Danone S.A.

Good day and thank you for standing by. Welcome to Danone 3rd Quarter 2024 Sales Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Mathieu Rodier, Head of Investor Relations of Danone. Thank you. Please go ahead.

Thank you. Good morning, everyone. Thank you for being with us this morning for Danone's 2024 Q3 Results Call. I'm here with our CFO, Jürgen Esser, who will give us some quick remarks before taking your questions. And before we start, I draw your attention to the disclaimer on slide 21 of the presentation related to forward-looking statements and the definition of financial indicators that we will refer to during the presentation. And with that, let me hand it over to Jürgen.

Thank you, Mathilde, and good morning, everyone, and a very warm welcome to our Q3 sales call. I suggest we go straight into the presentation as this is a busy day for all of you. So let me start with page number two. As you will have seen already from the press release this morning, we are sharing with you today another strong set of numbers with like-for-like sales up plus 4.2% for the third quarter of this year. This represents yet another quarter of broad-based growth with consistent overall delivery, demonstrating the resilience we have built into our company over the last three years, which is giving us the ability to deliver on our commitments even within a soft consumer environment. Our Q3 performance is again supported by growth across all our geographies, with particularly strong performances in the North America as well as in the China, North Asia, and Oceania region. Before going into the details of each zone, let us turn to the next slide, slide number three, to put these results into perspective. Since the start of our Renew Danone strategy, we have been very clear about the business model we are striving for. The model which is based on competitive growth, on quality growth. And we are delivering against this ambition as the quality of our growth does indeed improve quarter by quarter. Our volume mix contribution for quarter three has reached a new height of plus 3.6%. with resilient pricing at plus 0.07%. As you can see on this slide, it is now the fifth consecutive quarter of volume mix acceleration, a testament to the effectiveness of our investment strategy. Turning to the next slide, slide number four, you will see that this quality growth is broad-based, being reflected across all our categories. Our focus on dynamic health oriented categories is paying off as we deliver once again positive volume mix as well as positive pricing across all categories from EDP to specialized nutrition and waters. EDP closed up plus 4.1% like for like sales with growth in volume mix accelerating to plus 3.8% in Q3 with particularly strong performances in North America and Japan. and a competitive performance in Europe. The dairy category is keeping its momentum, and by doing so, growing faster than the overall food and beverage market, which is offering us great growth opportunities, especially for our more differentiated portfolio. In specialized nutrition, like-for-like sales were up plus 5.2 percent, with strong growth in volume mix at plus 4.1 percent. We continue to see our premiumization strategy winning in IMF. while medical nutrition continues to perform strongly, supported by positive macro trends and enabled by capacity expansion across the network. And in waters, we see like-for-like sales growth of plus 3.2 percent, with solid volume mix up plus 2.3 percent, despite rather mixed weather conditions around the globe. The growth continues to be driven by Maison in China and our Avion brand across the regions. Let's move on to the traditional sales bridge on slide number five before we talk in more detail about our geographies. As we said, like for like sales, we're up plus 4.2 percent during Q3 and we delivered plus 3.6 percent volume mix while pricing continued to normalize with a contribution of plus 0.7 percent. Outside of the like-for-like, we had a minus 2.3% impact from currency, hyperinflation, and others, reflecting mainly the devaluation of emerging market currencies against the euro. The scope effect is still negative at minus 3.1%, yet sequentially reducing as expected. This is mainly due to a disposal of our Horizon Organic business in Q1 of this year. Altogether, this gives us net sales for quarter three of around 6.8 billion Euro, down minus 1.2 percent on a reported basis. Let's now move on to slide number six to look in more detail at our geographies. And here, let me start with Europe, where we delivered in Q3 like-for-like sales growth of plus 1.4 percent, driven by as much as plus 2.4 percent in volume increase. This volume mix growth is actually the strongest level we have seen in the region for some time, a proof point that we are becoming more competitive, that our investments into brand equity and selective price initiatives are yielding results. The volume mix growth acceleration is led by EDP, where we see a strong momentum of our functional platforms. Our high protein range performed again strongly with double-digit growth also in Q3. We have in this last quarter successfully extended its distribution to the German and Polish markets and see all across Europe strong consumer demand. In parallel, Actimel, as well as Alpro, also delivered very strong performances, going mid to high single digits. By pushing hard our existing winning platforms, we also launched a new kefir proposition under the Activia brand in countries like France and in the UK. We are very much looking forward to the impact this new range will have in the coming quarters. In parallel to EDP, we can report resilient performances in specialized nutrition, as well as in waters, despite mixed weather conditions in the quarter. And with that, let's turn to North America on slide number seven, please. In