Monday, 19 October 2015

Danone - strong conference call (and correctly recently a stronger share price)

The last time I wrote about Danone I observed the need to take profits (link here). Since then the shares have fallen over 10% (15%+ at the market nadir) and I turned more positive on them again (albeit not published on Financial Orbit). 

Some Q3/9m sales only numbers from Danone this morning.  Whilst the headlines note FY15 numbers/hopes reiteration what first struck me was that value kept on outpacing volumes i.e. the company was still placing pricing above sales.  In other words the pricing power I have previously discussed continues (all four key divisions – Dairy, Water, Child Nutrition & Medical Nutrition) had positive pricing). 

Another interesting aspect was that despite a ‘challenging environment…in some emerging markets’ (Russia, Brazil), Danone also noted ‘different dynamics between different geographies’.  You can see this in the chart below.  And which is the strongest performing geography?  Europe…

What was particularly behind this notably stronger performance in Europe was the continuing improvement in the Dairy division:

Dairy – ‘key positive trends’.  Europe: ‘volumes are improving…every country is improving…the deflation (in milk prices) will not last…but will go on longer than previously expected due to inventories’ (given Danone is a purchaser of milk raw materials no bad thing).  Also guiding do not see a major global pricing war.

The focus on pricing was very apparent with the observation that in Europe the aim was to ‘return to growth in as profitable manner as we can':

Water – as noted by Nestle last week this area is showing good growth currently. Danone noted the division ‘benefited from good weather…strong Evian and Volvic brands…believe have the right combination of brands to capture this opportunity in full’. 

Child Nutrition – continued to bounce back in countries like China as ‘Chinese market performance continues to be supported by the success of international brands’. 

Pulling it all together Danone had ‘Three messages…strong foundations…progressing in changing our model and investing in future growth…environment is challenging…so strengthening the resilience of our business model…focused on profitable sustainable growth’.  In practical terms what this meant was that the full year guidance was confirmed: 

Elsewhere (back in July at the time of the H1 numbers) I noted that below Euro60 offered opportunities (mid-teens prospective EV/ebita, optionality as the company continued to drive efficiency as per their 2020 efficiency drive business targets etc.).  That remains my view. 
With the share just below the Euro60 level the shares just remain a ‘BUY’ but are close to flicking into ‘HOLD’.  Overall excellent conference call however reiterating that Danone is clearly a preferred name in the Europe-listed consumer space (far more attractive at-the-margin versus say a Nestle). 

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