Danone S.A. (BN) Earnings Call Transcript & Summary

Good morning, everyone. My name is Nadia Ben Salem-Nicolas. I'm heading the Investor Relations teams of Danone. It is my pleasure to welcome you at this investor event. You know this event is a first for us in many ways. First, it's the first of a new series of capital market events we're launching called reinventing Danone, aimed at regularly updating you, our shareholders and the investment community, on the progress of our adaptation plans to a COVID world. It's also the first time we're hosting a 100% virtual investor event given current restrictions. And finally, it's the first time you'll see some members of the executive team of Danone in its new shape and meet with Juergen Esser, the new CFO of Danone. Today's session is focused on efficiencies, showing how Danone will unlock efficiencies by reshaping its organization and reconnect rapidly with the path of profitable growth. We have set a total of 2 hours for the event. Let me give you a quick overview of the schedule. Emmanuel Faber, Chairman and CEO, will kick off the event. It will be followed by a deep dive by Véronique Penchienati on the benefits of our Local First organization, how it will work and why it's relevant for our business in the future. Then Henri Bruxelles, COO, will provide details on the benefits to expect from an integrated and connected value chain from design to delivery. Juergen Esser will pull it all together from a financial perspective, and Emmanuel will share closing remarks and we'll end with a Q&A session with the sell-side analyst. The presentation will include forward-looking statements and non-GAAP indicators, and I, therefore, draw your attention to the disclaimer on Page 1 of the presentation. And with that, I wish us an insightful and engaging event. And please welcome with me, Emmanuel Faber.

Good morning, everyone. I am thrilled to be in Paris this morning with some of my colleagues and the executive committee team of Danone to welcome you all. And they all have new roles, and they will be thrilled and excited to share with you what this role is about and how they will create value altogether. The theme of my introduction, as you can see here, is reconnecting with sustainable shareholder value creation in a COVID world. This is indeed the question for today. My question: what led us from being a company, which mid-2018, was trading at par or at a premium versus our peer group to be today in a situation, 18 months later, where we trade at about a 30% discount? This can be seen through numbers to start with, and I would like to share a few with you before we reconnect with this question. If we look at the 5 last year's numbers that we have shared with you already. Our like-for-like sales growth has been about 3%, the low part of our 3% to 5% midterm ambition, at par, basically with some pretty good competitors overall. Our margin has expanded by 260 basis points to 15.2% in 2019, which is one of the fastest evolution of the margin of Danone ever since I've been with this company. We reached a record recurring EPS level last year after a 50% increase in EPS in the last 5 years, again, a record fast improvement in EPS in Danone's history. And maybe to finish with one, we've paved the way for the future over the last several years. And when I listen to some of our competitors and peers making announcements for the back end of '25 to 2030 on plant base, as far as we are concerned, we'll be very soon already at EUR 2 billion in this great category to build the future. But let's look now at this year. This year, we have faced as, I guess, everybody else, out-of-home closures that had huge impact, in particular, on our Water business and its profitability. We've seen cross-border limitations that has affected a number of our categories, but in particular, our Specialized Nutrition business in China. We have faced a lot of extra cost and inefficiencies because operating in the COVID world is obviously much more costly if we want to serve our customers and ensure the resilience of our supply chains. That led to numbers that we shared in October. Sales declined on 9 months by 1.6%, a clear headwind on our margins, which dropped back to 14% on the first half. And finally, a recurring EPS, which is down 10% in H1. They are not good numbers. And to add to the list of the reasons why COVID has caused these numbers, I could add a number of those. Including, for instance, the fact that we see already and feel the early signals of a dip in the birth rate in anticipation by millions of households in the world of lower incomes in the months to come. So yes, this is true. COVID had a cost for us this year. But there is more than that. I don't think we want to blame COVID for all the impact that we are seeing in this year's numbers. I think we have our fair share of opportunities that we have missed to take in the last several years. For instance, our growth rate with the incredible categories that we have and how relevant our positioning on healthy categories is today, should be higher than what it has been in the past, and certainly, what it is on this chart. Our margin has expanded faster than ever, as I said, but it's still lagging behind a series of our peers on that front as well. And by the way, many of them have actually gone through a heavy restructuring and significant reorganization plans over the last 5, 2, 3 years, and we have not. And it is high time we do. We need this, first of all, for our teams, who are looking for impact, for business, for an organization that is agile and allows them to win in the market. We need this for our businesses that need more growth, more ability to fight, to win and more efficiency locally. We need it for our shareholders who are currently facing a situation of a share price, which is really not where we believe it should be. This plan has a name, Local First. We laid the ground of that plan in October, and we are presenting you today the first of a series of event to update you on where we are on this plan, which, as I said in October, has only one goal, reconnect us with our profitable growth agenda as soon as possible. So if we look at the next several months, we'll be in touch with you probably in H1 to update you on our portfolio refocus. We'll be also in touch with you in H1 on how we believe this new organization with integrated functions and local business units and responsibilities will help us capture a fantastic space of new eating habits, new growth spaces. Some of them will be mentioned today, but this is not the focus of today. The focus of today is to explain you how we are going to go much more local, how this will create a much more efficient organization, a more competitive one from a cost standpoint. So before I turn to my colleagues to share this with you, let me briefly recap what we announced last month, basically 3 big organization shifts announced. One, the way we lead, conduct our business. We will shift from global categories, vertical in countries to a local organization, geography-led. Second, we will change our ways of working from the pyramidal traditional model to a delayering of these pyramids, lowering down and pushing down decisions to make sure that we are more agile, flexible, nimble in the way we work. And finally, an integrated value chain from a siloed organization today by categories to a connected and integrated end-to-end design to delivery function that will have a major role in providing the efficiencies, but also the growth that we need to drive our agenda to reconnect as soon as possible with our profitable growth agenda. We also announced in October, new functions in our executive team, and I will not come back to them. They are with me for some of them here, but I'm really thrilled to announce today that we are also appointing a series of leaders that will drive with us the countries into this transformation and into making sure that in this world with COVID, where local has been so much of the answers from a systemic standpoint, from a political standpoint, from a consumer standpoint, that they will play a key role in the geographies. But also we want them -- I want them to play a key role in the way we govern, we manage, we lead the whole company. So these are the executives that from now on are joining the executive committee team to express the voice of our big countries around the table. Together with me, together with my current executive committee team and many executives in the company, they will have the difficult task to transform and lead a restructuring, which, frankly, has been probably one that is bigger than any of what Danone has done for many, many, many years: to delayer our business to go local, to integrate and connect our end-to-end supply chains with one single simple goal, generate EUR 1 billion of recurring savings by 2023 to serve our growth further and to make sure that we can be competitive and improve radically our margin. I will now let Véronique to go through the presentation of our organization, and I will come back to conclude after my colleagues. Thank you.

