Danone S.A. ($BN)

Okay. Everybody, thank you very much for joining this session, and thank you very much indeed to Antoine to Sand CEO of Danone and Juergen Esser, CFO of Danone. Thank you for making the very long journey to get here as well. It's much appreciated. So -- before we dive into company specifics, perhaps you could give us an overall assessment as you see it of the current consumer and category backdrop. Yes, the Q1 stage, you noted the impact of the Middle East and the infant formula recall and market on your results. But has your outlook at all changed significantly over the first 6 months of the year?

No, I don't think so. I mean the -- what is structural in the market is staying. I mean we said it a number of months ago. I think the food market is at a tipping point. People realize that they are what they eat. The link between health and food is more obvious every day. And you just have to look at the scientific literature also what you find on the Internet. So the -- well, the demographic trend with aging population in need for mobility, the trend of cancer explosion in some ways in need for our problem support hasn't changed. So the fundamentals of the market are exactly the same, and they are playing to what Danone is, we are health of foods I mean do it in a way that is science-based and consumer and patient focus. So none of the fundamentals, I think, have changed.

Maybe 1 element which is important is that the Q1 was, in many dimensions, exceptionally for us for all the reasons you mentioned. It's changing absolutely not the way we are looking at the yield, absolutely not changing the way we look at the guidance and it's absolutely not changing the way we look at the business model. which means all the focus of our organization is on volume mix growth and capturing the opportunities the markets are offering to us because the markets are coming our way. .

Okay. Very clear and -- thank you. So an outcome of the conflict is, of course, renewed inflationary pressures. Your productivity program has really been a really significant enabler for you, underpinning, I think, a lot of what you've been able to do in pricing, to A&P and opening up distribution. Is this level of COGS productivity you've had expected to be the same going forward? And does the inflationary pressure make any difference to that dynamic?

Well, it's in the way it's a competitive edge, which we are now leveraging since what 2, 3 years, I would say and they are still runway for us. It just means 1 thing that we can invest back into the business, which is important to us. And it means that in an environment we are today in with higher inflation coming through the Middle East consequences that the pricing we go to will be as limited as possible and as selective as possible. So in that sense, our ambition is to keep delivering productivity ahead of the industry without doing large-scale restructuring, and this is also very important. We want our people to focus externally and not internally.

Just maybe to add a word on that. There, what we've been doing well with the war in Ukraine and for the last couple of years is a good blueprint. As you said, very high level of productivity, doing silent restructuring when we need to do some restructuring, focusing on delivering on our business model.

And you're saying you believe your relative productivity, for sure, is also there versus your European group. Okay. So picking up on 1 significant aspect of your overall performance this last couple of years. There's obviously been substantial mix benefits from your product innovations, whether, say, the functional component protein, fiber, et cetera, or format changes there have been mix benefits. Are you able in any way to size or quantify those mix benefits? And I suppose when you look at your innovation slates that are coming forward, do you see that mix component remaining as strong as it clearly has been? .

So obviously, we don't -- I mean, we don't guide or you wouldn't expect me to guide on volume mix. But if you step back and you look at the way we drive our business, there is a category in its effect. And if you look at the dynamic behind medical nutrition, which is obviously accretive, both in terms of growth and in terms of our gross margin, you have a mix effect. There is an innovation mix effect. Obviously, when you launch high protein or when you launch some value-added variance of [ Activia ], you're driving a mix effect. There is also a channel mix effect. I mean, as you know, over the last 5 years -- I mean, 5 years ago, we had about 55% of our business that was in hypermarkets, so large retail stores. Today, I mean it's 45%. It's a mix of resilience effect and mix effect because obviously, mix is better in places like pharmacies to take an example.

And perhaps we could dive into a bit more detail in the divisions now and perhaps starting in North America, and there's obviously a heightened focus particularly on North America. Or if we look at first at the yogurt business, what do you see happening at the category level currently, particularly the difference in growth between higher protein, Greek yogurt and other yogurt.

