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

Good day, and thank you for standing by. Welcome to the Danone Third Quarter 2023 Sales Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker day, Mathilde Rodie, Head of Investor Relations and Financial Communications. Please go ahead.

Thank you. Good morning, everyone. Thank you for being with us this morning for our Q3 results call. I'm with Juergen Esser, the CFO, who will go through some prepared remarks, before taking your questions in the second step. Before we start, I draw your attention on our disclaimer Page 22. Please pay attention to that. And with that, let me hand it over to Juergen.

Thank you, Mathilde, and good morning, everyone. I hope you are well, and thank you for being with us this morning to discuss our third quarter sales. I propose that we go straight into it, starting with Page #2. We have been closing this third quarter with solid results with like-for-like sales up by 6.2% compared to last year. Beyond the quantum, we are particularly pleased with the quality of the growth as it starts to show that our recent Danone initiatives are paying off, yielding results exactly in line with our expectations. Pricing reached plus 6.6% this quarter, sequentially decelerating from the high single-digit levels we saw in previous quarters. This normalization has been driven by all geographies, with North America unsurprisingly the zone where prices are normalizing the fastest. Most importantly, as price contributions start to go down, we are able to sequentially improve the dynamics of our volumes and mix, which are only slightly down, with minus 0.3% in this third quarter, a clear improvement versus the first semester where we were down around minus 1%. This dynamic is very encouraging and is giving us confidence to further improve the trend in the last quarter of the year. In other words, and let me be very clear by the way, we are confident that the fourth quarter of this year, we'll see a positive contribution from volume and mix, a key milestone, as you know, in our renewed Danone journey. Let us look first at our performance through the lens of our categories on Page #3. While we continue to deliver solid and consistent growth across EDP, Specialized Nutrition and Waters, with all 3 categories growing above 5% in this quarter, we're also reporting an improved underlying volume/mix dynamic. This is most visible in EDP where volume/mix significantly improved, only down minus 0.8% this quarter compared to around minus 3% in the first semester of this year and compared to as much as minus 6% when looking back into the second semester of last year. These results do not come by coincidence. They rather reflect the hard work of our teams over the last 18 months where we consistently executed against our strategic agenda, that we actively stepped up the performance of our portfolio, of our core assets, of our underperformers, of our winners, which is well illustrated on the next page, Page #4. In EDP Europe, our teams have, over the last few quarters taken bold actions to restore value creation after many years of underperformance. After having clarified the swim lanes of our brands, we refocused our ranges, which has led to the retire-zation of roughly 20% of the least value-creative SKUs in dairy. This first step allowed us to give more clarity to our value propositions within each brand, but also to ease what I would call the shopability of our shelves. And combined with improved execution and investment, the transformation of EDP starts delivering results. As an example, in the U.K., we are emerging from the transformation phase, not only with a stronger portfolio recently complemented by the rollout of our high-protein range, but also with higher distribution and share of shelf levels. Those are measurable successes, and I'm convinced that this will sequentially translate into stronger growth and competitiveness. Next to EDP in Europe, we've also been active in turning around Mizone. After a deep root cause analysis, the team has been deploying the renewed Mizone proposition for the last quarters, and we are pleased with the results. Now that the first season is behind us, Mizone has been growing plus 13.9% in the beginning of the year, mostly driven by volume and mix. Importantly, this growth translated into higher market share. After years of slowdown, we can say that Mizone is reconnecting with value creation, which bodes well for the resilience of our model in China and for the performance of our Waters category. Last but not least, you have seen us actively and intentionally boost the winners of our portfolio. This is, for example, the case of Medical Nutrition, a business that has been consistently growing in double-digit territory. Since the beginning of the year, we have made several investments to increase production capacity in Europe. And we are, in parallel, actively expanding the reach of our portfolio, for example, in China in the diet nutrition. There, we continue to lead the interior nutrition space, while we are now expanding beyond hospitals, introducing our oral nutrition solutions, a key step in expanding our presence from hospitals to post discharge models. You remember that delivering strong and balanced growth sits at the heart of the Renew Danone business model. I will conclude this brief introduction by reiterating that the efforts of the last 18 months are starting to pay off. And as our sector is shifting away from price-led growth, we are confident that moving forward we can demonstrate that we have categories, brands and capabilities to deliver more balanced growth with volume, mix and price contributing. Let me now move to Page #5 for our traditional sales bridge. I have already been commenting our like-for-like sales growth of plus 6.2%. On top of that, we see this quarter, a negative impact from ForEx of minus 7.4%, reflecting the depreciation of the majority of currencies against the euro, while Scope was negative at minus 6.2%, mainly resulting from the deconsolidation of EDP Russia and Waters Argentina business from our perimeter. Let's now look at the performance of our zones, moving to Page #6. This quarter, again, all our geographies have been contributing to the growth. To be efficient, I would even suggest we move immediately forward to the next page, to Page #7, to look deeper into the performance of each zone starting with Europe. Europe delivered solid growth of plus 5.1% in this third quarter, with all categories contributing. Pricing started to