Danone has booked solid 2018 results and outlined plans for the year ahead. Here’s what you need to know from today’s announcement and analyst call.
Danone “proud” of 2018 but debate on margins
The Activia and Alpro maker pointed to its “accelerating” sales growth and progress on efficiency as it reported rising like-for-like sales and underlying profits in 2018.
On a reported basis, sales dipped 0.7% to EUR24.65bn (US$27.97bn), although on a like-for-like basis, they were up 2.9%. Reported operating income was 26.5% lower at EUR2.74bn but, on a recurring basis, grew 0.7% (or 6.7% on a like-for-like basis). The net income Danone generated in 2018 was 4.1% lower than in 2017, falling to EUR2.35bn, but rose 5.4% on a recurring basis.
“I am proud of the results achieved by our teams at Danone in 2018,” chairman and CEO Emmanuel Faber said.
Among equity analysts, the broad view of Danone’s results was they were “solid”. MainFirst’s Alain Oberhuber described the numbers as such. “Danone reported solid full-year 2018 results with a slightly higher organic growth rate, somewhat lower EBIT margins, but higher earnings per share.”
The growth in sales Danone saw in the fourth quarter surpassed market expectations, with the Actimel owner seeing sales from what it calls its essential dairy and plant-based (EDP) businesses rising in both the division’s units – North America and International. The latter stood out to analysts as it saw a return to growth thanks to improvement in Latin America, expansion in the former CIS and more stable performance in Europe, all offsetting the impact of a consumer boycott in Morocco.
Nevertheless, some Danone watchers argued its operating margins came in lighter than they had hoped. On a call with analysts this morning, CFO Cécile Cabanis remarked: “I don’t think we came in low versus expectations. This is not what really matters. What really matters is that, despite significant headwinds both in terms of inflation and Morocco, we’ve been able to make significant progress in continuing to improve our overall margin in terms of basis points and progress and it came through record-high productivity and efficiency.”
2019 guidance prompts questions about 2020 targets
For 2019, Danone is forecasting like-for-like sales growth of “around 3%” and a “recurring operating margin” of more than 15%.
It already has in place targets for 2020, wanting its like-for-like sales to be growing by 4-5% and for that margin metric to be above 16%.
At Sanford Bernstein, analyst Andrew Wood said he expects to see “good progress” towards those 2020 targets this year.
MainFirst’s Oberhuber described Danone’s sales guidance for 2019 as “a bit cautious” and the forecast prompted Société Générale’s David Hayes to press management on what parts of the business will “step up” to meet the company’s 2020 target.
Cabanis said Danone was expecting this year’s sales pattern to have an “unbalanced profile”, with factors including the timing of Easter and the residual impact of the boycott in Morocco weighing on sales. She also said Danone expects its early life nutrition business in China – predominantly infant formula – to be “around flat” in 2019.
However, overall, she added: “The exit growth rate of the year should be compatible and in line with our 2020 growth objective. This is a 3% guidance in terms of like-for-like sales for the year but with an acceleration pattern that will be built throughout the year.”
Danone’s finance chief also pointed to the company’s work on savings and on its top line as evidence of its belief it could hit its 2020 margin target. “We will continue to maximise our efficiency,” she said. “We continue to have synergies of WhiteWave that will come also for next year until 2020. And overall our continuing productivity, which we continue to maximise. Then, on our gross margin, it’s also about everything we do in terms of growth and value growth. Innovation has been accretive. We are also working on targeted price increases and improving our overall mix, optimising our trade terms. And, finally, very strict portfolio review and management will also contribute to fulfil our commitment to our 16% objective for margin for 2020.”
How is the former WhiteWave business performing?
Danone significantly reshaped its business in 2016 when it moved to buy US dairy and dairy alternatives business WhiteWave Foods, a transaction finalised a year later.
Reporting its 2018 group results today, Danone said three-quarters of what was the former WhiteWave portfolio was enjoying sales growth of more than 5%. Faber said Danone was “more than excited than ever” about the acquisition and set out the company’s plans for one of WhiteWave’s flagship brands, dairy alternative Alpro, in 2019.
“2018 has really been about the four main markets of Alpro [Belgium, the UK, the Netherlands and Germany], plus a couple of markets like France and Spain, where we have been extremely successful. In France, we are already the second [player] and we are growing 50% of the category. In plant-based yogurt, we are talking about a category growing 30% in France.
“We have Mexico and now we’re going to work on more Latin American countries in 2019, as well as Russia, which has long-term great potential from a low base today, and redesigning some categories, including for instance in Japan, where the category has been very traditional and we believe it can be revived.”
MainFirst’s Oberhuber asked management about the performance of the quarter of the ex-WhiteWave business, predominantly in North America, that did not see sales growth of at least 5% in 2018.
