French dairy giant Danone – which owns Activia yogurts, dairy alternative Alpro and Evian water – has returned a positive set of full-year 2017 figures as synergies kicked in from its acquisition of US natural and organic foods business WhiteWave Foods. But that’s not the full story. Andy Coyne delves a little deeper.
You had me at Yakult
The announcement by Danone on 14 February (two days before its full year results were published) that it was selling 14% of its 21% stake in Japanese probiotics drink firm Yakult might be viewed as a pre-emptive strike.
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The divestiture of the 14% holding – to be instigated by Yakult through a market transaction – could be worth around US$1.9bn to Danone, it is suggested, and investors seemed to greet the news positively.
Indeed the stock was up 1% at EUR64.53 (US$79.68) in Paris on the morning of the announcement, confirming Jefferies analyst Martin Deboo’s view there would be a positive reaction from the market.
Whether the action was bowing to pressure from activist investor Corvex Management, the US-based fund that reportedly bought a shareholding in Danone last year, is open to debate but analysts are accentuating the positive of a move that brings in a wedge of cash but sees Danone remain Yakult’s largest shareholder.
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Deboo said Danone has been “under pressure around [its] capital allocation discipline” following its acquisition of US-based dairy and dairy alternative group WhiteWave Foods (a deal announced in the summer of 2016 but finalised in April last year).
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By GlobalData“This feels like a sensible and positive move to us,” he said. “Danone will reduce net debt and simplify its business somewhat, but retain the benefits of a useful strategic collaboration in its core category.”
Alain Oberhuber, an analyst at MainFirst, agreed. He said: “It made no sense any more for Danone to have such a large minority holding.
“We think the reduction of the stake is favourable as timing is good, will bring Danone more financial flexibility and will make Danone’s management more focused to its core business.”
The results – sales accelerate in H2, underlying margins rise
The company, then, hit the ground running going into its 2017 results announcement on Friday (16 February).
And a positive set of results they were too, by and large. Sales were up 2.5% on a like-for-like basis at EUR24.67bn (US$30.91bn).
Danone’s sales growth sped up in the second half, with like-for-like sales in the first half having inched up by only 0.4% year-on-year.
Full-year operating income was up 27.7% on 2016’s figure at EUR2.92bn and net income was up 42.6% at EUR2.45bn.
On a like-for-like basis, Danone’s recurring operating margin increased by 70 basis points to 14.36%, with the company pointing to factors including its rising sales, “significant productivity gains” and more than US$50m in synergies had been delivered in 2017 from the integration of WhiteWave into the business.
CEO Emmanuel Faber said: “In 2017, Danone once again demonstrated the strength of its portfolio, the resilience of its business model and its ability to execute. Despite volatile food and beverage markets and rising input costs, we delivered very strong full-year results with double-digit recurring earnings per share growth in line with our latest guidance.”
On the whole, analysts seemed please with what they were hearing even though sales growth of 2.5% was down from 2016’s 2.9% and significantly down on the 4.4% growth achieved in 2015.
Andrew Wood from Sanford Bernstein said: “2017 was a good start for Danone on the way to meeting its reasonable and balanced 2020 objectives, as it aims to become strong, stable and reliable.
“Strong progress on WhiteWave synergies and Protein savings [Protein is Danone’s EUR1bn savings programme] should contribute to strong margin momentum in 2018.”
He added: “Q4/H2 was a strong end to 2017 for Danone: Q4 like-for-like sales (+3.7%), H2 margins (+35bps) and EPS growth (+14%) were all above consensus. FY 2017 showcased the good progress Danone is making towards fulfilling CEO Faber’s vision of a more reliable and consistent company.”
John Baumgartner at Wells Fargo talked of “solid delivery” and a “positive outlook” while Deboo at Jefferies said: “We see good progress being made here, but on-going negative momentum in fresh dairy testifies to the continuing challenges ahead.”
Positives and negatives
Those challenges come from Danone being a dairy business and trying to work through the problems dairy as a sector is facing.
Its premium dairy sales “declined strongly” in the fourth quarter and continued to suffer severely from the impact of industry over-supply of organic milk. “The whole industry was challenged in 2017 due to the abnormally high disparity in retail prices between organic and conventional milk and its recovery will take time.” it said.
By stark contrast, Danone’s big winners in sales terms on a year-on-year basis were specialised nutrition (+9.3%), which was supported by “continued positive market dynamics in China” and waters (+4.7%) while EDP (essential dairy and plant-based) International was down 1.3% and EDP North America down 2%.
