DANONE GROUP 1998 ANNUAL REPORT

Transcription

1 DANONE GROUP 1998 ANNUAL REPORT DANONE has three strategic priorities: refocus on three core businesses where we are already leaders on world markets (dairy products, beverages and biscuits), expand our international presence, and enhance profitability and with it shareholder value. No. 1 in France, Spain, Italy and the Benelux No. 3 in Europe No. 7 worldwide 1998 sales: 12.9 billion (FF84.8 billion) 1998 net income: million (FF3.9 billion) Employees: 78,945 More than 120 companies and 200 sites around the world Products sold in over 150 countries

2 Group Management Executive committee Franck Riboud Chairman and Chief Executive Officer Jacques Vincent Vice Chairman and Chief Operating Officer Christian Laubie Senior Executive Vice President and Chief Financial Officer Philippe Jaeckin Senior Executive Vice President Activités From left to right René Antoine Exportation Philippe Jaeckin Jean-René Buisson Executive Vice President, Human Relations Pierre Bardon Plats cuisinés frais et surgelés Jan Bennink Jan Bennink Produits laitiers monde Jean-René Buisson Jan Bennink Executive Vice President, Dairy Products Worldwide Jean-René Buisson Ressources humaines Christian Laubie Pedro Medina Executive Vice President, Water Worldwide Jacques Demarty Emballage Jean-Louis Gourbin Executive Vice President, Biscuits Worldwide Didier Ernst Biscuits Europe Franck Riboud Jacques Vincent Simon Israel Executive Vice President, Asia-Pacific Simon Israel Asie-Pacifique Maurice de Kervenoaël Boissons Simon Israel Pedro Medina Jean-Louis Gourbin Christian Laubie Affaires financières 2

3 From the Chairman The process of review and analysis we conducted in 1996 and 1997 led to the adoption and initial implementation of a new strategy for the Danone Group. Built around a clear focus on three core businesses, this implies not only reorganization of our management structure, but also added efforts to promote our leading brands and quicken international expansion. By the same token, we are emphasising increased profitability and shareholder value. This strategy is designed to create new momentum in our drive to build a worldwide presence. We will be doing so without losing sight of our fundamental values, which stress the quality and nutritional value of our products, attentiveness to consumers and Danone s longstanding dual commitment to business success and social progress. With this in mind, we have launched a broad array of initiatives to generate new synergies, streamline operations and clarify our goals. These efforts to adapt and anticipate have involved all members of the Danone workforce, as well as management, and were rewarded in 1998 with improvements across the board. Our growth rate doubled from the previous year, with business outside western Europe providing much of the momentum its contribution to consolidated sales rose to 24%. At the same time, operating margin picked up from 9.1 to 10%, mainly thanks to progress within the group. This reflected our drive to cut production costs and enhance efficiency in logistics, purchasing, marketing and research. The profitable growth program pursued over the past two years has thus helped all our companies focus on their strengths and in so doing improve performances. Finally, the stockmarket value of Danone was multiplied by 2.2 in just two years to reach FF110 billion on December 31, We are now ready to face the challenges of 1999 and coming years with renewed strength and energy. In doing so, we will naturally continue consolidation of existing positions. But we will also be moving to win positions in new countries to make the most of worldwide market potential. As a leader in our businesses, we must use our specialized expertise to understand, anticipate and stimulate demand with each type of consumer. Which means that we must continue to stand for what Danone has always represented enthusiasm, openness and recognition of human worth. 3 Franck Riboud Chairman and Chief Executive Officer, Danone Group

4 Strategy Danone s strategy aims for profitable growth and quickening international expansion in three high-potential businesses: dairy products, beverages and biscuits. Our market approach focuses on the essentials, starting with a readiness to listen to consumers and understand differences in taste and eating habits. This enables us to better meet their needs with international brands built on reliable quality and concern for health each perceived as a local name on national markets. To implement this strategy effectively, we need to pool all our resources, in particular through cross-company initiatives to promote Danone as a worldwide, multi-product brand. Here, as always, people are central to our strategy, which places equal emphasis on business success and social progress. Controlling costs and enhancing earnings Constant efforts to enhance efficiency have always been a hallmark of the Danone Group and this remains very much the case today. Yet our efforts to raise productivity have taken a new direction in recent years. Extensive restructuring of our industrial operations, logistics and sales has involved closing a number of our European production and management sites, as well as eliminating some of our less profitable brands. We are now working to further enhance performances by ensuring that all our companies enjoy the full benefit of our Group s technical resources and expertise in purchasing, research and information technology. Clearly, higher margins hinge on pursuing the efforts we have made over many years to improve productivity. Early gains can also be expected from quicker growth in our three core businesses, which already generate margins above the Group average. At the same time, we are phasing out less profitable brands and launching innovative, high-margin products. Finally, we stand to benefit from the expansion of our operations on emerging markets, which will bring economies of scale. Quicker growth Strength in our core businesses means that we have the leading positions we need to take the offensive and win new market share. With operations now more sharply focused, we are better able to move ahead with the development of our three strategic business lines and key brands. And we plan to continue the gradual withdrawal from non-strategic businesses that we have pursued with determination over the past two years. Consolidating a core asset: the Danone brand The adoption of the Danone name for our company in 1994 marked the beginning of a move toward brand concentration within our Group. Today, increasingly fierce competition in the food industry, the growing power of retailers and the positions won by retailer labels make a strong brand a more crucial advantage than ever. And we intend to make the most of that advantage, adding to it wherever we can. A key priority for our strategy is to achieve maximum sales with as few brands as possible. Brand concentration is a source of additional synergies between different product ranges in terms of image and communications, and thus helps optimize advertising and promotional outlays. 4

5 International expansion Building on positions in France and then in Europe, at the beginning of the decade our Group moved to make the most of its very considerable experience and expertise. In concrete terms, we expanded into new markets and developed a more broadly-based international presence to underpin continued growth. Potential for profitable growth was the key criterion which led us to focus our resources on three core business, but our choice also reflected opportunities for international expansion, since we already rank first worldwide in dairy products and biscuits, and second in bottled waters. In just six years, business outside Europe has climbed from 5% to 24.3% of our consolidated sales, a figure we hope to raise to 33% by Our main targets for international development are emerging markets in Asia, eastern Europe and Latin America, where prospects are best for rapid growth. Creating shareholder value Enhancing shareholder value through higher returns is now a priority for managers throughout our Group, which has integrated value creation into its key business indicators. Results are already visible return on capital, measured as the ratio of after-tax operating income to average capital invested, has picked up significantly over the past two years, rising from 7.3% in 1996 to 7.6% in 1997, then 8% in This improvement reflects the combined benefits of generally higher margins, more selective acquisition and capital spending policies, lower working capital requirements and the sale of lower-margin operations. Shared commitment to ambitious human resource and social policies Danone corporate values are built on the belief that the responsibilities of a business extend beyond immediate profit. Equally, we are convinced that the success of our strategy will largely depend on the expertise, enthusiasm and personal commitment of our staff members. In keeping with these principles, we have adopted innovative policies not only as regards recruitment, evaluation, training and compensation, but also for the placement of employees when restructuring involves staff cuts. In addition to building an organization consistent with the worldwide scope of our businesses, a further priority of human resources policies is to develop the management expertise needed to back future expansion. Our target is to recruit 80% of our executives in-house, and we aim to foster a truly international culture by encouraging staff mobility and combining technical and geographical responsibilities. 5

6 1998 highlights This year saw further sales of non-strategic assets and the adoption of a new organizational framework to reflect the worldwide scope of our businesses. We also took advantage of a number of acquisition opportunities in the sectors and regions we have made our priorities. Improved results confirmed the validity of our strategic options. Focus Withdrawal from groceries business continued. In 1998, we sold sector companies representing sales of some 229 million or FF1.5 billion, but generating margins below the Group average. Altogether, grocery business divested since 1997 thus represented sales of approximately billion or FF10 billion. Our container division also initiated a major change in its operations through an agreement to merge glass container business with that of Germany s Gerresheimer. January: sale of La Familia, Spain s number two pasta maker March: sale of Stoeffler, a French subsidiary specializing in Alsatian-style meat products July: sale of Général Traiteur s fresh pasta and quenelles business in France and Birkel Sonnen Bassermann s pasta business in Germany August: signature of an agreement to merge glass container operations with those of Gerresheimer. October: sale of Birkel Sonnen Bassermann s ready-to-serve business. Growth At the same time, we took advantage of acquisition opportunities. In 1998, equity investments came to a total of approximately 485 million or FF3,181 million. April: acquisition of a 12.45% interest in Yeo Hiap Seng, a leading producer of Asian-style beverages based in Singapore. May: acquisition of full ownership of the biscuit business of Cokoladovny in the Czech Republic following the division into two entities of this company, formerly operated jointly by Danone and Nestlé. June: a first step into the Turkish market for dairy products through the acquisition of Tikvesli in association with the Sabanci group; acquisition of a 40% interest in PT Tirta Investama, an investment company which controls Aqua, the leading producer of bottled water in Indonesia and Asia as a whole; acquisition of Health, China s leading producer of mineral water. October: agreement for the purchase of Poland s leading biscuit-maker Delijca (a Wedel Group division), to take effect in February November: successful tender offer for Aquapenn, the US producer of bottled spring water. Innovation A large number of new products were put on the market in France was again the main focus of launches that included Danao, Crème de Yaourt, Danette Liégeoise, Charles Gervais Crèmes Renversantes and Danone et Fruits Recette Crémeuse in dairy products; Lu Ourson, Hello Brownies, Pepito Mini-Rollos and Biscoto in biscuits, and Kronenbourg 2.6, Kronenbourg Ice and Volvic one-liter bottles in beverages. We also made a number of Europe-wide launches. In biscuits, these included Taillefine/Vitalinea, a low-fat range illustrating the scope for synergies between different areas of business to maximize the benefits of advertising outlays already made to promote our brands. Our group also continued to expand sales of Prince and Petit Ecolier biscuits across Europe. In dairy products, Actimel is now on sale in 12 countries, while sales of Petit Gervais in squeeze-packs was extended to Germany, Italy and Poland. In China, fruit yogurts were put on sale in plastic containers with an attached spoon. Finally, the crushable PET bottles launched by Evian in 1995 made their debut on Spanish and Turkish markets. 6