progressively normalize, yet still being up plus 9.2%, thanks to significant carryover from last year. At the same moment, volume/mix was down minus 4.1%, with a weaker volume performance in our Waters business, where volume/mix was significantly down, while EDP, on the other side, experienced a tangible sequential improvement as expected. On EDP, as I commented already, our teams have made good progress in the transformation of our portfolio. We are starting to deliver results with a sequential improvement in the volume/mix dynamics. The quality of our delivery and our competitiveness are both improving month by month, led this quarter by strong performances of our dairy brands like Aptamil, Danone or YoPRO, all of them growing double digits, but also of our Alpro brand in plant-based, which delivered high single-digit growth. Specialized Nutrition posted another quarter of resilient growth, while Waters registered further market share gains in a category which was, at the beginning of the quarter, penalized by very poor weather conditions. And maybe a last comment on our European performance. When looking for the length of our distribution channels, our away-from-home business was the fastest-growing channel this quarter, benefiting from an enhanced focus on price pack architecture across categories from dairy to Plant-based and Waters and supported by increased investments. Let's move now on to North America on Page #8. North America delivered plus 3.9% like-for-like growth in Q3 with the pricing that is normalizing in line with our expectations, up plus 4%. Volume/mix was again very resilient this quarter, ending broadly flat, despite an elevated base driven, as you will remember, by our contribution to addressing the IMF formula shortage in U.S. last year. The performance in North America was led by our Coffee Creations range that posted again double-digit growth this quarter. Here, let me highlight the International Delight and Stok brands that continue to drive growth and market share gains. Beyond Coffee Creations, our Yogurt business also delivered a solid quarter with our Oikos brand registering another quarter of steep double-digit growth. On plant-based, we started taking corrective actions to restore short-term competitiveness, which seem to yield best results. In parallel, we are working on a more structural plan to restate our portfolio and increase the relevance to consumers. So overall, another solid quarter in North America, benefiting from a well-positioned and resilient portfolio and results. Moving to the next page, which is Page #9, about China, North Asia and Oceania zones. The zone registered plus 8.4% like-for-like sales growth in the third quarter, mainly driven by volume/mix, up plus 7.3%. Starting with China and zooming into our Infant Mix Formula, Aptamil delivered another quarter of solid growth with continued market share gains. The uniqueness of our business model in China is indeed a great asset, particularly in this moment where the category is shifting from old to newly registered recipes. We are carefully navigating this transition period, focusing on keeping tight control on inventory and price levels, while introducing in a staged manner our newly registered innovations in this space. Next to IMF, our Medical Nutrition portfolio posted another strong quarter, building on the strength of our interior tube feeding business, which delivered double-digit growth. We are very pleased that we can now meaningfully expand our portfolio in the coming quarters, thanks to the recent introduction of our oral products in China, as I commented earlier in the presentation, a key milestone to strengthen our presence in this fast-growing segment. In Waters, Mizone is delivering another strong quarter of competitive growth, with the team now focusing on further enhancing our execution of methods to solidify the turnaround with the next team to comment. Finally, beyond China, our business in Japan posted again a strong double-digit growth led by our Functional Dairy range and notably the Oikos brand. Let me move on to the LatAm zone on Page #10. LatAm registered sales growth of plus 8.2% in Q3 on a like-for-like basis, with price up plus 10% and volume/mix down minus 1.8%. The focus of this zone is to restore our resilient profitable growth model to streamline its portfolio and to optimize its business model. Our teams are making good progress on this agenda across the different countries and categories. As we have been discontinuing or resetting a number of activities, including our Liquid Milk business in Brazil, which is sequentially visible in the results. While doing so, the focus is to drive the winners in the zone, with brands like YoPRO, Bonafont and Aptamil, all of them growing profitably also in this quarter at very fast pace. Finally, moving on to the Rest of the World zone, which is Page #11. The zone posted sales growth of plus 9.7% on a like-for-like basis this quarter, with a balanced contribution of price, up plus 7.7% and volume/mix up plus 1.9%. Let me here particularly highlight the continued solid performance of our Specialized Nutrition categories in Southeast Asia, but also in India, which has posted another quarter of double-digit growth. We continue to win market share across the region, with a strong focus on our superior Aptamil portfolio, but also our unique local brands like SGM in Indonesia. On EDP, we are making further progress on the portfolio transformation of our Dairy business in Africa, a clear mandate to reconnect with a profitable growth algorithm in this region. Our teams are laser-focused on getting into that value creation journey with results visible quarter-by-quarter. Let me now conclude this presentation with an update on the full year outlook, which is Page #12. Reflecting our solid delivery over the first 9 months of this year and the momentum of our business across geographies and categories, we are today raising our guidance for like-for-like sales growth. We now expect like-for-like sales growth between 6% and 7%, Yet at the same moment confirming our full year guidance for recurring operating margin, delivering a moderate margin increase versus previous year. Here, more specifically, and as you already observed in the first semester of this year, we expect our full year operating margin to be led by the expansion of our gross margin, while we will continue to make significant reinvestments in A&P, product security and capabilities. And with that, let me hand it back to Mathilde to start the Q&A session.