Thank you, Emmanuel, and good morning. I am Véronique Penchienati, CEO of Danone International, in the company for more than 20 years, leading different position in marketing, general management and regional lead in both Dairy and Water businesses. I joined the executive committee of Danone 3 years ago as head of the newly created function Growth and Innovation for Danone, and was appointed early 2019 EVP of Specialized Nutrition division, where I led the integration of our Early Life and Medical Nutrition business at the global and country level. One month ago, I took over the responsibility of Danone International with one single obsession: reconnect, as soon as possible, to our 3% to 5% profitable growth agenda. And today, as a first step, I will share with you how we will reshape Danone organization in order to be fitter, more agile locally and to fully reap the benefits of our synergetic health portfolio, both in terms of growth and efficiency. We need to act now to adapt to the new reality prompted by COVID. First, the increasing importance of local. The willingness of consumers to buy local brand and product is increasing everywhere. Healthcare system, impacted by the pandemic, will request locally-adapted solutions. The competition as well is becoming more and more local, calling for locally-adapted strategy and execution. Second, the need for extreme supply chain and customer service agility at competitive costs. Third, the power of trusted brands, leveraging their heritage and local relevance. The increasingly blurring of categories as well calling for a truly consumer centricity versus a category centricity. And last, the structural channel shifts with an incredible acceleration of e-commerce over the past months. To embrace fast this new reality and win in our markets, we have strengths to leverage, but as well, weaknesses to fix. Let's start with the strength. We have a 100% health-driven portfolio. We have trusted brands with the right balance between local brands and global brands. We operate in the right categories where we have competitive position. We have leadership expertise in protein, in plant-based and probiotics. We have as well a well-balanced geographical exposure between developed and emerging markets. And we have a guiding framework of action, One Planet. One Health, fully in sync with people health, our people in Danone, our consumer and our communities. But we have as well areas for improvement. Over the past years, we have become too fat with too many layers of management and heavy cost structure above countries, leading to complex decision-making process and internal complexity while we need to act fast in markets to address fast-changing trends in local consumer behaviors. We have siloed organization by categories with 3 consequences: first, limited synergies and scale at country level; second, slowdown of the key transformational projects we must accelerate across categories, data and digital transformation, e-commerce acceleration, packaging transformation, and agile and efficient operation; and third, blind spots on business opportunity across our different categories as we are more category-centric than truly consumer-centric. We need to act now and shift to a Local First cross-category organization with leaner structure above the country. This will allow to best serve our local consumer and patient, to empower our unified teams in categories to unlock synergies and growth across categories, to truly unleash the energy of our people through more agile ways of working at every level of the company with very simple principle: zero overlap and 2 touch point decision. And last but not least, deliver significant cost cut savings to improve our margin and to continue to fuel the growth of our brands and innovation. This is a must to reconnect ASAP to our profitable growth agenda. Our new organization and operating model will follow 3 principles: local empowerment; growth within, across, and beyond our categories; and more competitive cost structure. Let's start with local empowerment. We will simplify drastically our organization with delayered structure above countries moving from 3 WBUs: Water, EDP and Specialized Nutrition; 1 strategic business unit, Africa; and 13 regional teams to 6 zone cross-categories with lean structure. At the country level, we will move from category-led independent units to country-led unit across categories, moving from 61 country business units and 45 market business units across the 3 WBUs to 22 country business unit and 35 market business units with one country, one portfolio, one P&L. Specifically at country level, becoming one entity, cross category, will increase our ability to impact locally. Keeping on one side, our categories expertise, but as well, capturing growth opportunities across categories and benefiting from synergies and scale on distribution, on route to market, on logistics, data and digital acceleration. This will allow as well to be much more agile in allocating resources at country level to profitable growth levers and portfolio, brands, innovation and channels. We will push down decision to our country teams to empower them to decide what is locally relevant for greater, faster responsiveness to local trends. But at the same time as well, we need to ensure scaling of ideas and enhanced capabilities. That will be the role of the Comex, the global function, like the growth strategy and capabilities team under, for instance, Nigyar leadership, we will enable the benefit of scale where it matters: data-driven insights, category intelligence, brand platform frameworks. One illustration, the management of multi-local brands like Activia, for instance. The global team will frame strategy, develop few desirable and scalable brand assets and animate seamless cooperation with countries with simplified decision-making with only 2 touch points, the countries and the global brand leader, enabling growth within, across, and beyond categories. While changing our center of gravity from WBUs to geography and streamlining organization above CBUs, we need, at the same time, to protect our category expertise. In the growth strategy teams, category expert will nurture current category understanding, animate community of practices, identify consumer insight and growth spaces within our categories, but as well across categories with upskilled, data-driven strategy and insight function, both at the country level and at the central level, moving from being category-centric to truly becoming consumer-centric. We have as well decided to keep a specialized nutrition unit at the Comex level with no P&L responsibility as all P&L responsibility are in the country. This SNU will act as a center of expertise, a control tower to protect and strengthen everything that is specific and unique to SN, medical offers, market access, quality and manufacturing standard, home care, engagement model with healthcare professionals. In each country where there is a significant specialized nutrition business, we will have an SN lead reporting to the GM in charge of the more medical part of SN. To support the delivery of our growth engines across and beyond categories boundaries, we will have as well 3 acceleration units, plant-based, healthy aging and e-commerce. To drive growth ambition and roadmap, identify growth opportunities across categories, food form and geographies and animate and steer a community of leaders in countries. Let's start with plant-based. We will further strengthen the existing plant-based team with upskilled and strengthened resources and a truly cross-categories approach to deliver our EUR 5 billion ambition by 2025. And we still have huge opportunity ahead of us. Plant-based is growing fast in 2020 year-to-date at plus 15%, both in the U.S. and is -- with Alpro in Europe and other countries. We are expanding into more ingredients beyond soy and almonds with rice, coconut and oat. We are launching plant-based alternatives into our key dairy brands with very strong traction from consumer on Actimel, Activia, Danette and more to come. Our business today as well is still very concentrated with 5 key markets, accounting for almost 80% of our plant-based business. But we are and we'll expand fast into new geographies: Mexico, Eastern Europe, CIS and Asia. Another big opportunity as well is to combine our expertise in Specialized Nutrition and in plant-based and expand our plant-based offers on Early Life categories with growing-up milks, breast milk substitute for allergy and as well in Medical Nutrition. With the example of a 40-feet plant-based just lent in Brazil or the recent acquisition of Real Food Blends in the U.S. Asia gene, it is the next big bet and a must-lead opportunity for us. That's why beyond our current business development on our existing portfolio on both immunity and mobility, we are creating a healthy aging acceleration unit located in Asia to best leverage the scientific assets we already have on what we call gene biotics, which is a gut and probiotics expertise, the expertise we have on cognition and on mobility but as well to look to new partnerships in order to develop truly disruptive ecosystem of products and services. E-commerce. E-commerce is the fastest-growing channel on all our categories. And it's clearly not anymore a sales channel. It's a full business model on its own to engage and convert consumer. To fully capture and outpace the growth in e-commerce, we will have dedicated e-commerce team across categories at country level reporting directly to the GM and gathering multiple capabilities that we need: data, search, content, sales and supply. These local teams will be supported by the global e-comm acceleration unit. We will equip countries with toolbox and methodology to win in digital shelf, track performance and will animate as well the e-commerce community of practices and steer strategic partnerships with global pure players, new players and tech partners. And last, more competitive cost structure. This fitter, delayered country-centric organization will not only drive speed and simplicity in our organization and open new growth opportunities, but will deliver significant savings of EUR 700 million by 2023. These savings will come primarily from above countries streamline organization, leaner teams in our global headquarters in Paris, Netherlands and Singapore. And as well from synergies of moving to one unit across categories in the countries. These savings will allow to reconnect to our margin target. A part of them as well will be selectively reinvested in fast-growing categories and countries. I will share with you in Q1, the details of these reinvestment plans, together with a detailed path and roadmap by categories and geographies to reconnect ASAP to our 3% to 5% profitable growth agenda. Now let me introduce Henri Bruxelles, in charge of the newly created end-to-end design to delivery function, a very important comment to support the countries in delivering superior product experience at competitive costs. Henri?

