the prices rise further.

14 January 2011 17
This publication has been prepared by Barclays Capital; the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. This
publication is provided to you for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Prices shown in this publication are indicative and Barclays
Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument.
Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors,
partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings
or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents.
Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be
reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to
change, and Barclays Capital has no obligation to update its opinions or the information in this publication.
The analyst recommendations in this report reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interests,
including those of Barclays Capital and/or its affiliates.
The securities discussed in this publication may not be suitable for all investors. Barclays Capital recommends that investors independently evaluate each issuer, security
or instrument discussed in this publication and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate
from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information in this publication is not intended to
predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results.
This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of the
Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professional
experience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons.
Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange.
Barclays Capital Inc., US registered broker/dealer and member of FINRA (www.finra.org), is distributing this material in the United States and, in connection therewith
accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative
of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019.
Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit
otherwise.
This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC (www.iiroc.ca).
Subject to the conditions of this publication as set out above, Absa Capital, the Investment Banking Division of Absa Bank Limited, an authorised financial services
provider (Registration No.: 1986/004794/06), is distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This
publication is not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary Services Act, 37 of 2002, or
any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or
entity wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Absa Capital in South Africa, 15 Alice Lane,
Sandton, Johannesburg, Gauteng 2196. Absa Capital is an affiliate of Barclays Capital.
In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research reports are distributed to institutional
investors in Japan by Barclays Capital Japan Limited. Barclays Capital Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1
Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services
Agency of Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143.
Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority.
Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong.
Barclays Bank PLC Frankfurt Branch is distributing this material in Germany under the supervision of Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).
This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd.
This material is distributed in Brazil by Banco Barclays S.A.
Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Barclays Bank PLC-
DIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence.
Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporated
outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi
(Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi).
Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLC-
QFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial
Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar.
This material is distributed in Dubai, the UAE and Qatar by Barclays Bank PLC. Related financial products or services are only available to Professional Clients as defined
by the DFSA, and Business Customers as defined by the QFCRA.
This material is distributed in Saudi Arabia by Barclays Saudi Arabia ('BSA'). It is not the intention of the Publication to be used or deemed as recommendation, option or
advice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al
Faisaliah Tower | Level 18 | Riyadh 11311 | Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number:
1010283024.
This material is distributed in Russia by Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177-
11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21.
This material is distributed in India by Barclays Bank PLC, India Branch.
This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For
matters in connection with this report, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose registered address is One Raffles Quay
Level 28, South Tower, Singapore 048583.
Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed at 'wholesale clients' as defined by
Australian Corporations Act 2001.
IRS Circular 230 Prepared Materials Disclaimer: Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be tax
advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be
used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters
addressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor.
© Copyright Barclays Bank PLC (2011). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of Barclays
Capital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information
regarding this publication will be furnished upon request.
US08-000001