Thank you, Juergen. So we will now open the Q&A with the first question from Guillaume Delmas, UBS.

A couple of questions from me, please. The first one is on pricing. I would be interested to hear what you're seeing on the pricing and promotional front at the moment. In particular, if there are some regions or product categories where you're seeing a pickup in promo activities or maybe more pushback from retailers. And then look, I appreciate it's very early days, but how do you think 2024 will play out from a pricing point of view? I.e., do you expect some additional pricing actions on your part? Some rollback? Or overall, some stability? So any color on this would be very helpful. And then my second question is on Specialized Nutrition in Europe. Because I think Q3 is your third consecutive quarter in the low single-digit territory, I would assume this is made of strong pricing and some negative volume development. So I don't think this is an area where you've had much SKU pruning. So my question is, how should we think about SN in Europe going forward? Is it realistic to assume better than flat to low single-digit organic sales growth, given that, I would think, you've got very limited volume growth in terms of -- from a category standpoint?

Let me try to help you on the different points. When it comes to pricing and promotional activities, you're right to say that pricing is coming down quarter-by-quarter at a different pace depending on the region. Depending also when we started to take pricing. So unsurprisingly, North America is first normalizing and you will see that Europe will normalize in the coming quarters. This is indeed combined with the fact that we are sequentially increasing our promotional activities. What we said some 6 months ago is still valid, which is that by the end of this year, we will be back to the level of promotional activities we had before COVID, which is probably a fair level of promotion moving forward. We're obviously in very close collaboration with our retailers organizing these promotions, because these promotions have 1 single objective, which is to bring the consumer back to the shelf. So very targeted promotions, making sure that promotions get us back to the magic price points, because this is what drives impact and rotation on the shares. How does it look going into next year 2024? Overall, of course, 2024, we want to reconnect and to connect to our desired growth model with contribution from volume/mix and price, all of them are positive. But more importantly than that, the level of pricing will depend on the level of inflation. And what we are seeing is that inflation is coming down quarter-by-quarter exactly in line with our expectation, but we expect inflation to stay positive. As a result of the fact that Liquid Milk in a number of markets is still way higher than it was 12 months ago as a result of the fact that cost of labor is increasing and also a few other ingredients like sugar. That means that we will probably go away from what we have seen over the last 12, 18 months, which was broad-based pricing to something which is more targeted pricing depending on the category and depending on the countries. Overall, we expect pricing to remain positive also going into 2024. On your last point on Specialized Nutrition in Europe, I would say, resilient performance. In IMS, we managed to deliver a competitive performance in more soft categories, while in Medical Nutrition, we benefit from obvious strong underlying segment growth. And we are investing, as you could see over the last weeks, in production capacities, like in Poland, to fully serve today's but also tomorrow's demand in a very dynamic space.

