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

Thank you for joining the call today. The call is for institutional investors that are clients of JPMorgan only. Therefore, if you are a corporate client or a member of press, please kindly disconnect from the call. I will now hand you over to your host for this call. From JPMorgan, Celine Pannuti.

Good morning, good afternoon. Thank you, everyone, for joining us today. I am Celine Pannuti and I head consumer staples research in Europe at JPMorgan. As part of our fireside chat series, I am delighted today for the first -- it is all about 2025 fireside chat to welcome Danone and the CEO, Antoine de Saint-Affrique. Antoine, good afternoon.

Good afternoon, Celine, and good morning, good afternoon, everyone.

Antoine, I'm very pleased to host you today and especially after what I would call stellar results for 2025. So let's go straight into that. You are guiding for growth rate of 2% to 5%, that's our midterm top line outlook. I think what strikes me in what you said is how the industry is at a tipping point, and Danone seems to be enjoying category growth that probably are faster than many of your peers where we've seen a lot of food and beverages category seeing a bit of a slowdown. So can you elaborate on what kind of category growth opportunity you see right now? And more importantly, as I see that your volume growth has been strong across division and region and we ended at the year of '25 -- '24 close to 3%. Is this a fast growing [indiscernible] maybe a couple of years ago.

Yes. So Celine, a couple of things. The first thing is and I said it our -- at the last CME, we do believe that the industry is at a tipping point. It's at a tipping point for topical reasons. I mean, the explosion of GLP-1 in the U.S. is having an impact, Celine, impact on the way people are eating. I mean, if you are under GLP-1, it may induce disorders when it comes gut health or you are in need of proteins because you lose in different [indiscernible] or muscular mass together with that, well, you are a fantastic customer for Oikos. So topical things like that. You have more fundamental things, which are linked to the aging of the population or the increase of chronic disease in your realization that food can either help you or hinder you, so the combination of them we see is opening the field for companies like Danone, which is exclusively about our health through food. I mean, Danone does fundamentally one thing, health through food for as many people as possible. And we do it in one way, which is our science based and consumer and patient focused. How does this translate in the short term? It translates with our categories that are growing faster than the average [indiscernible], partly because of what's happening to the market, partly because we are reinvesting into our categories and driving our categories. Obviously, we will not stop there. The name of the game for us is to keep supporting our categories. Will I give a guidance or an outlook on what is going to be the growth of categories? No, but the direction of Danone is one where our health through food is going to matter more and more.

A part of that journey as well has been the premiumization of the portfolio and I would say through innovation, renovation, improving the mix. Can you tell us where we are in terms of this journey? I mean, do you think that there is more to go and if that -- in which category and which regions? Also, when you think about premiumization and price points specifically, many of your peers are talking about the consumer under pressure and price point and affordability being an issue. How do you think about that as you think of launching a new premium product?

Yes. So Celine, let me start with the end of your question. When you are playing in our consumer group, which is [indiscernible] business, the name of the game is to bring value to our platforms. So it's not only going and selling our premium products, but is being able at every price point in the market through offering value that is [indiscernible]. So that's the name of the game for us, which means that while we are launching or entering into more premium parts of the categories and what we do in EDP, our [indiscernible] protein business is a good example of that. It was a bit less EUR 400 million a few years ago, it's now around EUR 1 billion turnover, we also make sure that we do focus on the bottom of the [ chain ], I mean, selling [indiscernible] is very important. It's important because you drive the category penetration. It's important because you drive occasional leverage within your categories. It is obviously [indiscernible] through volume. And it's important also because you make sure that you remain relevant at every price point. On your first question, which is where are we in the journey? Well, the journey is never over or it's never ended and there is not one answer across all our categories. We've restarted the innovation machine and we're very, very focused, by the way. Very clear on where we put the science of the company. Very clear also on how we leverage that science with clear innovation on that over the course of the year. You see that at work on proteins. Obviously, we form our proteins in one form to proteins in many different forms, drinkable [indiscernible] our [indiscernible]. But you see that also with our Activia. I mean, we start putting back on our packaging claims explaining what the product is -- what the products do for your health, and making sure that good products and the expression of good products is matching the positioning of the brand and [ it rolls ]across the entire portfolio. I mean when you sell C-section or Infant Formula, I mean, you are going to [ listen ] to retailers, it's important. When there is [indiscernible] C-section , I mean the [indiscernible] same as babies born naturally because they don't benefit from formula from their mother where C-section formula [indiscernible] more and more mothers are giving birth via the C-section. So it's a lot of technology, it's lots of [indiscernible], it's premiumization in the IMF category, the [indiscernible]. What we are doing with Medical Nutrition is of the same nature. So the underpinning of portfolio through science enables us to actively participate through our [indiscernible] value, which translates into premiumization at the [indiscernible] that translates to into relevance at the bottom end of the [indiscernible].

