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  1. Analysis
February 22, 2021

Will Danone’s growth predictions placate grumbling investors?

French dairy giant Danone has released its 2020 results and made performance predictions for 2021. Andy Coyne looks at whether either will placate critical investors.

By Leonie Barrie

French dairy giant Danone has released its 2020 results and made performance predictions for 2021. Andy Coyne looks at whether either will placate critical investors.

Danone’s 2020 results, announced today (19 February), were marginally better than expected, which is to damn with faint praise.

But the Activia and Alpro brands owner has faced criticism from some investors about its corporate structure and portfolio mix, which they see as impeding growth, so it is the company’s comments about what it is hoping to achieve over the next year which will be most closely scrutinised.

The headline figures from its 2020 results were that sales were down 6.6% year-on-year at EUR23.62bn (US$28.62bn), while net income rose slightly (1.4%) to EUR1.95bn.

Like-for-like sales fell 1.5% in 2020, which was slightly better than analysts’ estimates – the consensus was for a 1.6% decline.

The best news came from the company’s Essential Dairy and Plant-based business, which reported 3.4% sales growth on a like-for-like basis in 2020. Plant-based sales in isolation grew 15% year-on-year.

Analyst Alain Oberhuber, of Stifel, said: “In our view, results which matched consensus estimates is an achievement after several quarters of disappointments.” But he added: “Danone’s mid-term guidance remains vague.”

Danone suggested it would return to profitable growth in the second half of 2021 after a tough first quarter – due to “unfavourable comparables”, in particular for its Specialised Nutrition operations in China – as its turnaround programme announced late last year kicks in.

CEO and chairman Emmanuel Faber reflected on “serious, challenging conditions” in 2020.

The maker of Evian and Badoit bottled water said this included a fall in water sales to the restaurant sector during government-enforced lockdowns and coronavirus travel restrictions in Asia weighing on sales of infant formula. The lockdown also means more parents are preparing baby food at home rather than buying it in, Danone said.

Faber predicted things will improve, however.

“2021 is therefore going to be a year of recovery. We are focused on preparing our return to sales growth as soon as Q2, and are fully confident that we are building the right conditions and momentum to reconnect with our profitable growth agenda as soon as H2,” he said. 

He added: “In this context, we fully recognise that our share price is not where we would like it to be and we are pleased that this FY announcement resumes our ability to dialogue openly with our shareholders.” 

Market-watchers may be forgiven for focusing on what was left out of Faber’s remarks rather than what they contained.

Activist investors have been calling for structural change and a portfolio shake-up at the company and neither were mentioned when the results were announced.

Earlier this week, French newspaper Le Figaro reported that US investment firm Artisan Partners is calling on Danone to separate its medical-nutrition business from its baby-foods unit to boost returns.

Artisan, which has said it has built up a stake of more than 3% in the firm to become its third-largest shareholder, also said that Danone’s Asian Mizone waters unit could be offloaded.

Danone has also come under pressure in recent weeks to make management changes, including separating the roles of CEO and chairman, which are both held by Faber.

Artisan echoed earlier calls from another Danone investor, Bluebell Capital Partners, in calling for corporate governance changes at the company.

It was left to analysts at the post-results briefing to quiz Faber on investor complaints.

Faber said he was open to dialogue with investors and that he was "not dogmatic" on the separation of roles issue but had no update.

"It might be a topic for the future, but you can't expect any more comment on that today," he said.

In terms of strategy, the group said it would provide more details of its plans at an investor day on 25 March.

Impatient investors are unlikely to be satisfied with what might be described as kicking the can down the road.

Indeed, news agency Reuters suggested Bluebell has today re-iterated its call for management changes.

Asked by just-food whether investor grumbling may die down as a result of today's results and post-result comments, Bruno Monteyne, a senior analyst at Bernstein said "not at all".

He added: "The presentation today started with a long description of the excellent performance of Danone, the contrary of what investors claim.

"There is also no indication that Danone is willing to invest materially more heavily in the brands.

"There was one point where the management was open to change, and that was the split between CEO and chairman."

Monteyne said the operating/strategy changes requested by the activists or shareholders won't be implemented. 

"If results remain poor for Danone in the next six to nine months, that will put increased pressure on the management team. If, however, the management team is right and things improve, then the pressure from activists will start to disappear," he said.

Faber has been CEO for seven years and has sought to diversify the group's portfolio into fast-growing products including plant-based and, alongside its results announcement today, Danone revealed it had agreed to buy US plant-based food business Earth Island. Danone is looking to reach a target of generating EUR5bn of plant-based sales worldwide by 2025 (the figure is currently around EUR2bn).

Danone said 10% of its sales now come from plant-based products – from brands such as Alpro, Silk and So Delicious Dairy Free – and Faber Tweeted this morning the deal opens for Danone a "strong foothold into the promising flexitarian trend in the US cheese market".

However, he seemed to be attempting to downplay expectations in the call with analysts when he said it is "not a big acquisition" but that to try and buy it [Earth Island] in ten years' time could be "too late or too expensive."

Hardly the stuff to placate investors with short- to medium-term performance improvement in mind.

Which brings us back to Danone's transformation strategy.

In November, Faber revealed a new locally-focused corporate structure under six separate zones, each with its own leadership team to promote, among other things, product development that fits with local trends and demands. The company also said it planned to cut up to 2,000 jobs and eliminate 20% of its SKUs.

In December, Danone announced it was creating a strategy transformation committee to sit beside three existing board committees that oversee audit functions, governance and engagement. Perhaps in a nod to building criticism of its corporate structure, it also revealed Cécile Cabanis, the former CFO who stepped down in October, had been appointed vice chair of the board in a non-executive capacity.

Faber will be hoping that further announcements about strategy at its investor day next month and signs of improved performance will keep criticism at bay but analysts are not so sure.

Martin Deboo, an analyst with Jefferies, speaking before the full-year results were released, said "in the background board loyalties seem to be shifting". He added: "A resolution of some kind feels imminent".

CEO Faber may well be "fully confident" that the second half of 2021 will see a marked improvement in performance.

But with activist investors unlikely to be placated by today's results announcement and no real engagement with their calls for change, the road towards those sunlit uplands is likely to be a rocky one.

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