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

Okay. I think we're going to kick off. Welcome, everybody, to the Barclays Global Consumer Conference, the 18th edition. Thanks for taking your valuable time out to join us today in Boston. We've got action packed a couple of days. And hopefully, you're all happy with the schedules that you have. But we are kicking off today with Danone and with CFO, Juergen Esser. Thank you, Juergen, for your time. It's going to be a fireside chat format, about 35 to 40 minutes. So with that, I'm going to start the questions.

So Juergan, can we kick off with the new organization? Obviously, you're now operating from 3 geographies and you talk about improving the agility and market impact. Can you tell us a little bit about why that's the right thing to happen now? And you've also lost some high-profile execs like Shane Grant to Colgate and Christian to Givaudan. Is that a concern? I mean, who, for example, will be running U.S. EDP. So a little bit on the organizational changes and the fact that you've lost some high profile execs. Welcome, by the way.

Thank you, Warren. Good morning to all of you. Yes, indeed, we published a new organizational setup as soon as we came back from holidays for many reasons, but the most important reason that we believe that is the right time to have a more compact and more agile executive committee. And when you think about where we started 3 years ago, which was going back to the fundamentals, reinstalling competencies, making sure that there's execution focus, hardcore also at the executive committee level, the agenda is slightly changing for the years to come. . And the agenda is slightly changing because you will keep the focus on execution. But now we want to demonstrate that the health-oriented portfolio is able to grow faster than the industry. And that will require a different level of agility, that will require also a different agenda in the Executive Committee because you will talk more about how we pivot our categories, how do we become the expert of gut health and protein. That will mean we will talk more about how we broaden our footprint in terms of geographies and channels. And we felt that it would be the right moment to go now to 3 macro geographies. And I would say not the rocket science because in the end, what we are doing is that we are keeping an Americas focus, maybe a bit more pronounced than what we had today that we are adding to Pablo's European responsibility at the African one and that we are adding to Bruno's responsibility on top of China and some part of Asia, the other parts of Asia. So evolution, no revolution. Obviously, we have said that Shane and Christian decided to leave us to 2 very good companies, obviously. But it's also fair to say that we have built over the last 3 years, a very strong talent pool and a very professional succession planning. So far, it's very natural in the evolution internally, and we feel that this sets us up for success for the years to come.

Just to follow up a little bit on the renewed Danone, the second chapter. I mean I think if I look at the numbers, you've done around 4% organic growth for about 5 or 6 quarters in a row, so quite consistent. Can you maybe go into a little bit more detail about what the key elements of the second chapter are? You mentioned pivots, broadening, expanding. Can you maybe sort of elaborate a bit on that? And will faster EPS growth also be part of the second chapter?

Yes. Fair to say that the first chapter was about fixing the fundamentals and we have been doing that. We have been reinstalling discipline. We have been putting execution at the heart of everything we do. And we have been reinvesting a lot of financial resources into competencies, but also into making sure that we are really competitive when it comes to brand marketing investments and a strong innovation pipeline. In the future, and now that we have Danone back in the game, we are raising the ambition. And the ambition is really that we want to demonstrate that our portfolio can grow faster than the industry. It can grow faster than the industry because we want to make even more focus on science and differentiation. And for that, it requires a different focus. When we are talking about pivoting our categories, it means nothing else than in the past, we were seen as the yogurt company. Tomorrow, we want to be seen as the protein expert and the gut health expert, as an example. And I think we will talk certainly later about our protein shake, which we are just testing in the U.S. market is a perfect example. I mean we have everything it takes to come with a very credible product, a product with a great Oikos branding, today very well established on the yogurt market. But with all the science, which comes from Specialized Nutrition, there is probably nobody else in the dairy industry, who knows better than us how to compact protein. There's probably nobody else in the industry knowing like us, how do you need to complement protein this probiotics and prebiotics to make it really effective to your well-being. And so this is what we want to play way harder in the future, and we believe that will set us apart from all the rest of the industry. And for the last 3 years, we have been putting fundamentals in place. We have been pruning the portfolio because you say we have been growing very nicely at 3% or 4%, but the reality is that we have been also letting assets go. So the absolute size of the company has been relatively stable the last 3 years. Now we are changing the game. We had a tipping point in terms of value creation because we want to make sure that our company in relative and in absolute is growing, and this is true for net sales, and this is true for earnings. So in that sense, we are opening a really new chapter of value creation for the company.

I want to dive into Aptamil. When I speak to investors, they're quite surprised when I say to them that Aptamil was your biggest brand in infant formula, it's a EUR 3.5 billion powerhouse brand that's growing double digit, high single digit in pretty much most geographies. I think it's grown 25% in aggregate in the last 3 to 4 years, especially when birth rates around the world are declining. Can you talk a little bit about Aptamil? I don't think it gets enough attention. Why is it doing so well? Why in China, for example, is Aptamil Essensis such a big hit? And then you're talking about the next-gen science and infant formula with Nuturis, which could be potentially quite big into China. Is that something -- can you talk a little bit about your thought process on that for China? And is that some sort of technology or science that you can then take for the Aptamil brand globally. So why is it growing quickly, China and then Nuturis?

