2023-07-28 00:51:06 ET
Summary
- Danone S.A. reported a 6.4% like-for-like net sales growth in Q2 2023, with strong sales growth across all geographical segments and progress in their transformation plan.
- The company faces several risk factors including a negative volume mix, adverse foreign exchange impacts, and ongoing issues in Russia, which could impact profitability and future growth.
- Despite strong sales growth, Danone S.A. is rated a "hold" due to these risk factors and the company's lackluster annualized return rate.
Thesis
My article analyzes Danone S.A.'s ( OTCQX:DANOY ) Q2 2023 Earnings Report , noting the company's impressive sales growth and ongoing improvements in their transformation plan. However, I also shed light on potential risk factors and headwinds such as negative volume mix impacts from adverse foreign exchange rates as well as challenges with Russia that ultimately concludes with a "hold" rating for the stock.
Company Overview
Danone S.A., an illustrious multinational corporation, boasts a diverse portfolio of goods, which extends from dairy products like yogurts, cheeses, and milk-based items, to beverages, plant-based offerings, ice creams, and frozen confections. The company is also acclaimed for its robust range of nutritional products specifically crafted for mothers, infants, and young children. Furthermore, it dispenses specialized healthcare nutrition items and an assortment of water brands that are enriched with the natural essence of fruits, fruit juices, and vitamins. The distribution of their products spans various channels, such as retail outlets, convenience stores, medical establishments, and digital commerce platforms. Having been established in 1899, the company's central headquarters is situated in Paris, France.
Danone S.A. Q2 2023 Earnings Highlights
Danone S.A. revealed a commendable Q2 performance , recording a like-for-like net sales growth of 6.4% - a testament to the strength of all its geographical sectors. This parallels the sales of Q1, signifying the firm's consistent stride in its broad-based expansion.
The company's Chinese market proved sturdy, and the European transformation strategy displayed meaningful progress. The Essential Dairy Products [EDP] category was instrumental to the Q2 growth, as it manifested a net sales increase of 6.2%, thanks to thriving High Protein, Everyday Nutrition, and Coffee Creation platforms. The Specialized Nutrition category retained a competitive growth rate of 4.9%, registering market share advances in regions such as China and Southeast Asia. The Waters category, driven by the stellar performances of Evian in Europe and Mizone in China, recorded a healthy increase of 9.6%.
The 6.4% like-for-like net sales increase in Q2 included a price effect of 8.7% and a volume mix contraction of 2.3%. Pricing took a downward turn relative to previous quarters, whereas volume performance displayed an uptick in the semester's initial volumes. However, currency exchange rates had a negative impact of 4.3% due to depreciation of some currencies against the euro. In totality, the quarter's reported growth stood at 2.4%, with net sales amounting to EUR 7.2 billion, a slight rise from EUR 7.1 billion in Q2 of the preceding year.
Each geographical region made significant contributions. Europe registered 6.5% growth, with countries like France, Poland, and Spain acting as the growth engines. North America yielded 5% sales growth in Q2, predominantly propelled by the Coffee Creations unit. The zone encompassing China, North Asia, and Oceania logged a 9.6% sales increase, majorly powered by volume mix. Latin America posted Q2 sales growth of 10.8% with all nations in the region contributing to this performance. Lastly, the rest of the world region recorded a 3.9% sales growth in the second quarter.
Danone S.A.'s recurring operating margin for H1 was noted at 12.2%, marking a betterment from last year. The firm has voiced confidence in its ability to meet its full-year guidance for modest margin enhancements. The recurring EPS for H1 2023 stood at EUR 1.76, a 7.6% rise relative to the preceding year. The free cash flow for H1 2023 touched EUR 1.1 billion, showing an approximately EUR 400 million increase from the prior year, a consequence of prudent capital allocation and working capital administration.
All in all, Danone S.A.'s leadership projects optimism about the remainder of 2023 and plans to implement its "value creation model" based on its first semester performance. And despite recent evolutions in Russia (elaborated below under "Risks & Headwinds"), the company remains steadfast in its forward-looking business strategy.
Performance
Danone's performance over the past eight and a half years has been, frankly, lackluster. The glaring statistic here is the company's annualized rate of return (ROR) without dividends at a dismal -0.26% - and this, during a time when the overall market, as benchmarked by the S&P Index, has been a handsome 9.75% return.
Despite this, I want to highlight what some investors might see as a silver lining - the dividends. The total dividends accumulated over this medium-term period stands at USD 2.077K on a hypothetical $10k investment, making Danone a choice (not necessarily an appealing one) for dividend-focused investors.
Valuation
Danone's growth rate stands at a rather modest 2.39%, which isn't exactly the number I'd be jumping up and down over. We have a blended P/E of 16.92x and a normal P/E ratio of 18.39x (see chart below) which indicates that Danone is currently trading at a slightly lower multiple than its historical norm. This could indicate that the stock is undervalued, providing investors with an attractive entry point; or it could signal lower future growth expectations. And for those with an appetite for income-generating investments, a dividend yield of 2.52% and EPS yield of 5.91% might pique your interest
Risks & Headwinds
A conspicuous negative volume mix of -2.3% was reported in Q2, marking a departure from the optimal trajectory. As volume mix is an amalgamation of both demand and competition factors, this downturn could potentially signify a diminished consumer appeal or an intensification of competition in the marketplace. You can take this small downturn lightly or view it as possibly signaling an early warning of eroding market share and potentially a dwindling topline.
Another noteworthy data point is the subdued price effect reported for Q2 - 8.7%, a reduction from 10% in Q1. The deceleration, albeit minor, of this metric may hint towards a waning pricing power. This potentially undermines the company's ability to maintain or increase its prices, which is a crucial aspect in offsetting cost increases and safeguarding profit margins.
Furthermore, let's not neglect Europe's recurring operating margin. This metric receded by 232 basis points compared to the previous year, dropping to 10.6%. As of now, this minor development suggests that even with reported growth, the profitability landscape in this critical market is retreating. With Europe being a substantial segment of the company's operations, continuous slippage in profitability here could spell trouble for the firm in the near-term.
Lastly, the precarious situation in Russia adds another layer of complexity to the firm's predicament. The decision to deconsolidate its Essential Dairy and Plant-Based [EDP] business will lead to a cash impairment of around EUR 0.2 billion and a currency translation difference of approximately EUR 0.5 billion. CEO Antoine de Saint-Affrique addressed the issue in his opening conference call remarks by noting
Given the sensitivity of the situation, I hope you will understand there is not much we can say at this stage other than the fact that we remain focused on people's safety and on continuity of operations.
Unfortunately, for now, that doesn't give investors much to go on.
Final Takeaway
Based on the provided details, I would rate Danone S.A. as a "hold." The company is showing strong sales growth in all its geographical segments, and the progress in their transformation plan is promising. However, the lackluster annualized return rate and several risk factors such as the negative volume mix, adverse foreign exchange impacts, and ongoing issues in Russia are concerning. These could significantly impact the company's profitability and future growth, necessitating a cautious approach.
For further details see:
Danone: Q2 Earnings, A Mixed Serving Of Profits And Challenges