Thank you, Véronique. Good morning. My name is Henri Bruxelles. I've been with Danone for 33 years, working and leading many businesses across Dairy, plant-based, Water and Specialized Nutrition, both in developed and emerging geographies. During the last 3 years, I have been leading the Water division and Africa region at Comex, and I'm now Chief Operating Officer in charge of the newly created end-to-end design to delivery function. COVID has plunged us all into an all-new world, resetting lifestyle and livelihoods, forcing units, width of shopping and consuming and value sets. It created major shift in portfolio, products and price point, and in supply chain, reshaping route to market, putting technology first with consumer and customers. We believe winners will be those able to reinvent themselves fast and broad to accelerate the new avenue for growth, to extract value at all steps and to find excellence in execution in the new delivery models. Our value chain in Danone start with 7 R&D centers across the globe. We source ingredients and pack from a network of 53,000 suppliers. We source milk, plant and fruits from 400,000 farmers. We produce in 180 factories and into network of 300 co-packers, around 13,000 SKU that we deliver through 400 distribution centers, with 80 million shipments a year to serve finally 1.5 billion consumer, ensuring every day the highest quality. Based on our recent learning, we decided to go a step further, and we have created the end-to-end design to deliver ambition, putting under the same roof 4 key function that design the user experience with research and innovation, source our milk ingredients and our pack through cycles and procurement, manufacture and deliver them through manufacturing and supply chain, always with the best quality and safety scores for each consumer everywhere at the most competitive possible cost. We have 4 objectives: first, accelerate top line growth through better, faster and bigger innovation and superior experiences, leveraging all of our scientific and technological assets; second, improve our gross margin through high end-to-end net COGS efficiency; third, improve our people and planet impact across our value chain and materialize it in the value of our brands; and last, unleash all the power of one integrated team and of all our multi-local ecosystems. Our design to deliver organization aims to look at value creation in an integrated and seamless way, cross category and cross function, breaking all internal and external silo with common KPI of performance, with consumer superior experience and competitive cost mindset as our first obsession. Actually, we have already started the journey in plant-based with integrated design-to-deliver approach. We are stepping up the unique product, package and manufacturing knowledge of Alpro and Silk in soy, almond and oat, historically based in the U.S. and in Belgium, into a networked plant-based center of excellence with specific user experience understanding, constantly upgrading our product design, advancing a new source of protein like sesame, hemp, nuts or pea, evolving coffee base and exploring new plant-based product forms with organic sourcing and deep crop and variety selection expertise, together with a network of external partners on technical engineering capabilities. Putting this integrated plant-based expertise close to Danone world-leading fermentation capabilities, combining the Alpro set with the SN ability to elevate the nutritional profile of ingredients, leveraging the global supply network of EDP and Waters for chilled or ambient product, will support our EUR 5 million ambition by 2025. Integrated design to deliver enables the cross utilization of our manufacturing, logistics and route to market existing assets, notably by stepping up the flexibility and allergen management of factories so that they can efficiently shift from dairy to plant-based production, accelerating our worldwide expansion. Another example of value creation through integration is happening now with valuation of the organic milk value chain. Organic infant milk requires very specific milling ingredients such as organic lactose or organic lactoserum, leveraging our organic milk expertise of EDP in France to help our farmers transition to organic milk. Installing filtration facility in our Steenvoorde factory, we are about to produce organic dairy ingredients, competitive as market price, enabling organic infant milk formula, launches in Europe and in Australia and New Zealand, production in our Zoetermeer plant while absorbing structural excess in the French milk collection. It is about to start in summer 2021, with positive impact on net sales and gross margin. Today, I will focus our conversation on how we will deliver high end-to-end efficiency lending in our gross margin starting next year. We aim to deliver EUR 300 million yearly extra efficiency by 2023, working end-to-end beyond categories in a cost-competitive way. This will involve the activation of 4 levers. First, dynamic portfolio management, adapting our portfolio through SKU or brand rationalization and reinvesting in high-value SKU while killing inefficiency. Second, designed to superior value program, aiming at product re-engineering to drive user experience superiority, focusing on what is essential for consumer while removing all non-value-based costs. Third, optimizing and transforming our manufacturing and supply network, both through immediate better utilization rate but also through digital transformation. And fourth, embracing the future of procurement, adding back local sourcing when relevant, but also upgrading our procurement ability through data-enabled solutions. Starting with dynamic portfolio management. With demand shifting towards new channel and occasion of consumption, with stressed supply chain, we are convinced SKU pruning is a dynamic value creation exercise. We started end to '20 and will accelerate through 2021 and beyond. During the second quarter of this year, with the accelerated demand that we experienced in the U.S., we decreased our number of SKU on the half-gallon format by around 30%. It enabled to liberate trapped production capacity, therefore, increasing the volume output by 10%. It allowed Horizon Organic to better sale opportunity and grow double-digit in the period, gaining 250 bps of market share. We have the same experience in Water in Africa. In Water, we reduced our SKU range by 30% in our French factory, evian, where