Cibi e Bevande
Danone: Good execution driving profitable growth On track to deliver guidance
2019 First-Half Results
Press release – Paris, July 25, 2019
Good execution driving profitable growth
On track to deliver guidance
“Our first-half results demonstrate our continued focus on the combination of strong execution and progress in the transformation of Danone, in order to drive agility and resilience, and deliver consistent profitable growth. I was pleased to see top-line accelerating in the second quarter, with growth across all our businesses. The innovation momentum remains strong, while we have addressed most of the underperformers in our portfolio. Our margin improvement was of high quality, driven by gross margin progression, and further savings from our Protein efficiency-program. As this short term delivery is served by our long-term focus on creating value in a responsible and inclusive way, we are well on track for our 2020 objectives. With unchanged expectations for the full year, I am confident that the improved fundamentals of our business will continue to drive top-line growth acceleration and margin expansion throughout rest of the year.”
2019 Half-Year Key Figures
All references in this document to Like-for-like (LFL) changes, Recurring operating income and margin, Recurring net income, Recurring income tax rate, Recurring EPS, Free cash-flow, and Net financial debt, correspond to financial indicators not defined in IFRS. Their definitions, as well as their reconciliation with financial statements, are listed on pages 7 and 8.
North America (Noram) : United States and Canada
In the second quarter of 2019 , consolidated sales stood at €6.5bn, up +2.5% on a like-for-like basis. Sales grew by +3.5% in value, with a continued sales/kg improvement. Volumes slightly declined by -1.0%. All reporting lines contributed to the growth and posted like-for-like sales growth over 2%. Reported sales were up +1.3% , including a negative scope effect (-1.4%), primarily linked to the deconsolidation from April 1 of Earthbound Farm , that was sold in April 2019, a minor negative impact of currencies (-0.1%) , and +0.3% from the organic contribution of Argentina to growth.
ESSENTIAL DAIRY AND PLANT-BASED (EDP)
Essential Dairy & Plant-based (EDP) posted in the second quarter net sales up +2.2% on a like-for-like basis, including a +3.4% increase in value, and a -1.2% decline in volumes. Performance was driven by a stabilization at global level of Dairy activities, while Plant-Based activities continued to deliver consistent strong growth. All regions grew in Q2.
Europe delivered slightly positive growth, including a good performance in Southern Europe with Spain and France stabilized for the first time in the last 7 years. Alpro continued to post double-digit growth, with balanced contribution from core business and new markets. North America delivered moderate sales growth, with solid growth in Plant-Based driven by almond-based beverages and adjacent categories, strong growth in Coffee creamers supported by a dynamic demand and gains in market shares in ready-to-drink coffee, flat sales in Yogurts impacted in the US by competitor promotion activity, notably in the Greek yogurt segment. CIS growth slowed down in Q2, as core segments were impacted by a softer consumer environment while kids and indulgence offerings performance remained sustained. In Latam , Brazil kept growing and Mexico posted solid growth driven by increasing plant-based penetration in the country. Morocco delivered sales growth of around +10%, with Centrale Danone progressively recovering market share and regaining market leadership, following strong consumer engagement and a reshaping of the portfolio.
SPECIALIZED NUTRITION
Specialized Nutrition sales growth accelerated in the second quarter, up +3.2% on a like-for-like basis (vs. +0.4% in Q1), with an increase in value of +4.4% and a decrease of -1.3% in volumes. Performance was driven by strong fundamentals of Advanced Medical Nutrition and a return to growth in Early Life Nutrition.
Advanced Medical Nutrition delivered mid single digit sales growth in the first-half, with all segments (adult and pediatric care) and all regions performing strongly. China led the growth, with double-digit sales growth, alongside robust dynamics in Europe and in rest of the world.
Early Life Nutrition registered moderate sales growth. After 3 quarters of decline, ELN China delivered slightly positive growth, supported by the good execution of development plans in the direct channels, in particular in low tier cities, as well as, in the indirect channels, by an increase in sales through social e-commerce. The rest of the world posted solid growth, with strong performance in rest of Asia, benefiting from the successful relaunch of Bebelac in Indonesia, and double-digit growth in the Americas. Performance in Europe was still negative but improving, notably in France, getting positive results from the large pipeline of Bledina innovations.
WATERS
In Waters, net sales were up +2.1% on a like-for-like basis, with a +2.5% increase in value and a -0.4% decline in volumes.
In Europe , sales were slightly down in the second quarter, adversely impacted by poor weather conditions in May with temperatures below the average of the season. Volvic infusions and Bulles de Fruits by Badoit continued to performed well in the Aquadrinks segment. In Asia , growth was solid, led by Indonesia benefiting from expanding geographical reach of Aqua and by Turkey with strong growth driven by Hayat and Sirma market share gains. In China, the brand model of Mizone is being adapted to better reflect fast-changing category dynamics. In Latin America, Bonafont registered strong growth in Mexico, driven by good plain waters performance.