I think jumping on that, clearly, that premiumization has an impact on the mix and the top line, but as well gross margin. Now your gross margin has gone from 46% a few years ago to 50% last year. What do you think structurally the gross margin potential is? And maybe looking more into the specific, if you can talk about your initiatives in terms of the gross margin expansion? Obviously, mix is one component, but as well you've done a lot of effort on supply chain and efficiencies. So how should we be looking at annual margin expansion for Danone?

So Celine, you know that we are not guiding on gross margin for a reason, which is as we expand our gross margin, which is what we aim to do. And on that, we can also envisage into the development of the business, into the long term of the business. I want also to make sure that we expand the gross margin in a way that is long term and sustainable and not through short-term topical transaction. So the way we grow the gross margin is combination of effects. We [indiscernible]. So making sure that where the gross margins is insufficient for our business or not good enough, we step by step by step improve them. And since step by step [indiscernible] should be lasting. We obviously try to sell our products with a real consumer added value, which helps [indiscernible] across the organization we work on efficiency. So we're doing work on [indiscernible] and we are today one of the best [indiscernible] in the industry. We work also and that's why [indiscernible] important on the leverage of our [indiscernible]. I mean [indiscernible] we put into the objective of management [indiscernible] as an important part because of their [indiscernible] because, I mean, there was a larger opportunity of [indiscernible], so that all we [indiscernible] Where are we on that journey? Well, we have made big progress, but we are not at the end of the journey. So is there further potential in increasing our gross margin? There is, but we've been doing [indiscernible], which is a mix of opportunity, leverage and working [indiscernible].

And just to talk about 2025, briefly, you mentioned there will be a return of normalized COGS inflation. Anything you can mention on that? And how does that play out in terms of the level of pricing? And will gross margin be up this year?

So yet again, we don't give gross margin guidance or growth guidance. We see through things, we see a return to more normal in terms of COGS or increase which means there are [indiscernible] inflation, we see inflation [indiscernible] in the last couple of days. The numbers are [indiscernible]. There are some places where it seemed very high, so there is no answer to that. We see country by country and raw material by raw material, which we see [indiscernible] volatility [indiscernible] The name of the game for us there is in some ways the same as in the last 2 years, one is opportunity to [indiscernible] So we keep working very diligently at our opportunity. The second one is our consumer-led pricing. So while we are [indiscernible] there should be certainly the number of countries price component to our growth.

You are finishing the Renew Danone chapter and there is a new chapter, in fact, starting. And I think over the past 2 years, the focus for Danone has been really to improve the level of playing in the market through improved investment in R&D, in A&P, in digitalization. So what I wanted to understand where are we in that journey? Where do you think -- as you look in the next chapter, the quantum of investment as well where will you be targeting and to which extent AI or technology is part of that journey? And if I may, since you are focusing on 50% of your sales where you do not sell to big box retailer where you said there is better growth and margin opportunity, does that mean more investment in SG&A in order to grab those opportunities?