we're able to reduce complexity, resulting in better operational efficiency and direct plant delivery, adding 30 basis points at plant gross margin. In EDP Egypt, SKU portfolio printing program reduced our SKU by 25%, enabled to cut losses by 35% and added 100 bps gross margin on the portfolio. Based on those experience will be the structured portfolio pruning program in 4 stages. Space for the euros, identifying all our euros SKU with high velocities and yet still shelf space opportunities. It will accelerate our growth by reinvesting in high-velocity proven SKU, optimizing their distribution and by enabling, therefore, better shelf utilization for our customers. Eliminate to innovate, replacing long-tail SKU by post-COVID, new occasion-based innovation. Unlock capacity at zero capital using all trapped line capacity or logistic space blocked by long-tail complexity. Track inefficiency and pain points, chasing all rationalization across the value chain, enabling discontinuous efficiency in product losses, buying massification or asset-based reduction. For 2021, we will review and cut 20% of our SKU long tail, resulting in more than 2,000 SKU. This will happen across our different business and region, Water, EDP International, EDP Noram and Specialized Nutrition, focusing first on first diet. Second, we have started, in several geographies, a design to superior value approach to ensure superior product experience at best cost. As an example, we have started to revisit our U.S. portfolio in 3 categories: plant-based beverage, coffee creamers and quick yogurt. Through a thorough market competitive benchmarking, resulting in flavor and food preparation harmonization, graphic printing technology, ingredient optimization and first and secondary packaging optimization. Those initiatives are showing great potential to support product superiority and generate 50 bps gross margin. We had similar approach in Water on newly-launched big format, reassessing each element to create value. Or in Africa, reassessing how we deliver the creamy mouthful experience through plant-based and vegetal fat. In 2021, we are rolling out the design to superior value program in our top SKU across the globe. First, defining through user experience deep dive beyond the clarity, the behavior-based genuine drivers of superiority and preference. Second, realizing complete extended market and packaging tier down. Third, removing nondifferentiating factors and reinvesting in superiority. Sitting at the conjecture of product design, consumer insight and competitive cost benchmarking, this methodology allows us to drive costs down while ensuring product superiority. Thank to a seamless cross-functional work between all functions, we will execute this important product improvement and cost efficiency program on our top 5 SKU with 5% to 10% cost reduction on those SKU across the globe. We have started our operation connected transformation program with engage to change in EDP, being the largest one, but also the global cross-WBU transformation, reimagined operation. We launched, for instance, in EDP Europe, a sweat our asset program to accelerate operational utilization rate of 11 new lines still underutilized at 30% rate. Through reverse line filling innovation programs with marketers and developers at the plant, we are able to identify an acceleration plan with new innovation helping to reach 60% utilization rate on major brands as Activia, Actimel or Danone. This program is under implementation. In parallel, we progressed into '20 in the digitalization of our value chain. To our factories, Opole, in SN, Poland and evian in France are progressing daily on their digitalization and are North Stars for our other factories. Opole with connected top floors, predictive maintenance and digital labs. Evian with end-to-end flow management within the factory. And we recently also in Ochsenfurt in Germany started upgrading smart automation tasks, processes and flows that make it more efficient at delivering ready for e-commerce products. We see clearly result in additional capacity and cost efficiency. We are -- also progressed on the transformation of advanced forecasting with data-driven demand planning. We went live in EDP Spain last month with a pilot, basing demand forecast with 63 million data points with -- formally less than 1,000 data points, enabling forecast accuracy improving 200 basis points, higher service level and enabling savings through reduction of losses and better production scheduling. For 2021 onwards, we will accelerate both the sweat our assets program across our business and roll out the connected transformation program with next wave of digital manufacturing, advanced forecasting and data-enabled end-to-end planning, while putting in place, in Europe and North America, logistic control tower. We aim to have, by 2023, 40 sites digitalized, and the sweat our assets rollout in the key countries. On future of procurement, which is our first level, the objective is twofold. First, accelerate all our inflation mitigation activities and protection via foreign exchange exposure. We are upgrading the inflation mitigation action with design to source program and local sourcing development. We have been already activating higher local sourcing in Africa and in Lat Am. We accelerate the market risk management methodology that we use to hedge ourselves against plastic volatility to other ingredients and raw materials using predictive analytics for better risk management. We are also accelerating our procurement efficiency through data-enabled sourcing. We are putting in place several data-enabled tool for faster and structure supply collaboration for advanced analytics on category and contract improvement. These allow us both to increase our outsourcing coverage from 70% to 90% of our indirect spend, but also increase our sourcing efficiency. To sum it up, I'm positive that our design to deliver organization can and will contribute to Danone profitable growth agenda. With the program efficiency for growth that we are launching, we will step up our productivity level from 4.5% to 6%, tracking end-to-end net COGS in order to deliver an equivalent of EUR 300 million yearly extra efficiency, lending in our gross margin by 2023. I am together with the people working with me within the design to deliver function, very excited to progress on this journey and look forward to further engage with you on this. Thank you. I will now pass to Juergen, our CFO.

