Okay, everybody. Thank you very much for joining this session, and thank you very much indeed to Antoine de Saint-Affrique, CEO of Danone, and Juergen Esser, CFO of Danone. Thank you for making the very long journey to get here as well. It is much appreciated. Before we dive into company specifics, perhaps you could give us an overall assessment as you see it of the current consumer and category backdrop. Yeah, at the Q1 stage, you noted the impact of the Middle East and the infant formula recall and market on your results. Has your outlook at all changed significantly over the first six months of the year?
No, I don't think so. What is structural in the market is staying. We said it a number of months ago. I think the foods market is at a tipping point. People realize that they are what they eat. The link between our health and food is more obvious every day. You just have to look at the scientific literature, also what you find on the internet. The demographic trend with aging population in need for mobility or the trend of our cancer explosion in some ways in need for our proper support hasn't changed. The fundamentals of the markets are exactly the same, and they are playing to what Danone is. We are health foods, doing it in a way that is science-based and consumer and patient-focused. None of the fundamentals, I think, have changed.
Maybe one element which is important is that the Q1 was, in many dimensions, exceptional for us for all the reasons you mentioned. It's changing absolutely not the way we are looking at the yields, absolutely not changing the way we look at the guidance, and it's absolutely not changing the way we look at the business model, which means all the focus of our organization is on volume mix growth and capturing the opportunities the markets are offering to us because the markets are coming our way.
Okay. Very clear indeed. Thank you. An outcome of the conflict is, of course, renewed inflationary pressures. Your productivity program has really been a really significant enabler for you, underpinning, I think, a lot of what you've been able to do in pricing, the A&P, and opening up distribution. Is this level of COGS productivity you've had expected to be the same going forward, and does the inflationary pressure make any difference to that dynamic at all?
In a way, it's a competitive edge, which we are now leveraging since what, Antoine, two, three years, I would say. There's still runway for us. It just means one thing, that we can invest back into the business, which is important to us, and it means that in an environment we are today in with higher inflation coming through the Middle East consequences, that the pricing we go to will be as limited as possible and as selective as possible. In that sense, our ambition is to keep delivering productivity ahead of the industry without doing large-scale restructuring, and this is also very important. We want our people to focus externally and not internally.
Just maybe to add a word on that. There, what we've been doing, well, with the war in Ukraine and for the last couple of years, is a good blueprint. As you said, very high level of productivity, doing silent restructuring when we need to do silent restructuring, focusing on delivering on our business model.
Importantly, you're saying you believe your relative productivity for sure is also there versus your peer group. Okay. Picking up on one significant aspect of your overall performance these last couple of years, there's obviously been substantial mix benefits from your product innovations, whether, say, the functional component, protein, fiber, et cetera, or format changes, RTDs, there have been mix benefits. Are you able in any way to size or quantify those mix benefits? I suppose when you look at your innovation slates that are coming forward, do you see that mix component remaining as strong as it clearly has been?
Obviously, we don't guide, or you wouldn't expect me to guide on volume mix. But if you step back and you look at the way we drive our business, there is a category mix effect. If you look at the dynamic behind medical nutrition, which is obviously accretive both in terms of growth and in terms of our gross margin, you have a mix effect. There is an innovation mix effect. Obviously, when you launch high protein, when you launch some value-added variants of Activia, you're driving a mix effect. There is also a channel mix effect. As you know, over the last five years, five years ago, we had about 55% of our business that was in hypermarkets or large retail stores. Today, it's 45%. And it's a mix of resilience effect and mix effect because obviously mix is better in places like pharmacies, to take an example.
Perhaps we could dive into a bit more detail in the divisions now and perhaps starting in North America. There's obviously a heightened focus, particularly on North America EDP. If we look at first at the yogurt business, what do you see happening at the category level currently? Particularly the difference in growth between higher protein Greek yogurt and other yogurt.
Well, the first thing is you see a trend that is a lasting trend on proteins. Well, overall yogurt market has been buoyant. By the way, the yogurt market is much smaller than what it could be. The consumption per head in the U.S. is about a 1/3 of the consumption per head in Europe, so there's still plenty of ways to go. The market has been buoyant. Protein has been buoyant, and is a trend that is here to stay. It's a trend that existed a long time ago, by the way. 10 years ago, you started seeing protein bars that needed to be coated with chocolate because otherwise they were really chewy and not tasting good. I know that because I was selling chocolate to the protein makers. You had people selling powder that you had to stir in your glass to get your protein.