North America, we delivered what I would call a stellar performance with sales up plus 5.8%, led by another very strong quarter of volume mix growth, up plus 4.9%, and a positive pricing of plus 0.9%. Our coffee creations platform is going from strength to strength, with our core portfolio as well as our innovation selling extremely well. enabling consumers to trade down from coffeehouses, replicating the experience in the comfort of their own homes. We also see a very good performance in the fast-growing yogurt category, where our high-protein products continue to post strong double-digit growth. The rest of our yogurt portfolio is also showing an accelerated momentum, including our Activia brand, sequentially increasing its contribution to the performance of our yogurt business. Next to our dairy business, we are working hard on the acceleration plan for our plant-based portfolio, leveraging the learnings from the successful relaunch of our Alpro brand in Europe, which is now delivering superior competitive growth. And last comment on waters is our Evian brand is posting another quarter of strong growth with further market share gains. With that, let's move on to our China, North Asia, and Oceania region on slide number eight. This region delivered another very strong performance in Q3, with like-for-like sales growth of plus 8 percent, reflecting broad-based growth across the region. The growth was driven by a very strong volume-mix contribution of more than plus 10 percent. In specialized nutrition, the momentum continues as we are consistently delivering strong and competitive growth with double-digit volume mix. We are very pleased with the ongoing performance of both the IMF and medical businesses, which continue to win share in their respective segments. In IMF particularly, our strategy of premiumization is paying off, with the Aptamil brand delivering strong growth in quarter three also supported by the recent launch of our Essensys innovation platform. While we are happy with this competitive performance, we do also see first signs of growth recovery of the total IMF market, with a segment of formula for young babies called Stage 1 Formula recently returning to growth. In waters, the MyZone brand has performed well in the second half of the summer season, Despite lapping some even stronger comparables, growth is very much supported by our successful repositioning of the core, as well as by the electrolytes innovation, which makes us win market shares in this very vibrant category. And in EDP, the Oikos and Activia brands continue to grow very strongly in Japan. And moving forward, this will be supported by the new capacity coming online very soon at our local factory. Our continuous strong growth in Japan is a testament to the investment we put behind our products to make them differentiated and value-added, attracting more and more consumers to our products in this very large Japanese dairy market. On to Latin America on slide number nine now. In Latin America, we had a solid quarter of plus 2.7% like-for-like sales growth led by price of plus 3.5%. Volume mix was slightly down this quarter by minus 0.7% due to poor weather conditions impacting our large waters business in Mexico. At the same moment, we are delighted to see our specialized nutrition business continuing to grow strongly, winning market share in its category. In EDP, excluding the impact from licensing out of our Paulista milk business, we saw a good growth momentum, especially of the Danone brand and the high protein platform. Let's turn to the next slide to discuss the performance of what we call externally the rest of the world region on slide number 10. Our Asia, Middle East, and Africa business saw a strong plus 6% like-for-like sales growth with volume mix at plus 1.2% and price at plus 4.7%. In specialized nutrition, we had a strong competitive performance in both IMF and pediatric specialties with double-digit growth across Asia, India, the Middle East, and Africa. Our hero brands Aptamil and Neocate are driving most of this growth. In EDP, we are increasingly benefiting from our ongoing transformation in Africa, as the quality of our growth is sequentially improving. Let me mention here particularly our business in Morocco, which posted strong quality growth in this third quarter, driven by a more and more differentiated but also locally relevant portfolio. This is making us commercially win in the market while we are building at the same time resilience into our supply chain. We are investing here into high-impact sustainability initiatives supporting our farmers' transition to regenerative agricultural practices, which among many other benefits will secure our access to high-quality milk also in the future. And finally, on to the last slide, slide 11, to discuss our financial guidance for year 2024. We are very pleased with our performance in the first nine months of the year, with the fact that the quality of our growth is increasing from quarter to quarter. This consistent delivery makes us today confirm with confidence our guidance for year 2024, with like-for-like sales growth of between plus 3% and plus 5%, and a moderate improvement in recurring operating margins. Moving forward, we will continue to drive a business model which focuses on a science-based and consumer-centric approach. We are investing for even stronger category leadership for not only winning where we play, but also taking care of our categories, keeping our categories growing faster than the average of the food and beverage market within a soft consumer environment. Our ambition is more than ever to support our consumers and patients by addressing their needs, leveraging the relevance of our categories, our strong brand equities, as well as our increasing product superiority. And with that, let me hand it back to Mathilde to start the Q&A.

