Danone S.A.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Mathilde Rodie:]

Good morning, everyone. Mathilde Rodie speaking, Head of Investor Relations at Danone. Thanks for being with us this morning for Danone's half year results. I'm here with Véronique Penchienati-Bosetta, Shane Grant and Juergen Esser. We will first go through some prepared remarks before taking your questions in a second step. Before we start, I draw your attention to the disclaimer on Page 2 related to forward-looking statements and the definition of financial indicators that we'll refer to during the presentation.

[Véronique Penchienati-Bosetta:]

Thank you, Mathilde, and good morning, everyone. Thanks for joining us today on this call. I hope you are all safe and healthy. Together with Shane, I have the privilege to be the interim CEO for Danone since March and until our new CEO, Antoine de Saint-Affrique, join us mid-September. Today, we will present Danone H1 results, and we are proud of what was achieved by the Danone team across the world during this particular period for the company. So first, let me start by thanking all the Danoners for their efforts, commitment and achievements in this context. Let's review on Slide number 4 the highlights of this first semester. We closed a semester of progress and delivery for Danone with an H1 like-for-like growth at plus 1.6% versus a year ago. After a negative Q1 and in line with our delivery agenda per quarter we shared with you back in February, Q2 is back to strong growth at plus 6.6% like-for-like. Importantly, all our categories are growing in Q2. Even if we benefited from an easier base of comps in some categories like Waters, this performance is also the result of effective execution and selective investment on our growth platforms, brands and channels. Indeed, we are delivering like-for-like growth on a 2-year basis, both on Q2 and on H1 at total company level, and we are gaining share on the brand and growth platforms where we have increased investments. Margin held up well, considering the negative category mix and the accelerated inflation we experienced this semester. We closed H1 at 13.1% margin, thanks to selective pricing, increased productivity and fixed cost discipline in a context where we strengthened investment and brand support, focusing on our strategic battles. Also, with regards to delivery, we made further progress on portfolio management with the disposal of Vega and of our 9.8% stake in Mengniu. We continue to progress on the other initiatives we announced, and we will come back to you in due time. Let's look on Slide 5 at our performance by category. First, on the Essential Dairy and Plant-based portfolio. Growth in Q2 was strong at plus 4.8% on a like-for-like basis with a sequential acceleration from Q1 and with all geographies contributing to growth. Plant-based continued to be a bright spot, delivering its sixth consecutive quarter of double-digit growth, growing plus 12% in the quarter. Dairy as well delivered another positive quarter in Q2, driven by strong performance and share gains on our priority platforms and brands, Probiotics with Actimel and Activia, Protein with Oikos and YoPro.

[Shane Grant:]

Thank you, Véronique, and good morning. I'm very pleased to be with you today. Moving to Slide 7, as Véronique headlined, we are executing against 3 priority growth drivers. Before speaking to some specific examples, let me provide just some very brief context. First, we have been focused on driving choice selections against our portfolio, both maximizing the relevance and growth of our core business, but also driving innovation at scale both locally and the accelerated lift and reapplication of successful platforms globally. On EDP, we remain focused on the growth platforms of Protein, Probiotics and Plant-based, which have been the key drivers of the accelerated growth of the business globally and, indeed, in our largest markets.

[Véronique Penchienati-Bosetta:]

[Juergen Esser:]