Well, I mean, the first thing is you see a trend that is a lasting trend on proteins. I mean, the markets -- well, overall yogurt market has been buoyant. By the way, the yogurt market is much smaller than what it could be. I mean the consumption per head in the U.S. is of the consumption per head in Europe. So there's still plenty of ways to go. The market has been buoyant. Our protein has been buoyant and is a trend that is here to stay. So a trend that exists a long time ago, by the way, 10 years ago, you started seeing protein bars, that needed to be coated with chocolate because otherwise, they were really chewy and not testing good. I know that because I was selling chocolate to the protein makers. You have people, I mean, selling powder that you have to see in your glass to get to protein. The revolution that Yogurt has been bringing is a product that -- the base of which is very natural. I mean, it's milk, it's yogurt with a health component that is perceived and is actually extremely healthy. The way to deliver a protein that is extremely pleasant, be in drinkable or be in spoonable and our benefits, and that's where, by the way, we are taking the category, benefits that are not only about the content of protein, but what the proteins are doing to you or the proteins combined with the yogurt. So this will keep going. It's very clear, and it will keep going because of the health trend because of all the push behind milk and make protein from the U.S. government and because of the accessibility of GLP-1. The rest of the segments for many reasons in our case for our capacity reason hasn't been properly taken care of. but there are a number of things where you see trends that are here and they are going to accelerate. Gut health is very central. It's expressed in many different ways. But I mean you see an explosion of -- from a very small base of [indiscernible] in the U.S., you see our probiotics everywhere in all kinds of support. By the way, a probiotics within yogurt is what Activia has been doing for living for a very, very long time. So there is a dip trend behind. I mean, gut health or pre and probiotics, which are fiber, by the way, which is just emerging. It is something that we know how to address. I mean we are going double digit with Activia in places like Australia or Japan. There is still a place for natural good-for-you value offer, which is what Danone is offering. Danone now is a bit of a sleeping beauty in the U.S. very strong brand launched in 1942, which we left a bit slipping. So that is going to be the name of the game. And the Danone now that we see step by step by step, or I mean, lines coming on stream, so capacity coming on stream. We will be back to doing what Danone is doing, which is segmenting, playing a portfolio game and addressing the various segments of the market.

The Danone brand, we don't talk a lot about it. And by coincidence, I haven't bought with me. It's now EUR 1 billion. It's not a billion growing double digit in Europe, growing double digit in Latin America and has not been leveraged at all so far in the U.S., and this will be part -- a very prominent part of the strategy moving forward. So it's not only an [indiscernible], but also a Danon branded play. .

And Activia is flying now in a number of places. Cafes [indiscernible] a big innovation. You've seen that we sold our participation in Life in the U.S. It doesn't mean it will disappear from [indiscernible] forever in the U.S.

But it does look like some of the scanner data is showing slightly weaker volumes than maybe the those trends outlined is that cyclical and there are parts of the customer base, consumer base, which are so a bit more under pressure, a bit more reticent to consumer at all?

No, I don't think so. I mean you see stronger value data because I mean when people see value, they end to pay for it. So you see what's happening in all the protein space, which is very, very premium. I think the -- I mean, there is a move for value at every price point actually. People do hard when they see value, they pay for it.

In U.S. overall, I think what is very important to take away is that we are totally on track on the improvement journey we have been discussing now for a couple of months. which is true for your work and which is true for creamers. So it will be progressive, yes, but we are going to improve quarter-by-quarter the performance of the American platform. .

Okay. I was going to say, you're bringing the capacity on to market. So just to be clear, your expectations for the trajectory of like-for-like growth, EDP North America are progressive?

Yes, it's going to be progressive. It's going to be quarter-by-quarter. We want to do the things properly, by the way. I mean I can't get you any number for a given quarter, but it is about rebuilding in a structural way. the competitiveness of our business in the U.S. So as capacity is coming on stream as we are progressively deploying the innovation funnel that we have behind the various brands you will see over the next few quarters, a progressive improvement of the overall performance of our North American business. .

