Flash Note – Danone August 31St, 2020

FLASH NOTE – DANONE AUGUST 31ST, 2020

Danone Danone (Ticker: DANO) Ticker Site BiG BN Ticker BiGlobal Trade BN Description Ticker BT24 BN Danone, a global leader in the food and beverage sector, with its mission to “bring health Ticker BiG Power Trade BN through food to as many people as possible”, is structured around in three main P/E Ratio 2020E 16.60 segments: EDP – Essential Diary & Plant-based - (about 50% of revenues); Specialized P/BV Ratio 2.24 Nutrition (30%) and Waters (20%). In terms of value, Danone is the nº1 worldwide for EV/EBITDA 11.52 Source: Big Research; fresh dairy products and plant-based foods and beverages, as well as the nº 3 worldwide for packaged waters and nº2 worldwide for early life nutrition. Geographically, Europe Price and Performance (Values in USD) and NorAm represent more than 50% of the business. Danone employees more than 100 Price 56.44 thousand people around the world and manages more than 190 production facilities. The 52 week high 82.38 company is listed in Euronext Paris and integrates the CAC with a market cap of EUR 38 52 week low 50.26 bn. YTD -23.6% Average daily volume (un) 2,312,003 Market Capitalization (mn) 38,753 Beta 0.67 Dividend 2.10

EPS 2.95 Source: BiG Research;

Analysts Consensus (last 3 months)

Buy 21 Hold 8 Sell 3

Source: BiG Research;

Financial Data Sales (USD mn) 25,287 EBITDA (USD mn) 4,623 Number of Employees 102,449 Source: Company’s data (2019) ROA 4.1%

ROE 11.7% D/E 1.00 Investment Case Dividend Yield 3.72% Leading Position: Danone is one of the leading companies and has a well-established

Source: BiG Research; position in every business segment.

Notes: Focus on healthier options: Nowadays there is an increasing concern regarding people’s All quotes were updated in Bloomberg at habits, and food is one of the main topics. Consumers are more conscious and informed 16h45 of August 27th, 2020. than ever, and the desire for healthier options is escalating. Danone understood that trend rapidly and started to adapt its portfolio very soon. Thus, the French group is already a Relevant Information: leader in these types of options. Use the following link to view our most recent publications: Emerging Markets Expansion: Over the past three years, Danone’s “Rest of the world” https://www.big.pt/InformacaoMercad segment has been increasing around 6/7% yoy in comparable sales (vs Europa & NorAm - os/TradingIdeas/Index/-1 1/0% yoy). China is the leading market in this segment, accounting with already 10% of total sales (second largest country after US). Use the following link to see our recommendation history: Gradual Profitable Growth: Since 2014, Danone has been improving the group’s https://www.big.pt/pdf/Newsletters/nl profitability. The recurring operating margin went from 12.9% in 2015 to 15.2% in 2019. d.pdf EDP profitability remained almost constant over the past years, however, Specialized Nutrition improved 390 bps and Waters 160 bps since 2016. Geographically, over that period, “Rest of the World” operating margin improved from 10.7% to 16%, surpassing “Europe and NorAm” margin that decreased from 16.6% to 14.6%. Analyst:

João Calado, CFA This document has been prepared exclusively for informative purposes, and is based on publicly available information, retrieved from sources deemed trustworthy. BiG does not assume any responsibility for the full correction of the information provided, and the information here provided should not be interpreted as an indicator that any results will be achieved. We emphasize that the projected results are susceptible to alterations due to changes With the contribution of: in the assumptions that have served as basis to the information here provided. We forewarn that the previous performance of a security is not a Francisco Fonseca guarantee of identical performance in the future. Changes in exchange rates of securities denominated in a currency different from that of the investor may lead to a negative impact on the value, price or return of such securities. BiG may provide additional information, if so is requested. This document is not a sale proposal, nor a purchase solicitation for the subscription of any securities. Research: BiG ensures independence in investment recommendations under the terms of points 7.23 and 7.24 of BiG's Conflict of Interest Management Policy. BiG continuously monitors the recommendations issued by analysts under the terms of the Code of Conduct and Personal Transactions Policy. [email protected] 1

FLASH NOTE – DANONE AUGUST 31ST, 2020

Free Cash Flow Generation: Danone has also a robust Operational Cash Flow generation

capability. Over the last three years, this measure has increased from close to EUR 3 bn in 2017 to EUR 3.4 bn in 2019. Meanwhile, capex remained constant, averaging just less than EUR 1 bn, giving room for the French group to recompensate shareholders and decrease debt. In 2019, the Operational Cash Flow yield was around 7%.

