April 27, 2022

 

Danone shares up thanks to report of merger interest and strong Q1 sales

 

 

Danone's shares soared almost 8% up, thanks to a media report of a merger interest from French dairy competitor Lactalis and better-than-expected Q1 revenues, assuring investors that the company's turnaround strategy was on track, Reuters reported.

 

Despite a strong start to the year, the producer of Activia yoghurt and Evian water has maintained its financial targets for 2022.

 

Antoine de Saint-Affrique, Danone's new CEO, is pursuing a turnaround strategy despite rising input prices and the uncertainty created by Russia's invasion of Ukraine, which has compelled Danone to halt projects in the country.

 

A report in French business daily La Lettre A said Lactalis has been studying a possible full or partial takeover of Danone for months. Lactalis was not immediately available for comment.

 

A spokesperson for Danone said it had no plans to sell any of its three main divisions: dairy and plant-based products, infant formula, and bottled water.

 

Juergen Esser, Danone finance chief, said in response to Lactalis's reported interest that Danone is actively fixing their under-performing assets and will provide an update if there is something new.

 

Saint-Affrique said there was nothing wrong with Danone's three divisions during an investor day in March, and that the key to fueling sales growth was to improve the company's execution, invest enough in the right brands and innovation, and sell off underperforming assets.

 

Danone, the world's largest yoghurt producer, reported a 7.1% increase in like-for-like sales to EUR 6.236 billion euros (~US$6.74 billion; EUR 1 = US$1.07) in Q1, compared to a 5.5% growth projected by a company-compiled consensus of 19 analysts.

 

This was due to better-than-expected year-ago comparables, price hikes, increased demand for infant formula in China, and a post-COVID boost in demand for water drank outside the home. Esser said the company is prepared for additional rounds of price rises if necessary.

 

Analysts at RBC Europe said the primary driver of growth is still pricing. However, higher-than-expected volumes are a sign of Danone's pricing power and a departure from the company's historically poor volume performance.

 

On the negative side, analysts from Oddo said volumes in the dairy and plant-based segment fell 1.8% in the quarter, owing to supply issues in Spain and the crisis in Ukraine weighing on volumes in Russia.

 

Danone projects an operating margin of above 12% in 2022, up from 13.7% in 2021, and a price-led like-for-like sales growth of 3% to 5%, compared to 3.4% in 2021.

 

This anticipates a 100% reinvestment of its Local First savings programme, stronger productivity than previous year, and input cost inflation in the "mid-teens."

 

Saint-Affrique took over as chairman and CEO from Emmanuel Faber, who was fired last year following conflicts with certain board members over strategy and requests from activist funds for him to leave over the company's poor performance compared to competitors.

 

-      Reuters