In the fourth quarter, what Danone describes as the “premium dairy” element of the portfolio – including brands like Horizon – saw sales rise for the first time since the WhiteWave acquisition boosted by rising volumes that were helped by innovation.
However, the company plans to remove some products from that part of the portfolio. “We are also going to consider probably pruning a bit the SKUs and brands we are using encompassing premium organic milk in the US in order to make sure we focus on the higher growth potential and opportunities we have,” Faber said.
The Danone chief talked up the potential of plant-based nutritional powders and snack bar Vega but admitted fresh produce unit Earthbound Farms remained under the microscope.
“Vega went through a reformulation that was not a consumer success so we had to very quickly unwind that back to the previous formula. That happened last summer. The brand hasn’t recovered yet. Its potential is untouched. We expect Vega to go through a transition year in 2019. [We’re] still very excited about what this brand is and its potential for expansion, beyond the US actually,” Faber said.
“Earthbound Farm is the leader in the organic salad business in the US. Last year, the company made good operational progress on its efficiency. [It’s] still loss-making, still not growing and in particular was hit by an e-coli outbreak that did not concern our products but hit the whole category. This is not a company that is integrated as part of the Danone North America business. It’s got separate dynamics. It’s a matter of intense strategic scrutiny by us.”
Last year, Danone was reported to be looking for a buyer for Earthbound Farm but was struggling to secure a deal. Given the business sits outside Danone’s core areas, it would not be a surprise if it was trying to offload the asset, even if the company declines to comment publicly.
The outlook for Danone’s international dairy and plant-based business
This year, Danone will combine its EDP Noram (North America) and EDP International (its dairy and plant-based operations outside North America) into one segment when reporting its results.
The performance of EDP International in the fourth quarter of 2018 stood out, with sales jumping 4.5% when excluding the impact of the Morocco boycott. A “high-single-digit” increase in sales in Mexico, “progress” in Brazil and “strong” sales growth in the CIS helped.
However, the “stabilisation” of the business in Europe was notable, given the amount of work Danone had carried out in the region, especially on Activia, and the ups and downs it had endured. Europe was, of course, helped by Alpro but the “roughly flat” performance of Activia should be seen as a relative success.
Morgan Stanley’s Eileen Khoo asked if the 4.5% growth seen from EDP International in the last three months of 2018 was sustainable. Faber said the “engines” of Russia/CIS, Mexico and Brazil were “already working very efficiently and we don’t expect them to accelerate”.
He said acknowledged lapping the impact of the boycott in Morocco effect would support the sales from EDP International in the second half of 2018 but his comments on Europe were telling, indicating Danone wants to make sure the recent improvement seen there can be sustained.
“What needs to continue to be happening and confirmed is, beyond the stabilisation, is the growth of Europe. So, in a way, most of the first half of this year for EDP International in terms of what needs to be executed properly is the continued, gradual reacceleration of Europe, on which we are very confident but it’s only one quarter that we have been positive and we need to repeat that every quarter this year.”
Danone’s innovation focus
In his prepared remarks, Faber emphasised the work Danone had put in on innovation and new product development. “Our company is becoming more agile every day,” he said. “We keep adjusting our ways of working and delivering efficiency. And we adapt to the ever-changing world around us, as exemplified by the impressive acceleration of our innovation rate, supplying a quarter of our total sales in 2018 from only 16% two years ago.”
Given the rapid change we are seeing in consumer habits around the world, which are leading to many a multinational with long-standing brands struggle to grow and fledgling, on-trend competitors gain ground, that a CEO of a listed member of Big Food should underline the work his company is undertaking on innovation is perhaps unsurprising.
That said, the step up in Danone’s innovation is noteworthy and, to be fair to Faber, he has been one of the more active CEOs in trying to get his business’ product work more focused on areas like health and sustainability. “If you think that food has no pricing power and it’s a commoditised business, we don’t think that’s the case. If you embrace the revolution, you end up with, in waters, innovation driving 50% higher net sales per litre and, in EDP, which is an area in which I know we had the proof of the burden, we’re coming up with a number of 25% higher net sales per kilogram,” he told analysts.
Asked about the level of innovation the market should expect to see from Danone this year, Faber said: “Mechanically, you will probably see some more but this is not an objective we have. What we need now is innovation that sticks and, actually even before sticking, we need them to hit the road and therefore be on the shelf, available for consumers. This was a huge step forward to bring the company where it is today from an innovation mindset standpoint.
“We now need to continue to adjust all our organisation and supply chain to make sure this innovation reaches its full potential. In a way, there will be probably fewer inventions and more roll-outs and executions in 2019.”