Thank you, Jürgen. So now we're opening the Q&A. First question from Guillaume Delmas.

Mathilde, and good morning. Good morning, all. I've got two questions. The first one is on your China, North Asia, and Oceania region, because you've been reporting now seven consecutive quarters of like-for-like sales growth in the high single-digit percentages, or even better. This has been mostly volume mix-led. So my question here is, how long do you think you can sustain that run rate, or how Or I guess maybe to ask it differently, I mean, what would cause a sudden deceleration, given that you are seeing first signs of gross recovery in IMF, you've got plenty of new innovations, including new tourists, and it seems my zone has a very strong momentum. So any color on the outlook for the region would be great. And then my second question is on European pricing, which was in negative territory in the quarter. Could you maybe shed some light on which divisions and countries were the main reasons behind this negative development? And would you expect some further deterioration over the coming quarter? And I guess what I'm trying to get to is, as input cost inflation seems to be returning, I mean, how confident are you that you will be able to implement new pricing actions late this year or early next year? Thank you very much.

Good morning, Guillaume. First, you are absolutely right that we are very happy with the ongoing performance of our business in China, North Asia and Oceania. I think what is reassuring on the outlook of this region is the fact that we are not depending on one or two engines, but that all our engines are performing. Medical nutrition, which is benefiting, as we all know, from strong macro trends, is winning in its market. My zone, as you say, is going from strength to strength. And I think on IMF, the new news is that we are seeing some first green shots on the category, which we have not seen for quite long. We are doing well in market shares, as you said, thanks to a lot of impactful innovations. But we also see that stage one formula, which is basically the entry formula for babies, has started to turn green in Q3 of this year. It's too early to celebrate that this category is now stabilized and returned to growth, but it can give us confidence on our ability to perform in this category moving forward. I made the comment on Japan because Japan is also now delivering since many, many quarters very strong growth. We have been putting new capacity in place in order to make sure that we can continuously and consistently deliver on it. So when it comes to the sustainability of our ability to deliver sustainably those quality results, we are quite confident. Obviously, the name of the game is staying on the ball and executing this excellence. And Bruno and the team are just doing a very, very good job. In Europe, Actually, we're pretty happy with the results of Q3, growing plus 1.4%, volume mix up plus 2.4%. Yes, we have been investing into making the volumes more dynamic, and it's working for us, which I believe is very good news. The acceleration of volume mix is actually led by EDP, which is on one side confirming that dairy is a growth category, and secondly, that we are making progress on our competitiveness. And so I believe that moving forward, we will stay with the approach we had so far, which is consumer-led pricing, which means that we're going to increase price when we are in the next round of negotiation, which will be early next year, on the more differentiated product formats. high protein to name, while we will manage prices more smartly and promotions more smartly for the less differentiated products. I'm confident that we are able to manage price in the right corridor. And I'm also convinced that mix can be a particularly strong driver of growth in Europe. When you think about the rollout of our high protein ranges, which is working very well, when you think about the launch of our kefir ranges we have just started, when you think about the fact that away from home becomes a bigger and bigger part of our business, especially in EDP in Europe, all of this is coming with higher price points. And this is what we are focusing on to drive quality growth in Europe. And maybe a last comment, sorry for being a bit long, is that You remember what we said at the CME in Amsterdam, that we have still idle capacity, especially in Europe. So bringing volumes back into our factories is obviously driving a disproportional operating leverage. So finding the right balance between volume, mix, and price was important, and I believe that we are here fully on track. Thank you very much.