The revolution that yogurt has been bringing is a product that the base of which is very natural. It's milk, it's yogurt with a health component that is perceived as, and is actually extremely healthy. A way to deliver protein that is extremely pleasant, be it in drinkable or be it in spoonable. Benefits, and that's where, by the way, we are taking the category. Benefits that are not only about the content of protein, but what the proteins are doing to you, or the proteins combined with the yogurt. This will keep going. It's very clear, and it will keep going because of the health trend, because of all the push behind milk and milk protein from the U.S. government, and because of the accessibility of the GLP-1.
The rest of the segments, for many reasons, in our case for our capacity reason, hasn't been properly taken care of. There are a number of things where you see trends that are here and that are going to accelerate. Gut health is very central. It's expressed in many different ways, but you see an explosion from a very small base of kefir in the U.S. You see probiotics everywhere in all kinds of support. By the way, probiotics within yogurt is what Activia has been doing for a living for a very long time. There is a deep trend behind gut health, pre and probiotics, fibers, by the way, which is just emerging. It is something that we know how to address. We are going double-digit with Activia in places like Australia or Japan.
There is still a place for natural good-for-you value offer, which is what Danone is offering. Danone is a bit of a sleeping beauty in the U.S. Very strong brand, launched in 1942, which we left a bit sleepy. Danone, now that we see step by step our lines coming on stream, so capacity coming on stream. We will be back to doing what Danone is doing, which is segmenting, playing a portfolio game, and addressing the various segments of the market.
The Danone brand, we don't talk a lot about it, and by coincidence, I have a bottle with me. It's now a billion- platform, growing double-digit in Europe, growing double-digit in Latin America, and has not been leveraged at all so far in the U.S., and this will be a very prominent part of the strategy moving forward. It's not only an Oikos or Activia play, but also a Danone-branded play.
Activia is flying now in a number of places. Kefir is a big innovation. You've seen that we sold our participation in Lifeway in the U.S. It doesn't mean that I will disappear from kefir forever in the U.S.
Okay. It does look like some of the scanner data is showing slightly weaker volumes than maybe those trends outlined. Is that cyclical? I mean, are there parts of the customer base, consumer base, which are sort of a bit more under pressure, a bit more reticent to consume at all?
No, I don't think so. You see stronger value data, because when people see value, they are ready to pay for it. You see what's happening in all the protein space, which is very premium. I think there is a move for value at every price point, actually. People do arbitrage. When they see value, they pay for it.
In the U.S. overall, I think what is very important to take away is that we are totally on track on the improvement journey we have been discussing now for a couple of months, which is true for yogurt and which is true for creamers. It will be progressive, yes, but we are going to improve quarter- by- quarter the performance of the American platform.
Okay. I was going to say, you're bringing the capacity onto market. Just to be clear, your expectations for the trajectory of like-for-like growth, EDP North America, are progressive.
Yeah, it's going to be progressive. It's going to be quarter- by- quarter. We want to do the things properly, by the way. I can get you any number for a given quarter. It is about rebuilding in a structural way, the competitiveness of our business in the U.S. As capacity is coming on stream, as we are progressively deploying the innovation funnel that we have behind the various brands, you will see over the next few quarters a progressive improvement of the overall performance of our North American business.
If I could, just one aspect in North America on the coffee creamers business, it does look like the two largest players within creamers have a lower share combined than they did, even though that share is moving between the two. Is there anything about smaller competition in creamers?
There are two things. The first thing is you need to take care of the core, because if you don't take care of the core, no innovation will replace the core. That's what, in our case, we are doing, and you've seen that in the last couple of periods. Creamers are heading in the right direction. The second thing is there is a trend around naturalness, which is emerging in the U.S., which is a trend that is eating into the overall market. Very relevant trend, which is one in which at some point we will play.
Okay. Understood. Maybe just also just on plant-based, if we could, you recently announced the closure, I think, of the New Jersey facility. How quickly do you think plant-based can see?
Well, if you step back and you look at the story of plant-based, and I've shared it very openly with the market. If you look back five years ago, Alpro and Silk were more or less in the same state, which is coming at the end of a cycle where the brands had been created on ingredients, almond, soy, and had been created on speaking to people that were averse to milk, and therefore positioned against milk. What we did very well in Europe is to pivot the brand from being ingredient driven to being benefit driven, and from being built as in opposition to milk to being built for itself because of the benefits it was bringing. An Alpro yogurt is a great yogurt experience. It happens to be made with plant. It's a great yogurt.
