Danone has indicated an appetite for further M&A as the dairy major reached a milestone in free cash flow, supported by another year of EPS gains.
“We want to move to the front foot on acquisitions,” CEO Antoine de Saint-Affrique said today (26 February) when asked on an analyst call where the money would be put to work.
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Free cash flow rose €400m ($420.4m) to €3bn in the 2024 financial year, meaning Danone has added €900m to its coffers since 2022.
At the same time, return on invested capital (ROIC) climbed 50 basis points to 10%, a level the Activia yogurt and Evian bottled water owner has not achieved since 2016, CFO Juergen Esser said as the executives presented the latest annual results.
“It’s very important that we are staying structurally in double-digit ROIC territory, which I think is very important and a strong frame to support our M&A activity,” he added. “A continued focus on working capital management has enabled us to post a record free cash flow.”
De Saint-Affrique said the business had invested 100 basis points annually in its brands and “capabilities” since introducing the Renew Danone strategy three years ago and provided an inclining of potential acquisition areas.
“We are convinced that the food industry is at a tipping point,” the CEO said, framing his comments in the context of the increasing consumer interest in gut health and the microbiome, protein, immunity and health in general.
“The name of the game for us is not only to invest in future looking science, but obviously to turn this science into relevant, consumer and patient-centric innovation, and in doing so, to drive the growth of our categories.”
Making a discreet reference to the bid for Lifeway Foods, de Saint-Affrique told analysts that “you’ve seen us make a move on kefir in the US”.
Danone has been in a drawn-out process to fully acquire Lifeway Foods since last September, when it sought to increase its 23% minority stake. The US company rejected the offer in November before the Paris-headquartered company upped its price, only to be turned down again.
M&A rationale
Today, de Saint-Affrique explained his rationale for future acquisitions.
“Does it improve our market shares? Does it improve our market position in places where we are not? Does it bring us businesses or capabilities in places where we are lacking those capabilities?
“We want to do that in a way that is financially responsible, making sure that the impact on ROIC is very limited in time and where that acquisition is structurally improving the quality of our business.”
A “step-up” in working capital to minus 8.5% of sales and an increase in underlying earnings per share contributed to the all-time high in free cash flow, CFO Esser said.
Danone’s recurring underlying EPS rose 2.5% last year to €3.63, based on sales of €27.4bn, which represented a like-for-like increase of 4.3%.
The recurring operating margin also moved higher, coming in at 13%, compared to 12.6% and 12.2% in the previous two years.
“We have been reinvesting very consistently. We progressively rebuilt our share of ROIC to share of markets,” de Saint-Affrique explained.
“We reinvested behind our brands in media, and there the journey is not over because obviously we moved from a place where we were massively under invested, to a place where we are getting closer to our fair share.”
Danone’s overarching strategy geared toward consumer health is also likely to benefit from the increasing use of the GLP-1 weight-loss drugs in the US, the CEO suggested, with a passing reference to the Make America Healthy Again campaign under the Trump administration.
“The trend of GLP-1 is significant in the US. The counter or negative effect for the people is the risk of muscle loss, so yogurts with protein become the absolute answer to what is a deep trend,” de Saint-Affrique said.
“We see no slowing down of the GLP-1 trend in the US. Interestingly, we see in the US a push for more natural and healthier food with the new administration, which happens to be very much in sync with what we are selling.”
