Reported sales were down mainly resulting from the deconsolidation from April 1, 2019 of Earthbound Farm, a negative impact from exchange rates (-2.1%) mainly driven by currency devaluation in Latin America and Russia as well as a +0.4% organic contribution of Argentina to growth.
The company said that while there was solid momentum in first quarter, the second quarter was hit by global lockdown with sales down 5.7% on a LFL basis.
Its Essential Dairy and Plant-based and Specialized Nutrition grew 3% in the first semester, however, Waters was down 19%.
Recurring operating margin was 14%, compared to 14.7% the previous year.
After strong momentum in the first quarter with sales up 3.7%, sales decreased by 5.7% in the second quarter on a like-for-like basis, hit by the expansion of the COVID-19 pandemic into new regions most notably Latin America, the reversal of pantry loading behaviors observed in the first quarter and the full impact of out-of-home closure in the quarter.
Performance by channel was very contrasted, with e-commerce growing at 30% in H1 while sales in out-of-home channels, representing 11% of 2019 sales globally, declined 30% on a like-for-like basis.
In terms of regional dynamics, Europe and North America posted stable sales (+0.5%) in the first semester, down by 3.5% in the second quarter after a strong start of the year. North America, the region where the company has the largest footprint, continued to see solid momentum in Q2 while sales in Europe declined, mirroring the reversal of pantry loading that occurred in the month of March and lower sales normally consumed away from home in Waters.
In Rest of the World, while trends in CIS and China were broadly in line with the previous quarter, revenues declined severely in other key regions as the impact of the COVID-19 pandemic become felt notably in Latin America, Indonesia and Africa.
Danone’s recurring operating income stood at €1.7bn ($2bn) in the first semester. Recurring operating margin stood at 14%, down 72 basis points. The change includes a negative 93bps effect from incremental costs directly related to COVID-19 incurred in the semester to keep employees safe and ensure business continuity.
These costs amount to €114m ($134m) and include around €40m ($47m) of sanitary costs (acquisition of masks, gloves, sanitizer and tests), around €35m ($41m) of donations and specific bonuses paid to the 60,000 employees that continued working on frontline during the pandemic lockdowns, and around €40m ($47m) of extra-logistic costs related to warehousing adaptation, and higher freight and transportation costs.
Excluding these costs, recurring operating margin would have increased to 14.9% despite a reduced operating leverage and a mix effect of -80bps incurred in the period mostly from Waters. To mitigate these headwinds, the company increased its efforts on efficiency and cost discipline. Brand investments were reduced only marginally (-23 bps in the semester) to sustain the competitiveness of brands. Reported margin also reflects a positive effect from change in scope (+20bps) and currencies (+33 bps), and a slightly negative effect of -6bps reflecting Argentina’s impact on margin.
Recurring operating margin is expected to remain impacted in the second half by Covid-19-related extra-costs, negative mix, as well as increased investments in the competitiveness of the business, as the company is leveraging the crisis as a catalyst to accelerate the business transformation that was already underway to emerge stronger.
Dairy & Plant-based (EDP) posted net sales growth of 3.1% in H1 2020 on a like-for-like basis, and margin remained slightly over 9%.
After a strong Q1 performance, EDP maintained revenue momentum into the second quarter with net sales up 1.6% on a like-for-like basis, including a 1.8% increase in volume, and a 0.2% decline in value. Europe and North America posted solid growth, demonstrating the continued dailiness resilience of the Essential Dairy business, growing at low-single-digit levels, and the increased penetration of Plant-Based which continued to grow at double-digit rate in Q2.
In the rest of the world, sales trend in CIS was broadly similar to Q1 while in Latin America and Africa, sales declined at high-single digit rate as lockdown restrictions implemented in Q2 affected sales in traditional proximity stores - the biggest channel in those regions.
Specialized Nutrition posted net sales growth of 2.7% in H1 2020 on a like-for-like basis. Margin improved by 113bps to reach a record level of 26.4% benefiting from synergies from the Early Life and Medical Nutrition integration.
In the second quarter, sales were down 2.2% on a like-for-like basis. The average price/kg continued to increase by 1.5% thanks to further premiumization. Volume declined by 3.7% primarily driven by Europe with sales down around 10%, as a significant destocking occurred after an exceptional month of March that saw sales increase more than 30%.
Total sales in China were broadly flat, with good performance of adult nutrition business and sales in infant nutrition still affected by Hong-Kong border closure and continued travel restrictions. The company continues its expansion in the country in the ultra-premium segment with the introduction of a number of innovations over the quarter, notably the range Aptamil Essensis. Elsewhere the business continued to benefit from strong momentum, notably in South East Asia.
Looking into the second-half, business remains difficult to predict as the environment is still volatile and much uncertainty remains about the severity, the duration and the implications of the pandemic as to how exactly macroeconomic conditions, lockdown easing and consumer habits will evolve for the rest of this year. Danone said it is not in a position to provide an updated financial guidance for fiscal year 2020 at this time.
Emmanuel Faber, chairmand and CEO, said, “Our second quarter began as the scale of the COVID-19 pandemic started to take hold globally, with roughly half of the world’s population living under lockdown. I want to thank everyone at Danone for their intense dedication over these last few months. Their continued focus on execution excellence and the culture of greater efficiency, agility and local proximity that had been infused in the past four years enabled us to navigate the enormous challenges and disruptions that were happening in our environment in a responsible manner while driving our brands’ preference and protecting our cash in what has been one of the toughest quarters in Danone’s history.
“While it remains difficult to predict exactly how consumer habits and macroeconomic conditions will evolve for the balance of this year, in particular given the uncertainty around the easing of lockdown measures, we’re confident that Q2 was the most challenging quarter of the year and the back half of the year will show a sequential improvement in growth.
As we adapt to the new COVID world, our compass remains to deliver superior sustainable profitable growth and to lead the way in creating and sharing sustainable value in a world where concerns about society, health and the planet are core to our business.”