Stable Financial Position: Currently, Danone has almost USD 20 bn and a Net Debt/ EBITDA close to 3x. Yet, a great portion accounts for the WhiteWave acquisition back in 2017 and is not correlated to poor management that degraded the company’s financial

position over the past years. Since the acquisition, Danone has been able to decrease its obligations and meet all its indebtedness goals.

Dividend Distribution: Over the past 10 years Danone has consistently increased its

dividend at a CAGR of 6%. In 2019, even with the economic uncertainty the company still distributed EUR 2.1 per share, which corresponds to a dividend yield of 3.7%.

Zero/Low growth in the largest markets/segments: Danone’s largest segments, by

product (EDP) and by region (Europa and NorAm), have been reporting almost no growth over the past years. More specifically, Europe and NorAm (54% of sales) comparable sales were -1.2%, -0.8% and 0.4% between 2017 and 2019. During that time, the operating margin decreased as well, as mentioned before. In addition, EDP’s (around 50% of sales)

comparable sales were -1.8%, 1% and 1.1% over 2017 and 2019, while the operating margin remained constant.

Analyst:

FLASH NOTE – DANONE AUGUST 31ST, 2020 IS (USD mn) 2017 2018 2019 Revenues 24,812 24,651 25,287 Income Statement COGS 12,630 12,730 12,878 - Sales: Danone divides its business in three main categories: EDP which aggregates Selling expense 5,831 5,685 5,773 General and adm. expense 2,229 2,342 2,385 52% of revenues, Specialized Nutrition with 30%, and finally Waters with 18% of sales. R&D expense 342 337 351 Revenue (USD mn) Revenue Operating Other op. expense (income) 51 816 662 Segments Operating Income 3,729 2,741 3,238 2016 2017 2018 2019 Growth (LfL) Margin Interest and other income 436 348 371 EBT 3,293 2,393 2,867 EDP 10735 13104 13056 13163 1.1% 10.2% Taxes 842 716 793 Specialized Nutrition 6634 7078 7115 7556 5.8% 25.3% Share of profit of associates -109 -762 46 (gain) Waters 4574 4630 4480 4568 1.5% 13.0% Non controlling 110 90 99 Total 21943 24812 24651 25287 2.6% 15.2% Net Income 2,450 2,349 1,929 Source: Company’s data Earnings Per Share 3.90 3.63 2.95 Source: Company’s data - CoGS (51% of revenues): industrial costs (raw material costs, depreciation of Earnings Per Share (EUR) industrial assets and personnel costs relating to production activity) and certain logistics and transportation costs. 3.90 3.63 - Operating Expenses: Selling Expenses (mainly marketing expenses and consumer 2.80 2.95 1.90 2.10 promotions) represent the greatest portion of these costs, averaging 23% of sales. 1.55 - Other operating expenses: o in 2018, Centrale Danone has subject to a boycott in Morocco, notably of its

2014 2015 2016 2017 2018 2019 H1 20 sales of milk under the Centrale brand, and has experienced a severe downturn in its activity and a significant decrease in its sales. o in 2019, Danone announced the proposed transformation of its organization Source: Company’s data -2% yoy based on the following priorities: integration of its Early Life Nutrition and

Advanced Medical Nutrition activities as well as the organization of its activities around 13 regions. - Effective Tax: around 27%

Revenue (USD mn)

26,000 16%

24,000 12%

22,000 8%

20,000 4%

18,000 0% FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

FCF (USD mn) 2017 2018 2019 Organic Growth Operating Margin Operational Cash Flow 2,959 3,112 3,444 Business Net Income 2,559 2,440 2,028 Source: Company’s data D&A 974 1,601 1,386 Share of profit of associates net -54 -729 99 of dividends received Free Cash Flow Changes in WC -123 -59 -311 - Over the last years, the company has been increasing its Op.CF generation, reaching Others -397 -141 242 Investment Cash Flow -11,436 334 -1,008 up to EUR 3.4 bn in 2019. Given the valuation by the end of 2019, the Op. CF yield Capex -969 -941 -951 was above 7%. Outros -10,467 1,275 -57 Financial Cash Flow 8,289 -3,251 -2,400 - Typically, Danone invests around EUR 1 bn in capital expenditures (around 3.8% of Debt change -1,487 -1,857 -1,889 Dividends -279 -431 -1,256 total sales) Others 10,055 -963 745 - On June 26, 2020, the dividend proposed concerning the 2019 fiscal year – EUR 2.10 Forex 272 14 -231 Change in fcf 84 209 -195 per share (dividend yield 3.7%) was approved. In 2019, dividends were all pain in cash Cash at the end of period 638 847 652 but previously shareholders could choose between new shares or cash. Source: Company’s data

- No buybacks.