And if I could just one aspect in North America on the coffee creamers business. It does look like the 2 largest players within creamers have a lower share combined than they did even -- that share is moving between the 2. Is there anything about smaller competition in creamers?

Well, I mean, there are 2 things. I mean, the first thing is you need to take care of the core because if you don't take care of the core, no innovation will replace the core. So that's what in our case, we are doing, and you've seen that in the last couple of periods, creamers are heading in the right direction. The second thing is there is a trend around naturalness, which is emerging in the U.S. which is a trend that is eating into the overall market, very relevant trend, which is one in which, at some point, we will play.

Okay. Understood. So maybe just also just on plant-based. If we could -- you recently announced the closure, I think, of the New Jersey facility, how quickly do you think plant-based can see...

Well, I mean, the -- if you step back and you look at the story of planes and I've shared it very openly with the market. If you look back 5 years ago, [indiscernible] in the same state, which is coming at the end of the cycle where the brands have been created on ingredients, almond, soy, and have been created on speaking to people that were averse to milk and therefore positioned against milk. What we did very well in Europe is to pivot the brand from being our ingredients driven to being benefit-driven and from being are built -- in opposition to milk to being built for itself because of the benefit it was bringing. So an Alpro yogurt is a great yogurt growth experience. It's not only -- it happens to be made with plant it's a great yogurt. Now Barista gives you a phone that is amazing in Capuccino. And by the way, the Barista can keen the machine easier than with most of the product. Alpro beverage has fibers, cultures, you don't find in other products. So we repositioned the product, moving to benefits and not in a position to milk. We didn't do that in the U.S. And we didn't do that for all kinds of reasons, but there was, and I was very public about that, a big not inventory here, where we've changed the teams. We've brought in place since January, the team that did the turnaround that we see on Alpro, they are going to deploy the book over the next number of months, I'm expecting to see progress in the next 12 months.

Okay. Very clear what you're saying on North America. So if we can now pivot towards Specialized Nutrition, Firstly, on Adult Nutrition, I mean you did mention it before, but you've obviously been investing in your sales and the go-to-market capability in China in particular. What's been the level of growth you've been able to get from that and the returns you're seeing? And is that an ongoing investment program or something that you're -- you've reached the level of investment?

When you look at adult medical invasion, Well, the first thing is, and I was discussing the market is coming our way. If you look at the demographics, if you look at the health of the population, if you look at the pressure on the health system, everything that can improve or address the frailty of elderly people, and therefore, their mobility. Everything that help people recover faster and better from cancer or everything that help people recover or better and faster from stroke, all that, by the way, having a positive economic impact on the health system. It's good for the individual, good for the health system, which are under pressure because of our demographics. So the market there is coming our way. What we deliver in adult medical nutrition are products that are extremely sophisticated. Some countries, we have medical license. It's long term our clinical. The way to go to market on those products is driven by sales force. It is, I mean, going into the hospital. It is talking to the health care professionals. It is making sure that you are present in the pharmacies. It is doing a job at health economics. So in some ways, and there are some exceptions because they are hybrid markets, your A&P is your sales force there. So we're super happy with the return on investment we get from the investments we made. We're growing very fast, both by the way, in Asia and in in Europe, and we'll keep pushing behind medical initiation.

Yes. In the end, and we are discussing that quarter-by-quarter, it's a business growing high single digit, double digit every quarter. We're the #1 in China. And for us, it's only about expanding the reach into the system from Tier 1 to Tier 2 to Tier 3 to more and more business and to pharmacies. So a very organic way of investing and a very predictable return. . We have been buying our route to market in U.S. with [indiscernible]. And that's, in a way, accelerating the speed at which we can have access also to the health care market in the U.S. in order to play exactly by the same playbook as we play in China or in Europe, and we happen to be the #1 in Europe and in China.

