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

Okay. Right. So we're going to move to our third session. Delighted to welcome Danone to the stage. Thank you, Antoine and Juergen for being here in Boston with us again this year. A lot to talk about. And I think we're going to do a bit of a Jet today, so we're going to try and sort of mix and match the questions between Antoine and Juergen.

And so Antoine, maybe to kick it off and start a little bit high level. I think we're firmly into the second chapter of Renew Danone. Can you -- for some of the audience maybe not quite as familiar with the story, can you explain the key elements of Chapter 2 what's working well, what is -- what still needs to be done? Maybe we can start there.

So if you look at what Danone is doing, Danone is only doing one thing. We do health through food to as many people as possible with one way which is anchored into science. And science is playing a very important role for us and obviously obsessed with our consumer and our patients. What we've said with Chapter 2 of Renew Danone is obviously keep doing or maintaining the discipline that we had with Chapter 1. But also, we looked at the market, we looked at the market in which we are playing, and we are absolutely convinced that the market is at a tipping point and that boost the demographics and the epidemiologics are coming away. At a tipping point, because basically people more and more realize that you are what you eat and what you eat has a major impact on your health, be it from a prevention standpoint, albeit to help and support you when you're in trouble. So what we said at the time is, listen, we're going to do 3 things. We're going to pivot the way we look at our categories. We are going to broaden our reach, and we're going to keep expanding. We have started pretty actively in pivoting, meaning our -- looking at go not only at HUGO, but fundamentally, as it being protein and protein has been one of our key growth driver. I mean you look at -- it's EUR 1 billion plus going very, very fast. Looking at Hugo being gut health, you look at -- Europe, it's back to growth. Moving from plant-based to our plant power, which we succeeded in Europe with our Alpro growing very fast. So that's about redefining at delight of where our categories are going. The way we look at our -- I'll talk obviously on Medical Nutrition, I'm sure during the course of our discussion. Keeping broadening our footprint from a distribution standpoint. I mean, if you look a number of years ago, Danone was essentially in large mass retail. So we had about 60% of our business in large mass retail. Today, it's closer to 40% with a number of implications. The main implication is it is a key driver of our resilience, and that's very exciting. And keeping expanding. Well, you've seen what we've done from an acquisition standpoint, very centered on our mission of health, very focused and bringing us to the next stage in a number of places. So we are making good -- I mean, we are making good progress. You've seen on the acquisition front. A lot -- I mean, a large part of our growth is coming from innovation and products that didn't exist 2 or 3 years ago, underpinned by our science. We have more to do, yes. I mean, I'm sure we'll talk of it, but there are plenty of opportunities. So we are still at the beginning of the journey. There are places that are working very well, places that are working less well as is the case in the business. We're working on them to improve them. So we live in a world of constructive dissatisfaction.

Yes. And I guess, Juergen, I mean, if I take that point, I mean, you're back above 4% organic growth in Q2, which is nice. When you look at the sort of second half, there's lots of factors. You've got Kate Farms coming into organic. You hopefully have progressive recovery in EDP in the U.S. You've got SAN in Rest of World doing well, it seems. Do you -- how should we think about like the algo? Is it set up for like an acceleration in organic in the second half given those positive things coming in?

Yes. When you look at the movie of the first half of this year, it has been very eventful in many dimensions, what happened in the Middle East with the IMF recall. And yet despite it is very eventful first semester. We have been delivering very solid results. And as you say, we left the Q2. This is a strong growth momentum. And there's a lot of confidence into the future. And so sitting here a couple of weeks better, we are still sitting here with the same level of confidence. So what is the variables moving forward? And I think you name it very rightly, Kate Farms is coming into the like-for-like. That's great. It means we play first time at scale in the U.S. it will mechanically add to our growth momentum. We will obviously see less and less negative impact from the early life nutrition recall elements we had in the first semester. That will help. And so in a way, we see that in the portfolio we have, which is a very broad portfolio, we have things which will accelerate, including North America, which will progressively go better and better. And on the side, we need to take care of those elements where we still have more opportunities. We talk Mizone, which was a drag in Q2, which probably will remain at the break in Q3 because the season is not good for no beverage company in China. We know that Indonesia has been very strong in Q2. I had by weather conditions, exactly the opposite of what we are having in China. So we have a couple of variables. But net-net, I think, to take out of it is we are very confident to deliver within our guidance in the short, medium and long term because we have built a portfolio which is able to resist to external shocks. And I think this is very important.

Yes, I think the -- I mean, if I may add to things, if anything, the first half of the year is displaying the resilience that we have built over time. And this is in to the diversity of our geography and the Daga CTR portfolio. Obviously, we talk a lot of what doesn't go well. But the name of the game for us is resilience. It is due also to a business model that is to deliver consistently in a 3 to 5 band. And that 3 to 5 give us the flexibility to do the difficult right rather than the easy one, which is why I keep telling you the guidance is 3 to 5, 3 to 5, 3 to 5.