Dividend (EUR) Operational CF (EUR mn)

CAGR 2015-2019: 7% 4,000 14.0% 2.10 1.90 1.94 3,000 1.70 11.0% 1.60 2,000

8.0% 1,000

2015 2016 2017 2018 2019 0 5.0% 2016 2017 2018 2019

Source: Company’s data Capex ROIC Analyst: Source: Company’s data João Calado, CFA This document has been prepared exclusively for informative purposes, and is based on publicly available information, retrieved from sources deemed trustworthy. BiG does not assume any responsibility for the full correction of the information provided, and the information here provided should not be interpreted as an indicator that any results will be achieved. We emphasize that the projected results are susceptible to alterations due to changes With the contribution of: in the assumptions that have served as basis to the information here provided. We forewarn that the previous performance of a security is not a Francisco Fonseca guarantee of identical performance in the future. Changes in exchange rates of securities denominated in a currency different from that of the investor may lead to a negative impact on the value, price or return of such securities. BiG may provide additional information, if so is requested. This document is not a sale proposal, nor a purchase solicitation for the subscription of any securities. Research: BiG ensures independence in investment recommendations under the terms of points 7.23 and 7.24 of BiG's Conflict of Interest Management Policy. BiG continuously monitors the recommendations issued by analysts under the terms of the Code of Conduct and Personal Transactions Policy. [email protected] 3

FLASH NOTE – DANONE AUGUST 31ST, 2020

Balance Sheet (mn) 2019 2Q20 Assets 45,363 46,684 Balance Sheet Cash & Equivalents 644 769 - Due to Danone’s several acquisitions over the past years, goodwill represents around Short-term investments 3,631 5,102 Receivables 2,906 2,702 40% of total assets. Inventories 1,933 2,150 - Acquired brands that are distinguishable, have significant value and have indefinite PP&E 6,844 6,604 useful lives are recorded under the heading Brands in the consolidated balance sheet Goodwill 18,125 17,766 Brands 6,329 6,174 - As of June 30, Danone had EUR 5.9 bn available in cash and cash equivalents, and Other Assets 4,951 5,417 total debt of EUR 19.8 bn, which corresponds to a net debt position of USD 13.9 bn. Liabilities 27,983 30,235 Debt 17,380 19,798 Accounts payable 3,959 3,901 Debt Deferred taxes 1,556 1,522 Other liabilities 5,088 5,014 - Considering the EBITDA of the last 12 months, Danone has a leverage ratio of 3.1x Total Shareowner's Equity 17,380 16,449 (the company is not subject to any financial covenant). Total Equity and Liabilities 45,363 46,684 - Danone has a considerable amount of debt due to the WhiteWave acquisition, which Source: Company’s data increased net debt from EUR 7.4 bn to EUR 15.4 bn, from 2016 to 2017.

- As of December 31, 2019, projected cash outflows related to the contractual

repayment of the principal amount based on the assumption of non-renewal was the

following:

Source: Company’s data

- Danone launched two EUR 0.8 mn bond issues in the 1Q of 2020 and holds as of June 30, 2020, a portfolio of EUR 3 bn of available committed credit facilities and EUR 6 bn of cash and short-term investments.

Last results (1st Semester 2020) Revenues: - Organic growth decreased 1.1% yoy and total sales came as EUR 12.2 bn (-3.6% yoy) - E-commerce grew 30% yoy while sales in out-of-home channels declined 30% yoy on a like-for-like basis.

Recurring operating Income: -8.4% to EUR 1.7 bn, which represents a margin of 14% (- 72bps yoy). Decreased due to incremental costs directly related to Covid-19 and reduced operating leverage mostly from Waters.