7 Key events Soccer World Cup Our support for the World Cup generated a wave of enthusiasm throughout the Group, while at the same time consolidating the worldwide reach of the Danone brand. Altogether nearly 550 related marketing and sales initiatives made a significant contribution to worldwide visibility and awareness of the Danone name, particularly among teenagers. A survey covering eight countries ranked Danone third for recognition among the World Cup s 45 official partners. The euro For the DANONE Group, which currently derives three-quarters of its sales from the euro zone, the introduction of Europe s single currency is clearly an important event. Over the past two years, we have examined the operational consequences as these affect clients, consumers, suppliers, employees and shareholders, as well as the implications for our financial organization and IT systems. Set up in March 1997, a special euro committee representing all our main business functions purchasing, production, logistics, marketing, sales, information, finance and human resources has organized task forces and coordinated implementation of our transition plan. After considering our position, we opted for a progressive switch involving two main stages. The first step was to be ready to handle all aspects of commercial relationships negotiation, orders, billing, delivery and payment in euros as of the beginning of 1999, with the choice left up to customers or suppliers. In this, our guiding principle is one customer, one currency. Information systems have been adjusted accordingly, and the euro is already the currency used for billings within the group as well as for cash management. The first eurodenominated transactions with customers and suppliers are expected in the second half of The second stage will begin in early 2001, by which date we are convinced most of our business with partners outside the group will be in euros. The euro will then become the Group currency used for accounting, financial systems and reporting. Year 2000 The change of millennium creates a risk because some software and programmed devices cannot recognize the difference between 1900 and There is thus a potential danger for all electronic equipment. In response, we are implementing a groupwide program with the assistance of outside consultants to identify and locate IT systems that might be affected. Special attention is being paid to three key areas: information systems, production plants and equipment, and supply flows between our group and its customers and suppliers. Regular progress reports are issued, with results checked and confirmed by consultants. Work to make necessary corrections to information systems and software applications should be completed in the first half of 1999 and in any event before December 31. The adjustments to information systems required for the euro and year 2000 compliance have been made within the more general framework of IT modernization programs and related costs have been charged to income or incorporated into fixed assets in accordance with their nature and Danone Group accounting policies. In the year to December 31, 1998, costs incurred to prepare information systems for the date change amounted to some 10 million, and a further 5 million will be required in If, despite these efforts, the transition is not entirely satisfactory, we do not believe that this will have a significant impact on our core operations. We are also monitoring the progress of our main customers and suppliers on Year 2000 compliance, but cannot offer any assurance that all will be fully prepared. Between now and the end of the year, we will be drawing up contingency plans to deal with all eventualities and minimize the impact of any failure of our own systems or those of our business partners, thereby ensuring the continuity of our commercial operations. 7

8 Human resources In human resources, 1998 marked an important turning point, with the reformulation of policies preserving our dual commitment to business success and social responsibility, as well as the launch of a management resources program designed to attract and promote international management talent. Other highlights included important initiatives in the areas of training and safety at the workplace. Redefinition of human resource and social policies In June 1998, a conference in Cagliari, Sardinia, brought together 450 human resource managers from Danone companies around the world and the members of the Danone Group Executive Committee. The conference was the occasion to redefine the terms of our Group s dual commitment to business success and social responsibility, at the same time underscoring our continued force and worldwide scope. Group policies in these areas are now built around four priorities: develop management resources committed to our values favor employee involvement and constructive debate build business success on organization and commitment to the highest professional standards promote good corporate citizenship. The management resource program In 1998, we launched a full-scale action plan designed to ensure that 80% of the managers in 1,800 key positions will be recruited in house three or four years from now. To this end, we are currently taking steps in four main directions: special recruitment programs to attract young graduates with international potential in western Europe, central Europe and Asia appointment at Group level of managers responsible for career development in areas such as purchasing, marketing, and research and development to ensure adequation with requirements in key positions new procedures for the identification and development of management talent through systematic assessments based on a single set of criteria for performance and promotion. New options in training programs with international scope Over recent years, in-house training programs have made an increasingly significant contribution to the development of expertise through the group. In 1998, over 1,000 managers from 19 countries attended courses covering core business functions such as sales, marketing, production, human resources, information technology and finance. During the year, new marketing programs were also launched to meet specific requirements in Asia and Latin America, building on know-how acquired in Europe. Readying managers for monetary union Executives also received special training to prepare for the single currency and enable them to negotiate effectively in euros with full understanding of the implications. The aim was to offer each company a range of options in keeping with Group strategy for Europe. More than 260 sales and purchasing staff benefited from these programs in Training to promote youth employment In 1998, Danone companies in France took on some 500 young people, equal to 2.2% of total staff, under apprenticeship and work experience programs. Our aim is to help them gain the experience, skills and educational qualifications they need to win a lasting place in the workforce. In addition to on-the-job training, we also offer special assistance in finding a permanent job when their time with us is over. 8

9 Negotiated measures to accompany restructuring Our drive to enhance competitiveness has led to continued restructuring of our European operations. In 1998, action of this kind concerned in particular the reorganization of VPSA following the sale of its confectionery business and the closure of the Marie frozen food plant in Saint Méloir, Brittany, which employed 191 people. In the latter case, the efforts of Danone Initiatives, a group entity specializing finding alternative employment, were rewarded when the site was taken over by a manufacturer of automotive parts which is to create 200 new jobs by All told, over 90% of employees affected by restructuring in France were able to find alternatives. In other parts of Europe, rationalization of production and logistics at Galbani involving the loss of 1,200 jobs between now and 2000 won the agreement of authorities and unions. The flexible organization set up to help employees find alternatives has the mobility needed to provide effective assistance at all of the company s scattered locations, and has already found solutions for 600 workers. representatives, to systematic analysis of accidents and definition of procedures to follow in the event of a serious accident. Corporate citizenship This year, we have for the first time appended a special report on corporate citizenship issues to our annual report. In particular, this Danone World Cup The Danone World Cup soccer tournament covers initiatives to encourage local economic development and assist less favored groups. organized within our Group attracted the participation of 10,000 employees from 30 countries. Over 5,000 matches were played out in an enthusiastic and friendly atmosphere. Reflecting employees enthusiastic response, the event is now to be staged every two years. Group employees by division Dairy products 19,642 19,750 21,599 21,743 21,696 Beverages 8,526 8,967 14,084 18,864 20,651 Biscuits 21,003 26,099 27,647 26,644 24,797 Other food business 10,995 11,095 10,760 6,020 4,598 Containers 7,596 7,468 7,035 6,856 6,708 Other subsidiaries Group total 68,201 73,823 81,579 80,631 78,945 Safety Worker safety is an essential priority for our Group. Since 1990, all Danone companies around the world have been called on to initiate practical programs to reinforce safety at the workplace. The aim is to reduce the number of accidents by a quarter from the average for the two previous years. To this end, units receive a variety of assistance in areas ranging from inspection and assessment of factories and warehouses, conducted with participation of staff Group employees by geographical area (fully consolidated companies at December 31) 9 France 20, % Italy 6, % Spain-Portugal 5, % Rest of western Europe 9, % Eastern Europe 2, % Asia-Pacific 23, % North and South America 10, % Export % Group total 78,945

10 Research and environment Through its support for research and sharing of know-how, the Danone Group takes the initiative well upstream from production to open up new prospects for healthier, more varied and safer eating. In-house research Successes scored by our research teams make an essential contribution to the competitiveness of the Danone Group. In 1998, this was reflected in the allocation of additional resources, with research spending up 6.3% from the previous year, while the number of employees in research rose 3.1% to total 1,251 worldwide. We have also moved to strengthen research capacity through reorganization now under way. A corporate Research, Development and Quality Department has been set up to develop programs built around four priorities: convenience, taste appeal, and, most importantly, safety and health as the hallmarks of Danone products. Environment Three years after adopting our Charter for the Environment, we are continuing efforts to enhance environmental standards in three key areas: packaging, production plants and farming. Developing environment-friendly packaging Wide-ranging initiatives in this area have included moves to reduce the quantity of packaging material used the weight of Evian plastic bottles, for example, has been cut by 17% since their launch and use of materials with less long-term impact. We also actively encourage recycling of packaging, notably through the development of new techniques to recycle plastic bottles. Finally, we play an active role in organizations concerned with processing of waste packaging such as Eco-Emballage in France and green-labeling bodies in other countries. Greening production Our group has adopted a variety of environment management tools to reduce the impact of factories on the environment. Since 1997, a number of sites have launched ISO certification programs. By March 1999, eight factories and one administrative site had been certified, while 19 others had initiated certification procedures and 33 were preparing to do so. To back up the ISO program, we conduct regular environmental reviews and track key indicators on an ongoing basis at all our sites. Results show improvements in a number of areas 81% of factory waste is now recycled, while the quantities of water and energy used are declining, falling by an average of 2% and 4%, respectively, in Promoting sustainable farming Our close links to the agricultural industry mean that we can encourage suppliers to adopt a more environment-friendly approach to farming. Over recent years, we have thus promoted reasonable methods preserving the taste quality of products and protecting the environment, while at the same time allowing farmers to stay competitive. Concrete steps have included the adoption of a quality charter for milk in 1992 and Kronenbourg s supplier specifications setting limits on nitrate fertilizers for the production of the barley it buys. In France, we have also entered into a three-year partnership with the Young Farmers Union to promote environmentfriendly farming. Food safety For an industry leader like Danone, product safety is an absolute priority. Major brands simply cannot afford any shortcomings in this area. We have thus made concerted efforts over many years to reduce 10

11 risks, many of which are now well under control, including in particular the risk of bacterial contamination. Among other measures, this has involved the introduction of sophisticated quality assurance procedures and inspection systems above and beyond regulatory requirements, as well as the development of HACCP (Hazard Analysis Critical Control Point) methods, identification of risky stages in the production process, and the adoption of strict quality charters. The results speak for themselves over two hundred sites, or nearly two-thirds of the group total are now certified under the ISO 9002 quality standard. To deal with new types of risk, we have set up a special food-safety unit within the research department, giving it responsibility for identifying, assessing and countering these risks. We also call on the assistance of outside experts to further reinforce the rigorous application of standards. A food-safety group made up of ten internationally recognized experts from outside the Group thus provides regular input. Originally set up to assist the Groceries division, in 1998 its brief was extended to all our businesses. In addition to clearly identified and recognized risks, we pay close attention to those perceived by consumers the best example now being genetically modified foodstuffs. Research findings and scientific publications to date suggest that the use of these foodstuffs is not a danger to human health. However, in view of consumer concern, we have decided to maintain our policy of using only conventional soybean or cornbased ingredients, or ingredients which contain no modified genes. We ask all suppliers of ingredients for the products we distribute within the European Union to provide us with an assurance that they comply with this policy and that they carry out the necessary inspections to ensure this is the case. In the event that we were not able to guarantee the absence of genetically modified ingredients, we would indicate this on labels in accordance with regulations. On this point, it should be emphasized that we have advanced capacity for the detection of genetically modified ingredients. Through our Strasbourg-based Tepral Research Center we are one of the first industrial groups in Europe to be able not only to detect the presence of modified DNA in our raw materials but also measure the quantity involved. Supporting research Danone Institutes The addition of Danone Institutes in Israel and Japan during 1998 brought the total opened since 1991 up to 15. These not-for-profit organizations bring together internationally recognized nutrition experts to develop programs for education and training in nutrition, as well as for the support of related research, with a total of over 140 individual scholarships awarded to date. In the same spirit, last autumn we presented the second Danone International Nutrition Award, a biennial event with an FF800,000 prize rewarding a nutrition scientist whose work has made a significant contribution to public health. Evian Water Research Center The Evian Water Research Center, headed by a committee of scientific experts, pursues similar goals, awarding prizes and supporting major research projects while at the same time encouraging greater public awareness. In addition to the publication of informative brochures for the general public, it has set up a website providing access to a unique store of knowledge with some 20,000 different documents. The Danone Fruit Association Finally, in 1998 we also set up the Danone Fruit Association to preserve the diversity of fruit varieties in France and raise public awareness of the available choice. The association will also favor initiatives of all kinds to improve the quality of fruit. 11