Okay. Thank you. And maybe just looking at or talking about infant formula. Maybe you could walk through the effects of the product we call in Q1 or so far this year? And whether you see there's ongoing effects at all and it seems to have had a higher effect of testing requirements in China? And what do you see, if any, lasting effects?

So we'll probably do a do it on that. I mean if you look at where we are today, we are basically back to normal when it comes to presence on shelf. When we come to our distribution, we didn't see -- I mean we see some effect on brand equity, but no major effect on brand equity. That is very much our market share, varies very much from country to country. It's going to normalize totally over time. We're spending all our energy today talking back to the materialities, talking back to the HCPs, talking back to the [indiscernible] opening virtually because you can't get into them, but opening our factories. So rebuilding the equity and the trust. We don't expect a significant or very lasting impact on the market. It's a category. Well, first, our brand has lots of credibility. Second, it's also a category that is totally renewed in 2 years. So we are back on shelf, we are back on the front foot with the consumer, and with the HCPs and doing the job of rebuilding the credibility.

Frankly, largely behind us, as Antoine said, so there will not be a lot of discussion around this topic, I believe, in the months to come. .

Okay. And to your question of -- I mean do the Chinese authority as for more testing? Yes, we are very well equipped. We are very disciplined. So in some ways, it gives more structure to the trend, which is not necessarily bad news.

Okay. Clear. And when you look at the infant nutrition market as a whole, I mean, obviously, we're seeing declining birth rates, but price mix or premiumization mix gains, are you comfortable that those dynamics can remain as strong as they have been over the last few years in the year, obviously, especially in China?

In China, there is a very interesting statistics. If you look 10 years ago, the size of the market was EUR 20 billion. If you look today, the size of the market is EUR 20 billion, give or take. If you look 10 years ago, a number of babies per year were EUR 14 million. If you look today, it's below EUR 8 million. So the market has stayed the same more or less in size. with a number of babies that has been almost divided by half. I think the dynamics you've seen at play in the China market is a combination of a number of things. One is market consolidation. You have a market where 7 years ago, you had about 1,000 players. Today, you have about 500 players. Top 3 players are 50-ish percent market share, top 3 players in most of the countries in the world are 70-plus. So there is still consolidation potential. The second thing is it's a market that is extremely sensitive to science. It's a market where innovation backed by science, has been helping the premiumization of the market. And it's a combination of 2 things. It's a combination of science that really makes a difference. When you look at what we do with SNCs. So you look at what we started doing with [indiscernible]. We are really deep science that can be proved and has an impact. It is about the ability that you have to tell the story. It is also something that is very common sense, which is when you have only one kid, you really take care, okay? So the direction of travel is that one. There was an extraordinary year or 18 months because of the year on [indiscernible] but it's now -- but we are back to normal, but normal is pretty good.

And the ambition remains to grow in China in Early Life Nutrition, thanks to market share dynamics and you look also at the last reading of market shares, they look pretty good. .

Okay. And in terms of your capital allocation in Specialized Nutrition, you spoke about the acquisition of Kate Farms,Medical Nutrition. How important is it to have a larger share of U.S. infant formula.

So I mean -- so if your question is would you buy a very large business that does exist and may be for sale in the U.S.? The answer is no, not the U.S. business. If you look at the liabilities that are floating around this business, if you look at the challenges, it's not appealing at all. So let me be very clear. When we look at acquisition and we look to 3 filters. Obviously, a strategic future. So does it make sense? I mean do we gain market share, do we gain capabilities or do we gain or reach in a place where we are not. We look at our financial I mean, ROIC, and we look at execution. Taking something that would bring us -- I mean, liabilities for the next 20 years is not something I will do for the company.

Very clear. And if we look at overall M&A for the company, how important is the distribution or retail channel. The targets have -- the acquisitions have, how important has that been relative to the business themselves because it doesn't feel like you've been buying market access as well as kind of quality of the products that you'll buy?