Thank you, Henri, and good morning, everybody. My name is Juergen Esser. I'm the new CFO at Danone. It's a great pleasure to meet you all today to discuss and share with you about the financial perspectives of our company. Before starting, maybe just a few words of introduction about myself. I've been in Danone already for more than 20 years in different roles, in operational business finance and also in corporate finance, had the chance to work with our operations in Waters, EDP and Early Life Nutrition, with my last position being the CFO of our Waters division as well as of the cross-category African business unit. And now taking over the role as CFO. I'm joining with one immediate objective, which is to reconnect as soon as possible to our profitable growth ambition. Few elements important for me personally in this journey: the need to act with consistency and rigor in the way we manage our business platforms; allocating our resources with discipline to create maximum value; and executing our plans with speed and excellence. That may sound very generic during those days, but these, you can call it guiding principles, are for me, very fundamental enablers to let us return back to our profitable growth to restart creating shareholder value and to deliver on our commitments. The efficiency plans, as presented by Véronique and Henri will be delivering in total EUR 1 billion of recurring savings by 2023. First, targeting to increase our level of annual productivity within our cost of goods sold by 1/3, delivering, therefore, EUR 300 million of extra recurring savings into our gross margin. And secondly, leveraging the new operating country-centric model to deliver EUR 700 million of recurring savings within our SG&A cost. With those plans and milestones in place, we do expect 2/3 of those savings to be materializing by the end of year 2022. Important to precise for our overhead plan that the EUR 700 million savings are translating into a reduction of our global SG&A cost by around 20% over the next 3 years. Those savings, as Véronique explained, are driven by a fitter, delayered and country-centric organization, which on one side means leaner teams at both countries. And on the other side is driven by synergies within each of our countries as they will be moving into one single unit across categories. The overhead reduction, therefore, does mainly impact our global but also our local headquarters. This program for our SG&A is a key enabler to restart our value creation. And materializing those savings will require an investment of EUR 1.4 billion, while delivering a fast and predictable payback of around 2 years. It means an accelerated pace of restructuring, doubling down on our restructuring cost versus previous years to fuel our profitable growth plans. Moving forward, we will be balancing reinvestment and margin flow-through of the EUR 1 billion efficiencies, especially in the moment where we are very conscious that short-term market conditions are and will be remaining uncertain and volatile, while we want and need to reinvest into our growth opportunities. We are, therefore, today, targeting a level of 20% to 30% reinvestment while staying flexible and agile in the way we allocate those resources to adapt to market conditions and opportunities. With this being said, let me move to the updated financial guidance, which is built around 3 pillars. First, a target for year 2022. Thanks to the plans, which we have been discussing today, the EUR 1 billion efficiency program with 2/3 of the savings impacting positively our financial equation by 2022, we are confident to confirm a target of more than 15% of operating margin for that year. After 2022, savings on overheads and supply chain will continue to fuel our margin expansion. This effect, combined with the return to 3% to 5% sales growth and the divestiture of dilutive assets, will ensure further yearly increase in operating margin until we have matched top-performing peers at mid- to high teens levels, which finally is letting us confirm our long term ambition, which remains unchanged, delivering superior, sustainable, profitable growth. Let me go onto more short term. Last month, we said our priorities for the remainder of the year were to focus on market share momentum and delivering the expected levels of margin and cash, and we restored the guidance on those metrics. And indeed, we confirm today that we are confident to achieve our objectives for 2020, this 14% recurring operating margin and EUR 1.8 billion of free cash flow. We are confident, despite market conditions in Q4, which are actually worse than 4 weeks ago, created by new COVID waves and restrictions, notably in Europe, but since some days also in the U.S., which have an impact on the pace of recovery of our out-of-home channels in the Waters division. Looking at 2021, we expect 2021 to be a year of recovery after 12 months of disruption from COVID that started end of Q1 this year. Visibility remains very limited, and we need to acknowledge that you will still have a few quarters in front of us that will be made potentially of stop and go in the economy. And headwinds related to COVID will continue, at least, into H1 2021 before vaccine is made available to mass. And that's why we will refrain from giving any detailed guidance today for 2021. But in line with current news flow around COVID, it seems clear that 2021 will be a year of 2 phases, significantly backloaded. In the first half, we will be running against a huge base of comparison of Q1 that benefited from panic buying and pantry loading, especially in our ELN business. The continued travel restrictions, limiting our cross-border sales in China, will weigh on our H1 2021 sales growth and even more on margin. That will be further impacted by category mix and continued extra costs linked to COVID. It will be, for us, the period in which we will deploy the new organization and prepare for a return to profitable growth in H2, including a first return to margin expansion, supported by the first wave of savings generated by the plans shared today. And finally, to reconfirm, with the biggest part of the efficiencies from the plans announced today materializing in 2022, it leads us to commit to a margin higher than 15% at that time. With this being said, I would hand it over to Emmanuel to wrap up the event.