12 Share performance and ownership In 1998, our new strategy and the implementation of the decisions announced won favors for Danone shares, with the result that market capitalization rose by more than 50% in just one year. Danone share price and CAC 40 index euros DANONE CAC % +70.3% Danone shares are traded on the monthly-settlement compartment of the Paris Bourse under the Sicovam number They are also listed in London, Brussels, Geneva, Zurich and New York. At April 14, 1999, after conversion of bonds, capital stock was made up of 77,270,330 shares with a nominal value of FF10 each. A vigorous performance In 1998, the Paris Bourse made its strongest showing in a decade, with the benchmark CAC 40 index gaining 31.5% Danone shares again stood out, putting on no less than 48.8%. This compares with a 22.9% rise in the SBF agrifood sector index. In the course of two years, our share price more than doubled and market capitalization rose from FF52 billion to well over FF100 billion. Following a steep rise in the first half, Danone shares reached their peak for the year at (FF1,885) on July 17, compared with the low for the year of (FF1,028) on January 12. Over the summer the stock price suffered from market upsets associated with worsening fallout from the Asian crisis and fears of contagion on other emerging markets affecting western economies. It continued to lose ground through to October before picking up again to close the year at (FF1,600). In the opening weeks of 1999, Danone shares came under downward pressure after the announcement of poor results from some of our main competitors, then recovered again as 1998 figures dispelled doubts on earnings quality. However profit-taking brought a decline from the beginning of the year to the end of March. At December 31, 1998, Danone ranked eleventh by market capitalization on the Paris Bourse, up from thirteenth place a year earlier. At that date, capitalization stood at billion or FF117.9 billion, the equivalent of 1.39 times annual sales. A daily average of 267,713 Danone shares changed hands on the Paris Bourse in 1998 compared with 254,940 in The rise reflected not only busier overall trading on the market, but also special interest in the financial community. At the same time, trading in Danone equity options on Monep rose from 127,610 lots in 1997 to 573,719 in The market status of Danone shares has taken a favorable direction for over a year now, with investors welcoming our new strategy and our readiness to put decisions into practice, as well as our capacity to weather international economic squalls. International awareness of Danone has also benefited from listing on the New York Stock Exchange, where the stock is traded in the form of American Depository Shares, with one ADS representing one-fifth of an ordinary share. Introduced at $31, Danone ADS have turned in a healthy performance, keeping step with share prices in Paris to show a 58% rise from November 20, 1997 to March 25, Early redemption of convertible bonds The 6.6% convertible bonds issued in 1990 and maturing in 2000 were redeemed early on January 1, Stockmarket data in millions of euros in millions of French francs Market capitalization at December 31 7,946 8,749 8,005 11,964 17, ,881 thousands of shares Average daily trading volume in euros in French francs High ,885 Low ,028 Closing price on last trading day of the year ,600

13 Ownership Share buy-back and treasury stock Pursuant to the authorization granted by the General Meeting of Shareholders on May 19, 1998 and in accordance with the Act dated July 3, 1998, reforming rules for the repurchase of securities by the issuer, Danone has launched a share buy-back program designed to enhance return on equity and shareholder value. In the second half of 1998, we thus bought back 1,450,000 shares on the market. Together with those already held, this raised the number of Danone shares held by our Group to 5.41% of equity at December 31, 1998, and subsequent purchases to 7.13% or 5,509,217 shares at March 31, The Annual General Meeting on May 19, 1999 will be asked to authorize the Board of Directors to cancel all or some of the shares bought back and to undertake a second buy-back program for up to 10% of equity. Main shareholders France s central securities depository Sicovam SA carried out procedures to identify holders of bearer shares on December 31, Findings indicate that shareholders represented on the Board of Directors held approximately 16% of equity and 24% of voting rights, while institutional investors held some 64% and 140,000 individual shareholders held a total of 15%. Surveys conducted in Europe and the US at the beginning of January point to a shift in the geographical breakdown of ownership. Listing on the NYSE has helped to create added interest among US investors, while investors making up a high proportion of European shareholders from outside France are British. They are followed by investors from Germany, Luxembourg and Switzerland. Main shareholders at April 14, 1999 Eurafrance (Lazard) 5.36% Worms et C ie 4.89% Findim 2.21% Axa 1.42% Treasury stock 7.13% Shareholder relations Returns Danone is committed to steadily improving returns for the shareholders who have entrusted us with their capital. A rising stock price reflecting the increased value of our business is thus an essential consideration. We also distribute an average 37% of earnings as dividends. The overall return for an investor who bought Danone shares in 1996 would thus have averaged approximately 50% a year since then. Disclosure Throughout the year, we keep shareholders as well informed as possible, providing them with a regular flow of publications and organizing special events. Regular notices appearing in the financial press include sales and earnings figures, as well press releases announcing developments such as acquisitions and divestments. Our annual report is available on request and all shareholders identified by the central depository receive copies of our Shareholders Letter published in April and October. Reflecting their central role on financial markets, securities analysts and institutional investors receive regular updates on finances and strategies through meetings and telephone conferences. Several times a year, Group management also takes part in roadshows in major financial centers in the US, the UK, Germany, Switzerland and the Netherlands, for example. Individual shareholders also receive special attention. They can call in for information on a toll-free line at any time and are invited to attend meetings organized by SBF-Paris Bourse, the Paris market operator. Danone Group participates in such meetings several times a year and in 1998 was present at those held in Mulhouse, Lyon and Tours. Finally, information is available over Minitel, France s national videotex network, as well as on our Internet site which provides quick access to all business details. Earning per share Number of shares outstanding at year end 69,685,276 71,295,796 72,639,149 73,071,609 73,924,810 Number of shares used to calculate EPS (diluted) 77,114,894 78,239,580 79,076,442 79,092,534 78,557, in euros in French francs Net EPS (diluted) Net dividend per share Total dividend (including French tax credit) Distribution ratio 32% 53% 37% 37% 37% Total yield 3.2% 3.0% 3.5% 2.6% 1.8%

14 Corporate governance Board of Directors The Board of Directors, which had 23 members in 1998, now counts 17, appointed for renewable periods of three years. They include four group executives (Franck Riboud, Jacques Vincent, Christian Laubie and Philippe Jaeckin), two former executives (Antoine Riboud and Philippe Lenain), seven members representing major shareholders (Michel David-Weill, Jean-Claude Haas, Umberto Agnelli, Dominique Auburtin, Yves Boël, Luca Fossati and Jacques Nahmias), and four independent directors (Edouard de Royère, Jean Gandois, Jérôme Seydoux and Yves Cannac). The minimum number of Danone shares that directors are required to hold was raised from 100 to 500 in At December 31, 1998, members of the board thus had interests worth at least 122,000 or FF800,000 each in Danone shares, and together owned 312,795 shares. The Board of Directors proposes to raise annual Directors fees from FF36,000 to FF100,000. The General Meeting of Shareholders will be asked to set the maximum amount of fees payable to members of the board and of board committees at FF2 million. Directors who are also Group executives have waived their entitlement to fees. Board committees Strategy and Appointments Advisory Committee The Committee is presided by Mr. Antoine Riboud and has twelve members, nine of whom are not Danone executives. Members receive an annual fee of FF25,000 and the Chairman twice that amount. Audit Committee The committee is presided by Mr. Jean-Claude Haas and has three members, none from Danone management. Members receive an annual fee of FF25,000 and the Chairman twice that amount. Compensation Committee The committee presided by Mr. Michel David- Weill has two other members, Mr. Yves Boël and Mr. Jean Gandois. None of the three are from Danone management. Members receive an annual fee of FF10,000 and the Chairman twice that amount. General management Executive Committee The Executive Committee is responsible for the general management of the group and has nine members. The members of the Executive Committee as it was on December 31 received compensation in a total amount of FF36.6 million during At December 1998, they held 285,000 stock options with exercise prices ranging from FF646 ( 98.48) to FF1,161 ( ) and expiration dates from July 7, 2000 to March 13, International Committee The International Committee was set up in 1998 to encourage contacts and the exchange of ideas between Danone entities in different parts of the world, and provide the Group with a more precise picture of market developments. It provides a forum for members of the Executive Committee and representative managers from our main geographical markets to share information and experiences. Stock options Stock options have periodically been granted to senior executives within our Group, and there are currently some 800 beneficiaries. Since 1997, only options for the purchase of existing shares and not subscription to new shares have been granted by the Board of Directors. At the beginning of 1999, the Board decided to extend plans to additional beneficiaries, to make more options available and to allocate these by lots every two years. Plans are all to run for eight years, but the period during which options may not be exercised has been reduced to two years. The exercise price will be equal to the average market price over the 20 trading days preceding the meeting of the Board of Directors which allocates the options. At the end of 1998, vested options still unexercised represented a total of 1,264,085 shares, while average exercise prices ranged from FF600 ( 91.46) to FF1,524 ( ). Business conduct policy A code of conduct to govern relationships between employees and business partners was published in 1997 under the title Business conduct policy at Danone and has been circulated to all Group companies. 14