So lots of questions. Let me start with the investment and where we are in the journey. As you said, with Chapter 1 of Renew Danone, we started to invest fundamentally on 3 things. We reinvest on our A&P. I mean, we will reinvest in our brands, reinvest behind research and development because that's at the heart of what we do in differentiation and invest into data, AI and technology. If you look at overall A&P, we've done lots of programs. We've done programs both in terms of quality, so we test more, we test better. We are much more focused on the return on investment or investments. And we've closed a large part of the gap that we have from [indiscernible]. We will not stop there, and we will not stop there because when you are a category leader, it is your responsibility to drive the growth of your categories, so invest for category growth. And this is why we will keep increasing the quantum of our investment, not necessarily at the same pace as before, but we will keep increasing the quantum of investment. R&D, we will keep investing on R&D. You can already see a difference. You see through some of the things we have put in the market because in the end, R&D is about innovation is the market. You see that in the precursor of [indiscernible] in the number of [indiscernible] that we have out there, which is extremely important. Because yet again, it is science-based innovation that differentiates you from other products in the [indiscernible] but it is also absolutely critical when we sell in [indiscernible] like pharmacies or hospitals. On your question on AI [indiscernible], we as a company have been working on AI for a long time. I think we've done a number of steps in a number of different fields in the last couple of years. Applied to everything that has to do with [indiscernible]. We've moved our planning in [indiscernible] applying AI to [indiscernible] generation. I mean, you start delivering faster [indiscernible]. AI [indiscernible] 2007 we start applying our AI [indiscernible] combinations that are really interesting. It's the same logic as what you see in the field of health or in the new health companies. We do apply Gen AI to marketing [indiscernible]. So our [indiscernible] in digital production [indiscernible] enabled by AI. So we are on the journey there [indiscernible]. The investment journey will continue. Our business overall is we grow 3% to 5%. We do it with the volume mix [indiscernible] and with discipline that enables us to do 2 things at the same time, invest and grow our core market, therefore our [indiscernible] and our cash. On your question on the [indiscernible] I mean, we have been [indiscernible] company while making sure that our footprint [indiscernible] So we are [indiscernible] in a number of our countries. We sell in [indiscernible], pharmacies and hospitals. And this enables [indiscernible]. What [indiscernible] is growing faster than mass retail on average and some parts [indiscernible] are parts that are extremely high value where you're selling [indiscernible] difference time or value, different types of a product as well [indiscernible] than what you sell into mass retail. So we are starting to work on a different things, which enables the resilience of the company.

Part of the 2024 results and the big surprise has been the free cash flow level of EUR 3 billion, which has been a midterm target of yours. You already achieved that in 2024. That gives you a lot of flexibility, obviously, a lower financial leverage and flexibility for cash investment. As we look to the last 10 years where I think close to 10% of your business -- 2 years, sorry, 10% of your business has been disposed. Now it feels like M&A is more on the top of your agenda in terms of cash usage. So now we -- can you share with us what is your framework in terms of value creation in M&A that you're looking at especially, I would say, as Danone has a history in the past of larger deals that have not necessarily delivered the value creation expected? And do you think that you have enough credential with the market in order to drive that M&A agenda? And obviously, now if you could talk about what are your priorities in terms of geographies and categories as you look for opportunities in M&A?

So a couple of things, maybe starting with the free cash flow. We have a very, very good free cash flow this year. By the way, we are not yet structurally at EUR 3 billion, but we are now structurally above EUR 2.5 billion, EUR 2.6 billion. And that's very important because if you look at models that are out there, a number of you are thinking that we were where we were for the last 10 years, which was more around the EUR 2 billion mark. We have moved past that mark, which our working capital is negative minus EUR 8.5 billion. So we are now in the position where we can deliver healthy free cash flow both where we were at EUR 2.5 billion and on the way to the structural EUR 3 billion. So indeed this and the way it impacts [indiscernible] is giving us in part freedom. Question is how do we use that freedom? We have a very [indiscernible] approach to acquisitions. We look at acquisitions through 2 filters. [indiscernible] I mean, does it bring us capabilities that we don't have? Does it bring us market position in the long term? Does it bring us access [indiscernible] And we look at it through financial lens, which is does it make the company better? And better we said we intend to structure double digits as a company [indiscernible] acquisition. I mean, it can have an impact for a year or so. But it's not getting back where we were, which is for a [indiscernible] at an ROIC that [indiscernible] We also look at what are the risks, what the bigger risks [indiscernible] we look at the capabilities we have on the [indiscernible] and the synergies. So we are strong on decision in the way we are seeing at acquisitions. You will have seen that we've made 2 small acquisitions in the last couple of months. Well, last year, we acquired [indiscernible] nutrition, Functional Formularies. We acquired [indiscernible]. At the beginning of the last year, we [indiscernible] brands in the U.S. So we are looking at our phases, which fits [indiscernible] and places [indiscernible] science we have. We can make additions. So we are not going back to the past when it comes to decision. The decision is there [indiscernible]