EPS: -2% yoy to EUR 1.55

Analyst:

FLASH NOTE – DANONE AUGUST 31ST, 2020 Free Cash Flow: -14% yoy to EUR 0.9. Operational CF – EUR 1.3 bn – decreased 10%, and capex – EUR 0.4 – increased 6%.

Balance Sheet: Net Debt increased 5% to EUR 13.5 bn, mainly due to the issuance of two EUR 0.8 bn bonds.

No financial guidance for second the semester

Earnings call (H1 2020, 30 July)

“What is definitely clear for us is that there will be a further hit in the margin by the continued obvious COVID cost…the continued negative mix that we are facing (categories and within categories when it comes to channels and formats mostly).

“Probably add to that what Cécile mentioned about CapEx where we need to reaccelerate a number of things and continue the transformation that will also drive additional costs”

“we believe in '21 (onwards) that this progressive normalization will support us towards our pre-COVID financial objectives and the midterm guidance”

“Today, WhiteWave's legacy business is growing double digit. Cécile mentioned Plant- based, but there is no category in which we are not growing at 10% in WhiteWave on the H1”

Top Line H2: • EDP: “same trend as we have done in Q2, with continued increased at-home consumption level, both in Europe and North America, and continued disruptions in Latin America and Africa”

• Special Nutrition:” we expect the second half to confirm the underlying trends

that we observed in H1”

Margin H2:” Our expectation today that probably we will be close to H1 margin “ • “on the expectation of extra COVID cost, we think we will be around the same magnitude” • “Mix will continue to be impacted” • “EUR 100 million extra investment in H2”

“China is about half of the total market in the world in Early Life. So the growth of Feihe (competitor) is a fact. There's no doubt this company is on a super strong momentum for the last 18 months now. That does not mean that there is not growth potential for others. Our most premium brand, Aptamil Platinum, has been growing double-digit over Q2 and

has gained market share.”

“Water, we were nearly at 70% of the channel being closed. We are growing in hypermarkets. And this is really where we focus today our investments and our support because this is where consumption is, and it's very important to anchor the mineral water and the spring water category in the daily consumption of people.”

“we are going to accelerate even more on e-commerce”

“there will be a polarization of the market. There won't be a middle class anymore in a way”

Analyst:

FLASH NOTE – DANONE AUGUST 31ST, 2020 Management Emmanuel Faber (CEO & Chairman): - Emmanuel joined Danone in 1997 as CFO, and became a member of the company’s Executive Committee in 2000. In 2005 he took up the position of Vice-President for the Asia-Pacific region. In 2008, Emmanuel was appointed Deputy General Manager and, in 2011, he became Vice-Chairman of the Board of Directors. In 2014, he became Danone’s CEO, and in 2017 Chairman of the board.

- Since Emmanuel joined the company as CFO, the share price went from EUR 16 to EUR 80, in 2019. - Since 2019, Emmanuel Faber is Co-Chair of the Consumer Goods Forum, a CEO-led organization that helps the world’s retailers and consumer goods manufacturers to collaborate, alongside other key stakeholders, to secure consumer trust and drive positive change, including greater efficiency. - In 1996, he moved to Legris Industries, where he was named CEO. - Emmanuel Faber began his career as a consultant at Bain & Company before working as an investment banker at Baring Brothers. Emmauel Faber - Graduated from HEC Paris in 1986 - Compensation: EUR 4.65 bn in 2019 and EUR 4.6 bn in 2018

Source: Company’s data

Cecile Cabanis (CFO & Vice-President): - Cécile Cabanis joined Danone in 2004 and has served in a range of key positions in finance, including Corporate Finance Director, then head of Business Development. In 2010, she was appointed VP Finance for the Fresh Dairy Products division. Since February 2015, she is CFO and member of the Executive Committee. In March 2017, besides her responsibility as EVP CFO, and Strategy, Cécile Cabanis took the leadership for Information Systems and Information Technology (IS/IT). In October

2017, Cécile Cabanis added Cycles, Procurement and Nature Sustainability to her scope of responsibility and becomes EVP, Chief Financial Officer, IS/IT, Cycles & Procurement. - In 2000, she was appointed Deputy Director Mergers & Acquisitions at France Télécom. - Cabanis began her career in 1995 with L'Oréal in South Africa as Logistics Manager and Financial Controller before moving to France as Internal Auditor. - Cécile holds an Engineering degree from Institut National Agronomique Paris-Grignon - Cécile Cabanis is also a member of the Board of Directors and Audit Committee of Cecile Cabanis Schneider Electric. - Compensation: EUR 1.7 bn in 2019 and in 2018

Analyst:

FLASH NOTE – DANONE AUGUST 31ST, 2020 Main segments & brands Danone organizes its structures and reports its results according to three different segments:

Essential Dairy & Plant-based: With over 100 brands distributed in more than 120 countries, Danone is the worldwide leader for dairy and plant-based products.