Thank you, Véronique. Thank you, Shane. And good morning to all of you. I hope you are all safe and well. Let me start the financial review with our net sales bridge on Slide #16. After 4 consecutive quarters of decline driven by COVID-related headwinds, we are delighted to confirm our return to net sales growth in the second quarter of this year. Like-for-like revenues grew by plus 6.6%, driven by a plus 1.8% positive contribution from volume and plus 4.7% from value. As mentioned by Véronique, the pricing dimension of value was positive in the quarter, which is a good testimony of the effectiveness of our selective pricing. Important also that mix was up in the quarter. I will come back to that later. Outside of the like-for-like, scope had a plus 0.7% positive effect, resulting from the integration of Harmless Harvest as of January 1 as well as from the integration of Follow Your Heart, 2 very exciting, fast-growing, plant-based businesses in the U.S. that will allow us to further accelerate in that space. Finally, currency and others, that had a negative impact of minus 3.6%, mostly driven by a minus 4% headwind from currency effects, reflecting the depreciation of the U.S. dollar and of several emerging currencies against the euro. All in all, reported growth stood at plus 3.6% for the quarter, bringing our quarterly net sales to roughly €6.2 billion, up from €6 billion last year. Let's go a bit deeper into the performance by division, and I will start on next page, Page 17, with Specialized Nutrition. Specialized Nutrition closed the first semester with revenues down minus 2.6% on a like-for-like basis. The overall volume decline in the first semester was partially offset by selective pricing, but most importantly, by a positive product mix due to continued outperformance of our pediatric specialties and premium ranges. Margin reached 22.9%, declining as expected this semester by minus 351 bps. This decline resulted from the strongly negative country mix, especially in the first quarter, but also from the lower volumes combined with inflationary pressure, which was partially offset by before-mentioned price and product mix effects. Important to underline that after a strongly negative first quarter, this division went back to growth in Q2 at plus 2.8% on a like-for-like basis. Going a little bit into the segments. The Adult Nutrition portfolio delivered high single-digit growth with all geographies contributing positively. Both oral and tube feeding platforms continue to grow. With Infant Nutrition, this business delivered low single-digit growth on softer basis of comparison with a contrasted growth -- with contrasted growth patterns

[Mathilde Rodie:]

Thank you very much. So now we're ready to open the Q&A.

[Mathilde Rodie:]

Okay. So first question coming from Warren Ackerman from Barclays.

[Warren Ackerman:]

Shane, Véronique, Juergen, it's Warren here at Barclays. So my question is around the Plant-based growth, it's one for Shane actually. So 12% growth in the quarter. Shane, can you break that out between Europe and the U.S.? And maybe can you be a bit more specific on your plans to address your underweight position in oats? That's obviously been a big question since the Oatly IPO. And then why Greek yogurt, which has been problematic for quite a long time, is suddenly back into growth? It's obviously quite encouraging. Just be interested to get your sort of take on the Plant-based growth. If I can just sneak in a follow-up, this is for Juergen, just on the financials. Can you just say something around the A&P spend, Juergen? Where has that gone in the first half? And how much should we expect in the second half? The same thing on cost savings, how much cost savings in the first half? And what should we expect in the second half? You're saying stepping up, but can you be specific in terms of euros millions of -- on that?

[Shane Grant:]

Warren, let me take the first 2 of those 3 questions. Look, firstly, maybe to comment on our Plant-based business. Clearly, that's a business which is very much a focus for us, a key driver of the growth of the business. I'm sure you'll recall, in 2020, it had accelerated growth around 15%, slightly higher than that in North America, but very good global performance. You saw in the results plus 12% in Q2 and a plus 12% in S1. I point you to really 3 big drivers of that. One, in the beverage space, specifically Alpro in Europe winning share and also winning share in oats. So sustained, very good performance of the business in Beverage in Europe. Secondly, a step-up in what we refer to as Plant-based adjacencies in North America. So globally, around 1/3 of the business is slightly more than that in North America. So by that, I'm referring to our Yogurt, Creamers, Frozen business, very good performance of that component of the business. And then thirdly, strong performance and acceleration in some of the geographic expansion markets, specifically LatAm and Russia. With respect to your question on oat, I mean, certainly, core beverage competitiveness is certainly central to the strategy. We headlined a little bit on this in the presentation, but specifically on oat, we have just commenced the full restage of that business with really a few components. One, the conversion of the business from Oat Yeah to Silk. Second, a full product reformulation with what we know from consumers as the best-tasting performing product in the market, some range architecture adjustment and then dedicated marketing and communications plus customer plans. So we feel very confident in the oat plans going forward. It's certainly a key segment for us globally and in North America. With respect to your second question on yogurts and as you noted, Warren, we're certainly very pleased with the progress of the yogurt performance in North America. It remains the biggest part of the business in North America. And so in terms of the acceleration of our North America business, it was certainly a place for us to start and focus on. I would say our actions in Greek specifically have really centered around, first and foremost, the restage of the Oikos brand. So good acceleration in core Oikos Black, the launch of Oikos PRO and, really, just in the last few weeks, a brand-new core range. That, together with continued focus on Two Good, has really seen that segment for yogurt really accelerate. And we're now winning share in Greek and winning share in yogurt overall. There's been a number of other components of the yogurt strategy in North America, but that's a specific reference to Greek, and we're obviously very, very pleased with the progress. I think with respect to your A&P question, I'll hand it over to Juergen.