Yes. You're absolutely right that this is actually a very exciting dynamic we are in. And sometimes, we talk a lot about China and I will come back to China, but the reality is that IMF is a EUR 50 billion market, a EUR 50 billion market in which we have, I believe, one of the best brands, Aptamil, which is present across many, many geographies, a very sizable brand way more than EUR 3 billion and growing very, very fast everywhere. Now when China is actually a very good example because China is one of the most sophisticated markets where everybody is first launching its innovations like we are doing. And 3 years ago, we decided to go away from marketing our products with 3 HMOs or 5 HMOs or 7 HMOs to something which actually talks to the parents. We have a formula for you, who is the right formula when your baby is born by C-section. We have the right formula for you when your baby is mixed fed. And this requires a very different formula. And since we are looking through the eyes of the parents into that category, we are winning, and we are winning in China quarter-by-quarter. But the reality is that Essensis is not only a Chinese product format, we have it now everywhere in the world, and we are winning everywhere in the world. And so we are looking at that industry as a huge opportunity for us. We will make sure that Essensis, we get the maximum return out of that launch, which is in China only a good year ago. So there's so much more opportunities but also in the rest of the world. And we have still Nuturis in the pocket. And Nuturis is the latest innovation in the category will be the most advanced IMF formula in the category, which we soft launched in Hong Kong with actually great results. But we want to make sure we really exhaust more Essensis before we put Nuturis into China and then across the rest of the world, but we really believe in a very, very significant growth and value creation opportunity in the IMF category moving forward.

I mean we talked about high protein. Can you tell us how big high protein and EDP is today, what it was a few years ago, what your ambition is? And then you're entering the shelf-stable high protein market with this product, Oikos. You said it's a $10 billion market opportunity. It's early days, but do you have any repeat purchase data from Costco and Walmart where you've launched it? And when should we expect it to go nationwide in the U.S. And because it's ambient, it's not refrigerated or it can be refrigerated, I guess that gives you other avenues, which you can then explore. Can you maybe give some examples of new areas that you're thinking about with this product? So how ambitious -- how big a deal can this be?

We are quite excited about the overall high protein space. When we launched our strategy some 3.5 years ago, we said we have gold in our hands. That was at that moment of EUR 300 million, EUR 400 million business and we brought it above EUR 1 billion by now. And it's still growing at a very, very high pace everywhere around the world. Obviously, in the U.S. but also in all other markets around the world. We have been sequentially launching it in Europe, in Japan, in Latin America, in Australia, in the Middle East, and we are still rolling it out. So the headroom is enormous because consumers understand better and better that the right protein intake with the right protein is important. And so while we want to maximize the opportunity we have on the dairy shelf and the opportunity remains huge, just think about the fact that yogurt consumption in U.S. is only 1/3 of yogurt consumption in Europe. So the headroom is immense. We want also to make sure that we are addressing different occasions and consumers. And today, we are not playing in ambient. And as you said, we have been soft launching this product of Oikos protein shake, which I invite you to test, it's in the public area in the refrigerated shelf. This is an amazing product. And obviously, we are coming into a category now, which is an established category with very important players, but we are coming with an established brand which today, I think, has a lot of credibility as a protein expert, and we are coming with the formula, which is very much focused on the goodies, no artificial sweeteners inside, high level of fibers because people understand more and more when you consume protein, you need to consume fibers to absorb the protein. And so I think we are coming with a great product into that shelf. We have been testing it, as you say, with a large retailer in the U.S. The retailer was quite excited already after 2 weeks. So we went from a regional to a national test, and we are continuing to expand. So you will see it in a few more retailers coming very soon. Today, you only get [ vanilla ] in the shops. So I invite you to test chocolate and the salted caramel here, which is not yet in the shops, amazing products. So we are going at the right pace because it's a huge opportunity. But once we press the bottom, we will press it and we'll be serious about that.

What about capacity, Juergen? I mean, obviously, the category is booming. Do you actually have enough capacity to service the demand. It sounds to me like you're having to make trade-offs and perhaps you can't prioritize everything. So it's understandable, you're going to go after the highest growth opportunities. Does that mean you expect to actually maybe lose some share in the rest of U.S. EDP as you focus your attention on high protein? And will you need to increase CapEx? I know you're doing something in Ohio, Minster, but how much does CapEx need to go up to make sure that when you get that demand from the retailers for this product, you can actually service the demand. So how do you think about that?