An Alpro barista gives you a foam that is amazing in a cappuccino, and by the way, the barista can clean the machine easier than with most of the product. Alpro beverage has fibers, calcium, minerals you don't find in other products. We reposition the product, moving to benefits and not in opposition to milk. We didn't do that in the U.S., and we didn't do that for all kinds of reasons. There was, and I was very public about that, a big not invented here syndrome, where we've changed the teams. We've brought in place since January the teams that did the turnaround that we see on Alpro. They are going to deploy the book over the next number of months. I'm expecting to see progress in the next 12 months.
Okay. Very clear what you're saying on North America. If we can now pivot towards specialized nutrition. Firstly, on adult nutrition, you did mention it before, but you've obviously been investing in your sales and the go-to-market capability in China in particular. What's been the level of growth you've been able to get from that and the returns you're seeing, and is that an ongoing investment program or something that you've reached the level of investment?
When you look at adult medical nutrition, well, the first thing is, and I was discussing, the market is coming our way. If you look at the demographics, if you look at the health of the population, if you look at the pressure on the health system, everything that can improve or address the frailty of elderly people and therefore their mobility, everything that help people recover faster and better from cancer, or everything that help people recover better and faster from stroke. All of that, by the way, having a positive economic impact on the health system is good for the individual, good for the health system, which are under pressure because of our demographics. The market there is coming our way. What we deliver in adult medical nutrition are products that are extremely sophisticated. Some countries, we have medical license. It's long-term clinicals.
The way to go to market on those products is driven by sales force. It is going into the hospital. It is talking to the healthcare professionals. It is making sure that you are present in the pharmacies. It is doing a job at health economics. In some ways, and there are some exceptions because they are hybrid markets, your A&P is your sales force there. We're super happy with the return on investment we get from the investment we made. We're growing very fast both, by the way, in Asia and in Europe, and we'll keep pushing behind medical nutrition.
Yeah. In the end, we are discussing that quarter by quarter, it's a business growing high single-digit, double-digit every quarter. We are the number one in China, for us, it's only about expanding the reach into the system, from Tier 1 to Tier 2 to Tier 3 to more and more hospitals and to pharmacies. A very organic way of investing and a very predictable return. We have been buying our go-to market in the U.S. with Kate Farms, that's in a way accelerating the speed at which we can have access also to the healthcare market in U.S. in order to play exactly by the same playbook as we play in China or in Europe, we happen to be the number one in Europe and in China.
Okay. Thank you. Maybe just looking at or talking about infant formula, maybe you could walk through the effects of the product re call in Q1 or so far this year, and whether you see there's ongoing effects at all and Q2 seems to have had a higher effect of testing requirements in China. What do you see, if any, lasting effects?
We'll probably do a duet on that. If you look at where we are today, we are basically back to normal when it comes to presence on shelf. When we come to our distribution, we see some effect on brand equity, but no major effect on brand equity. Market shares varies very much from country to country. It's going to normalize totally over time. We are spending all our energy today talking back to the maternities, talking back to the HCPs, talking back to the mothers. Opening up virtually, because you can't get into them, opening our factories. Rebuilding the equity and the trust. We don't expect a significant or very lasting impact on the market. Well, first, our brand has lots of credibility. Second, it's also a category that is totally renewed in two years.
We are back on shelf, we are back on the front foot with the consumer and with the HCPs, and doing the job of rebuilding the credibility.
Well, frankly, largely behind us, as Antoine said. There will not be a lot of discussion around this topic, I believe, in the months to come.
Okay.
To your question of do the Chinese authority ask for more testing? Yes. We are very well-equipped. We are very disciplined. In some ways, it gives more structure to the trade, which is not necessarily bad news.
Okay. Clear. Thank you. When you look at the infant nutrition market as a whole, and obviously we're seeing declining birth rates, but price or premiumization mix gains. Are you comfortable that those dynamics can remain as strong as they have been over the last few years, obviously especially in China?
In China, there is a very interesting statistics. If you look 10 years ago, the size of the market was EUR 20 billion. If you look today, the size of the market is EUR 20 billion, give or take. If you look 10 years ago, number of babies per year were 14 million. If you look today, it's below eight million. The market has stayed the same, more or less, in size, with a number of babies that has been almost divided by half. I think the dynamics you've seen at play in the China market is a combination of a number of things. One is market consolidation. You have a market where seven years ago you had about 1,000 players. Today, you have about 500 players. Top three players are 50%-ish market share. Top three players in most of the countries in the world are 70%+.
There is still consolidation potential. The second thing is it's a market that is extremely sensitive to science. It's a market where innovation backed by science has been helping the premiumization of the market. It's a combination of two things. It's a combination of science that really makes a difference. You look at what we do with Essensis. You look at what we've started doing with Nutricia. You have really deep science that can be proved and has an impact. It is about the ability that you have to tell the story. It is also something that is very common sense, which is when you have only one kid, you really take care. Okay? The direction of our travel is that one. There was an extraordinary year or 18 months because of the year of the dragon, but it's a blip. Now we are back to normal.