[Juergen Esser:]

Warren, on the A&P part, what we said at the end of Q2 is that we are going to start reinvesting behind our brands, and this is indeed what we did. And this is what you saw in the EBIT bridge where you saw minus 16 bps coming from investments, and here we talk mostly about A&P. What we did is that we really focused our A&P reinvestment behind our strategic business, and Shane was talking about most of them Plant-based, Protein, Probiotics. But let's also be clear that we started to reinvest into Waters, especially in Europe and in China behind Mizone in the second quarter. Moving forward, you will see that we will continue on this reinvestment journey, especially on what I said for EDP. And in Waters, we will stay agile or depending on we will see on mobility, but we are very clear that Mizone, we want to now capture the opportunity of the season and same for Europe. And for other emerging markets in Waters, we will need to see how COVID situation is going to evolve. When it comes to cost savings, you are right, I mean, first, inflation was heavy in the first semester, and Véronique said it, almost 7%. In front of that, we put a productivity which reached almost 5%, which was a record high, and this was thanks to the organization we launched end of last year, which was this cross-category D2D design to delivery organization. Moving forward, what we say is that we see inflation picking up by 1 to 2 percentage points in the second semester versus the first semester. But on the same moment, we have also very solid plans in place to also step up productivity in the second semester versus the first semester. On top of that, and this is important, we also see the -- and expect the first savings from Local First kicking in, in the first -- in the second semester. And we will continue to benefit from lower cost of COVID-related costs.

[Mathilde Rodie:]

So next question coming from Bruno Monteyne from Bernstein.

[Bruno Monteyne:]

My first question is about how you have all the productivity savings offsetting the cost inflation, which is remarkably strong. Now at the beginning of the year, you wouldn't have known about the size of cost inflation coming through. So given your ability to offset it, are you really arguing that your margin would have been at least 300 basis points better if it hadn't been for this kind of cost inflation? So I'm just trying to see if you have all that cost savings, what did it say about the initial margin? And the second of all is you're referring to price increases that you've been able to put through to offset some of that inflation. Could you comment on whether those price increases are in line with the rest of your markets? So is it -- does it keep your relative price position the same? And do you worry if at some point it might make private label more attractive in the second half and put some competitive pressure?

[Juergen Esser:]

Bruno, on your first point, you are right to say that the inflation we experienced in the first semester was higher than what we expected at the beginning of the year. You're absolutely right on that. At the same moment, we need also to say that the productivity we achieved to deliver on S1 was also higher than what we expected at the beginning of the year because we made much faster progress on a number of programs, which include what Véronique was saying that we were able to reduce our SKUs by around 15% at the end of H1. And you remember that we were talking about minus 20% by the end of the full year. So we, in fact, we made much faster progress, and that's helped to a very large extent to offset each other and which is the reason why we were able to sustain our level of reinvestment as we were planning it when we were talking 3 months ago and delivered the margin, which makes us confident to deliver also the full year margin as we have been guiding to. When we talk about pricing initiatives, look, we have been very selective in our pricing initiatives. And when you look at the way inflation is hitting us, it's not the same in all the geographies. So we are more exposed to inflation in markets like Russia, Brazil, Mexico, where we have also more frequent, I would say, ability to increase prices, and this is what we did in line with the market. In North America and Europe, the pressure from inflation is not at all the same. And so here, we have been extremely careful with the pricing initiatives, let's say, promo management in order to make sure that we protect our competitiveness and take benefit of the reinvestment.

[Véronique Penchienati-Bosetta:]

Maybe to add on that because we have a rather solid process to monitor price increase. As Juergen was saying, it's not only about price increase, but it's as well as about promo management, revenue growth management. And we have a full process in place to monitor competitor price positioning identified by channel, by SKU, by brand where we can pass price and reduce promo, implement a price increase or create as well more valued additional SKU, implement it and, of course, track the impact on the volume and the competitiveness. So that's really the way we are doing it. That's why we call it selective pricing opportunities.