Maybe moving on to Europe EDP. Clearly, it has been a point of focus because the market has been under pressure. The division have been under pressures for years. In 2024, the division has hovered around 0 to 1% so back to positive. Nevertheless, we've not seen the same impetus that you have delivered in the North American EDP division. So can you talk about from a category standpoint, is consumer desire for this category very different in Europe versus what you see in North America? And as you look at Danone's market performance, what do you think has not yet worked? If you could talk about your execution rollout plan, the difference between the Essential portfolio and the premiumization and as well, I think, Activia turnaround?

So if we start with good news, which is we are seeing consistent progress in our -- we have 5 quarters of positive volume mix after 10 years of decline. Is it enough? No, it's only the start of the journey. Why is there a difference between U.S. and our Europe? Well, it's relatively simple. I mean, U.S. is one country with relatively narrow portfolio when it comes offering and brands. Europe is a multiple countries having had their own portfolio, their own brands and their own market structure. No 2 markets are similar in Europe. So the journey started earlier in the U.S. Number three, the journey which started much later in Europe because so you need to restructure [indiscernible] portfolio. That's what we've done in places like [indiscernible] where we moved from 13 to 14 brands to 8 brands, defining the [indiscernible] position, restructuring the formats, the benefits, et cetera, and start [indiscernible] country by country. And that will take time [indiscernible] hopefully. You see some early signs that are very encouraging. I mean, Activia has done extremely well throughout Europe. You see some promising signs of Activia, which is number of things that are moving in the right direction. But the journey, for instance, in Activia is also, I mean, [indiscernible] momentum in other countries in Europe. We see other countries where we have [indiscernible] solving the niche. Name of the game for Activia, for instance, is number one, making sure that we start training [indiscernible] convenience to the level that we can tend to have also [indiscernible] in the next 2 generations. So if we increase [indiscernible] Doing it in a way that is relevant and relevance varies from country to country. Gut health doesn't have the same expression in the U.K. that it does in France or [indiscernible] And Aligning our portfolio to our [indiscernible] which is gut health. So moving from [indiscernible] variants of fruits to variants that are good and good, so good in terms of taste and doing the job in terms of our gut health. So bringing cereals, bringing fibers, bringing the right kinds of proteins or the right kinds of [indiscernible] or launching into our [indiscernible] The journey is a more complex journey. It's a journey that is promising well, but we will take the time it takes to do it properly.

The flip side is the North America performance has been rather stellar. I think it has been around mid-single digit growth and most of that volume driven. So can you talk about the growth rate that you see in that market? Clearly, with a lot of focus on the high-protein content, I believe, from the U.S. consumer? At the same time, we see that market share for Danone seems to be a bit under pressure. So can you talk about the competitive setup in the U.S. dairy yogurt and whether you also see competition from outside of just dairy in other form being beverages or ambient food that could encroach into that opportunity?