15 Board of Directors Committees (at March 18, 1999) Board of Directors Antoine Riboud Honorary Chairman Franck Riboud Chairman and Chief Executive Officer Michel David-Weill Vice Chairman Jacques Vincent Vice Chairman and Chief Operating Officer Christian Laubie Senior Executive Vice President and Chief Financial Officer Philippe Jaeckin Executive Vice President Umberto Agnelli Dominique Auburtin Yves Boël Yves Cannac Luca Fossati Jean Gandois Jean-Claude Haas Philippe Lenain Jacques Nahmias Edouard de Royère Jérôme Seydoux Honorary Directors Daniel Carasso Honorary Chairman Renaud Gillet Pierre Lambertin Strategy and Appointments Advisory Commitee Antoine Riboud Chairman Umberto Agnelli Yves Boël Daniel Carasso Michel David-Weill Luca Fossati Jean Gandois Christian Laubie Franck Riboud Edouard de Royère Jérôme Seydoux Jacques Vincent Compensation Committee Michel David-Weill Chairman Yves Boël Jean Gandois Audit Committee Jean-Claude Haas Chairman Yves Cannac Jean Gandois Statutory Auditors Auditors Befec-Price Waterhouse Member of PriceWaterhouseCoopers Mazars & Guérard Alternate Auditors Denis Grison Marc Chauveau Umberto Agnelli born November 1, No. of DANONE Group shares held: 500. Director, Member of the Strategy and Appointments Advisory Committee Groupe DANONE, France. Chairman IFIL SpA, Italy. Vice Chairman, Managing Director IFI SpA, Italy. Vice Chairman Giovanni Agnelli EC Sapaz, Italy. Director Piaggio & C., Italy. Member of the Supervisory Board and Strategy Committee Worms & Cie, France. Dominique Auburtin born July 30, No. of DANONE Group shares held: 500. Director Groupe DANONE, France. Chairman of the Executive Board Worms & Cie, France. Chairman of the Supervisory Board Saint-Louis Sucre SA, France. Director CAR SA Cabinet de courtage, d assurances et de réassurance, France. Les Petites Affiches, France. Permal Group, France. Arjo Wiggins Appleton, UK. Yves Boël born September 12, No. of DANONE Group shares held: 510. Director, Member of the Strategy and Appointments Advisory Committee, Member of the Compensation Committee Groupe DANONE, France. Chairman SA Sofina, Belgium. Chairman, Managing Director SA Union Financière Boël, Belgium. Vice Chairman SA Tractebel, Belgium. Director Eurafrance, France. SA Royale Belge, Belgium. SA Petrofina, Belgium. Yves Cannac born March 23, No. of DANONE Group shares held: 500. Director, Member of the Audit Committee Groupe DANONE, France. Group Board Cegos SA, France. Director Caisse des Dépôts- Développement (C3D), France. Société Générale, France. AGF, France. 15

16 Michel David-Weill born November 23, No. of DANONE Group shares held: 19,387. Vice Chairman and Director, Member of the Strategy and Appointments Advisory Committee, Chairman of the Compensation Committee Groupe DANONE, France. General Partner Lazard Frères & Cie, France. Chairman Lazard Partners Ltd Partnership, US. Lazard Frères & Co., LLC, US. Chairman Eurafrance, France. Member of the Supervisory Board Publicis. Director Pearson plc, UK. ITT Industries Inc., US. IFIL SpA, Italy. Luca Fossati born October 23, No. of DANONE Group shares held: 525. Director, Member of the Strategy and Appointments Advisory Committee Groupe DANONE, France. Chairman Findim Finanziaria Industriale Immobiliare Mobiliare SpA, Italy. Findim Investments SA, Switzerland. Star Stabilimento Alimentare SpA, Italy. Director IFIL SpA, Italy. Jean Gandois born May 7, No. of DANONE Group shares held: 1,799. Director, Member of the Strategy and Appointments Advisory Committee, Member of the Compensation Committee Groupe DANONE, France. Chairman Cockerill-Sambre SA, Belgium. Member of the Supervisory Board Peugeot SA, France. Compagnie Financière Paribas, France. Suez Lyonnaise des Eaux, France. Siemens AG, Germany. Akzo Nobel, Netherlands. Director Institut Curie, France. Jean-Claude Haas born February 22, No. of DANONE Group shares held: 1,945. Director, Chairman of the Audit Committee Groupe DANONE, France. General Partner Lazard Frères & Cie, France. Chairman and CEO Compagnie de Crédit, France. Director Pathé, France. Eurafrance, France. General Partner Lazard Partners Ltd Partnership, US. Managing Director Lazard Brothers & Co. Ltd, UK. Philippe Jaeckin born December 14, No. of DANONE Group shares held: 500. Director, Executive Vice President, Member of the Executive Committee Groupe DANONE, France. Christian Laubie born August 19, No. of DANONE Group shares held: Director and Senior Executive Vice President, Member of the Strategy and Appointments Advisory Committee, Member of the Executive Committee Groupe DANONE, France. Chairman Alfabanque, France. Philippe Lenain born September 9, No. of DANONE Group shares held: 500. Director Groupe DANONE, France. Eco-Emballages, France. Nord Est, France. Jacques Nahmias born September 23, No. of DANONE Group shares held: 553. Director Groupe DANONE, France. Chairman and CEO Propétrol, France. Chief Operating Officer and Director Pétrofrance SA, France. Director Danone SA, Spain. Antoine Riboud born December 24, No. of DANONE Group shares held: 231,183. Honorary Chairman, Director, Chairman of the Strategy and Appointments Advisory Committee Groupe DANONE, France. Vice Chairman Mahou SA, Spain. Director Pathé, France. Eurafrance, France. L Air Liquide, France. Renault, France. IFIL SpA, Italy. ONA, Morocco. Sofina, Belgium. Franck Riboud born November 7, No. of DANONE Group shares held: 600. Chairman and CEO, Chairman of the Executive Committee, Member of the Strategy and Appointments Advisory Committee Groupe DANONE, France. Director Fiat, Italy. Edouard de Royère born June 26, No. of DANONE Group shares held: 500. Director, Member of the Strategy and Appointments Advisory Committee Groupe DANONE, France. Honorary Chairman and Director L Air Liquide SA, France. Chairman ANSA, France. Director L Oréal, France. Sodexho, France. Solvay, Belgium. Jérôme Seydoux born September 21, No. of DANONE Group shares held: 500. Director, Member of the Strategy and Appointments Advisory Committee Groupe DANONE, France. Chairman Pathé, France. British Sky Broadcasting Group plc. Deputy Chairman and Chief Operating Officer Chargeurs, France. Member of the Supervisory Board Accor, France. Director BSKyB Group Ltd, UK. Jacques Vincent born April 9, No. of DANONE Group shares held: 500. Vice Chairman and Chief Operating Officer, Member of the Strategy and Appointments Advisory Committee, Member of the Executive Committee Groupe DANONE, France. Chief Operating Officer and Director Brasseries Kronenbourg, France. Manager Minute Maid Danone, France. 16

17 Management report In 1998, we reaped the first rewards of the strategic refocus begun at the end of Sales growth quickened in terms of comparable data, particularly in our three core businesses Dairy products, Beverages and Biscuits where the rise was 5.6%. Operating margins improved in all these businesses and in Containers, setting the overall figure for the group at 10%. Finally, net income rose 7.1%. International operations again provided most of the momentum, but growth was also healthy in Europe, which continues to provide a sound basis for all our businesses and still accounts for over 75% of our consolidated sales. Reflecting the reorganization of operations, figures are now presented for business lines worldwide, while regional data cover all products. in millions of euros in millions of French francs Change 1998 Sales 13, , % 84,848 Operating income 1, , % 8,483 Operating margin 9.1% 10.0% 10.0% Net income % 3,923 Cash flows from operations 1, , % 8,706 Capital expenditure % 4,663 Net financial borrowing 2, , % 18,848 Stockholders equity 7, , % 47,864 Debt/equity 37.9% 39.4% 39.4% 17

18 Sales Danone Group consolidated sales came to 12,935 million or FF84,848 million 4.1% less than in the previous year due to the sale some of our grocery businesses. At comparable scope of consolidation and exchange rates there was a rise of 4.6%, twice that observed in Changes in the scope of consolidation cut 8% off sales, while exchange-rate variation had a negative impact of 0.8%, thus masking quicker like-for-like growth. The divestments of 1997 led to the exclusion from the scope of consolidation of Panzani- William Saurin, Liebig-Maille-Amora, Agnesi, Liebig Benelux and La Familia in groceries, of the confectionery business of VPSA in biscuits, and of Best s business in New Zealand. The sales of Stœffler and Griffin s sauces in 1998 also resulted in their exclusion. Newly included were the yogurt activities of the joint-venture Clover Danone, fully consolidated from January 1, 1999 and, in the beverages division, Villa Alpina of Argentina and Shenzhen Health Drinks of China, both fully consolidated from April 1. The negative impact of foreign-exchange translation mainly resulted from unfavorable trends in the New Zealand dollar, the Indian rupee and the South African rand. These were only very partly offset by gains on the US dollar and sterling. A breakdown of sales by business shows even firmer growth in strategic business lines, which reported a 5.6% rise in sales that included 8.2% in Beverages, 5.2% in Dairy products and 3.6% in Biscuits. Our other operations posted sales down 1.4% in Containers and 1.2% in Other food business. Volume increases in all areas except Other food business contributed 3.5 points to the 4.6% like-for-like rise in sales, while the remaining 1.1 reflected a price/mix effect. Volumes were up 4.3% in our core business lines. Growth was unevenly spread during the year. After an exceptional rise of 6.6% in the first half, partly as a result of the catching up in beverages and the benefits of the World Cup, growth eased to 2.7% in the second, due in particular to unfavorable weather conditions in northern Europe. At the end of 1998, the Group sold several companies, principally representing pasta and ready-to-serve business in Germany, which will only be excluded from the scope of consolidation in Operating income Operating income rose 5.7% to 1,293.2 million (FF8,483 million). Reflecting the impact of divestments, there was an even steeper rise of 11% at comparable scope of consolidation and exchange rates, which was significantly greater than the rise in sales. Group operating margin thus rose from 9.1% to 10%. Operating margin for core business lines was higher at 10.6%, standing at 12.3% in Beverages, 11% in Dairy products and 7.8% in Biscuits. A third of the overall rise of 90 basis points in operating margin is explained by the first benefits of an extensive program to sell off lower margin subsidiaries. The remaining two-thirds rewarded the efforts made throughout the Group to generate profitable growth through cost cutting, productivity gains, improved prices for existing products and the launch of new, high value-added products. The rise in operating margin reflects a 270 bp fall in the cost of goods sold as a percentage of sales that was partly offset by a 130 bp rise in selling expenses, as a portion of productivity gains was put into advertising to spur sales growth. The Group is now benefiting from the reorganization of European production and logistics begun three years ago, as well as the first effects of the worldwide organization of purchasing now being phased in. Increasingly systematic use of synergies across Group companies is also having beneficial effects, with initiatives including the harmonization of IT systems, the creation of joint service companies to handle finance and administration for Group subsidaries in the same country, and a group-wide approach to research. 18 Key figures by division Sales Operating income in millions of euros in millions of French francs Dairy products 4, , , , ,073 Beverages 2, , , , ,416 Biscuits 2, , , , ,334 Core business lines 9, , , , , , ,823 Other food business 2, , , Containers , Intra-Group sales , ,165 Unallocated items Group total 12, , , ,848 1, , , ,483