Thank you, Guillaume. Next question from Warren Ackerman, Barclays.

Yeah, good morning, everybody. It's Warren here at Barclays. I've also got two. Jürgen, can you maybe dig into the US EDP performance in a bit more detail? Obviously, there's the copy creations piece, which is doing well, but on the core, the core EDP looks like it's accelerated from Q2 into Q3. Q3 maybe what's your outlook into Q4 any update on plant based in the US on silk do you still think you can keep growing double digit in coffee creation so just the moving pieces around the US would be super and secondly I'm just interested a little bit on your comments about disproportionate leverage from the volume that's quite a you know you've said before you're underutilized in in factories in Europe. Any kind of comments around, you know, the volume leverage that you're talking about through to margin and then sort of interlink to that. Any comments around COGS or, you know, margins, noticing, for example, that, you know, milk prices are starting to tick up, just to kind of help us a little bit, sort of thinking through the back half. Thanks.

Yeah, good morning. Good morning, Warren. Morning. Very good results in North America, actually stepping up further with a very good start of the year, Q3, with an even stronger performance. And you're absolutely right that coffee creamers is pulling a lot of that growth, growing again double digits, growing again competitive winning share in its market. What is reassuring and comforting us is this is not only linked to the innovations we have been putting into the market earlier this year, but also the core portfolio is winning. So we are quite confident that we have here really a strong asset which we can further make grow in the coming quarters. What is fully accelerating is yogurt, you are absolutely right. We are pretty happy with our high protein range, Oikos Black. But what we are seeing now that also remains the other part of our yogurt portfolio is getting into a better momentum, especially Activia within a category which is very dynamic. The category of yogurt in the US is growing very, very fast. consumers understand more and more that this is contributing to a healthy diet and So today we are winning in that in that segment on plant-based. We are we are still not where we want to be. Let's be very clear what We are working hard to get this Part of our business back to solid growth. I think the blueprint of a pro in Europe is will be very helpful for us. Alpro is now, since the beginning of the year, accelerating very strong performance in Europe on the back of the fact that we have been investing in a very intentional manner into going into away from home, making our barista ranges more visible, but also have a more occasion-based approach with driving oat on one side and almonds as the right ingredient with cereals on the other side that's working for us extremely well in Europe we will make that also happen in the same way in the US and we know that's not being solved from one quarter to the next but we will take the time to make it happen and are confident we can do so When it comes to the volume leverage of Europe, this is very important, as you say, because we are still sitting on idle capacity, although we have been taking out some of it over the last years. And this is particularly true for yogurt. So for us, getting our yogurt category in Europe back to growth, and you saw the dynamics of the third quarter, which are really encouraging, is important for us. In a moment, as you say that some of the commodity prices have probably touched the lowest point and so I can confirm what I told you three months ago that we also see, I would say, some inflation on our material cost moving forward. So having the right balance between driving strong volume and mix. maintaining the pricing within the right corridor, getting the volume leverage while delivering strong productivity moving forward will be for us the recipe to continue increasing our gross margins for Europe and for the company, and we are on track here.

Thank you, Warren. Next question from Celine Panetti, J.P. Morgan.

All right, good morning. So my first question, and I'm sorry if I have missed if you have already answered that, would be on understanding the pricing dynamic in Europe and in China, because those are two regions where pricing has sequentially weakened. So maybe if you could talk about those two regions. and in terms of whether you expect this to continue or whether there would be there were some temporary issues and then my second point which may be a bit of a follow-up on the same subject in terms of cost inflation can you remind us what you expect for the full year and whether this has changed and what you think 2025 is shaping like and the ability you may have to raise prices in developed markets. We heard from one of your competitors that when they tried to raise prices, they got delisted, so is the environment a bit more challenging? Thank you.