So I'm sure we'll do it with Joan on that. I mean the first thing is the filter I just described on, I mean, [indiscernible]. The second thing is, as you know, our guidance is organic guidance. So we grew the business. And then when we acquire, we acquire things that are complementing our business. If you look at the various acquisitions we have made over the course of the last 2 years, when you take -- you take Kate Farms, extraordinary business, gives us critical mass in the U.S. in our Medical Nutrition with a footprint that is complementary to us in a segment that is our exciting premium accretive, et cetera. So ticks absolutely all the boxes. So in category in the market, well, it doubles or so. So we were there alone. But the market -- this is the market of the future. You take what we are in the process of doing with [indiscernible]. We haven't closed yet. The logic is at the same time, the same and slightly different. Fantastic brand, totally on trend, different target, but straight on what we do, human fuel. So food is that you can take at lunchtime and serves you at lunch. Capabilities, we don't have our capabilities in which they are much better than us. Direct to consumer, community management. So super exciting from a mix standpoint, from the relevance of the category standpoint, from capabilities they bring. We bought not a long time ago, a small business called akkermansia. Akkermansia from a consumer standpoint, very small, irrelevance, immaterial in terms of size. But it's a strain that has very significant impact on gut health with very strong claims endorsed by [indiscernible], which works in a pasteurized way. It's a formidable technology break out of which you can do something. So different angle through -- I mean, through the same filter, which is strategic execution, financial.

And probably the 1 element which is really important is, as we are buying into companies which are complementary to our portfolio, the returns are very predictable. -- we are discovering a new landscape, a new category or whatsoever. And this is very important because -- we went from 7.5% ROIC 4 years ago to more than 10%, and we love the double-digit ROICs. And the M&A activities we have should contribute to develop our ROIC. And so this is also in the way we are looking at it. And so it's great to see a Kate Farms or HUL, which will be accretive to EPS after 12 months. And so in that sense, it takes all the boxes. .

Okay. Thank you. So if we zoom out a little bit and bring this all together, you've given a view on category growth. and outlook in part for the -- well, that you've given guidance for the year, but as our view on North America as well as ongoing productivity. Previously, you'd articulated that you were coming out of the period of higher A&P investment. And you've obviously, the last couple of years, delivered around 40 basis points of recurring margin improvement. Would you expect a similar degree of margin improvement this year even though your A&P growth may be moderating?

Look, I mean we are extremely committed to our guidance, and our guidance is the consequence of a business model. And the business model is about volume -- and so in any year, whatever the inflation will be the priority is growth through volume mix because it's the best way to get operating leverage is the best way to be able to reinvest into the business. and expand our margin year-on-year-on-year. And so that recipe is not changing. The variables are changing. So this year will be a year where the inflation will be a bit higher than what we have seen last year. And so we are adapting to it. We talked about productivity, we talk about price. And so you will see us delivering on our commitments and our guidance as the last year. .

Maybe just interesting on 1 thing. I mean you know our guidance, 3% to 5% growth with bottom line growing faster than top line. There is a reason why we don't qualify the percentage of [indiscernible] or a percentage EBIT margin. If you do that, and the company has been through that a long time ago, you start managing the company to a KPI, not to a business model. And the consequence of that, and we have been there, you start cutting in advertising, cutting in [indiscernible] or cutting innovation when you are under pressure. We are managing the company to a long-term business model, delivering on our guidance, but not creating a new guidance. And we had the discussion in the past when they were -- when we were expecting tailwinds. We said we will reinvest the tailwinds in the future growth of the company. So we will be consistent in our guidance.

Okay. So before we finish, it would be good to hear your perspectives on the use of AI within the company. If we look at the investments you've made so far, in AI, would you view these as more on cost savings, operational side or in demand creation?