[Mathilde Rodie:]

Thank you, Bruno. Next question from Celine Pannuti from JPMorgan.

[Celine Pannuti:]

So my question would be around Specialized Nutrition and specifically China. So thank you for giving some of the moving parts there. So as we look into the second half, how should we look at the Daigou channel or the families and friends altogether? I mean are we going to still see this channel declining? Or do you think that there is a bit of a base line? And then following on that, could you talk about what is, you feel, the outlook for the overall regulatory environment in China regarding the category? Are you sensing that there could be some changes? And then finally, again on this, the margin has been lowered in this category. Do you feel that now your margin in China is at a healthy level? Or what -- or do you feel that there is more investment that needs to be made in order to maintain what has been a rather good market share performance in Mainland?

[Juergen Esser:]

Yes. Celine, maybe I'll start with the margin, and then I will let Véronique talk through the other moving parts. You saw that we closed the first semester in terms of margin just below 23%. And I think it's important that we put that a little bit into perspective. When you get back to last year, you have seen last year, we had a first semester with a very strong margin profile, above 26%, mainly due to the fact that China was really over-performing. And then we entered into a second semester last year where we had a much lower margin in the division because of China's issues with the cross-border constraints. Now this year, we will have a very, I would say, opposite evolution. So you saw that we had a tough Q1. And overall, the first -- S1 in Specialized Nutrition, which was down, and China particularly down. However, we were able to deliver a margin close to 23% by continuing to invest behind our strategic battle which is, in China, the Aptamil brand. And Aptamil brand shows an impressive resilience in the market. And now we will be entering into a second semester where the division will be overall in growth and China will be growing faster than the division. And so indeed we can be confident that we will see margin progression in the second semester versus the first semester.

[Véronique Penchienati-Bosetta:]

And maybe to comment on the dynamics by channel in the China market on Infant Nutrition. So as Juergen was saying, definitely, first, we have a sustained growth in domestic channel, which is very important in S1, where our Aptamil brands continue to gain market share through strong performance in mom-and-baby stores and e-commerce. And as well, as Juergen mentioned it, again, in the last June 18 shopping festival where Aptamil was ranked #1 brand in the IMF category, so that's the big part of the business. Now on the continuous decrease in indirect China, we start the Daigous, friends and family. They continue to be severely impacted by travel bans and border closure with Europe, Hong Kong and ANZ. Honestly, it's very difficult to know when it will be back to normal. Yet importantly, this channel, you may remember, that used to account for a big part of our business back in 2016. But today, it's less than 30% of the business. And in parallel, we push as well to accelerate the development of all the cross-border e-commerce, which represent today more than 20% as well of our revenue and where we were growing fast in Q2. So that's just to expand the dynamic there per channel. Maybe to comment on the regulation. So the regulation clearly is evolving and will continue to do so. And it's positive because, first, from a product regulation point of view, we believe that at the end, it will be the players that have the ability to deliver science-based offering that will continue and will have a sustainable business in China. And as well, there has been several communication as well about authority taking action to ship out birth rate, which can be positive as well for the category because we know that right now, the birth rate weigh on the dynamics of the market in China.

[Mathilde Rodie:]

The next question coming from Jon Cox from Kepler.

[Jon Cox:]

Congratulations on a very reassuring set of figures there. I've got -- well, I'm going to pretend it's one question, but I'll do what my colleagues are doing and bung in a few others. But one more of a broader strategic one, just on this concept you're talking about beyond the milk which you're going to launch in the second half in the U.S., I wonder if you can give us a bit more detail on that. You said taste profiles are better than traditional milk. What is the scale of the launch? And I guess you would launch, if it's okay, then into Europe and elsewhere. Maybe you can talk about that or what you can commercially given, I guess, it's somewhat sensitive. And then the second part of the question of the one question is really on the costs, other operating costs. We saw €700 million in the first half of the year. What should we expect for the full year? Because I seem to remember, all in, it was like €1.1 billion or so, the program. It seems quite a lot already in H1. Can you just confirm what the cost will be from the Local First? And also, you mentioned, you said the €700 million savings, all on track. I just wonder if you can just confirm the other €300 million because I think the program in total is about €1 billion originally. So anything detail you can provide there would be much appreciated.