Thank you, Juergen. Before we go to your questions, I would simply like to briefly wrap up the presentation of our team this morning. And come back to the theme of my introduction, which was about how do we reconnect with a sustainable, resilient shareholder value-creation agenda at Danone. I want to tell you that I am extremely confident that what has been shared is the essence of the recipe to do that. Maybe to be a bit more precise, I will use the charts that Juergen shared on the guidance. On this chart, you obviously have a 2022 milestone with a margin that will come back to its pre-COVID level after 2021 year, which will be a year of heavy work to prepare the plan, returning to profitable growth in the second half and landing on this above 15% margin. I want to express very clearly that this was the pre-COVID ending record margin of Danone, 15.2%. I consider it as the starting point of our next journey. And that journey -- and that important journey is what is on this chart here. So if you look at the midterm ambition, we continue to believe that we have exactly the right categories, maybe still a bit of pruning to do in the portfolio, and we will, to be comfortable in the 3% to 5% like-for-like sales growth equation that we have for the midterm ambition. And we believe the COVID world and even the post-COVID world, we'll continue to foster those categories and our ability to deliver this growth agenda. As shared earlier in this presentation, we will come back to you on this growth agenda sometime in the H1 of next year. But I want to insist on the operating margin, mid- to high teens. Let's recognize this. We have never ever been so ambitious at Danone. And I want to say that I am personally convinced that we need to do that. We need to do that for at least 2 reasons. One is because our businesses, as I said in my introduction, have managed to expand in margin but this year shows that this expansion is not resilient enough. And I don't know what will be the next COVID, what will be the next external shock, the currency, the trade, the inflation in agriculture, whatever else. So if we want to invest and deliver for the long term, which you know is this company's goal, my personal goal as the CEO of this company, I'm absolutely convinced now through these 9 months of COVID, very tough circumstances for us that we need to create a safety cushion, a significant safety cushion in our level of operating margin to just make sure that we have a business model that is more resilient the day something will come, and it may come. That's the first reason. The second is that, as I said, we have been lagging behind in margin with a number of our peer group. They went through very significant restructuring and reorganizations. And as I said in my introduction, we are now doing this. So it will be clear that we will also end up with the same algorithm in terms of improvement of our margin through these plans, which will be, for me, an extremely important driver on an agenda on which we have control, more than on growth in this environment, to deliver and reconnect with shareholder value creation at Danone. What you have heard from my colleagues on the organization on one side, on the savings on the other side, whether on the localization or whether on the supply chain end-to-end, for me is saying that not only we need to do that but we can do it, and we will. So I would like to thank you for attending this event. And I will now turn to Nadia to open for your questions and comments. Thank you.