Essential Dairy:

• Yogurts (Classic and drinkable): o yogurt brands such as Danone and Danonino as well as more recent brands like Light & Free that support consumers’ new lifestyles. o functional brands sought by health-conscious consumers such as Actimel, as well as iconic global brands like Activia, which continues to develop products that support digestive health; o indulgence treats with Oikos and Danette in Europe for consumers who are seeking enjoyment in healthier ways and more convenient formats; o high-protein products that offer athletes and sports enthusiasts nutritional foods in a format that fits with their activities, with brands

Source: Company’s data (2019) like YoPRO; • Milk: sold mainly in Russia, Brazil, Morocco, and in the United States where the Horizon brand is a leader in the organic milk market; • Coffee Creamers: includes coffee creamers, products sold under the International Delight, Dunkin’ Donuts (under license) and Bailey’s (under license) brands, as well as coffee beverages under the SToK brand.

Plant-based: focuses on consumers that are looking to diversify their sources of protein or are lactose intolerant. While plant-based beverages and plant-based alternatives to yogurts represent the core product range, Danone is also strengthening its position in new fast-growing categories such as ice creams, desserts, coffee drinks and nutritional powdered protein products. These products are sold in America under the leading Silk, So

Delicious and Vega brands and in Europe under the Alpro brand, as well as through iconic dairy product brands that offer new plant-based alternatives such as Oikos and, more recently, Activia.

Growth drivers: • win over the millennial generation • accelerate plant-based sales • gourmet products • impulsive and on-the-go channels

Revenue (USD mn)

14,000 14%

13,000 10% 12,000 11,000 6%

10,000 2% 9,000

8,000 -2% FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Organic Growth Operating Margin

Source: Company’s data

Analyst:

FLASH NOTE – DANONE AUGUST 31ST, 2020 Specialized nutrition: develops and sells products for individuals with specific nutritional needs across the full life span, from preterm birth until old age: • Infant milk formulas: these products represent the bulk of the segment and are sold under international brands (such as Aptamil and Nutrilon) and local brands (such as Gallia in France, Cow&Gate in the United Kingdom and Bebelac in Indonesia

• complementary food for babies includes strong local brands such as Blédina and

Olvarit in Europe and Happy Family Organics in North America • pediatric medical nutrition portfolio includes products that are specially designed to meet the specific needs of children diagnosed with certain medical conditions. • adult medical nutrition portfolio includes products such as Fortimel and NutriDrink, oral nutritional supplements for patients suffering from malnutrition caused by illnesses such as cancer or CVA, as well as tube feeding (Nutrison) for patients who can no longer feed themselves normally.

Source: Company’s data (2019) Revenue (USD mn)

8,000 30%

25% 7,000 20% 6,000 15% 10% 5,000 5%

4,000 0% FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Organic Growth Operating Margin

Source: Company’s data

Waters: offers a unique portfolio of mineral waters, that come from natural sources, and flavored waters enriched or infused with natural fruit extracts, fruit juice and vitamins. The products are sold under international brands such as evian and Volvic and under many very strong local brands: Aqua in Indonesia, Mizone in China, Bonafont in Mexico, Villavicencio and Villa del Sur in Argentina, Hayat and Sirma in Turkey, Fontvella and Lanjarón in Spain, Zywiec Zdroj in Poland and Aqua d’Or in Denmark.

Revenue (USD mn)

5,000 16%

12%

4,000 8% 4%

3,000 0% FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Organic Growth Operating Margin Source: Company’s data (2019)

Source: Company’s data

Analyst:

FLASH NOTE – DANONE AUGUST 31ST, 2020 Main Markets Europe and NorAm (54% of sales): Europe and North America Rest of the world (46% of sales): includes all markets in ALMA - Asia/Pacific, Latin America, Middle East and Africa - and CIS regions - Commonwealth of Independent States.