[Shane Grant:]

Jon, this is Shane. Let me maybe take the first question on Plant-based. Maybe to step a bit sort of broader back and then I'll speak specifically about the opportunity on the dairy-like. I think, certainly, as we headlined in the presentation, our competitiveness in core Plant-based beverage is really important to the growth of the business. Maybe if I use the U.S. as an example, and then I'll talk specifically about dairy-like maybe Pan-Europe and North America. I mean I think our beverage acceleration strategy has really got multiple components. One is maximizing the relevance of our big master brand. And I would say, Silk obviously in the U.S., making sure that's modern and relevant. And we're really driving actions to scale that up. You've seen probably already some of the new Milk of the Land campaign work. You should expect further work in terms of packaging and overall modernization of the brand to come in 2022. The second is obviously Almond, which is obviously the biggest segment of Plant-based beverage, the entry point for consumers, and really the drive there is differentiation. So we continue to stay very assertive on providing points of differentiation in that segment. And you should expect more on that to come certainly in the U.S. later this year and into '22. We've spoken about the third pillar, which is about competitiveness in oat. The fourth component is really soy, which we've had, I think, very successful repositioning of that segment into very much a nutrition space, both from the messaging and an innovation perspective. And then lastly, maybe to comment, Jon, on the dairy-like. Look, the fundamental strategic underpinning of that is while we might consider plant-based beverage to be very developed, there's still 60% of users that are not in the category. And so as the leader of the category, that's really an opportunity we see to really step up the growth of the segment overall and then our opportunity to really lead it. So we are going to attack that certainly in North America, and you see a 2-brand strategy to do that, specifically Wondermilk and the natural channel under So Delicious and into a more mainstream audience, our NextMilk with Silk. So it will be a channel-specific play. But the underlying product technology is really a plant-based entry point versus just an ingredient-specific entry point. And that allows us to access that big 60% of the user base that are not in plant-based today. But also because it is taste-first allows us, we think, to make inroads, for example, in segments like oat, which we know is the underlying consumer motivation for the consumption of that segment. We do intend to launch it at scale certainly in North America. It will happen very much at the end of the year, and we think it'll have a big impact going into 2022. So that hopefully gives you a little bit of context on how we're thinking about that platform. Maybe I'll hand to Juergen for...

[Juergen Esser:]

Jon, just a few comments on the nonrecurring one-off cost. You're right, we posted €700 million of charge in the first semester. 80% of that is linked to Local First. The rest is linked to the transformation of our operations. When we announced Local First, we said that this program will have a total cost of €1.4 billion, and we are confirming this. We believe that the phasing will look like that we will post around €1 billion into this year, 2021, and the remainder of €400 million in 2022. So you will see €1 billion linked to Local First this year, and you will probably see some costs related to continued transformation of our operations footprint.

[Mathilde Rodie:]

Okay, thank you. The next question is coming from Guillaume Delmas from UBS.

[Guillaume Delmas:]

So my one question is on Infant Nutrition. When you talked this morning about lower birth rates starting to affect category growth in Europe and China, I mean what do you mean by starting? Did you mean it's just the beginning and we could see some deterioration from here from a category growth standpoint as Stage 2 and the Stage 3 segments are soon going to be affected by this lower birth rate? And secondly, in the context of lower volume category growth, would you expect this weakness to prompt a heightened level of competition? I mean, often, lower volume growth come hand in hand with an increased level of promotional activities.