19 Strategic business lines Our three strategic business lines accounted for 86% of consolidated sales and 90.9% of consolidated operating income in Their combined sales rose from 10,752.7 million (FF70,533 million) in 1997 to 11,275.9 million (FF73,965 million) in Sales growth at constant structure and exchange rates reached 5.6%, while operating income rose 12% to 1,192.6 million (FF7,823 million), setting operating margin at 10.6%. Dairy products Our largest single business, dairy products accounted for 43.2% of Group sales and 47.3% of 1998 operating income. Sales rose from 5,323.8 million (FF34,922 million) in 1997 to 5,665.3 million (FF37,162 million) in At constant structure and exchange rates, the rise in sales was 5.2%. Operating income rose 11.6% to million (FF4,073 million), with operating margin up half a point to 11%. Beverages Beverages accounted for 22.9% of Group sales and 28.1% of 1998 operating income. Sales increased from 2,754.6 million (FF18,069 million) in 1997 to 3,004 million (FF19,705 million) in At constant structure and exchange rates, the rise in sales was 8.2%. Operating income rose 12.6% to million (FF2,416 million) with operating margin up from 11.9% to 12.3% of sales. Biscuits Biscuits accounted for 19.9% of Group sales and 15.5% of 1998 operating income. Sales declined from 2,674.3 million (FF17,542 million) in 1997 to 2,606.6 million (FF17,098 million) in 1998, mainly as a result of the sale of VPSA s confectionery business in At constant structure and exchange rates, sales rose 3.6%. Operating income rose 12% to million (FF1,334 million), with operating margin up from 6.8% to 7.8%. Other food business The contribution of grocery business to consolidated sales fell from nearly 20% in 1995 to under 7% in Other food sales were down from 1,986.8 million (FF13,033 million) in 1997 to million (FF5,933 million) in This mainly reflected 1997 divestments including Panzani- William Saurin, Liebig-Maille-Amora, Agnesi, Liebig Benelux and La Familia in Europe, and Best s business in New Zealand, as well as the sale of Stœffler and Griffin s sauces. However there was also a decline of 1.2% in sales at constant structure and exchange rates, mainly because of poor performances of pasta and ready-to-serve businesses in Germany. These have now been sold and excluded from the scope of consolidation since January 1, Divestments naturally brought a decline in operating income, which fell 59.7% to 28.6 million (FF188 million), while operating margin stood at 3.2% compared with 3.6% in Key figures by division Cash flows from operations Capital expenditure in millions of euros in millions of French francs Dairy products , ,658 Beverages , ,582 Biscuits , Core business lines 1, , , , ,892 Other food business Containers Intra-Group sales Unallocated items Group total 1, , , , ,663 19

20 Containers Geographical breakdown Rise in net income Containers accounted for 7.1% of Group sales and 6.9% of operating income in Sales declined 1.4% at constant structure and exchange rates, with volumes throughout Europe showing a more than seasonal decline toward year end. This in turn appears to reflect cuts in brewers inventories after the end of the World Cup. Against this backdrop, 1998 sales came to million (FF6,115 million) in 1998 after million (FF6,213 million) in Operating income rose 0.8% to 90.6 million (FF594 million), with operating margin up from 9.5% to 9.7%. In 1998, France accounted for 37% of consolidated sales, contributing a total of 5,041.6 million (FF33,071 million). Other western European countries represented 38.7% or 5,266.7 million (FF34,547 million) and the rest of the world for 24.3% or 3,303.3 million (FF21,668 million). Growth was particularly vigorous in Asia, where sales rose 18.8% to account for 7.5% of the consolidated total, as well as in Central Europe where they rose 25.5% to account for 2.3%. This made up for slacker, although still significant, growth in North America, where sales rose 6.4% and accounted for 6.8% of the Group total, as well as in Latin America, where they rose 3.8% and accounted for 7.8%. Turning to operating income, France again accounted for the largest share, contributing 45.1% to the total, with operating margin the highest for the group at 11.7% and still rising in all businesses with the exception of groceries. This reflects the benefits of restructuring over recent years, as well as the commitment of the workforce to profitable growth programs. Operating income in other parts of the European Union rose 10.3%, with operating margin up a full percentage point to 9% overall as a result of improvements in all strategic business lines. Margins were steady in Other food business, and edged down in Containers. Operating income in the rest of the world rose 21.8%, reflecting a combination of sales growth and higher margins in all areas of business. All told, operating margin picked up from 6.6 to 7.5%. Consolidated net income rose 7.1% to million (FF3,923 million). This was after a net exceptional charge of 44 million (FF289 million) made up of 52 million (FF341 million) in restructuring charges and 8 million (FF52 million) in capital gains. Marking the end of the extensive restructuring for which provisions were set aside in 1995, 1998 was a year of transition. It also saw the beginning of more modest restructuring with clearly identified costs booked to exceptional charges. This year, these mainly concern Galbani and Danone Spain in dairy products, and biscuit operations in the UK. Net interest expense fell nearly 14% to million (FF959 million) thanks to the proceeds of the sale of grocery business, booked at the end of 1997, as well as efficient management of interest-rate exposure. The effective rate of corporate income tax declined from 42.6% in 1997 to 39.3%. This was due in particular to the fact that some exceptional charges incurred in 1997 were not deductible, as well as to the lower rate of income tax charged to Italian companies in Minority interests rose 18% to 96.8 million (FF635 million) due to the improved results of subsidiaries where minority shareholders hold a high proportion of equity. This was true of both profit-making businesses, in particular in Spain, China, India and Argentina, and loss-making companies, notably in Indonesia. 20 Sales by business Sales growth at comparable structure and exchange rates Dairy products 43.2% Beverages 22.9% Biscuits 19.9% Core business lines 86.0% Other food business 6.9% Containers 7.1% Dairy products + 5.2% Beverages + 8.2% Biscuits + 3.6% Core business lines + 5.6% Other food business - 1.2% Containers - 1.4% Group total + 4.6%

21 The contribution of affiliates accounted for by the equity method fell 21%, reflecting the change in the method of consolidation applied to the yogurt business of Clover in South Africa, as well as the impact of the Russian crisis on our biscuit business in eastern Europe. On the basis of the weighted-average number of shares, which is 78,557,577, fullydiluted net income per share rose 6.8%. The impact of share buybacks on net income per share was limited to a rise of FF0.28 per share, since most purchases on the stockmarket were made in the second half of the year. Cash flow from operations rose 8% to 1,327.2 million (FF8,706 million). Working capital requirements, the object of particular attention in keeping with our focus on return on capital employed, fell by 30.9 million (FF203 million). Capital expenditure totaled million (FF4,663 million), with main items concerning dairy products and beverages. In dairy products, they included the completion of new factories at Longchamps in Argentina and Fortaleza in Brazil, extension of production lines in France, in particular to free capacity for new products, and transfers of operations in connection with restructuring of production and logistics at Galbani. In Beverages, investments were made to raise the production capacity of Bonafont in Mexico and Wahaha in China. Investments in subsidiaries and affiliated companies came to million (FF3,184 million), compared with 470 million (FF3,083 million) in The main focus was on beverages, in particular water. Reflecting our strategy of international expansion, all acquisitions were outside France, they included a 12.45% interest in Yeo Hiap Seng, a Singapore-based company that is a leader in Asian beverages; 40% of PT Tirta Investama, which controls Indonesia s leading producer of bottled water, Aqua; and 60% of Shenzhen Health Drinks, which produces and distributes mineral water in southern China. We also took control of Aquapenn, a US producer of bottled spring water, of dairyproduct company Tikvesli in association with our partner Sabanci in Turkey and, at the end of 1998, of the biscuit business of Poland s Wedel, whose Delijcia brand will be operated by the Danone Group as of Divestments Program continued with new sales of groceries business. Reflecting the new strategic focusing of our business, main asset sales in 1998 concerned Stœffler, a French company making Alsatianstyle meat products, Spanish pasta-maker La Familia and Birkel Sonnen Basserman, a German firm specializing in pasta and readyto-serve dishes, as well as the Général Traiteur s fresh pasta and quenelle business and Griffin s sauces in New Zealand. At the end of the year, we also sold the clinical nutrition operations of Bledina in France. Proceeds of divestments in the year totaled million (FF1,560 million). Financial position A sound base. Stockholders equity at December 31 amounted to 7,296.8 million (FF47,864 million). Net financial debt rose from 2,752.3 million (FF18,054 million) in 1997 to 2,873.4 million (FF18,848 million) mainly due to purchases of Danone shares totaling million (FF2,349 million). The ratio of debt to equity thus edged up from 37.9% to 39.4%. Financial instruments The Group uses financial instruments to limit exposure to exchange rate and interest rate risk arising from its industrial and commercial operations. The net exposure of all subsidiaries is managed on a centralized basis by the Group finance department in accordance with the aims and principles laid down by general management. In concrete terms, exposure of subsidiaries to exchange-rate risk resulting from commercial transactions in foreign currencies is first netted, and the resulting net exposure is hedged with quality counterparties, mainly through forward contracts and options. As regards interestrate risk, the Group s finance departments uses swaps, caps, floors and Pibor futures to strike an overall balance between fixed and floating rates for the Group s net debt, in line with management policy. Consolidated sales by geographical area 21 France 37.0% Rest of European Union 38.7% Italy 12.6% Spain 9.8% Germany 4.2% Other 12.1% Rest of world 24.3% Eastern Europe 2.3% North America 6.7% Latin America 7.8% Asia 7.5%

22 Return on capital and creation of value Return on invested capital now plays a major role in assessments of the Group s various businesses. Reflecting improved business performances, shareholders added value, representing the difference between net operating profit and the cost of capital, rose to 111 million (FF730 million), compared with 61 million (FF400 million) in 1997 and 15.2 million (FF100 million) in Return on invested capital defined as the ratio of net operating profit after tax to average capital employed was up to 8% after 7.6% in This further improvement reflected both a rise in operating income and control of capital employed. At the same time, the weighted average cost of capital, representing the cost of debt and returns expected by shareholders, edged down from 7.1% to 7%. Recent developments At the beginning of 1999, our Group announced several moves expanding its international presence. In Latin America, we reinforced our control of two Argentine subsidiaries, acquiring additional shares from our partner Mastellone to raise our interest in dairy-product company Danone SA to 99.5%, and launching a buyout offer that increased our interest in biscuitmaker Bagley to over 91%. We also signed an agreement with Alimenticias Noël in Colombia for the acquisition of a 20% interest in the country s leading biscuit-maker, Galletas Noël. In Europe we moved to consolidate German biscuit business through the merger of our biscuit operations in Germany and Austria with those of Griesson, a German company with a strong position on its domestic market. Finally, at the beginning of April, we announced plans for the sale of Pycasa, Spain s leading producer of frozen ready-toserve dishes. Outlook We are continuing to sharpen our focus on our three core business lines through the sale of some of our grocery operations in Europe and restructuring of our container business. While there will be no letup in efforts to cut costs, we are also seeking to expand all our business, particularly in Europe, through a major commitment to research and product innovation. At the same time, business outside western Europe is continuing to gain weight through a combination of acquisitions and organic growth outpacing that in Europe. With cash flow healthy and debt low, we are also pursuing our share buyback program. Efforts in these directions should bring a renewed rise in operating margins in 1999, by the same token improving return on invested capital and raising shareholder value. 22 1,090.2 Sales in rest of world Operating margin 10.0% Cash flows from operations 24.3% 8.8% 8.8% 8.9% 9.1% 21.6% 1, , , % 1, % 9.9%