The market in the U.S. incredibly [indiscernible] and that's to a large part the impact of GLP-1. So people realize -- I mean there is a huge in our [indiscernible], there is a shift towards healthier foods. As I said earlier, GLP-1s having an impact on a lot of people on loss of muscle, loss of -- or intestinal problems and others are growing [indiscernible] are a great answer to that. This is not only about GLP-1, I mean, as you know, it was the position of FDA on [indiscernible] and yogurt, we have results out there that it's healthy and advising people [indiscernible] weight loss journey with our Oikos brand. So there is a niche in the category. We have also in our portfolio things that are not yet where they should. So that's the name of the game for us. That's the name of the game, by the way, with the type of guidance we have, which is clearly [indiscernible]. On the other fixed issues that we have because [indiscernible] everything we go hard at the same time. So a smaller [indiscernible] for example where [indiscernible] We are not yet at the level we are [indiscernible] when it comes to [indiscernible]. We have a fantastic journey in our [ black coffee ]. In some of the segments, normal rate, we could do much better. So altogether, a huge [indiscernible] but there are still a number of things that we need to [indiscernible] Maybe one that brings me back again to, again, to our category relevance. When you're a category leader, and that's what we are doing you and there will be more in the future, you invest in your category because name of the game is not anymore a bigger market share [indiscernible] market share. But if you go, your category first, you benefit [indiscernible] So we'll keep investing into our category relevance as we do in the U.S. [indiscernible] we start with other categories because in the end, the [indiscernible].

I remember when we had a discussion about 18 months ago I asked you whether that would be core given that it has been a business in turnaround. Now as I look again for 2024, I would say it's probably been a mixed performance with [indiscernible] pretty well in Europe, but still the U.S. Silk brand being under pressure. So what is your analysis? Is this core? Can it be turned around? And if so, what do you think will be the remedy and when will we see other green shoots?

So you said very well, out of all this we're doing very well in Europe both, by the way, in terms [indiscernible] And the reason why we are [indiscernible] is it moves quarterly for [indiscernible] In the U.S., we were pretty sure at doing that [indiscernible] really well. So is this core? Yes, the world will benefit [indiscernible]. We are the leaders of the market in cranberries [indiscernible] around cranberries -- when it comes to cranberry beverage and plant-based in Europe. I'm not sure that other parts of the categories are as [indiscernible] and we see with our plant-based niche, for instance. In the U.S. we have started, I mean, seeing the charge or the share of standardizing the penetration numbers a little better. But we are only at the start of the journey, which we did a long time ago, which is moving from [indiscernible] benefits in Europe, Asia and the U.K. than we are today [indiscernible] outside supermarkets, you can find [indiscernible] is great for barista [indiscernible] so you start thinking of your consumer [indiscernible] In our U.K. overall. Earlier in July 1 of [indiscernible] and the name of the game is [indiscernible] We are always starting that journey in the U.S. this year, which we are doing step by step. I mean [indiscernible].

A business that has been doing quite well as well in '25 in Specialized Nutrition in China. It's about 1/4 of your profits. And we have seen a big change last year with the new regulation coming and probably helping big brands like yours to come with new innovation. So my question is where are we in terms of your introduction of your new products? it has gone with a premiumization gain, but as well as market share gain? So if you can talk about this. China is a market where other companies are seeing pressure from consumer and consumer looking for value for money. So does that marry with the premiumization story in Infant Formula? And let's see, I could not resist to ask about what is your take about growth in the baby population?

Let me start with the last one, the dragon. I mean, the issue on about a couple of years ago the number of babies in China was around 40 million, going down anywhere between 8 and 9 million. This year it's actually 9.4 million. Well, first, let's say, the good news because when you have 9.4 million babies, they are with you for 2 years. So it is good news. Whether it will stabilize whatever or normalize [indiscernible] I don't know, we'll see over course of the year. There was a very [indiscernible] to make sure that they send the refund. So on the year of dragon or the year of snake or beyond, I don't know, the time will tell. When it comes to our Infant Formula in China, we have launched 5 quarters ago our [indiscernible], which is doing extremely well [indiscernible] positive impact on our market share. It's pretty healthy with the large [indiscernible]. We've just established [indiscernible] as a market test on those advanced [indiscernible] infant formula. There is [indiscernible]. The most advanced formula, by the way, is more or less in the [indiscernible] of the market, which was entirely [indiscernible] Infant Milk Formula, size matters. Chinese mother is truly cognizant of what is in the product, of how the product is working. She goes extremely deep into the science and she knows that the science [indiscernible] has a price. So we don't see [ consolidation ] of the market. It's a market that remains very, very consolidated, the top 3 players are 40% of the market. We see about 500 players in the market today, opportunities for consolidation in the markets. But first of all, the market is [indiscernible] content driven [indiscernible]