We'll do a duet as well on that. When we look at , we look at in some ways, in 3 dimensions. There is a dimension where in partnership with Microsoft. We've put everyone on co-pilot, I mean, to give a culture of throughout the company. So it's raising the floor of everyone in the company. So they are familiar with AI, they use the tools or do it in a sandbox to preserve our data, but making sure that we lift the company from an AI standpoint. Then there are verticals where we say, well, we think there is a return on invested capital or return on investment. We think it can have an impact. We do things. So we obviously use AI in research and development. I mean when you have a base of 1,200 ferments, you start playing and forecasting on the fairness in a radically different way. We use AI in marketing. We use it in content creation. We use it in a consumer relationship. I mean, if you look at what we are doing with tools like [indiscernible] tracker, it's more than marketing, by the way, it becomes business model. We use AI as well in everything that is productivity. So whether quality or our forecast finance a number of things, I'm sure that Juergen will complement. We also are starting to plan for the long run, the impact of AI on people. And if you say, well, in 10 years or 80% of the jobs will have changed. In the Western world, where the availability of people is going to be scarce, making sure that you manage in parallel, your [indiscernible] knowledge and making sure that you become very good at upskilling and reskilling, make sure that in 10 years' time, you still have the capabilities that you need, knowing that you won't find them or you won't find a number of them on the market is something that we are also doing.

[indiscernible]

No, the apprenticeship model is not completely there. The permanent learning model is not completely dead. And actually, that's where we believe that as Danone, we have a distinctive strength.

In the end, we went -- we are going through 3 phases. The first phase was very broad education on the topic. So we had individual productivity. I do my job better every single day. We went relatively fast into this collective productivity, especially on the supply chain management. So one of the reasons why we are able to deliver a very high level of productivity with our cost of goods sold is because we had focused their first and foremost because the business cases were the most tangible and the most easy to access. . So when you go today to Poland, [indiscernible], it's one of the most digital factories in the world in specialized nutrition, and it shows what is possible. And Phase III is now as we go, which is going faster and more efficient on and going faster and more efficient on the way we engage consumers and retailers, which is extremely important.

Okay. And maybe then just looking at Agentic AI. I think really interested on the procurement side of retailers, and how they use it in price negotiations as well as on product discovery side, what are your thoughts and perspectives on that and how...

They use it, we use it. So I mean we use it with our suppliers. We use it to prepare also what we do with retailers. So that AI is becoming standard. It is becoming standard practice. Where Agentic AI is super interesting is in consumer relationship I mean, the speed and the breadth at which you can detect what's happening and we to what's happening surfacing either issues when there are issues or trends is really impressive. The speed at which you can create screen, narrow product concept is really interesting. So the -- there is a whole dimension around consumer that is very, very interesting. There is a whole dimension in sales that is very interesting. And we do and you'd go in France with one of our sales guys users, I mean, image recognition powered by to do store check, look at where the things are, how should they be. So the sales force productivity that is immediate.

Okay. Well, look, we've come to the awards the end of our formal Q&A and Antoine and Juergen. Thank you very much, first of all, but perhaps you'd like to make some closing remarks on the outlook for Danone in 2026. And indeed, are we at peak protein or even peak pricing growth?

So I mean the first question is no, we are not at our peak protein. It's going to keep going. And what we are doing in protein, specifically on atopic is yet again move from protein to benefit. What does the protein does to you? What does the carrier of the protein do to you. So we are only at the start of the journey and obviously, the expansion of our -- I mean, GLP-1 is helping. Aging population is helping because people need protein for their muscles and for mobility. Cancer is sadly helping. So there are secular trend, which brings me probably to the second thing, which is where I started, which is the choice we've made of a company that is only health through food, which is science-based and consumer and patient focused position us with a portfolio that is healthy. I mean, 85% of our product or [indiscernible] with products that have an impact on your health, position us exactly at the point where the consumer trends are going. So the market is coming our way, which gives us all the confidence in the world that we will deliver our guidance.

Okay. Well, look, Antoine and Juergen, thank you very much indeed for your time today. Very clear and very interesting to your perspective.

Thank you very much.

Thank you.