23 Business lines In 1998, we streamlined organization, structuring it around business lines in keeping with our development strategy. The Danone group now comprises three worldwide business lines Dairy products, Beverages and Biscuits as well as a special division for the Asia-Pacific region. Other businesses, mainly confined to Europe, are ready-to-serve dishes and sauces, classified as Other food business, and Glass containers. 23

24 Dairy products The Danone Group is the world s largest producer of dairy products yogurts, yogurt-style cheeses, dairy desserts and beverages with 15.1% of a market estimated at 17.8 million metric tons a year. Business is mainly in Europe, North America and Latin America, but we are also present in Asia, South Africa, North Africa and Israel. Dairy products also include the business of Galbani, a leading producer of Italian-style cheeses, and Bledina, which has strong positions on the French infant-food market. In addition, the division takes responsibility for refrigerated fruit juices sold under the Minute Maid Danone name in association with Coca Cola. Dairy products contributed 43.2% to consolidated sales and 47.3% to operating income in France accounts for 25.2% of sales, other parts of the European Union for 47.5% and the rest of the world for 27.4%. In 1998, performances were again highly satisfactory. Both volumes and margins were on the rise, and international expansion continued. in millions of euros in millions of French francs Sales 4, , , ,162 Operating income ,073 Operating margin 10.4% 10.5% 11.0% 11.0% Cash flow from operations ,845 Capital expenditure ,658 Employees 21,599 21,743 21,696 21,696 Innovation and international deployment drive growth Dairy product sales were up from 5,323.8 million (FF34,922 million) in 1997 to 5,665.3 million (FF37,162 million) in At constant structure and exchange rates, sales growth reached 5.2%, with volumes up 4.6%. The rise in sales under the Danone name was an particularly beneficial effects on the digestive tract. At the same time, we continued our drive to focus on core products. In the first half of 1998, the World Cup not only helped sales of Danone dairy products, an official partner of the event, but also boosted worldwide awareness of our brand, particularly among teenagers. even more impressive 7%. Nearly all division companies reported higher sales, and growth in Europe was vigorous. Creative flair was again to the fore in 1998, with a number of recently launched dairy products proving successes, particularly in Europe. They include Danao, a mixture of milk and fruit juice which won 12.5% of the French market for refrigerated fruit juices in just a few months. Another highlight was the remarkable progress of Actimel, a dairy drink combining three cultures with 24

25 Significant improvement in operating margin Operating income from diary products rose 11.6% to million (FF4,073 million), with operating margin up half a point to 11%. This was despite increased spending on advertising to back brands and new products. In addition to a rise in volumes, dairy products benefited from the productivity gains and industrial restructuring of recent years. This concerned operations in France, where factories in Seclin and Strasbourg were closed, as well as in Spain and at our Italian subsidiary Galbani. New products generating higher margins have also made for more profitable ranges. Raw material prices were generally steady, while both sales and operating margins rose on all geographical markets. France, where margins are highest, consolidated its leading position and further increased its profitability. Europe The Danone Group is European leader in dairy products, with a market share estimated at 15.4%. France Rises of 7.9% in sales revenues and 5.7% in volumes consolidated the position of France as our leading market for dairy products. Market share was up for the second year running, thanks in particular to the success of innovative new products including Actimel, Crème de Yaourt and Danone Recette Crémeuse yogurts, and Charles Gervais and Danette Liégoise dairy desserts. Diépal, our subsidiary specializing in infant and diet foods, changed its name to Bledina, that of its main brand, in At the end of the year, it sold both its sales network serving pharmacies and its clinical nutrition arm. Bledina sales, up only 2.1% in 1998, suffered from the halt in its exports to Russia, which had been promising at the beginning of the year. OTHER EU Our sales rose in all EU countries except Italy and the UK. Spain In Spain, our second largest market for Dairy products, growth remained firm at 10%, outpacing the market by a narrow margin. Nearly all products contributed to gains. Belgium A number of less important lines were discontinued in 1998 to concentrate on core products. The successful launches of Bio Maigre and Danette Liégeoise raised our share of the Belgian market, while the Rotselaar factory, which supplies Actimel to the whole of the European market, was expanded to keep pace with the rise in sales. Germany After investing heavily and refocusing operations on brand products in the previous year, our German dairy food business got back onto the road to growth in Sales under the Danone brand rose 6.7%, driven by the success of Actimel, launched in the course of the year. Italy Against a backdrop of fierce competition, Danone Italy lost some ground but held onto its leading market position. Efforts to renew and reposition core brands La Selezione, Danette, Danito and Vitasnella were rewarded with a rise of 14% in second-half sales under the Danone name. For Galbani, 1998 marked a turning point, with sales reorganization completed in December, although restructuring of production and logistics will continue through the first half of For the year as a whole, the company reported a rise of only 0.6% in sales but the last two months brought healthy rises for ranges and brands notably Santa Lucia and Vallelata which have recently been updated or repositioned. With the Italian market for salamis and other pork products contracting overall, Galbani s Casa Romagnoli brand suffered a decline in sales volumes but operating income was unaffected. All told, Galbani significantly improved its operating margin. 25

26 UK The strength of retailer brands and differences in the way yogurt is eaten continue to make the British market particularly difficult. Central and eastern Europe Despite slower growth and sometimes steep devaluations, central and eastern Europe made a significant contribution to growth in Sales revenues were up 26.6% and volumes 17% compared with overall market growth averaging 8%. Buoyed by the success of Jemny creamy fruit yogurts and the Vitalinea range, our Czech subsidiary provided much of the momentum, raising sales by over 50%. While international competition stiffening, our positions remain strong, particularly in Poland. Our Hungarian subsidiary is still expanding more quickly than the market and Danone Serdika has won its place on the Bulgarian market. North America We rank first in dairy products in both the US and Canada, where performances were uneven in Canada Sales rose by over 15%. Delisle yogurts were renamed Delisle Danone in the course of the year. US Against a backdrop of concentration in the dairy industry and food distribution, our US business showed only a slight rise. Dannon remains the country s leading brand for dairy products, and efforts to focus on core products have had a favorable effect on sales. Latin America Here, too, trends varied. Mexico Sales rose 20%, with a steep rise in demand for dairy products benefiting all our ranges Danino, Licuado, Dany, Dan Up and Gran Dia. Other countries South Africa Danone Clover, a joint subsidiary in which Danone has a 55% interest and Clover the remaining 45%, began operation in 1998, which also saw the launch of the first product under the Danone name, Danone Corner. This proved a big success on a market where yogurt sales have been stagnating for the past three years. Exports Exports of dairy products, mainly consisting of infant food, account for 8% of total Danone Group exports. In 1998, they declined, primarily because sales to Russia halted after August. Argentina Sales were steady on a stagnant market where Danone remains well ahead of the field. Product mix improved with healthy rises in sales of higher-margin lines. The new factory at Longchamps went into operation in the middle of the year. Brazil With prices under severe pressure, sales revenues declined despite a modest rise in volumes. 26 Sales by product Geographical breakdown of sales Yogurts 42.1% Yogurt-style cheeses/fresh Ital. cheese 24.9% Desserts 10.3% Infant food 6.4% Italian-style processed cheeses 6.2% Dairy beverages 2.2% Other 7.9% France 25.1% Rest of Europe 47.5% Rest of world 27.4%

27 Beverages The Danone Group is the world s second largest producer of bottled waters, accounting for 11% of a market estimated at 53.5 billion liters a year. Evian, on sale in more than 110 countries, is the top brand worldwide in the sector. We operate on European markets where bottled waters are part of people s way of life. Yet our core brands Evian, Volvic and Ferrarelle offer significant potential for export sales of both still and sparkling waters. Recent acquisitions also give us a place on markets where demand for bottled water is growing fast, notably in North America and Asia. We are the leading brewer in France through Kronenbourg, and in Spain through San Miguel and Mahou. We also enjoy strong positions on beer markets in Belgium, Italy and China. Beverages are the Danone Group s second largest and most profitable business line, accounting for 22.9% of consolidated sales and 28.1% of operating income. France accounts for 49.4% of sales, other parts of the European Union for 24.8% and the rest of the world for 25.8%. Water accounts for 53% of the consolidated total and beer for 47%. Sales growth at comparable structure and exchange rates was quicker than for any other Group business line in 1998, and operating margin improved further. Sales Beverage sales came to 3,004 million (FF19,705 million) in 1998 compared with 2,754.6 million in The rise at constant structure and exchange rates was 8.2%, with volumes up 7.4%. Water provided much of the momentum for growth, with sales putting on 11.5%. Beer sales, in contrast, suffered from unusually in millions of euros in millions of French francs Sales 2, , ,004 19,705 Operating income ,416 Operating margin 11.3% 11.9% 12.3% 12.3% Cash flow from operations ,987 Capital expenditure ,582 Employees 14,084 18,864 20,651 20,651 cool weather during the peak season in northern Europe and thus rose only 4.3%. Growth was particularly strong outside western Europe, where sales were up 22.7%, driven by rises of 39.3% for Wahaha in China and 82% for Dannon Water in the US Chinese and US markets thus illustrate potential in the sector. Business outside western Europe accounted for 25.8% of total beverage sales in The more modest 2.8% rise in European sales reflected the maturity of markets where bottled waters have long been common, whereas they have begun to win favor more recently in North America and the developing world. In France alone, beverage sales increased 4.7%, with pace much the same for water and beer. world. In France, our highest-margin market, operating margin was steady. In addition to a rise in volumes, beverage business has benefited from improved productivity in both production and logistics, as well as a close watch on raw material costs, particularly for packaging. Improved operating margins in water are all the more satisfying as they were associated with rises in advertising outlays, reflecting in particular campaigns for Evian and Badoit in France and the launch of new bottle sizes. Higher sales, cuts in promotion and lower costs all contributed to the rise in margins. In the US, Dannon Water continued to gain ground, approaching break-even after the losses resulting from its market launch. In brewing, the return to normal sales volumes in France after exceptional Operating income Operating income rose 12.7% to million (FF2,416 million) in 1998, with operating margin up from 11.9 to 12.3%. This mainly reflects a steep rise in margins in EU countries excepting France and significant distortions in 1997 put margins back on track. Operating income was also up in Spain, where San Miguel benefited from higher sales and restructuring, and in Belgium, where cuts in fixed costs and other measures offset a decline in sales. improvements in other parts of the 27