Okay. But in terms of where I want to focus today, I want to really dive into EDP a little bit and SAN and some in China, but on U.S. EDP, there's obviously been quite a lot of investor frustration. The amount of inbounds I get on Nielsen Day is a lot. Can you maybe just sort of walk through where we are. You're talking about progressive improvements. We saw progressive in Q2. I think that the frustration maybe a little bit is the capacity just takes a long time to come on. Can you maybe reassure us that it's happening and your -- the gap between you and the market is going to close because I think that some people are beginning to think that there's a structural element as well as kind of a capacity element. I know this is a big topic, but it's still there as a topic for investors.

So I'm sure we'll do a duet on that. I think correct me EDP in North America is about what, 7% of our turnover. So we need also to frame the magnitude of the issue. I've seen or have said that the improvement will be progressive. I know -- I mean, a number of people don't like the world progressive, but it will be progressive because we try to do things the right way so that our change is stickier. So progressively, our capacity is coming on stream. As per plan, that's a topic I'm sure we won't discuss in 5 to 6 months from now. We have 13 factories. We do it one line after the other in an orderly fashion. I think the second thing which to me is as important or more important than capacity or it's enabled by capacity is we are progressively back to playing a Danone game in the U.S. . And what is the Danone game, obviously, keeping driving protein, as I said -- is doing very well. We will expand into new formats. We'll keep actually playing the game of protein. But the new -- of Danone is the ability to play portfolio and to address some key fundamental trends in the market. So obviously, protein. The next big trend, by the way, not only our U.S. is fibers, everything on -- you are starting to see in the market what we are doing with Actelion. And with Actelion, we are back to growth in Europe. We are doing very well in places like Japan and Australia. We are deploying the playbook -- and a lot of it is about fiber. You will see us or entering Kefir in the U.S. in the coming months. Kefir is a trend that is actually present in the U.S., very small but growing very fast is a very important driver of growth of the market also Activia in Europe, we will be a player in Kefir or in the Kefir spacer in the U.S. in the coming months. And we are going to revive the Danone brand. Danone is the historical brand in the market, the one that has shaped the market, entering with a new approach to Greek into the market with Danone at the start of '27.

Maybe just 1 element to add. When you step back and you look at the H1 EDP, global 3.6% growth. Driven by Europe, which is now consistently delivering with, as Antoine said -- protein going through the roof. We see Asia and especially Japan growing at a very fast pace. We see Latin America growing very fast. And progressively improving just will help this number to grow further. And we have the Made Group coming, the Made Group in Australia, an acquisition we did -- or we are doing those budgets closed, will help us to further build -- get an amplified trend in Asia. So the category of EDP is poised to grow at a very fast pace. Is the U.S. frustrating? Yes. Does it take 12 to 18 months to build capacity? Yes, but this will be over at some point and then we will get the full potential also in North America. So we are very bullish actually on the category.

The interesting thing, right, people focus on the U.S., but it's the globalization of EDP that's changing the dynamic and you've got Japan growing, Australia coming in Latin America. And so I suppose the way you're thinking about it is if those engines keep growing. Australia comes into organic and then you progressively improved the U.S. in theory, you should see mathematically an acceleration in EDP overall?

You see -- I mean, we are very -- and you can just say it, we are very, very positive on the EDP category in the long run. I mean protein is here to stay. Penetration of GLP-1 is still nowhere. Some markets -- consumption in some markets is still lower. I mean, in the U.S., it's 1/3 of what it is in Europe. Fibers, pre and probiotic are the next trend or naturalness is absolutely critical, and we see it with -- in Europe, which is a mix of own natural and protein. So I mean they are exactly, we are only at the start of the journey. And we are starting to do what Danone is doing, which is shaping the category playing on different engines.

Yes. And maybe could you dive a little bit more on to the European EDP? What are you actually seeing in different countries and you've got Cafe, you've got the Skyr how is it animating, -- how are you sort of rolling it out into Europe? Are you seeing Europe accelerating in aggregate in Italy.

So we see -- I mean -- and you've seen that in the last few quarters. We see good momentum in Europe. We are very, very happy with the revival of Activia and it is a long-haul journey, and we've said it now for a while, you are transforming a brand that had become a future growth back into a brand that takes care of yogurt. It's back to growth. And it's back to growth, thanks to what we do around very hard plans inspired from what we do in Japan or Australia. Fibers and recentering the portfolio on our fibers, but also Cafe, which is going -- I mean we just launched it's going to be EUR 100 million plus, growing very fast. You look at Danone, which is all about family, natural mass, et cetera, same story. On the core Danone, reminding people that our Danone is not a yogurt, it's a Danone because of the Fairmont, because of naturalness because of what it does to your gut and things like her which are the combination of the naturalness of Danone and all the goodness of protein.

I wouldn't ask about plant-based because you've got a very different situation with Alpro in Europe accelerating, but Silk not really performing for a while. I know you're doing protein still and it's working, but it's still quite small. So is it really the case that you can take learnings from Alpro in Europe, which is a different kind of market, I suppose, on plant-based to the U.S. and bring it across. Just trying to understand like how much patience do you have with that brand? And is that the right answer to the issue to look at the out pro game plan and play in the U.S.