[Véronique Penchienati-Bosetta:]

Okay. So I will take the question, answer the question. What is important is that overall on this market, the birth rate, as you know, has an impact on what we call the baby pool, which is the overall number of babies and then the impact on the different stages, Stage 1, Stage 3, Stage 4. If I take, for instance, and I will zoom -- I will take the example of the Chinese market, for instance, year-to-date, despite the fact that the overall newborn were down last year, for instance, the market year-to-date in China is still positive in value. It's positive with different dynamics and with different drivers. First, the baby pool, that is down versus a year ago, very clearly as a consequence of the birth rate, yet the per capita consumption is increasing, which is a combination both on penetration but as well journey extension, we are talking about the Stage 4 and all that, that continue to drive the growth of the Chinese market. And the last thing, which is about price and valorization on science-based innovation that the moms are looking for. So year-to-date, the market is positive. The way we see it for the rest of the year is that most probably a slowdown of the growth of the market as we have seen, by the way, over the past 2 months because the market as well was slowing down, still positive but slowing down. But still an increase in per capita consumption, and we believe that the valorization will continue on the Chinese market. That's -- I would say that overall, the dynamics of the market in Europe as well on some of the category, we see the category on Infant Nutrition down overall as a consequence of the birth rate. What is important as well to understand is that even on the decline in category, you have pocket of growth, you have segment that specifically enter babies' nutritional needs like pediatric specialties, like allergy that are growing, even sometimes double digit, specific offer as well like organic data growing. And that's why all the innovation and renovation that was presented in the presentation is really tackled to capture this growth in the market.

[Mathilde Rodie:]

Thank you, Guillaume. And our next question is coming from David Hayes from Societe Generale.

[David Hayes:]

I'm going to be a good boy in the class and just do the one question as well. So just on the -- I'm going to get to the semantics question, if I can, on the margin guidance. I guess using this term broadly around last year, I guess the term broadly could be anything from, let's say, 13% to 15%. So can you kind of give us a bit of a definition as to what you mean by that? And I guess sort of tying back to some of the answers earlier, clearly, with input costs going up, pricing uncertain, we've seen some of your peers, as you know, cut their guidance. I mean is it fair to say that within that range that you were talking about back in April, there is a little bit less optimism and that you might be towards the lower end of a range of 13% to 15%? If that was the broad definition.

[Juergen Esser:]

David, and I see you have a very broad definition of broad...

[David Hayes:]

I was going to get towards the 16%, but...

[Juergen Esser:]

I would not reach it that far. Look, to be more serious, we are very clear that we confirm the margin guidance as we said it at the beginning of the year. And because of all the uncertainties we see and the volatility of the markets, especially from a COVID standpoint, we are refraining from being more specific than what we have said half year ago. However, in the end, when you look at the moving parts, and this is true for our net sales dynamics, this is true for the inflation and the productivity we are delivering, there is -- we do not look in a different way today at the full year than we have been looking at it 6 months ago. And so far as when I say today, our full year margin broadly in line with that of 2020 is exactly the same meaning then 6 months ago. So we are traveling within a context which has a lot of uncertainties, but I think the team does a great job in navigating the debt with a high level of precision.

[Mathilde Rodie:]

So I think we're going to take the last question from Martin Deboo from Jefferies.

[Martin Deboo:]

Just a quick one on the flow of margins in H2, which I know has come up a lot, because I want to be crystal clear. Are you giving any firm guidance on what you expect your commodity inflation to be for the full year? And secondly, I just wanted to reclarify what you said to Celine on China. I think you said you expected China infant margins to be higher in H2 than H1. But what are you saying with Specialized Nutrition margins generally? Do you expect them to be higher in H2 than H1? Or similar or lower? That's it.

[Juergen Esser:]

Martin, look, what we are saying on inflation, almost 7% H1, we see 1 to 2 percentage points more in H2. I think we will end up in this corridor because we have now relatively good visibility on many aspects, including on milk. Transport is probably an element which will continue to be very volatile and especially in U.S., where we have seen especially in the second quarter quite a steep increase in demand. But I think we have a relatively good visibility on that point. When it comes to Specialized Nutrition, yes, I was talking about the total division. And yes, we are indeed expecting the H2 margin to be higher than the H1 margin for the reasons I mentioned, the first one because we will be back to growth with the division in the second semester and China will be over-contributing to the growth.

[Mathilde Rodie:]

Okay. So I think this is ending our call for today. So thank you, everyone, for attending. And we remain available, the IR team, obviously, if you have any further questions during the day.

[Juergen Esser:]

Perfect. Thank you very much, guys. Have a good day.

[Véronique Penchienati-Bosetta:]

Thank you very much. Thank you.

[Shane Grant:]

Thank you.