Normal is pretty good, no?
Okay.
The ambition remains to grow in China in early life nutrition, thanks to market share dynamics. You look also at the last reading of market shares, they look pretty good.
Okay. Thank you. In terms of your capital allocation in specialized nutrition, and obviously you spoke about the acquisition of Kate Farms medical nutrition, how important is it to you to have a larger share of U.S. infant formula?
If your question is would you buy a very large business that does exist and may be for sale in the U.S.? The answer is no. Not the U.S. business. If you look at the liabilities that are floating around this business, if you look at the challenges, it's not appealing at all. Let me be very clear. When we look at acquisition, we look through three filters. Obviously, a strategic filter. Does it make sense? Do we gain market share? Do we gain capabilities? Do we gain reach in a place where we are not? We look at our financial. ROIC . We look at execution. Taking something that would bring us liabilities for the next 20 years is not something I will do for the company.
Okay. Very clear. If we look at overall M&A for the company, how important is the distribution or retail channel that the targets have, that the acquisitions have? How important has that been relative to the business themselves? Because it does feel like you've been buying market access as well as kind of quality of the products that you're buying.
I'm sure we'll do a duet with Juergen on that. The first thing is the filter I just described applying. The second thing is, as you know. Our guidance is organic guidance. We grow the business, and then when we acquire, we acquire things that are complementing our business. You look at the various acquisitions we have made over the course of the last two year, where you take Kate Farms, extraordinary business, gives us critical mass in the U.S. in our medical nutrition, with a footprint that is complementary to us in a segment that is exciting, premium, accretive, et cetera. Ticks absolutely all the boxes. In a category in the market, well, it doubles our size, so we were there already. A market that is a market of the future. You take what we are in the process of doing with Huel.
We haven't closed yet. The logic is at the same time the same and slightly different. Fantastic brand, totally on trend, different target, but straight on what we do, human fuel, so food that you can take at lunchtime and serves you as a lunch. Capabilities, we don't have capabilities in which they are much better than us. Direct to consumer, community management. Super exciting from a mix standpoint, from a relevance of the category standpoint, from a capabilities they bring. We bought not long time ago, a small business called Akkermansia. Okay. Akkermansia from a consumer standpoint is very small. Irrelevant. Immaterial in terms of size. It's a strain that has very significant impact on gut health with very strong claims endorsed by EFSA, which works in a pasteurized way. It's a formidable technology break out of which you can do something.
Different angle through the same filter, which is strategic execution, financial.
Probably the one element which is really important is as we are buying into companies which are complementary to our portfolio, the returns are very predictable. We are discovering a new landscape, a new category or whatsoever. This is very important because we went from 7.5% ROIC four years ago to more than 10%, and we love the double-digit ROIC.
Right.
The M&A activities we have shall contribute to develop our ROIC, and so this is also in the way we are looking at it. It's great to see a Kate Farms or a Huel, which will be accretive to EPS after 12 months. In that sense, it ticks all the boxes.
Okay. Thank you. If we zoom out a little bit and bring this all together, you've given a view on category growth and an outlook in part, and that you've given guidance for the year, but obviously your view on North America as well as ongoing productivity. Previously, you'd articulated that you were coming out of a period of higher A&P investment, and you've obviously the last couple of years delivered around 40 basis points of recurring margin improvement. Would you expect a similar degree of margin improvement this year, even though your A&P growth may be moderating?
Look, we are extremely committed to our guidance, and our guidance is the consequence of a business model. The business model is about volume mix. In any year, whatever the inflation will be, the priority is growth through volume mix, because it's the best way to get operating leverage, it's the best way to be able to reinvest into the business and expand our margin year on year on year. That recipe is not changing. The variables are changing. This year will be a year where the inflation will be a bit higher than what we have seen last year. We are adapting to it. We talked about productivity, we talked about price. You will see us delivering on our commitments and our guidance as the last years.
Maybe just insisting on one thing. You know our guidance, 3%-5% growth with bottom line growing faster than top line. There is a reason why we don't qualify the percentage of bips or a percentage EBIT margin. If you do that, and the company has been through that a long time ago, you start managing the company through a KPI, not through a business model. The consequence of that, and we have been there, is you start cutting advertising, cutting in our R&I or cutting innovation when you are under pressure. We are managing the company through a long-term business model, delivering on our guidance, but not creating a new guidance. We had the discussion in the past when we were expecting tailwinds, we said we will reinvest the tailwinds in the future growth of the company.
