EUR 850.00 For Business Accounts Only

Morningstar | In-Line 3Q Sales for Danone as Water and EDP Counter Nutrition Slowdown; Margins Remain a Question

Danone reported third-quarter sales with like-for-like sales growth up 3.1% and 1.4% for the first nine months and third quarter, respectively, broadly in line with our estimates. Management reaffirmed fiscal 2018 guidance of double-digit recurring EPS growth at constant exchange rates. Although we maintain our EUR 71 fair value estimate for now, we intend to take a fresh look at our underlying assumptions after the company's investor day, which will take place on Oct. 22.

On a more granular view, specialised nutrition declined by 1.5% in the quarter, driven by weakness in China (25% of segment's sales) and tough comparables (17.8% in third-quarter 2017, including 50%-plus in China). Although performance outside China has been healthy and premiumisation trends in Asia continue apace, an expected slowdown in demand, especially for infant formula in China, and channel rebalancing to direct platforms (modern trade, mom and baby stores, business-to-consumer e-commerce) had a higher-than-expected impact.  EDP Noram sales grew by 2.7%, supported by a pickup in volumes, with fresh foods being the only drag (3.5% excluding that category). Water outperformed with 6.4% growth, aided by warm weather in Western Europe and price/mix effects (up 4.2%). EDP International was flat, with Morocco's (boycott) negative contribution amounting to 260 basis points for the quarter.

Our two main concerns out of this broadly in-line sales update are the following: 1) a notably negative volume contribution versus historical evidence (negative 0.5% for the nine-month period versus flat on average during the past five years), with value contribution (3.3% versus 3.9% on average over the previous five years) partially helped by mix effects (50% mix, 50% price) and more specifically weakness in Morocco's operations (as management admitted on the call), and 2) the impact China slowdown will have on margins, since the region is admittedly the highest-margin market of the nutrition segment.