Maybe staying into China, but moving into Waters. So over the next 2 quarters, the overall category you mentioned, we need to go back to Mizone, I seems this to be the silent success story. It probably doesn't get the airtime it deserves, but volume mix back to a strong level. Can you talk about, well, obviously, what you've done in China with Mizone and how you feel about the sustainability of that performance? But outside of China, if you think about the premiumization of the portfolio and effectively your focus just on the big retailer, how do you expect to move forward in the category?

So on Mizone, as you recall, it was -- I mean, it had been for a long time a problem child. We will see more potential of Mizone. So we did what is true to change the brand. [indiscernible] of what we are doing, which is not running away from the issue, but [indiscernible]. And then taking the time step by step [indiscernible]. In the case of Mizone, it was a problem of the way [indiscernible] the way it was impacting the availability of the core and therefore the way the system was working. So it took us a number of years to change the structure of renewal, change the integration process, change the way we incentivize our solution network and the way we [indiscernible] extremely well. So we are very happy with what happened with Mizone. Mizone, by the way, is more [indiscernible] than the average [indiscernible] important part of our business in China, but it's [indiscernible], for example, taking the time to do the difficult part and fixing things in a way that goes through the depth of each [indiscernible] short-term solutions. On the Waters, [indiscernible] premium Waters in lots of countries, which is [indiscernible] through the Alps. By the way, we are projecting new [indiscernible] for the last 35 years [indiscernible]. It's great for us, which we start to do marketing again. If you haven't seen [indiscernible] was launched a year ago or so that our markets [indiscernible] having an impact on the ground. [indiscernible] the impact around the world and the impact it had in particular on our Away From Home business was actually great. So we [indiscernible] with Waters [indiscernible] premium water in developed countries, access to safe water in the unsafe water country and we see potential, yes.

A business that has done well for you in '24 has been Creamers. It's such a good part of the North American market, profitable and I think you've been growing double digits. There is a lot of interest for that category from particular smaller and bigger that are coming back with capacity. Do you think you can grow in that business again in '25? And how do you intend to defend your market share?

So I mean, the process is revenues for our competition -- relating to our competition because it will keep developing the category. And that's the starting point. We want a category that is [indiscernible]. The second thing is [indiscernible] good competition forces good [indiscernible] Whether we'll keep our market share, we'll fight for that. What we fight for also is category development. We have is a great range, we have quite a bit of generation. What we [indiscernible] is really exciting. What we have [indiscernible] result is actually is quite remarkable. So exciting category. Competition makes it more exciting. Our shares are never stable, so some will go up, some will go down. But I mean, this will keep us sharp and honest.

We are coming to closing this question, sorry. And I wanted to come back to value creation algorithm. So if I step back and look at the past 2 years, growth rate has accelerated, it has been volume driven. We've seen you on the right path to improve free cash flow. However, looking at the last 3 years of EPS growth, we've been hovering around 2% to 3%. So as you look at the next chapter of Danone, one where potentially there is more volume growth, one where you see a bit more at ease with your level of efficiency and operational leverage, how should we think about the ability to grow the bottom line faster?

As you've said, we've performed not too bad or pretty well over the past years. But we will also [indiscernible] to stand still in absolute [indiscernible] because we rotate and invest 3 years about 10% overall. I think the thing that should make the big difference in the coming years is [indiscernible] we tend to keep growing towards 3% to 5%, keeping the same good decision. So it will have a natural impact on the EPS. And as we get into absolute growth and not only [indiscernible]

Right. Well, thank you so much, Antoine, for this. It was a pleasure. And thank you everyone else for dialing in today.

Thanks, everyone. Take care as well.