In yogurts, Danone says it continued to outperform the broader US retail market in the fourth quarter and recorded additional market share gains.
Oberhuber at MainFirst highlighted as a positive the gradual improvement Danone has seen with its brand Activia, with signs of progress in some of the bigger countries where the brand is present (France, Spain, UK and Italy). The performance of Activia has been affecting Danone’s fresh dairy sales for a number of quarters even after a relaunch of the brand in Europe in 2016. Towards the end of that year, Danone acknowledged the relaunch of Activia had not gone entirely smoothly and spent part of 2017 making a series of further changes.
However, Oberhuber pointed to a negative in the shape of the 6.1% volume decline in Danone’s EDP International business in 2017, mainly due to issues in Brazil, a market where a number of companies have struggled amid challenging economic conditions.
Over a shorter time frame, the sales from Danone’s dairy and plant-based products in Europe (excluding Alpro, the key brand in the region acquired through the WhiteWave deal) remained negative in the fourth quarter. However, the company said “the sequential improvement has continued since the second quarter, with turnaround results coming at a different pace from one country to another”.
In Europe Danone also continued to expand its portfolio of “young and local-heritage” brands, including Light & Free in the UK and Les Deux Vaches in France.
Danone points to growth from alternatives – an area much-scrutinised by investors
Sales of Alpro rose nearly 10% in the fourth quarter, driven by what the company describes as “robust demand for nut-based beverages and plant-based alternatives to yogurts”. Alpro is the market leader in its top four countries: the UK, Germany, Belgium and The Netherlands, which together account for nearly 80% of its sales.
Danone said that, generally, plant-based food and beverages delivered a meaningful growth improvement in the fourth quarter, driven by a “steep rise” in its Silk nut-based beverages and continued strong growth of the Vega brand and So Delicious frozen desserts, three other products attained through the WhiteWave deal.
Nevertheless, some in the investment community have expressed dissatisfaction with the way Danone reports its numbers in the wake of the WhiteWave deal. Sanford Bernstein’s Wood claimed the way Danone now groups its different assets makes it harder to see how WhiteWave is performing, where, he said, growth has slowed.
“The biggest issue that many investors have had with Danone over the last two years is the EUR11bn acquisition of WhiteWave,” Wood said.
“WhiteWave averaged +11% LFL growth from 2011-2015 but growth fell in 2016 (+5%). This slowdown did nothing to convince doubters that WhiteWave had been a good deal, although Danone argued that it was partly due to, one, disruption in the business in H2 following a prolonged closing period and, two, a declining US market. Another issue for investors was that WhiteWave was combined with Danone’s Fresh Dairy
business to create 2 new business units: EDP Noram (broadly 50:50 Danone/WhiteWave) and EDP International (broadly 90:10). This now makes it virtually impossible to track progress in WhiteWave.”
Getting with the programme – the year ahead
Danone launched its Protein efficiency savings programme early last year with ambitions to deliver EUR1bn in sustainable savings by 2020 by making “smarter spending choices”.
This included cutting spending on marketing and general expenses such as corporate travel, with the proceeds being partly used to fund future growth.
At launch the company said the turnaround of its European dairy business was taking longer than expected but CEO Faber vowed to return Danone to “strong profitable and sustainable growth” by 2020.
Deboo at Jefferies is generally pleased with the progress made so far. He said: “The EUR1bn Protein savings target is re-confirmed. The implication of guidance is that cost saves will be sufficient to overcome pricing less commodities and (possibly) increased A&P and implies maybe 80-100bps of margin improvement. FY18 guidance excludes Yakult transaction effects, which we expect to be modestly dilutive.”
Wood at Sanford Bernstein is also largely positive about Danone’s immediate prospects. He said: “We expect improving top-line momentum in 2018, although management’s breakdown of growth by business remains somewhat cautious.
“Strong progress on WhiteWave synergies and Protein savings should contribute to strong margin momentum in 2018.
“More generally, a steady recovery in Danone’s top-line growth, along with consistent margin growth and good free cash flow progress should drive strong EPS growth.”
Meanwhile, Baumgartner at Wells Fargo pointed to what he sees as WhiteWave rebounding strongly and China formula showing strong acceleration in direct channels. “We’re increasingly confident in the risk/reward,” he said.
CEO Faber sought to sum up: “We are starting 2018 with stronger foundations and I am confident that we are on track to accelerate towards our 2020 ambition, with another year of delivery against the commitment we made to our shareholders for consistent EPS growth.”