Okay.
We will be consistent on our guidance.
Okay. Thank you. Before we finish, it would be good to hear your perspectives on the use of AI within the company. If we look at the investments you've made so far in AI, would you view these as more on cost savings, operations side, or in demand creation?
I will do a duet as well on that. Christian, when we look at AI, we look at it in some ways in three dimensions. There is a dimension where, in partnership with Microsoft, we've put everyone on Copilot to give a culture of AI throughout the company. It's raising the floor of everyone in the company so that they are familiar with AI, they use the tools, or we do it in a sandbox to preserve our data, but are making sure that we lift the company from an AI standpoint. There are verticals where we say, "Well, we think there is a return on invested capital, or return on investment. We think it can have an impact." We do things. We obviously use AI in research and development.
When you have a base of 1,200 ferments, you start playing and forecasting around the ferments in a radically different way. We use AI in our marketing, or we use it in content creation, or we use it in consumer relationship. If you look at what we are doing with tools like a tool tracker, it's more than marketing, by the way. It becomes business model. We use AI as well in everything that is productivity, so the quality of our forecast, finance, and a number of things. I'm sure that Juergen will complement. We also are starting to plan for the long run, the impact of AI on people.
If you say, well, in 10 years or 80% of the jobs would have changed, in a Western world where the availability of people is going to be scarce, making sure that you manage in parallel your pyramid of age and your pyramid of knowledge, and making sure that you become very good at upskilling and reskilling. Make sure that in 10 years' time, you still have the capabilities that you need, knowing that you won't find them or you won't find a number of them on the market is something that we are also doing. Literally three dim-.
The apprenticeship model's not completely dead then, is that it?
No, the apprenticeship model is not completely dead. The permanent learning model is not completely dead.
Actually, that's where we believe that as Danone, we have a distinctive strength.
Yeah. In the end, we are going through three phases. The first phases was very broad education on the topic. We had individual productivity. I do my job better every single day. We went relatively fast into this collective productivity, especially on the supply chain management. One of the reasons why we are able to deliver very high level of productivity with our cost of goods sold is because we had focused there first and foremost, because the business cases were the most tangible and the most easy to access. When you go today to Poland, to Opole, it's one of the most digital factories in the world in specialized nutrition, and it shows what is possible.
Phase III is now as we go, which is going faster and more efficient on R&I, and going faster and more efficient on the way we engage consumers and retailers, which is extremely important.
Okay, thank you. Maybe just looking at agentic AI, I think really interesting on the procurement side of retailers and how they use it in price negotiations as well as on product discovery side. What are your thoughts and perspectives on that and how prevalent it is?
Well, they use it, we use it. We use it with our suppliers. We use it to prepare also what we do with retailers. That is becoming standard practice. Where agentic AI is super interesting is in consumer relationship.
Yeah.
The speed and the breadth at which you can detect what's happening, answer to what's happening, surfacing either issues when there are issues or trends, is really impressive. The speed at which you can create screen narrow or product concept is really interesting. There is a whole dimension around consumer that is very interesting. There is a whole dimension in sales that is very interesting. You'd go in France with one of our sales guy, uses image recognition powered by AI to do a store check, look at where the things are, how should they be? You have a sales force productivity that is immediate.
Okay, thank you. Well, look, we've come towards the end of our formal Q&A. Antoine, Juergen, thank you very much, first of all. Perhaps you'd like to make some closing remarks on the outlook for Danone in 2026, and indeed, are we at peak protein or even peak protein growth?
The first question is, no, we are not at our peak protein. It's going to keep going. What we are doing in protein, specifically on that topic, is yet again, move from protein to benefit. What does the protein does to you? What does the carrier of the protein do to you? We are only at the start of the journey, and obviously the expansion of our GLP-1 is helping. Aging population is helping because people need protein for their muscles and for mobility. Cancer is sadly helping. There are secular trend. Which brings me probably to the second thing, which is where I started, which is the choice we've made of a company that is only health through food, which is science-based and consumer and patient-focused.
Position us with a portfolio that is healthy, 85% of our product are three and a half star, health star, or more, with products that have an impact on your health. Position us exactly at the point where the consumer trends are going. The market is coming our way, which gives us all the confidence in the world that we will deliver our guidance.
Okay. Well, look, Antoine, Juergen, thank you very much indeed for your time today.
Thank you.
Very clear and very interesting to hear your perspectives. Thank you very much indeed.
Thank you too.
Thank you.