Danone anticipates volumes will keep growing in the back half even amid the need for further pricing, which will continue to support margin recovery.
The France-based dairy giant delivered what were generally positive first-half numbers for like-for-like sales, including for the group, regions and business divisions, along with positive volumes, pricing and gross margin.
CEO Antoine de Saint-Affrique and finance chief Juergen Esser, discussing the results with analysts this week, are confident the trajectory will be maintained as the year progresses, albeit not with the same intensity in some cases.
“With pricing normalising in the coming quarters, the effect on gross margin will not repeat with the same magnitude in the coming second half,” Esser said, as he noted Danone is getting back towards the 50% mark of a “number of years ago”.
The margin increased 257 basis points over the first six months to 49.4% as like-for-like (LFL) sales revenue rose 4% to €14.2bn ($15.3bn). Group volume-mix advanced 2.1%, with pricing up 2%.
Esser added: “We are very pleased with the gross margin expansion of the first semester [H1], which, in a way, shows that we are really working our business model - quality top-line growth, driving operating leverage and therefore, driving very naturally gross margins up.
“Moving forward, gross margin will definitely continue to expand. This is our business model we are aiming for to allow for continued value creation over time, also including reinvestment, but it will not grow at the same speed that we saw as some of the commodity indexes are rebounding a little bit.”
The CFO said what Danone is seeing in margin progression is “quite promising”, with Europe, North America and the single regional division of China, North Asia and Oceania, all registering increases.
In terms of sales and volumes, Europe delivered LFL sales growth of 1.7% in the first half, although volume-mix was only just positive at 0.1% as “short-term delivery disruptions” spilled over from price negotiations with retailers.
However, Esser said “those negotiations are now behind us, making us again 100% focused on working with our retail partners to grow our categories”.
North America LFL sales were a positive 3.7%, with volume-mix up 2.9%. But it was China, North Asia and Oceania that led the way with increases of 8.6% and 8.3%, respectively.
For the rest of the world region, the figures were 5.6% and 1.4%, while Latam posted 4.6% sales growth but a negative volume-mix of 0.2%.
“This is a volatile world, there's things happening here and there,” Esser said in terms of the volume outlook. “But as you hear, we are confident that we are on the right path, and this is also why we have been reinvesting to solidify the growth momentum for the second semester and the years to come.”
Danone kept its LFL sales guidance for the year at 3-5%, while the outlook for the recurring operating margin also remains – a “moderate improvement”. The margin rose 45 basis points in the first half to 12.24%.
Esser explained the pricing strategy, deemed to be selective, over the back half, with a veiled reference to Europe.
“Pricing will stay positive also in the second half of the year. Just to be very clear about this, there has been a reason why, in some instances, negotiation took a little bit longer than we would all have wished because the way we are approaching it is to ensure that we do consumer-led pricing where we have strong brands, brands which bring innovations into the market…”
