Danone Earnings: Pricing and Cash Flow Ahead; 2023 Guidance Unchanged

Danone BN reported first-half results that included like-for-like sales up 8.4% ahead of company-compiled consensus of 7.9%, driven by a second-quarter beat (LFL sales up 6.4% versus consensus of 5.6%). Within this, volume/mix was down 2.3% (versus down 2.5% for consensus) while pricing was up 8.7% (versus up 8.1% for consensus). As we explained in our first-quarter stock analyst note, the resilient first-quarter volume/mix performance was driven by the North America and China, North Asia, and Oceania regions, but more importantly by favorable phasing—Ramadan in the second quarter, the Mizone vitamin drink brand benefiting from the reopening in China, and restocking in specialised nutrition, with some of these effects now reversing in the second quarter. The recurring operating margin was up 14 basis points at 12.2%, broadly in line with consensus (12.1%) with free cash flow ahead at EUR 1.1 billion versus EUR 968 million for consensus. Management confirmed expectations for organic growth of 4%-6% and a “moderate improvement in recurring operating margin.” In the quarter, the group’s largest division, the essential dairy and plant-based business, was up 6.2% (negative 3.3% volume/mix, unchanged sequentially) while the specialized nutrition and water divisions were up 4.9% and 9.6%, respectively (negative 1.7% and flat volume/mix growth, respectively).

In the long term, Danone expects 3%-5% organic sales growth, versus 2.8% in our model, and operating income growth higher than sales growth in the midterm, in line with our estimates. We don’t expect to make material changes to our EUR 56/$12.20 fair value estimate. We expect to dial down our margin forecasts closer to 12%, which we expect to offset higher top-line growth for 2023, resulting in immaterial changes to our fair value estimate. The shares appear fairly valued.