28 Water Europe Volume demand for mineral water was up 2.6% in Europe in Unseasonably cool weather in northern Europe partly offset a return to more favorable conditions in the South. France The market as a whole grew 4.5% in In still waters, sales leveled off as a result of unfavorable weather in the second half, with Evian and Volvic undergoing a modest decline in market share. However, the new advertising campaign for Evian launched in November has already had a positive impact on the brand s sales. Turning to sparkling waters, where Badoit is our leading brand, we increased our share of the market as sales of Salvetat headed up and Arvie scored even quicker gains. Evian and, even more, Volvic, saw rapid rises in exports to other parts of Europe, in particular Germany and Switzerland, where they significantly strengthened their market positions. Spain With the economy doing well and weather conditions favorable, Spanish demand for mineral water surged 8%. Font Vella, the country s leading brand for still water, further increased its market share, as did Lanjaron, the number-two brand, which benefited from a vigorous rise in sales. Highlights of the year included the successful launch of 1-5 liter PET bottles for Font Vella and the continued success of the Font Vella maxi-pack containing six two-liter bottles, launched in Italy Volume demand grew 3%, with the focus on still and natural sparkling waters. At the beginning of the year, the competitive position of Italaquae was weakened by a wave of promotions on the Italian market, as well as a rise in retailer margins. However it was able to turn the situation around in the second half. Against this backdrop, sales and market share of the Ferrarelle brand suffered some erosion, but correction got under way as of summer. Boario and Santagata made a steady showing. North America In 1998, we consolidated our position in North America with the acquisition of Aquapenn Spring Water Company of the US. Canada Aquaterra s sales of water in large containers for refrigerated drinking fountains rose 14%, consolidating its leadership in Quebec and Ontario. Bottled waters under Aquaterra brands Crystal Springs and Labrador, as well as Evian and Volvic, continued to make satisfactory progress in supermarkets, strengthening our Group s leadership on the Canadian market. USA The market for bottled still waters continued to expand rapidly, growing 33% from the previous year. Dannon Water consolidated its position as the leading brand for still waters sold in supermarkets, accounting for 12% of total volumes. At the end of 1998, Danone group acquired Aquapenn Spring Water, a company with three plants which operates three springs located in Pennsylvania, California and Florida. Synergies between Dannon water and Aquapenn, especially in purchasing and logistics, will help accelerate Dannon Water s growth and allow all operations to pass break-even earlier than expected. Evian sales continued to rise, with the brand s leading share of market volume up to 7%. Latin America Mexico While emerging market upsets made for unfavorable conditions, the market for bottled waters remained firm, with volumes up 20%. Bonafont confirmed its leadership with a rise in market share, although gains were limited by a shortage of bottling capacity. Investment will be made as of 1999 to remedy this. Argentina Unfavorable weather at the beginning of the year led to a decline of over 3% in market volume, and weighed on the sales of Aguas Minerales under the Villa del Sur brand. At the end of 1997, our group acquired Villa Alpina, a company specializing in home and office deliveries, where volume growth was robust in Other countries Turkey Volumes sold under the Danone Hayat brand, the leading name for bottled waters in Turkey, showed a satisfactory 18% rise despite a difficult economic environment. Exports Sales of Evian and Volvic, which account for 60% of Group exports, were up 9% despite the negative impact of the Asian crisis. As in our other areas of business, profitability is a priority for the export department, which is rationalizing its ranges and putting an end to operations on unprofitable markets. Operating income on water exports thus rose three times more quickly than sales in

29 Beer Europe While the first quarter compared well with the same period of 1997, when French sales were hit by a rise in excise, 1998 as a whole was not particularly favorable for European beer markets. Consumers showed increasing favor for specialty beers. France Market volumes were up 3.5%. Weather was favorable through to August, but the last three months of the year were disappointing. The World Cup had contrasting effects. While it favored beer sales in towns hosting events, it had a negative impact in that it encouraged people to stay home more and caused a temporary decline in tourism. Against this backdrop, Kronenbourg held onto its substantial share of the market, which in 1997 had benefited from moves to concentrate efforts on its three core brands Kronenbourg, Kanterbräu and Higher prices set the rise in sales revenues a full percentage point above that in sales volumes. The revamp of the Kronenbourg brand continued in 1998, with efforts focused on a higher profile in distribution channels including grocery stores, cafés, hotels and restaurants and the grey market. Spain With the help of exceptionally fine weather, the Spanish beer market grew 1.5% in 1998 after 0.7% in Sales under retailer brands are starting to level off and concentration in the food retailing sector continues, even if it is not yet as marked as in France. Against this backdrop, both San Miguel and Mahou raised their share of the market, with new products put on the market by San Miguel in 1996 and 1997 gradually gaining ground. All told, sales were up 3.4%, with higher prices in stores as well as in cafés, hotels and restaurants compounding the benefits of a larger share of a growing market. Belgium Unseasonably cool weather from August to October caused a decline of approximately 2% in market volumes. The underlying trend in demand remains downward and the move to concentration among independent wholesalers continues. All told, 1998 was not a good year for Alken Maes, which faced stiff competition and suffered a modest decline in market share, mostly in sales through grocery outlets and of Pilsen-type beers. However sales revenues declined less than volumes, reflecting good performances from its specialty beers Grimbergen and Brugs, as well as some price hikes. Exports Direct export sales of Kronenbourg showed a volume rise of 4% and growth in franchised sales in the UK remained sustained. Italy Peroni had an excellent year for both sales and operating income. Sales by product Geographical breakdown of sales 29 Still water 36.50% Sparkling water 10.30% Standard beers 24.30% Premium beers 14.30% Non-alcoholic beers 1.50% Specialty beers 1.60% Other (including Asian-style beverages) 11.50% France 49.4% Rest of Europe 24.8% Rest of world 25.8%

30 Biscuits Danone Group is the world s largest producer of sweet biscuits, with 9% of a market estimated at 7.9 million metric tons a year. We also produce savory snacks and crackers, mainly in France, Italy and Argentina. Sweet biscuits account for 59.1% of sales for this business line, which also makes packaged cakes and bakery products. Main markets are in Europe, Asia and Latin America. We produce biscuits in some 20 countries and market them in nearly 70. Biscuit business is under the LU banner in France, Belgium, the Netherlands and Spain, while other major European brands are Jacob s in the UK and Ireland, Papadopolous in Greece, Saïwa in Italy and De Beukelaer in Germany. Outside the European Union, main brands are Bolshevik in Russia, Opavia in the Czech Republic, Britannia in India, Bagley in Argentina, and Campineira and Aymoré in Brazil. At the end of 1998, we also acquired the biscuit business of Wedel in Poland, and will be taking over its Delicja brand from 1999 on. In addition, our group exports biscuits under the LU Silver Range to some 50 countries where we have no production facilities. Biscuits account for 19.9% of Danone consolidated sales and 15.5% of operating income. France accounts for 36.2% of biscuit sales, other European countries for 34.6% and the rest of the world for 29.2%. in millions of euros in millions of French francs Sales 2, , , ,098 Operating income ,334 Operating margin 6.7% 6.8% 7.8% 7.8% Cash flow from operations ,485 Capital expenditure Employees 27,647 26,644 24,797 24,797 Sales Operating income Biscuit sales in 1998 came to 2,606.6 million (FF17,098 million) compared with 2,674.3 million (FF17,542 million) in The decline was mainly due to the sale of VPSA s confectionery business in 1997 and the negative impact of exchange-rate variations in Asia. At constant structure and exchange rates, growth was back to healthier levels at 3.6% overall, with steeper rises recorded for brand products. Operating income rose 12% to million (FF1,334 million), with operating margin up from 6.8% to 7.8%. Margins improved in all geographical areas, including France, where they are highest. However, gains were strongest outside Europe, thanks in particular to better performances from Bagley in Argentina, Danone in Indonesia and group companies in China and India. In addition to the sale of VPSA s lowermargin confectionery business and a rise in sales volumes, results reflect the quality of a product line-up that has benefited from greater differentiation, emphasis on value added and steady price trends. At the same time, productivity improved in sales, production and logistics, in particular through the operational merger of LU and VPSA. 30

31 Purchasing costs were also significantly reduced through negotiations with suppliers and changes in recipes, with the proceeds partly reinvested in advertising targeting strategic geographical markets. European Union Demand for sweet biscuits was flat in 1998, but trends were firmer for crackers and savory snacks, with the market growing 3.1%. There was no major change in our Group s market shares, although they tended to be on the rise in countries where we are the leaders with the LU brand, while there were modest declines in Germany, Italy and the UK. A major highlight of the year was the launch of the innovative Vitalinea range of low-fat biscuits sold under the names Vitasnella in Italy and Taillefine in France which has effectively renewed the image of biscuits with consumers. Marketed in France, Italy, Spain, Belgium, the Netherlands and the UK, Vitalinea has proven a quick success without taking business away from other lines, thus providing a genuinely new source of growth. France LU, our flagship brand, provided much of the impetus, in particular with its new Taillefine range. In soft cookies and cakes, the success of our new Ourson, Napolitain and Brownies lines offset a decline in our traditional gingerbread products. In bakery products, market leader Heudebert turned in a steady performance despite weaker demand. Since October 1998, Heudebert s offering of toasted products has gained from the success of Biscoto, specially designed for children s breakfasts. Grany granola bars have also done well. Other European Union Business was briskest in Greece, the Netherlands and Spain. At the beginning of 1999, we moved to bolster positions in Germany and Austria through a tie-up with Griesson, a major contender on these markets. The new entity made up of Griesson and De Beukelaer will be accounted for by the equity method in Danone consolidated accounts as of January United Kingdom Restructuring enabled Jacob s to improve margins despite tough competition. Spain Sales revenues in Spain and Portugal grew more quickly than sales volumes despite a decline in the market. Greece A sales rise was driven by the launch of a new range of pastries. Central and eastern Europe Up until last year, we were present in central and eastern Europe only through interests in unconsolidated companies, principally in the Czech Republic and Russia. The size of these markets and differences in levels of per capita consumption mean promising opportunities for biscuit business. In 1998, we thus took a number of steps to consolidate our positions in line with our growth targets for the region. Czech Republic Cokoladovny, the company which our Group previously operated in association with Nestlé, was divided into two separate entities as agreed, and we will thus be taking over all its biscuit operations as of January 1, Italy After a difficult first half, Saiwa s business picked up in the third quarter thanks to a strong start for the low-fat Vitasnella range and the continuing success of Oro Ciok (called Petit Ecolier in France). Benelux The launch of the Vitalinea range offers significant promise of fresh growth in Belgium and Luxembourg. 31