Yes, you're absolutely right. I mean, obviously, we cannot go to the retailer to sell a nice story. In the end, we are not able to serve. So that's not going to happen, and we have the right ambient capacity in place in order to deliver demand once we decide to go full blast. At the same moment, you're absolutely right that the high protein, the refrigerated formats are flying off the shelf. And that's a capacity challenge for Danone. That's a capacity challenge for the industry because nobody in the industry today has capacity for high protein. And so we are all building and you said it, we are expanding our capacity today in several of our plants in the West Coast and the East Coast in order to be able to serve better demand. Today, we are prioritizing high protein because we need to do some trade-offs which means we cannot serve all the demand we have on the rest of the product portfolio in yogurt and that is explaining some of the scanner data you see. But as the new capacity will come online, we can play again the full portfolio. This is why we have been launching a new innovation in Activia with Activa Proactive because now we will be able to serve again the demand on Activia. So it's quite exciting. It's a good problem to have, obviously, and at the same moment, we need to make sure that we are better forecasting those demand boosts we are having on high protein. It's really a U.S. phenomenon, it's not so much a phenomenon we have in Europe and other parts of the world where we have enough capacity available.

And CapEx?

And CapEx is exactly what we said in the CME last year. CapEx has been relatively low in the first 3 years of Renew Danone, we were traveling around 3%, 3.5%. There's reasons to believe that we will go to 4%, 4.5% for the years to come because we invest into high protein and you will interest and that's important into medical nutrition in order also to serve the demand. That's part of our financial guidance. And I would say, we will not make that we will deliver on the cash flow objectives which we are having. So that's absolutely part of the financial planning of the company.

Maybe moving to the coffee creamers. Obviously, it's been a big topic for analysts and investors. I mean you've said it will take a few months for the numbers to improve. A few months have gone by and the numbers aren't really improving that much. I know you've got a new capacity coming in Jacksonville, Florida. But can you maybe give a bit of an outline when should we expect to see the scanner data turning because it's still down big. And then secondly, [indiscernible] is going a bit more natural, a bit more milk, a bit less heavy on calories. How big is that part of the market? How fast is it growing? And what's stopping International Delight going much harder than that road rather than being a follower, become a leader and actually drive the category.

You're absolutely right. I mean we are very happy with many parts of our portfolio. We cannot be happy with what's happening in the first semester -- in the first month of this year on coffee creamers. And this is, to a very large extent, a safe inflicted issue because we had supply chain issues, which are solved by now. You said it we had capacity coming online, but we lost a lot of shelf space and rebuilding -- and the shelf space has been taken when we were not able to serve, somebody else has taken the shelf space. So it takes time to rebuild it. Market share data since April is going up, but it's still very negative versus last year. So it will still take us a couple of months in order to get where we used to be. It's a category which is in growth, mid-single digit, a category which we believe will continue to grow. The category which is driven a lot by the flavor experience. And that means today, we don't have 1, 2, 3 SKUs, we have many SKUs with many flavors. And so we focused on rebuilding first distribution on the larger SKUs and the rest will follow in the next couple of months. We believe that this is a very interesting category and which means that you will see us continuing to innovate, innovating in many ways and including the fact to make that category more appealing through [ natural cues ]

And when should we see that?

And that will come very soon.

Okay. Another area is Silk, which, I mean, to me, it is starting to look a bit more structural. You may disagree. But it has the history of struggling underperformance. Do you get to the point where this can't be fixed and you need to look at other options?

Yes. Silk, we are not happy. I mean we said it, Antoine said it. We have been working on turning around Silk now for a couple of quarters. We have not yet seen the results we wanted to see. The reality is that we have a EUR 2 billion, a bit more than EUR 2 billion plant-based category which is growing very well and very fast in [ Alpro ] in Europe on beverages, which is growing very fast on yogurt actually in the U.S. and in Europe. But so far, Silk beverages has not been turned around in the way. So it's frustrating. We are changing gears here. We believe that this category has also play in our portfolio in the U.S. and that we have a game plan. So you will see initiatives coming into the market very soon on that one.

Okay. And maybe moving to Activia. It's your biggest brand in EDP and we've seen some improvement. I think you said you're back in the game, but now you want to become the category shaper. How will you do that? Does the brand simply have too much sugar for what the consumer is looking for? And can you maybe talk about the Activia Proactive motion in U.S. and maybe just generally, what are your expectations for Activia in the second half?

Actually, we're making very good progress. It's not yet totally translated into the numbers for one reason, which is Activia has become for many, many years of fruit yogurt, sold through promotional activities. We have been launching over the last 2 years a lot of innovation. I mean, you think about what we did with Activia with cereals, Activia with fibers, drinkable formats, [ Kefir ], all of this is flying off the shelf. However, it's a different consumer buying this vis-a-vis 4 or 8 pack, which is sold at a promotional price in retail. And so we are rebalancing the portfolio Activia towards the more differentiated, more sophisticated offer while managing slowly and progressively out the high promotional volumes we had. So we're actually quite happy with the progress we are seeing and all the innovations, which are going to come, we continue to contribute to that. Proactive is a very, very good example. We have launched a different form of that in Japan a couple of months ago, growing very, very fast and showing that Activia has everything it takes to become again the expert of gut health in the yogurt shelf. So we are actually quite excited about that.

Overall sugar in the product. Is it pretty much?

I think that when you look today, all the innovations today we are launching are extremely natural low sugar, high content of prebiotics and probiotics, everything you need for gutters. It's a journey because a EUR 3 billion brand, you don't change from one day to the next. But we are seeing very, very good signs.