Yeah, good morning, Céline. Look, when we look at pricing of the third quarter at company level plus 0.7%, we clearly see that we are back to a more normalized level. What I said three months ago is that we were confident to remain positive in terms of pricing for the company, and I confirm what I said. When we double-click on Europe and China, for China, you saw that we are growing very fast in volume mix, actually in double-digit territory, that pricing is negative at minus 2%, and this is mainly to be attributed to our IMF business where there is a very strong correlation between strong volume mix effect and this temporary negative price. We have been launching a number of new SKUs, as you know, in this category, each of them at a higher price point compared to previous average. Those innovations, and we have been talking a lot about e-Census, have actually a good start, a very good start, and are driving significant positive mix into our results. While the stimulation of this demand made some investments necessary, to get the right distribution in both the offline and online shares. So this is a temporary element, and you will see that pricing will normalize as we go over the next quarters. In Europe, I've been talking about that. We have been investing, I would say, selectively into pricing, where we thought it's important in order to get the right volume dynamics. This is not about one country or one category. It spreads a bit across everywhere where we believe that we are a bit less differentiated. We have been investing, and the good news is that volumes are reacting to it. To reassure you on what's in front of us for Euro pricing, while realistically speaking, price will not be a major driver of growth for Europe in the coming quarters, it will neither become a major drag on our reported performance there. So we are looking with confidence into that.

Thank you, Céline. Next question from Charlie X. Sorry.

On the cost, Céline, actually no change vis-à-vis what we discussed at H1. We see some inflation at, I would say, normalized level. driven by milk and some milk ingredients, driven by labor cost and transportation. Some volatility, but no real change vis-à-vis what we have been discussing, which means, and coming back to the pricing point, what we will do moving forward is to stay with our consumer-led pricing approach, increasing prices where we have a very strongly differentiated product portfolio and staying a bit more cautious where this is not the case.

Thank you, Céline. So next question from Charlie X, Redburn.

Yeah, good morning. Yeah, good, Mathieu. I hope you're both well. My first one is just on the guidance reiteration this year. I know you've been clear about reinvesting margin upside behind top-line growth, but with China and specialized nutrition, MyZone, doing so well versus, say, EDP Europe, why would you not perhaps raise the the four-year guidance, or should we read it as there'll be greater marketing investment in H2 along with some of the negative pricing we've seen to support top-line growth? That's my first question. And then the second one was just on EDP Europe. Could you maybe just give an update on Activia, what you're seeing there in the market, and how some of your recent focuses on gut health and fiber are performing? Thank you.

Good morning, Charlie. On the guidance, look, we have now been delivering three good quarters in year 2024, each of them at around plus 4%, with actually a good mix, as you are saying. What is very important for us is to build a sustainable growth path. And as we have been discussing in the capital market event in Amsterdam, we want to invest into true category leadership projects. When you look today at our categories, they are performing extremely well. They are performing better than the average of the food and beverage market, and it is because those are categories which are invested into, and they are invested into also by us as a category leader in many of the regions we are operating. When you look at the results of China, because you were mentioning China, China is performing very well, but also because we are investing into this growth. And this is our intention also moving forward. This is why we are today confirming the guidance in terms of growth, but also in terms of moderate margin progression for the year 2024. When it comes to our EDP and yogurt portfolio, and more importantly, the Activia portfolio, making very good progress. can confirm what we also said in Amsterdam, that the repositioning of the brand, going back to a very clear position on gut health, a very clear positioning on the health benefits is working for us. It's working for us in Europe as well as in North America. And you will see that moving forward, we will be even more clear on the benefits and the claims of this great brand. This brand has a fantastic reputation. We have been creating the conditions over the last two years to go back to growth, and we are seeing that sequentially getting into our results. So we are confident on that part.

Thank you.

I think this was the last question. So thank you, everyone, for your question and your interest. And speak to you soon.

Thank you very much, guys. Have a good day. Talk soon. Bye-bye.