Danone, the French dairy producer, has lowered full-year targets after reporting that the fallout from a recall of baby milk products in Asia had a bigger impact than expected.

The company, which makes Activia yoghurt, said that like-for-like sales in its previously fast-growing baby nutrition unit fell 8.6 per cent in the third quarter after a recall sparked by what turned out to be a false alert. The company described it as “a very steep decline”.

It said the impact of the recall in several key Asian markets, including China, would reduce full-year sales growth to between 4.5 per cent and 5 per cent. The group had previously said that it expected full-year sales to grow “at least 5 per cent”.

In a conference call, Pierre-André Térisse, Danone’s chief financial officer, said: “We have been moving to seek compensation for the damage we have suffered.”

Danone pulled milk products off the shelves in August following a warning of tainted ingredients from Fonterra, a New Zealand-based supplier.

The group said the operating margin was expected to fall 80 basis points compared with the group’s previous estimate of a 30bp-50bp drop.

Danone said that full-year free cash flow would be between €1.5 billion and €1.6 billion in contrast to the €2 billion of free cash flow that it had expected previously.

Mr Térisse said a three- pronged strategy of promotional activity, communication and product development had increased sales of baby milk sales in the affected markets to 40 per cent of pre-recall levels.

Danone is in talks with Fonterra, the company that in August warned about the possibility of harmful bacteria in several batches, over appropriate levels of compensation for the false alert. Danone said growth increased 4.6 per cent on a like-for-like basis in its core dairy division, the strongest increase in the past nine quarters. – (Copyright The Financial Times Limited 2013)