Thank you, Guillaume. Next question from Jon Cox, Kepler.

Yes. Jon Cox from Kepler. Congrats on the decent print there. I have a couple of questions really. One, just on China. I wonder if you can talk through what's going on in China with a bit more detail on the IMF front. We've seen some of your competitors actually closing down production of international brands because of the softness in that China market. I wonder what you're seeing there. Is it really expanding the domestic? Talk us through that. Also on the medical nutrition expansion, I'm just wondering when you think that would come on tap into that region. And then just the last one on Europe. It seems pretty impressive when you're sort of reeling off a lot of stuff about double-digit growth for this and that. I wonder if you can just talk a little bit more about the SKU rationalization, where you are. Is that pretty much done? When will we roll over in terms of the comps? And when can we start modeling maybe more growth elements into Europe Dairy in terms of volume/mix going forward?

Look, on China IMF, the team is doing a stellar job as you can see quarter-by-quarter, increasing our market share in a category which is transitioning, and transitioning, I would say, without any surprise with a little bit of volatility, which is impacting some players. Because of our very unique business model, which gives us strong control on stocks and price, we are navigating through that, I think, in an exemplary way. That transition, we expect to finish towards the end of the year, early next year, when all the old stocks will be completed. So in that sense, we don't look at it differently than the way we looked at it 6 months ago. What bodes well is that, as we speak, we are introducing in a staged manner our first innovation. You may remember what we presented in the month of May in the Paris-Saclay event that we have a number of innovations now kicking in into our portfolio, which is meaningfully expanding our portfolio in the more premium part of the category. And so this is happening as we speak. Other element I can give you is the fact what we are calling our controlled versus uncontrolled channels. So the Daigous -- the friends & family -- the Daigous friends & family continues to decrease, which means our controlled channels represent more than 90% of our business in China, which is also a very important element to navigate through the next quarters. And last but not least, we feel good, in fact, about our operating model with an efficient mix between global and local manufacturing capacity. This recipe is developed, as you know, in our local R&D center in China, and we're just leveraging both our global science assets but also our local expertise. When it comes to the medical part of it, we are pretty happy with the performance of our diet portfolio in China, growing consistently double digit. But you know that today, our presence is mostly in interior, prescribed and reimbursed category, which -- where we are reaching today already 90% of top tier hospitals. We are now in the moment that we can first time expand our portfolio beyond the interior space with 2 ranges, in fact, which will allow us to go from mainly hospital-focused to more post-discharge moments. So when patients have left the hospitals. And so there's 2 elements we are introducing. One is our Nutrison powder, which is something called -- which we received a drug license and which means that we also go through prescription and reimbursement. And on top of that, we are introducing our Fortimel range with oral nutritional products, what we are calling ASNP, which is self-paced, so not reimbursed product format, which is going through recommendation from key opinion leaders and then sold through pharmacies. So overall, I would say, it bodes well for the future dynamic of that part of the business. On your last question, which was on Europe. Look, I mean, we started the transformation of our EDP portfolio some 12 months ago. And as expected, as you could see, volume/mix dynamics start to sequentially generally improve. We have cut something like 20% of SKUs, which as you could see over the last quarter has led shorten to some pressure on our volume performance. However, we are now emerging stronger from this reset, because we have a more optimized segmentation, we have a better buildup of our portfolio, and we start to reinvest behind it. And so it starts to show concretely in the key metrics of our business. And so this is why I was using the U.K. example, where we have first, I would say, successfully agreed with a number of key retailers to implement a new planogram for dairy shelf. It's a much clearer segmentation by benefit for health and protein base. We tried about -- across many supermarkets, which is helping the category because it's attracting more consumer. But also, it means that our distribution numbers are going up, our share of shelf is going up. And we will see sequentially translating that into volumes and market shares. And so we are seeing that kind of progress in the U.K., like in U.K., across the board. It happens, obviously, at different speeds of implementation, depending on the local reality. But net-net, what it means that you will not hear us any more talking in a very prominent way about portfolio transformation in Europe, as we will now sequentially shift the gears towards better execution and reinvestment.