H1 2019 RECURRING OPERATING MARGIN: +68bps LIKE-FOR-LIKE
In H1 2019, Danone's recurring operating income stood at €1.9 bn. Recurring operating margin reached 14.69% , up +42 bps on a reported basis.
This was driven by a +68 bps margin improvement on a like-for-like basis, reflecting notably Danone's valorized growth model and operational savings from 'Protein' efficiency-program, offsetting raw materials gross inflation; sales and marketing expenses optimization, as the company pursues the shift of its marketing spending towards digital; and overheads management. Overall, 'Protein' efficiency program delivered an additional ~€150 million gross savings in H1 2019.
In addition, reported margin included:
North America (Noram) : United States and Canada
H1 2019 RECURRING EPS: +6.3%
Other operating income and expense stood at -€314 million, mainly related to a non-cash pre-tax charge of -€150 million recorded in the first half of the year, as a result of the divestiture of EarthBound Farm on April 2019, as well as restructuring costs of around -€150 million, including provisions linked to the further integration of Early Life and Medical Nutrition organizations, reorganisation of operations notably in Africa, and the integration of WhiteWave.
The net financial result slightly increased in absolute amount, from -€172 million in H1 2018 to -€182 million in H1 2019, mainly reflecting a negative impact on the USD-denominated portion of net debt from the USD revaluation since the beginning of the year.
The recurring income tax rate decreased to 27.0%, more than 2 points down vs. last year, driven by a positive geographical mix.
Recurring net income from associates increased to €51 million, despite the reduction in Danone's stake in Yakult from 21.3% to 6.6% in March 2018, reflecting good results from the participation in Mengniu and Yashili.
Recurring minority interests increased to €52 million, notably as the result of the good performance of Aqua in Indonesia, and recurring EPS increased by +6.3% to €1.87.
Total non-recurring net income amounted to -€186 million in H1 2019 (including a post-tax loss of around -€50m from the sale of Earthbound Farm ), down from an exceptional positive amount of €72 million last year that was linked notably to the capital gain from the partial sale of Danone's stake in Yakult. As a result, reported EPS was €1.58, down -15.4% versus last year.
H1 2019 CASH-FLOW AND DEBT
Danone delivered a consistent €1.1bn of free cash flow in the first semester. Capex amounted to €359 million, or 2.8% of net sales, in line with H1 18.
Danone's net debt stood at €13.9 bn as of June 30, 2019, up +€1.2 bn from December 31, 2018. The application of IFRS16 increased net debt by €0.7 bn (please refer to IFRS Standards section page 6).
2019 OUTLOOK
(From press release issued on February 19, 2019)
Macroeconomic outlook
In 2019, Danone expects further cost inflation with a mid-to-high single digit inflation in the costs of raw and packaging materials, including:
· milk price inflation high-single digit overall, on the back of a rebalancing supply and demand dynamic,
· continued inflation in PET cost driven by sustained market demand,
· inflationary conditions in other raw materials, including sugar and fruits.
2019 guidance
In 2019, Danone will continue to progress towards its 2020 objectives by strengthening its operating model through its priorities: accelerate growth, maximize efficiencies and allocate capital with discipline. Delivery of its agenda of sales growth acceleration and improved recurring operating margin will be supported by valorized innovations, active portfolio management, and further savings from the Protein efficiency program and WhiteWave integration synergies.
For the year, Danone is targeting like-for-like sales growth around 3% and recurring operating margin above 15%.
MAJOR FINANCIAL TRANSACTIONS AND DEVELOPMENTS OVER THE PERIOD
OTHER INFORMATION
IFRS STANDARDS
IFRS16: applicable starting January 1, 2019, no restatement of 2018 financial statements
Danone applies IFRS 16 on leases starting January 1, 2019 and elected for the modified retrospective approach for its implementation:
IFRS 16 has no significant impact on the recurring operating income, recurring operating margin and recurring net income.
IAS29 impact on reported data
Danone is applying IAS 29 in Argentina from July 1 , 2018 with effect from January 1 , 2018. Adoption of IAS 29 in this hyperinflationary country requires its non-monetary assets and liabilities and its income statement to be restated to reflect the changes in the general pricing power of its functional currency, leading to a gain or loss on the net monetary position included in the net income. Moreover, its financial statements are converted into euro using the closing exchange rate of the relevant period.
Breakdown by quarter of first-half 2019 sales after application of IAS 29
The breakdown of H1 2019 sales by quarter after application of IAS 29 in Argentina is provided in the table below for information (data not audited).
