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Morningstar | Danone's Capital Markets Day Finds Us Cautiously Optimistic; Shares Attractive

On Oct. 22, Danone hosted an investor seminar day at its London offices, at which it reiterated its 2020 objectives (introduced in 2017), including 4%-5% organic sales growth and operating margins higher than 16%, while delaying its 12% return on invested capital target to 2022 (from 2020). Given that the event was largely in line with our expectations, we do not expect a material change to our EUR 71 per share ($17.50 per ADR) fair value estimate and we maintain our narrow moat rating.

We believe the most important takeaways were the ROIC target postponement, the reiteration of growth and margin targets even after a disappointing specialized nutrition reading in the last quarter, and an eventual rise of the capital budget plan (to 4%-5% versus 4% of sales previously) to support growth going forward.

Danone cited IFRS 16 (capitalization of operating leases) and a slower onboarding of Whitewave as the main reasons behind its two-year postponement of the 12% ROIC target. We estimate the company will achieve 10% ROIC in fiscal 2020, gradually extending to 11% by 2022, although we admit that we may not use the same calculation methodology.

On the nutrition division, the company still expects higher than 5% organic growth rate by 2020, even after the short-term issues it faces such as rebalancing of its channel exposure (reduce indirect sales) and weaker fundamentals in China (low- to mid-single-digit growth expectations), which the company plans to tackle through premiumization and leveraging capabilities in the dynamic "tailored nutrition" space (allergy prevention).

In EDP, in response to investor concerns about growth and because the division is the largest in terms of sales, Danone highlighted its goal to focus on the higher-growth segments, more specifically probiotics, plant-based and protein, which the company said are growing at high-single-digit rates; it shared its aspiration to reach EUR 5 billion (from EUR 1.7 billion) of plant-based sales by 2025.

The firm reaffirmed the EUR 1 billion savings target, with already EUR 100 million expected to flow through fiscal 2018 profits and EUR 300 million by fiscal 2020, which we find achievable.

Further, the company indicated that it has lifted its digital marketing expenses to 40% of the total marketing budget from 30% previously, as it is more cost-effective than traditional alternatives, demonstrating higher returns on investment.

Lastly, Danone talked a lot about innovation and the need to increase the pace of new product introductions to the market (similar to Nestle) and its efforts to generate 100% of its sales (currently only 20%) from manifesto brands, or brands with a specific social purpose-driven objective.