Revenue (USD mn) Revenue Operating Segments 2016 2017 2018 2019 Growth (LfL) Margin Europe and Noram 10933 13193 13654 13710 0.4% 14.6% Rest of the world 11011 11484 10997 11577 5.3% 16.0% Total 21944 24677 24651 25287 2.6% 15.2%

Source: Company’s data

Revenue Growth LfL

10% 8% 6%

-2% 2017 2018 2019

Rest of the world Europe and Noram Source: Company’s data

Recurring Operating Margin 18% 16%

14%

12%

10%

8% 2016 2017 2018 2019 Rest of the world Europe and Noram

Source: Company’s data

“Rest of the world” segment has been the company’s growth catalyst. It is already the most profitable segment and the comparable revenue growth is much higher vs Europe & NorAm.

Strategy

“One planet. One health”: Launched in 2017, Danone’s “One Planet. One Health” vision reflects its strong belief that people’s and the planet’s health are interconnected. This vision is inspired by the food generation, i.e. the growing number of people who increasingly care about where their food comes from, how it was grown, how it arrived to them, as well as about social and environmental practices of brands.

2030 Goals: Building on its “One Planet. One Health” vision, Danone has defined nine 2030 Goals to drive long-term sustainable value creation of the company: Business Model • Offer superior food experiences and innovate, always: Danone commits to high

quality and food safety standards Analyst:

FLASH NOTE – DANONE AUGUST 31ST, 2020 • Deliver superior sustainable profitable growth: deliver in the mid-term a consistent mid-to-high single digit recurring EPS growth with like-for-like sales growth to be in the 3% to 5% range, and a Net Debt/EBITDA ratio that the company expects to maintain in the 2.5 x-3.0 x range. • Be certified as a B Corp: mark of trust for companies demonstrating high standards of social and environmental performance (goal of becoming one of the first multinational companies)

Brand Model • Impact people’s health locally: Danone’s mission is to “bring health through food to as many people as possible”. • Grow Manifesto brands: Danone’s goal is to build purpose driven brands – what we call Manifesto brands – that will serve as true activists towards their point of view, not only delivering an exciting experience to people, but also committing to create a positive impact on health and the planet. • Preserve and renew the planet’s resources: Danone commits to sustainable sourcing for its ingredients and to enhancing the circular economy of packaging.

Trust Model • Entrust Danone’s people to create new futures: Danone gives each employee the opportunity to co-own its strategic agenda and the path to its 2030 goals, both at a global and local level. • Foster inclusive growth: Danone will continue to invent pioneering ways to foster inclusive growth for vulnerable partners in its food chain, including family farmers, street vendors and waste collectors • Serve the food revolution with partners: To change the way water and food are grown, produced, marketed, distributed, sold and consumed Danone relies on key initiatives include the active participation in the Consumer Goods Forum, to collaborate with consumer goods retailers and manufacturers to drive positive change, on its USD 200 mn Danone Manifesto Ventures fund to invest in innovative companies disrupting the food sector.

Costumers In 2019, Danone’s top 10 customers worldwide (five of which are French) accounted for approximately 20% of its consolidated sales and the top five represented approximately 13% of its consolidated sales. Thus, Danone has a diversified consumer portfolio and is not depend in one client.

Raw Material Purchasing Danone’s principal raw material needs consist primarily of: • materials needed to produce food and beverage products, mainly milk (nº1), sugar and fruit, as well as fruit-based preparations. • product packaging materials, in particular plastics and cardboard. • energy supplies (limited portion) Since the price trends of major raw materials may affect the structure of company’s results, Danone takes the following measures to manage cost volatility: • continuous productivity gains: Danone strives in particular to optimize its use of raw materials (reductions in production waste, lighter packaging and more effective use of milk sub-components in its products) and take advantage of pooled purchasing, for example through centralized management of purchases other than milk for the EDP and Specialized Nutrition Reporting Entities; • purchasing policy (“Market Risk Management”) that defines the rules for securing the physical supply and price setting with suppliers and/or on financial markets when they exist. The monitoring of exposures and the implementation of this policy are Analyst: carried out for each raw materials category by the central purchasing team. João Calado, CFA This document has been prepared exclusively for informative purposes, and is based on publicly available information, retrieved from sources deemed trustworthy. BiG does not assume any responsibility for the full correction of the information provided, and the information here provided should not be interpreted as an indicator that any results will be achieved. We emphasize that the projected results are susceptible to alterations due to changes With the contribution of: in the assumptions that have served as basis to the information here provided. We forewarn that the previous performance of a security is not a Francisco Fonseca guarantee of identical performance in the future. Changes in exchange rates of securities denominated in a currency different from that of the investor may lead to a negative impact on the value, price or return of such securities. BiG may provide additional information, if so is requested. This document is not a sale proposal, nor a purchase solicitation for the subscription of any securities. Research: BiG ensures independence in investment recommendations under the terms of points 7.23 and 7.24 of BiG's Conflict of Interest Management Policy. BiG continuously monitors the recommendations issued by analysts under the terms of the Code of Conduct and Personal Transactions Policy. [email protected]