Welcome back to the second part of the event, the Q&A session with our speakers that I'll have the pleasure to animate. [Operator Instructions] And to kick off the call, first question's come from Celine Pannuti at JPMorgan. We cannot hear you, Celine. So I suggest we take another question.

Yes, sorry. I was on mute. Yes. My first question is on the margin target. So first of all, I wanted to understand why choosing to commit to a margin target when a lot of your competitors seem to be willing to reinvest more to grow. And I think the growth has been the issue at Danone. It could have, by and large, managed to increase your margin over the past couple of years. And within that, if you could also answer when you look at your business, structurally by business division, how you make up mid-to-high teens structurally, again, because we've seen some of your competitors, reinvesting and -- for example, you are one of the most profitable in specialized nutrition. So if you could answer that.

Emmanuel, you want to take the first one on the emphasis on margin and not the absence of growth. We have growth in our targets?

Yes, absolutely. Thank you, Nadia. Thank you, Celine, for the question. I think the level of ambition is clear for us, not only for the reasons explained that we want to reconnect as soon as possible with our top line profitable growth but also, as I explained in my presentation, we have come to realize that the volatility of the world in which we live economically in the countries does not lead enough room for maneuver for us in our profitability to live with the current or actually the previous set of ambition that we had for margin. So we believe that there is a need -- an opportunity and a need to be much more ambitious, and this is what we shared with our margin expansion to mid-to-high in the midterm. This is not without fueling growth. We expect to reinvest 20%, 25% of our savings from the plan to make sure that we push our brands because over the last several years, gradually, we've lost about 100 points -- bps, sorry, of margin in A&P spending, which we believe we need to catch up, and there are opportunities for us to catch up. So that's really one thing. It's not against, but I'm clear on the fact that with the environment in which we live today, I want an agenda that is under our control and the efficiencies agenda, the organizational agenda, the productivity agenda is in our control. So we start with that, and we will refuel growth gradually. To your questions about the businesses, we also said that we are pruning -- reviewing our portfolio, pruning it from an operational standpoint. My colleagues made comments on that in the presentation to make sure that the brands, the SKUs are fit with the ambition that we have of profitable growth. And second, we have started a strategic review with 2 assets to start with. There will be more. We will update you in the next several months on the progress of this review to make sure that the assets that we have are fit with the equation that we ambition.

Thank you, Emmanuel. Next question is coming from Warren Ackerman at Barclays.

I hope you can hear me okay.

We can hear you.

My question is, I suppose, on the reinvestment rates again. I mean on project Protein, you said EUR 1 billion and you'd retain, i.e., EUR 300 million, so 70% reinvestment, where on the new plan, is only 20% to 25% reinvestment. There's a much lower reinvestment of the gross savings. Why is that the right number given the volatility out there? And then my kind of follow-up is for Juergen, just on the disclosure and the reporting. How would the reporting change for us given the move to kind of local organization?

Two questions for you, Juergen.

Yes.

First one on the pace of reinvestment of the savings?

Thank you, Warren, for your question. Let me try to help you on that one. So what we are indeed explaining is that we have now this EUR 1 billion saving plan with the majority of the savings kicking in 2022. And what we are saying today is that we want to reinvest between 20% to 30% of those savings into our strategic growth initiatives. And we will discuss these strategic growth opportunities in the next CME session, which we'll have in the first semester. Obviously, we will need to stay extremely flexible and agile in the way we are going to reinvest because we know that especially next couple of months and quarters, the context will stay very volatile. There will be probably a lot of stop and go in the economies. And so we want to maintain a high level of flexibility. At the same moment, we know that we need to invest, and we want to invest when we see market opportunities, but we also want to make sure that we really adapt our investment pace to the rhythm of what we see happening in our categories. When it comes to the second question on the reporting, there's 2 elements which are probably important. Number one, on 2020 full year, there will be no change in the way we will communicate in our financial communication. For 2021, we are currently under discussion. We didn't do -- we didn't take a decision yet. But where I want to reassure you is on the fact that the organizational changes we have been discussing will not lead to any reduction in the level of granularity of our financial disclosures. So our intent is really to keep reporting the performance by category. We might then adjust the geographical split to reflect the new geographical focus over the organization. But again, as I said, we didn't decide on that yet, and we will keep you updated as soon as there's something new to say on that.

Thank you, Juergen. I'd like Henri to comment further on your question about the need for reinvestment because there are also elements about the innovation model that will be changed with our end-to-end design to deliver new function.

Yes. Thank you, Emmanuel. Actually, we -- with a new organization end-to-end design to delivery, putting under the same roof, the research and innovation, the cycles and procurement, the manufacturing and the quality, we want actually this organization to act as a one shop -- one-stop shop for the countries in terms of ingredients, in terms of scientific and technological assets, in terms of recipe design. Because what we want is really to have bigger innovation -- fewer, bigger, more impactful innovation. So this will be articulated with the innovation led at country level based on local insights, based on an end-to-end approach locally around the key growth spaces, plant-based, probiotics, SN and many others. But at the same time, we will fuel and accelerate these innovations through the global organization that will develop stronger assets, which will be used by the countries to really accelerate their innovation pipeline. We want also to balance better the innovation in terms of short-term innovation, but also having more medium-term, long-term innovation fueled by the science and technological assets.