So first thing you said it. I mean, Alpro is going from strength outside in Europe. And what we've done with Alpro is moving from plant-based to plant powered -- benefits in terms of our presence, entering protein, driving our yogurt into meal replacement. So are being extremely active with Alpro. I am on -- or having said that under the previous regime or the U.S., we're suffering -- and I was very clear a couple of months ago saying, well, we need to see movements in the coming 12 months. The local teams, Patricia and the team are doing a stellar job to progressively move Silk into a place that is similar to Alpro. It's not exactly the same because the market is different. -- but you start doing what we do with protein. You started seeing what -- I mean a renewed focus on renewed activity on secure growth. So step by step, we are moving in the right direction. Is it going to be exactly the same? No. Is it moving in the right direction? Yes, is the journey over, nobody all means because we are starting from a different standpoint. But I was very clear also, which is to see -- we need to see progress in a relatively short period of time.

Good. Interested to move into SN. Now if that's okay. There's a lot of topics. One of the ones just to hit quickly is the seralide issue from the beginning of the year. And in terms of the recovery that you're seeing, particularly in Europe, I know Middle East is coming back quite quickly. But in Europe, -- how do you feel about the recovery? Some of the data we still see is still a bit soft. How are you viewing it? And what are you doing to reinforce the Aptermill brand perception in Europe?

There is indeed very different context in the different regions. You said the Middle East, we lost a little of sales in Q1. It bounced back very quickly in Q2, and we are back to where we used to be in a way in terms of distribution sell out market shares. That has been very visible actually in the second quarter performance. Europe is a mixed bag. And what we are seeing is that, one, the category is going a little bit slower. So there is still credibility to be rebuilt, especially by the leading brands in that sector. And we are confident that we can do that. market share situation in each of the countries is different. We have been winning in some countries. We have been losing in some countries depending on the competitive set. I think it will level out as we go through the -- as we go through the next quarters. And so in the end, I think that as we go through the next quarters when I'm talking about Danone performance, this recall will not be anymore a major driver of the pluses or minuses will not be any more key variable. What is very important is that we have been protecting our Chinese ELN business during that period. Obviously, the Chinese population through social media has been made aware of what happened in Europe, which led to a shift from international labor to Chinese label -- and here, the good news is that we are playing on both sides. We are playing on international labels. So products imported from Germany products imported from the Netherlands, from the U.K. and the repaying on China label. But this has been a very clear shift because there has been more confidence and credibility built into the China label part.

And Jean, while you're on that topic of China, you talked about normalization, right? I think the word you've used of the category makes sense given the dragon and the birth rate, but comps do get a lot tougher in the second half, we can see the numbers. What can you do to combat those comps and still e-count growth in the China IMF category or your business specifically in the second half? That's the first part. And then second piece is do you still think medium term in China, SN beyond the normalization period that this business can grow mid-single digit so shorter term H2 and then kind of maybe and...

So let me take the medium term, and Juergen will address the shorter term. If you look at where the category was a couple of years ago, 14 million babies, EUR 20 billion category. You look today between 7 million and 8 million babies still a EUR 20 billion category. So what has been happening in China is a combination of 2 things. One is premiumization of the category on the base of science. The second thing is penetration as people move from country size to cities, which compensates the decline of the birth. So that is a first factor that will still keep going on because I think the journey boost of premiumization growth of penetration is not over. The third thing, which is probably even more important when it comes to IMF is it's a nonconsolidated market. you take the top 3 players, they are around 50-ish percent of the market in most of the countries of the world. Top 3 players are closer to 80% of the market. So there is still a consolidation game to replan. So those 3 things are probably indicative that we can still grow in China, even in a market where the birth rates what they are, they've normalized. And when the markets are flattish, whether they are slightly increasing or slightly decreasing, but -- so that's the name of the game on IMF, it will be a normalization versus what we've seen at the year of Dragon. What is important as well is we play in medical nutrition in China. So if you think mid to long term, there will be also a different balance, both in terms of growth, but in the end in terms of total business between infant and medical people over 60 years old were about EUR 250 million in '23. There will be EUR 300 million in 2030. There will be EUR 350 million in 2040. So the need for medical nutrition, the need for support to -- will keep growing in a very structural way, which will rebalance over time our portfolio and at margin profiles that are more or less the same.

When you look at it net-net, specialized distribution in China has been a mid-single-digit growth contributor to Danone for years. We had 12 months we had went up because of the year of the Dragon. When we talk about normalization of everything we see there, it means that, yes, the expectation is to go back to mid-single-digit contribution over the years to come. thanks to medical nutrition growth and thanks to market share wins in early life nutrition. And I think we have everything it takes to continue winning that market. Just a reminder, 4, 5 years ago, we started as a #4 or 5 in that market. Today, we are co-leading the early life intrusion market. So consolidating as a co-leader of that market, I think we are in the right position.