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March 8, 2022

Danone adopts fix-or-sell approach as tenth of portfolio up for “rotation”

“If we cannot fix them, we will sell them,” CEO Antoine de Saint-Affrique explains in terms of underperforming lines

By Simon Harvey

Danone’s recently-installed CEO, Antoine de Saint-Affrique, has adopted a fix it or flog it approach to breathe new life into parts of the French giant’s portfolio.

Laying out the path for organic growth and margin accretion at Danone’s capital markets day today (8 March), the former Barry Callebaut chief said 10% of Danone’s portfolio could be up for “rotation”.

“Either we fix the underperformers or they will go out. We expect a rotation of about 10% of assets or sales,” de Saint-Affrique explained during a Q&A session with analysts, as he set out a target of 3-5% organic sales growth for 2022 through 2024 and a recurring operating margin for this year of “above” 12%.

“We want to do it in a way that is value-creating, which means that if you need to disentangle something in whichever category, you want to do it in a way that doesn’t throw the rest of the category into chaos,” he said.

However, de Saint-Affrique stated the strategy needs to be well thought through “so that all the dis-synergies you’re getting, the untradeable, are being compensated for by something else but it’s done in a very methodical way. Otherwise, you destroy value rather than trade value”.

Pressed by one analyst on whether the plan would entail expanding the portfolio externally, the CEO responded: “It’s the rotation of a percentage of our sales in rotation, which is a mix of acquisitions and disposals.

“One of the problems we are facing in terms of competitiveness is [the] underperforming of some assets, which have been underperforming for a long time. So we will be very determined. If we cannot fix them, we will sell them and then we have no taboo or we have no sacred cows.”

Under a ‘local first’ strategy adopted in the back end of 2020, CFO Juergen Esser said Danone will reinvest EUR700m (US$761.6m) this year, and rather than “being obsessive about deleveraging” from three times EBITDA, the company will invest too in organic growth and capex.

“If you want to be serious about value creation, you want to be serious about driving our ROIC and our EPS, we believe that the first and foremost priority is really to reinvest into organic growth for our business. And this means reinvesting into our brands,” he noted.

Last year, Danone registered like-for-like sales growth of 3.4% with sales reaching EUR24.2bn. While recurring operating profit edged up 0.6% to EUR3.3bn on a LFL basis, the margin dropped nine basis points to 13.7% and was down 30 points in reported terms.

For 2023-24, Danone said today it expects recurring operating income to be “growing faster than like-for-like net sales”, and from 2025, the company hopes “to progress towards mid-teen” margins, de Saint-Affrique clarified.

Esser added: “We want really to go first and invest into the foundations of our business in the short term, into boosting short-term performance but also into building what we need to build in order to accelerate growth in ‘24 and ‘25 because we believe that this will give us a much more solid foundation to really sustainability deliver mid-teens margins.

“What we are doing is basically to invest into our level of competitiveness to make those margins resilient.”

Nevertheless, there could be a rocky road ahead as Danone instigates pricing to combat surging input costs, Esser explained, with a potential hit on volumes as inflation runs into the “low- to mid-teens”.

Speaking in the context of historical and forward-looking like-for-like sales growth, the CFO added: “2022 was the first year where we delivered more than 3% since 2015. So, in a way, 2022 is the real first year we are going to deliver more than three in a corridor between three and five.

“And what we’re going to see is that all of our categories are going to contribute to this growth. We need to expect that this is price-driven. The fact that we are pricing across all geographies, it just means that we cannot expect volumes to grow. We need even to be prepared for volumes to short term at least react negatively.”

Danone has also chased productivity gains to offset inflationary pressure, described by Esser as “fierce”, which will require “aggressive pricing”. He added: “We need to get prepared for a gross margin decline in 2022.”

Vikram Agarwal, Danone’s newly-appointed COO in charge of purchasing, manufacturing and the supply chain, outlined the simplification process he plans on the road to increased efficiencies and to offset the ongoing supply chain disruptions.

He aims to simplify the variety of ingredients used in Danone products, as well as the packaging inputs, in a consolidation move to get more “buying leverage and more manufacturing efficiencies”.

Agarwal added in terms of logistics. “Synergising the different supply chains we have, which have evolved historically with four divisions into one, and actually using that as a platform to be more value-added in our logistics and distribution, rather than just operating parallel chains.”

Danone is also increasing its push into plant-based and is converting a dairy factory in south-west France to a dedicated facility, de Saint-Affrique said.

However, the CEO was questioned on the feasibility of reaching EUR5bn in sales for the category by 2025, a target set out by his predecessor Emmanuel Faber. De Saint-Affrique said sales stand at about EUR2.5bn and attaining that threshold is “unlikely”.

“While we will drive the category as hard as we possibly can, we will not get after a number for the sake of getting after a number,” he explained.

De Saint-Affrique added in terms of Danone’s progress in moving from soy and nut-based plant-based foods into oats: “Winning in plant-based, and we’ve seen that, is not only a matter of moving from soy to oat but doing what we are starting to do, which is our moving from ingredients to benefits, and moving also beverages into other adjacencies.

“It is about moving into an approach which is answering the needs of the flexitarians. We do believe that being flexitarian will become the norm and that offering the balance will be a key growth driver.”

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