Danone (XPAR:DN), one of the largest dairy food producers and bottled water suppliers in the world, was the largest detractor for the quarter, declining 14%. Danone’s third-quarter results were weaker than expected given continued destocking in both its Waters and Early Life Nutrition segments. The Waters division is suffering from oversupply as growth normalizes in China. Early Life Nutrition has been hurt by regulatory changes in China since distribution is shifting from indirect to direct. We believe both divisions will continue to be weak in the short term. Additionally, Danone is in the process of acquiring WhiteWave, a U.S.-based dairy food producer, and investors reacted negatively to WhiteWave’s third-quarter results, which fell short of expectations. We continue to believe the strategic rationale behind the WhiteWave acquisition is sound. It will enable Danone to integrate fast-growing brands and gain leverage with retailers, which should lead to improved competitive positioning. In December, Danone amended fiscal-year guidance by lowering organic growth but increasing operating margins. The organic growth shortfall is due to weakness in its European Fresh Dairy division, attributed to a shortfall in the Activia relaunch. Management believes a more tailored approach on a country-by-country basis should remedy the shortfall. Although Danone faces some near-term headwinds, we believe it remains an attractive investment for our shareholders.
From David Herro (Trades, Portfolio) and Bill Nygren (Trades, Portfolio)'s Oakmark Global Select Fund fourth quarter 2016 commentary.
