Danone: Volume/Mix Ahead Partly Due to Favorable Phasing; 2023 Guidance Upgraded

Danone DANOY reported a first-quarter sales update that included like-for-like sales up 10.5%: Volume/mix was up 0.2% and pricing was up 10.3%, with pro forma volume/mix up 1.1% excluding the Russian essential dairy and plant-based business. This was ahead of company-compiled consensus expectations of 7.3% (negative 2.8% volume/mix and positive 9.5% pricing). The resilient first-quarter volume/mix performance compared with the previous quarter (volume/mix down 4%) as well as peers (Nestle reported negative 0.5% volume/mix in the first quarter) was driven by the North America and the China, North Asia, and Oceania regions but more importantly by favorable phasing—Ramadan in the second quarter, the Mizone brand benefiting from reopening in China, and restocking in specialised nutrition, with some of these impacts expected to reverse in the second quarter. Thus, despite this solid first-quarter top-line performance, management upgraded its guidance by only 100 basis points, for organic growth of 4%-6% versus 3%-5% before, while confirming expectations for “moderate improvement in recurring operating margin.” In the quarter, the group’s largest division, the essential dairy and plant-based business, was up 9.3% (negative 3.2% volume/mix) while the specialized nutrition and water divisions were up 12% and 12%, respectively (5.4% and 2.5% 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.