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Danone just loves to give its years a sense of identity. 2012 was a "step change," 2013 is about "transition" and next year will be "back to growth." Linguistic pedants might ask why a step change has to be followed by a transition. Tuesday's full-year results give the answer. Although sales growth at the French dairy group is ticking along nicely at 5 per cent, margins are falling and profits are flat. The blame lies in the weak European dairy market, home to a fifth of sales.

Danone's shares rose 5 per cent on Tuesday as the fourth quarter turned out not to have been too bad. But it is too early to call a bottom. The transition relies on self help in the form of a €200-million ($271-million) cost-cutting plan. That should help to steady the margin decline, but it will take just 1 per cent off costs, so the benefits will be easily lost if revenue pressures continue. Not only that, but the one-off cost of €450-million looks high for the promised savings.

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The two more promising routes out of Danone's predicament lie in its non-dairy businesses and its cash flow. Sales from water and infant nutrition are growing at double-digit rates, although the combined total is still smaller than the dairy business. At current rates of growth, they will not pass that mark until 2016. Free cash flow is up, almost doubling to €2.1-billion over five years. That leaves the company with resources to invest in the sort of innovations that could keep revenues stable in European dairy or in expanding the other businesses even faster. There might also be money for acquisitions.

But these are aspirations for the medium or long term. Buying Danone on 17 times forecast earnings requires confidence that European dairy is over the worst, and that cost cutting and better markets can turn things around. 2013 may well be a year of transition. The risk is that, by December, the transition will not quite be over.

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