FINANCIAL INDICATORS NOT DEFINED IN IFRS
Due to rounding, the sum of values presented may differ from totals as reported. Such differences are not material.
Financial indicators not defined in IFRS
Like-for-like changes in sales and recurring operating margin reflect Danone's organic performance and essentially exclude the impact of:
Bridge from reported data to like-for-like data
Recurring operating income is defined as Danone's operating income excluding Other operating income and expenses. Other operating income and expenses is defined under Recommendation 2013-03 of the French CNC (format of consolidated financial statements for companies reporting under international reporting standards), and comprises significant items that, because of their exceptional nature, cannot be viewed as inherent to its recurring activities. These mainly include capital gains and losses on disposals of fully consolidated companies, impairment charges on goodwill, significant costs related to strategic restructuring and major external growth transactions, and costs related to major crisis and major litigations. Furthermore, in connection with IFRS 3 (Revised) and IAS 27 (Revised) relating to business combinations, the Company also classifies in Other operating income and expenses (i) acquisition costs related to business combinations, (ii) revaluation profit or loss accounted for following a loss of control, (iii) changes in earn-outs relating to business combinations and subsequent to acquisition date.
Recurring operating margin is defined as Recurring operating income over Sales ratio.
Other non-recurring financial income and expense corresponds to capital gains or losses on disposal and impairment of non-consolidated interests as well as significant financial income and expense items that, in view of their exceptional nature, cannot be considered as inherent to Danone's recurring financial management.
Non-recurring income tax corresponds to income tax on non-recurring items as well as significant tax income and expense items that, in view of their exceptional nature, cannot be considered as inherent to Danone's recurring performance.
Recurring effective tax rate measures the effective tax rate of Danone's recurring performance and is computed as the ratio income tax related to recurring items over recurring net income before tax.
Non-recurring results from associates include significant items that, because of their exceptional nature, cannot be viewed as inherent to the recurring activity of those companies and distort the reading of their performance. They include primarily (i) capital gains and losses on disposal and impairment of Investments in associates, and (ii) when material, non-recurring items as defined by Danone included in the net income from associates.
Recurring net income (or Recurring net income – Group Share) corresponds to the Group share of the consolidated recurring net income. The recurring net income measures Danone's recurring performance and excludes significant items that, because of their exceptional nature, cannot be viewed as inherent to its recurring performance. Such non-recurring income and expenses mainly include other operating income and expense, other non-recurring financial income and expense, non-recurring tax, and non-recurring income from associates. Such income and expenses excluded from Net income are defined as Non-recurring net income and expenses.
Recurring EPS (or Recurring net income – Group Share, per share after dilution) is defined as the ratio of Recurring net income adjusted for hybrid financing over Diluted number of shares. In compliance with IFRS, income used to calculate EPS is adjusted for the coupon related to the hybrid financing accrued for the period and presented net of tax.
Free cash-flow represents cash-flows provided or used by operating activities less capital expenditure net of disposals and, in connection with IFRS 3 (Revised), relating to business combinations, excluding (i) acquisition costs related to business combinations, and (ii) earn-outs related to business combinations and paid subsequently to acquisition date.
Represents acquisition costs related to business combinations paid during the period.
Net financial debt represents the net debt portion bearing interest. It corresponds to current and non-current financial debt (i) excluding Liabilities related to put options granted to non-controlling interests and (ii) net of Cash and cash equivalents, Short term investments and Derivatives – assets managing net debt.
Including derivatives-liabilities
Managing net debt only
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FORWARD-LOOKING STATEMENTS
This press release contains certain forward-looking statements concerning Danone. In some cases, you can identify these forward-looking statements by forward-looking words, such as “estimate”, “expect”, “anticipate”, “project”, “plan”, “intend”, “objective”, “believe”, “forecast”, “guidance”, “foresee”, “likely”, “may”, “should”, “goal”, “target”, “might”, “will”, “could”, “predict”, “continue”, “convinced” and “confident,” the negative or plural of these words and other comparable terminology. Forward looking statements in this document include, but are not limited to, predictions of future activities, operations, direction, performance and results of Danone.
Although Danone believes its expectations are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those anticipated in these forward-looking statements. For a detailed description of these risks and uncertainties, please refer to the “Risk Factor” section of Danone's Registration Document (the current version of which is available on www.danone.com).
Subject to regulatory requirements, Danone does not undertake to publicly update or revise any of these forward-looking statements. This document does not constitute an offer to sell, or a solicitation of an offer to buy Danone securities.
The presentation to analysts and investors, held by CFO Cécile Cabanis, will be broadcast live today from 8.30 a.m. (Paris time) on Danone's website ( www.danone.com ) . Related slides will also be available on the website in the Investors section .
APPENDIX – Sales by reporting entity and by geographical area (in € million)
North America (Noram) : United States and Canada
Attachment
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