Next question is from John Ennis at Goldman Sachs.

Hopefully, you can hear me, loud and clear as well.

Very well.

My question is on cash costs to deliver the saving plan. These are, of course, exceeding the overall savings plan by EUR 400 million. I just wondered can you give a few more details behind cost. And are these restructuring costs disappear by 2023? Because I guess, by then, we will have seen restructuring costs over 2018 to 2023. So can they completely roll off?

So if I rephrase it, the question is about the constituent of the EUR 1.4 billion restructuring costs. Juergen?

Yes. Thank you, John. So what we are saying today is indeed by launching our savings plan of EUR 1 billion, and particularly the one with local first, we are engaging into a restructuring project of EUR 1.4 billion of overall cost. Those costs will hit, particularly our EPS in 2021. It will be mostly cash. It will be spent upfront. And so we will see first savings kicking in, in the second semester of 2021 and then the vast majority of savings -- around 2/3 of the savings being impacting positively our P&L in 2022. So upfront investment 2021 and then cash flows 2021, and particularly 2022, positively impacting our balance sheet.

And I would like to add that from a timing standpoint, we expect all the projects, the local-first project that we have presented this morning to be ended from an execution standpoint.

I see that next question in the queue is coming from Bruno Monteyne at Bernstein.

There seem to be 2 views out there about how to improve margins medium term to long term. So one is clearly focusing on cost savings. The other one is focusing on more innovative brands that have a stronger connection with consumers. Given the whole focus today on cost savings, is that because in the short term, do you think that is the right as you already see opportunities to improve innovation and branding in the short term? And related to that, is there a medium-term to long-term risk that new organization -- you're cutting 20% of overhead, making people redundant new organizational structure, is there a risk to the organization's capability to drive innovation with all that organizational turmoil going on?

You want to take the 2 questions, Emmanuel?

Yes. Thank you, Bruno, for the question. I'll take the first one and leave answer the Veronique to answer the second one as she has also done our SN merger last year pretty successfully. So on your question, it's both. As you'd rightly say, there are 2 views, and we have both views actually. We have decided to focus this event on efficiency because again, that's definitely something that we feel is under our own control, and that is what makes us comfortable that the first material benefits from the EUR 1 billion savings plan is going to be felt in H2 next year, so in less than 12 months from now. And as I said, by the end of 2022 everything will be implemented to move forward in the full year of 2023 with a EUR 1 billion saving. The reinvestment is there exactly because we believe that by unlocking the ability of our countries to be much more nimble, faster and not in a way, having to wait for decisions and trade-offs being made all up and down the pyramid of categories, yes, category expertise will stay, of course. And I'm sure my colleagues will expand on that. But it's absolutely essential that we free our people to just make sure they are on the market with the great brands that we have. And as you know, 2/3 of our portfolio is absolutely local, strong brands of positions of #1 and #2 locally. So it's not one or the other. We present this morning an efficiency program that will be the backbone of reorganization, which we expect will unlock growth, and I would like Veronique to comment further on this aspect.

Thank you, Emmanuel. Maybe 2 additional points on what Emmanuel just said. So yes, definitely, this local first adaptation plan is for efficiency and for growth. All the principle of having local centricity supported as well by comments, the reorganization, the growth strategies and the expertise and categories is really to equip the countries to be locally centric, answering the need from the local consumer, but at the same time, ensuring as well scale and efficiencies, and that's very important for us. Now it's clear, it's a big transformation. And we've been through to a much, I would say, smaller impact when we did the SN integration in 2019, combining the Early Life Nutrition businesses and Medical Nutrition businesses, both at the global level and as well at the local CBU level. And for that, we are taking as well all the learnings in terms of governance and all that to ensure that we have teams that both are able to deliver and as well, at the same time, transforming. The way we will overall manage and govern, especially in the next months to come till the implementation of the new organization, will be by segregated teams. The current teams really focusing on delivering the business. And as well, the new zone president entering the comex working on designing, shaping, implementing the new organization for the future.

Can I maybe add one question for you, Veronique. How did you manage on retention of the people and this business continuity issue?

So on that, we had clearly passed on to make sure that we keep the right people and in SN over 1 year. We had no regretted loss during the SN integration. So we will drive the same way with proximity, engagement with the team to ensure that we deliver, transform and keep the people.

Thank you Veronique. Always indeed useful to remind this merger was led in 12 months' time frame and delivering mid-single-digit growth for SN and still also margin improvement at that year. Let's move to next question from Martin Deboo at Jefferies.

One main question and one supplemental for me. Emmanuel, as you said at the start, you said at 2 occasions that peers have been through big restructuring programs and you hadn't. But the reality is you went through Protein as other question as I've alluded to, which is also EUR 1 billion saving program. So I think the question has to be what are the new sources of cost savings you're finding in today's program over and above protein? Or is it the case that Protein savings were dissipated and cost creep elsewhere. So just some clarification on this versus Protein. And the quick supplemental is, I think you're going to incur probably around 90 basis points of COVID on cost this year, which will hopefully reverse next year. Is the reverse of those on costs within the EUR 1 billion target? Or is that an additional source of cost upside in 2021?