Thank you, Jon. So next question from Warren Ackerman, Barclays.

Warren here at Barclays. So yes, just back on EDP, Juergen, you talked about tangible progress. And in the last question, you mentioned a couple of things. But can you maybe walk us through what you're most pleased about in EDP and where there is still work to do? And that's a question for EDP U.S. and Europe. It's not just a Europe question. And then within EDP Europe -- or within EDP Europe, we can see the like-for-like went from 5.8% to 6.6%, I think it was, from Q2 to Q3. Are you able to actually break that out for us in terms of volume versus pricing, just to understand the kind of sequential volume mix performance in EDP? That would be that would be super helpful. And then the second one is really around the kind of Waters business. You've told us a little bit about, obviously, Mizone, and you're sounding bullish about that. But can you -- looking at the Europe volume overall, which was down 4% plus, how much was water volumes down in the quarter? Because I guess there was a big summit impact given poor weather. And then maybe can you just outline what's happening to the performance in Waters in your other big EMs of Mexico and Indonesia? I'm just trying to get a sense of how we should be thinking about the Waters growth going into the final quarter and into next year?

Yes, Warren. Let me start with the Waters part, which it's true on one side, we saw in Q3 a very encouraging result in China with Mizone, which is, I would say, really going along its turnaround plan, market share wins in a category which is quite dynamic, so that's going well. In Europe, in Waters, the start of the quarter has been tough, especially in the month of July. Very poor weather conditions. The category double digit down. And so despite the fact that we have been winning market share, especially with the Evian brand, we have been suffering quite a bit in that quarter. So volume/mix significantly down in the third quarter. Which unfortunately is hiding some of the good progress we are doing in Europe on EDP. That will not be the -- I would say, that will not be so much the case anymore in Q4 because Q4 will be out of the season in Waters growth. So we can expect a normalized growth rate. Weather is not playing such a big role there, which we also make, I would say, EDP progress probably more visible moving forward. We are not yet happy with everything in EDP, let me be very clear. I think that we have done very good progress on a number of elements. I think the portfolio transformation is really yielding the results. Now it's about execution and reinvestment. On some brands, we are seeing that the transformation plus the investment is already showing good traction on others business lines. But we now need to make sure that all of our larger brands are getting into the right dynamics. We are talking a lot about Dairy, but let me also make a comment on Plant-based because Plant-based showed a quite good dynamic also in the third quarter. Alpro growing high single digits, where we are refocusing on clear occasion moments with breakfast and coffee, where we are refocusing on the fundamentals of that category. When you go now to the U.K. today and you go in 1 of the 4 largest coffee chains in the U.K., you will Alpro everywhere. That was not the fact 12 months ago. So we are going back really to the fundamentals of managing a category as a category we have done in Dairy. So more to come quarter-by-quarter, but we are confident. And this is also why we are saying that the fourth quarter for the company, we see positive volume/mix and EDP will contribute its fair share too.

And Juergen, sorry to press you, but on the EDP numbers, are you actually able to break out what the volume/mix was in Europe, just in the quarter versus the last quarter, so we can understand that sequential improvements?

Yes, no we are not -- Look, we will not -- we neither give guidance, not departing all of [indiscernible], but very tangible progress on volume/mix and EDP quarter by quarter, so very, very significant.

Thank you, Warren. So next question from Pascal Boll, Stifel.

Do you hear me?

Yes, Pascal.

Perfect. So 2 questions from my side. On Specialized Nutrition in China, the situation with your local competitors, I mean, we have seen a couple of months ago, the profit warning of one of your largest competitors. And when I look at your results, I think Danone is doing quite well. So what what's really the difference? What do you see regarding -- versus your competitors? And then on Mizone, I appreciate that year-to-date, you're up like-for-like 13.9%. Where do we stand in comparison to pre-pandemic levels at Mizone?