32 Poland We have taken over Delicja, the leading biscuit brand on the Polish market, where we were previously represented only through imports. Russia The outbreak of the financial crisis brought an immediate response with ranges of our subsidiary Bolshevik revamped to meet the new demands of a market now practically closed to imports. Bolshevik should thus be able to come through this troubled period with increased market weight and greater public awareness. Encouragingly, it overcame initial difficulties to lift sales volumes of brand products at year end to the same level as in Latin America Latin America accounts for 11.6% of worldwide biscuit sales at Danone. Argentina After two difficult years, Bagley steadied sales and improved margin significantly in Ranges were upgraded with new recipes and packaging, as well as a number of product launches. Together these efforts have won back its number one position in supermarkets, but the situation remains more difficult in traditional retailing where business is under attack from local producers, particularly in inland regions. Brazil Campineira de Alimentos launched a full range of biscuits under the Danone name at the end of the year, fueling a steep rise in sales volumes despite the slowdown in the Brazilian economy. All told, Campineira sales for 1998 rose 20%, with volumes up 17%, but Aymoré suffered a decline. Exports Biscuit exports, which account for 20% of total Danone Group exports, declined 8% in During the year, export line-ups underwent further rationalization to place LU s Silver Range clearly at the top end of the market, with a view to optimizing operating margin. 32 Sales by product Geographical breakdown of sales Cookies and sweet snacks 59.10% Savory snacks 18.80% Crispbread and crackers 10.40% Packaged cakes 5.30% Other 6.40% France 36.2% Rest of Europe 34.6% Rest of World 29.2%

33 Asia With 3.4 billion consumers, markets in the Asia-Pacific region are a strategic priority in our drive for international growth. A special unit coordinates business development in this area. Danone has major operations in China, India and New Zealand, and is also present in Malaysia and Indonesia. Operations in Asia focus primarily on beverages and biscuits, but also include selected dairy products. In China we operate breweries, and are also active in sauces and heat-and-serve specialties. Together four companies Griffin s in New Zealand, Amoy in Hong Kong, Wahaha in China and Britannia in India generate nearly 80% of sales in the region saw three major acquisitions: a 40% interest in Aqua, Indonesia s leading producer of bottled water, 100% of Health, a mineralwater producer in southern China, and 12.45% of Singapore-based Yeo Hiap Seng, market leader in Asian-style beverages. Despite economic troubles, our businesses turned in a strong performance for the year. China Sales in China rose more than 20%, with Wahaha, the country s largest beverage company, reporting a steep 39.3% increase to confirm its role as a major player in dairy beverages and market leader in bottled water. Our two Chinese breweries in Wuhan (Dongxihu) and Tangshan (Haomen) increased both market share and profits. Shanghai Danone Biscuits reported strong growth in sales, notably in northern China where it is now market leader in premium biscuits. Launched a year earlier, Danone Milk Sales by product Dairy products 3.2% Water 32.6% Beer 9.2% Biscuits 43.7% Heat & serve/sauces 11.3% Biscuit has proved a resounding success with Chinese youngsters and strengthened brand awareness. Dairy product operations in Shanghai and Guangzhou are expanding steadily, backed by successful new-product launches. It was also a good year for sauces and heatand-serve specialties made by Amoy, the only Danone subsidiary in the region to supply export markets. Sales of frozen dim sums were up sharply. Geographical breakdown of sales China 57.6% Malaysia - Indonesia 3.6% India - Pakistan 25.4% Australia-Asia 13.4% India - Pakistan Sales in India and Pakistan were also robust, rising more than 20%. In India, Britannia reported vigorous growth in both its traditional biscuit business and in new processed cheese activities. Continental Biscuits Pakistan raised capacity to secure future growth. New Zealand In 1998, Griffin s sold off sauce operations to refocus on core biscuit and savory snack businesses. Sales rose slightly. Indonesia - Malaysia Biscuit sales increased despite severe economic difficulties in both countries. Danone Indonesia gathered momentum, emerging from start-up to break even. 33

34 Other food business In 1998, Danone pursued a strategy based on divesting grocery product activities. By year-end, these accounted for only 6.9% of sales. Following the sale of Liebig-Maille-Amora, Panzani-William Saurin and Agnesi at the end of 1997, we continued to pull out of grocery activities, selling Stoeffler, La Familia and Birkel Sonnen Bassermann sales came to million (FF5,993 million), or 6.9% of the consolidated total. Of this, million was generated by companies sold during the year, reducing the total contribution of this business line to around 716 million (FF4,697 million) at present, or approximately 5% of the group s total sales. Other food business now comprises sauces, through HP Foods in the UK and Lea & Perrins in the US, frozen heat-and-serve dishes through Marie Surgelés in France, and chilled delicatessen products through Générale Traiteur in France. France Marie Surgelés won market share in frozen starters with a string of new products. Générale Traiteur sold its fresh pasta and quenelles activities during the year to refocus on Marie brand products. Market share improved as a result. in millions of euros in millions of French francs Sales 2, , ,933 Operating income Operating margin 4.3% 3.6% 3.2% 3.2% Cash flow from operations Capital expenditure Employees 10,760 6,020 4,598 4,598 Sales Geographical breakdown by product of sales Heat & serve specialties 58.8% France 41.3% Sauces and condiments 30.5% Rest of Europe 43.8% Pasta 7.4% Rest of world 14.9% Other 3.3% Spain United States Pycasa, Spanish leader in heat-and-serve frozen foods under the Cocinera name, reported sales up nearly 4%. Market share also rose and margins improved significantly. Plans to sell Pycasa to the Nestlé group were announced in early April US subsidiary Lea & Perrins reported a sharp 7.5% rise in sales during the year, due primarily to higher volumes. The company refocused marketing efforts on steak sauces and Worcestershire sauces, its two core products, and consumers responded positively. United Kingdom Sales at HP Foods were up around 2% in all business segments. Gains reflected efforts begun last year to sharpen focus on core products brown and Worcestershire sauces and expand in Asian ethnic specialties. Margins also continued upward. 34

35 Containers The Danone Group is Europe s second largest producer of glass containers, with operations in France, the Netherlands and Spain. Business focuses on bottles for wine, beer and spirits, as well as jars for the food industry. Glass container sales reached million (FF6,115 million) in 1998, contributing 7.1 % to Danone Group sales and 7% to consolidated operating income. Despite a modest 1.4% like-for-like decline in sales due to unfavorable weather and competitive pressure on prices, operating margin picked up from 9.5% in 1997 to 9.7% in In August 1998, our Group announced plans to merge glass container business with that of Gerresheimer Glas in Germany and create Europe s second largest glass maker with around 23% of the market. At the same time, Danone s interest in the new entity will be reduced as a result of the participation of a financial investor. The merger is expected to take effect towards the middle of in millions of euros in millions of French francs Sales ,115 Operating income Operating margin 11.2% 9.5% 9.7% 9.7% Cash flow from operations Capital expenditure Employees 7,035 6,856 6,708 6,708 Sales Geographical breakdown by product of sales Bottles 73.9% France 63.8% Jars 20.2% Other Europe 36.2% Tableware and other 5.9% Europe France With deposit bottles increasingly a thing of the past, the wine industry was again the mainstay of growth for BSN Emballage in In contrast, sales of both beer bottles and food jars suffered from poor weather in the closing months of the year. With a view to enhancing its competitive position, BSN Emballage has adopted a reorganization plan calling for plants to specialize by bottle type for beer, wine or spirits. Staff is to be cut by 700 over the next five years, without dismissals. Finally a new factory is to be built in the Languedoc region of southern France to meet rising demand from wine-growers. Netherlands Vereenigde Glasfabriken also suffered a modest decline in sales, down 0.7%. Very unfavorable weather in the final quarter hit production of fruit and vegetables, by the same token weakening demand for food jars. At the same time, production of bottles suffered from the halt in exports of beer and spirits to Russia. Spain A buoyant economy and fine weather helped Vidrio España to a 7.6% rise in sales, with demand from the wine industry particularly firm. 35

36 24/6/ :25 TRIO Condensed consolidated financial statements Introduction Following condensed consolidated financial statements have been prepared from the Group s 1998 F-20 available at the Group s Financial Communication Department. Condensed consolidated statement of income in millions of euros in millions of French francs Net sales 13, , ,848 Cost of goods sold (7,466.2) (6,806.4) (44,647) Selling expenses (3,633.1) (3,650.1) (23,943) General and administrative expenses (826.1) (852.4) (5,591) Research and development expenses (115.5) (120.3) (789) Other expense and income (223.2) (212.6) (1,395) Operating income 1, , ,483 Non-recurring items 6.1 (44.0) (289) Interest expense (170.1) (146.2) (959) Income before provision for income taxes and minority interests 1, , ,235 Provision for income taxes (451.6) (433.4) (2,843) Income before minority interests ,392 Minority interests (82.0) (96.8) (635) Equity in net earnings of affiliated companies Net income ,923 Fully diluted earnings per share in euros or in French francs Condensed consolidated statements of cash flows in millions of euros in millions of French francs Income from consolidated companies ,392 Depreciation and amortization ,604 Gains on sale of non-current assets (168.5) (13.3) (87) Other 53.7 (31.0) (203) Cash flows from operations 1, , ,706 Net change in current assets and liabilities Cash flows from operating activities 1, , ,909 Additions to property, plant and equipment (796.7) (710.8) (4,663) Investment in subsidiaries and affiliated companies (470.0) (485.4) (3,184) Proceeds from the sale of businesses and other investments 1, ,560 Cash flows from investing activities (250.2) (958.4) (6,287) Increase in capital and capital surplus Movements in treasury stock (155.8) (358.1) (2,349) Dividends (218.0) (252.6) (1,657) Net change in loans and debts (682.9) Cash flows from financing activities (1,009.1) (471.5) (3,093) Effect of exchange rate changes on cash and cash equivalents 14.6 (16.0) (105) Increase in cash and cash equivalents 89.8 (87.8) (576)

37 Condensed consolidated balance sheets at December 31 in millions of euros in millions of French francs Assets Property, plant and equipment net 3, , ,634 Brand names and goodwills 5, , ,983 Other intangible assets-net ,251 5, , ,234 Long-term loans ,831 Long-term investments ,265 Equity in affiliated companies ,845 Other ,109 1, , ,050 Non-current assets 10, , ,918 Inventories ,927 Trade accounts and other receivable , ,959 Marketable securities, cash and cash equivalents ,867 Current assets 4, , ,753 Total assets 15, , ,671 Liabilities and stockholders equity Stockholders equity 6, ,513,7 42,727 Minority interests ,1 5,137 Convertible bonds and long-term debt 3, ,103,0 20,354 Provisions and other long-term liabilities ,5 4,930 Stockholders equity and non-current liabilities 11, ,151,3 73,148 Trade accounts and other payables 3, ,891,0 25,523 Total liabilities and stockholders equity 15, ,042,3 98,671 Report of independent accountants Considering the assignment given by your shareholders, we have audited, in accordance with auditing general standards, the consolidated financial statements of the Danone Group as of December 31, 1997 and 1998 as they are presented in the 1998 F-20 (not reported hereafter). In our report dated March 17, 1999, also presented in the 1998 F-20, we have certified those consolidated accounts. According to us, condensed financial statements presented in pages 36 to 40 form a summary which presents the main aspects of the consolidated financial statement presented in the 1998 F-20. March 17, The Statutory Auditors MAZARS & GUERARD BEFEC-PRICE WATERHOUSE Membre de Yves Robin - Loïc Wallaert Pierre Coll - Patrick Seurat