10 FLASH NOTE – DANONE AUGUST 31ST, 2020

Production Danone has production facilities around the world in its principal markets and generally policy owns its production facilities. As of December 31, 2019, Danone had 190 production sites. Lastly, Danone rents some facilities, notably offices and warehouses.

Distribution Danone’s distribution models reflect three main approaches: • distribution aimed at major retail chains: Danone has taken several initiatives to work closely with large retailers in order to optimize the flow of goods and the inventory levels of its customers with the Efficient Consumer Response (ECR) • distribution to traditional market outlets: globally, and in the emerging countries particularly, a large portion of Danone’s sales is generated through traditional market outlets thanks to small-scale sales points networks • distribution to e-commerce, on-the-go and convenience stores: o brick-and-mortar companies (major retailers that have created an e- commerce activity); o pure players (e-commerce) o direct to consumer (a proprietary Danone website that enables sales directly to consumers without intermediaries) • In the Specialized Nutrition markets, a significant portion of products are marketed in hospitals, clinics and pharmacies, through specialized distributors or following a tendering process.

Research and Innovation Prepare for the future with a focus on major scientific and technological challenges such as microbiota and biotics, plant-based matrices and new sources of protein, naturalness and organic, packaging and beyond plastic, the development of allergies, etc.

Acquisitions and Disposals The latest main acquisitions were as it follows: • The WhiteWave (2017): Danone acquired WhiteWave for USD 56.25 per share - 24% premium - in an all-cash transaction, representing a total Enterprise Value of approximately USD 12.5 bn. At the time, WhiteWave was a global company which generated USD 4 bn in sales in 2015 and had a portfolio of large and leading branded platforms in North America and Europe in high-growth, on-trend food and beverage categories. With this acquisition Danone doubled the size of its US business and created a truly unique global leader in healthier and more sustainable eating and drinking options.

The latest main disposals were as it follows: • Earthbound Farm (2019): on April Danone completed the sale of the US organic salads business Earthbound Farm to Taylor Farms, in line with its portfolio management and capital allocation optimization strategy. The transaction will contribute to the improvement of the recurring operating margin. Earthbound Farm had annual sales of about EUR 400 mn dollars in 2018.

Analyst:

11 FLASH NOTE – DANONE AUGUST 31ST, 2020

Risks Packaging: Packaging is fundamental to Danone’s ability to provide people around the world with safe, nutritious, high-quality food and drinks. Danone’s total packaging represented 1.6 mn tons in 2019, of which plastic represented 0.7 million tons. Today’s mainstream packaging system is unsustainable and there is a global focus on plastics because large amounts of plastic are flowing into the natural environment, particularly the oceans. As a result, regulatory and consumer pressures around plastics are moving at an unprecedented pace.

Over reliance on principal markets: For the financial year ended on December 31, 2019, Danone’s top 5 markets account for around 50% of the company consolidated sales: USA (19%), China (10%), France (9%), Russia (6%), Indonesia (6%). Any poor performance (by one or more of Danone’s business units within one or several of these 5 countries), due to economic slowdown, political instability, health crisis, etc., would be likely to have a negative impact on Danone’s activities and results of the whole company.

Fast changes in consumer preferences: Fast evolution of consumers’ preferences and habits requires constant innovation and adaptation of Danone’s product range and overall supply chain. If Danone is unable (i) to anticipate rapidly enough changes in consumer expectations in terms of tastes, eating & drinking habits and environmental impacts, the demand for the company’s products and its sales could fall.

Raw materials price volatility & availability: Overall, about 35% of Danone’s Cost of Goods Sold are related to raw materials and around 20% are related to packaging (of which approximately 55% in plastics). Variations in supply and demand at global or regional levels expose Danone (i) to a potential price increase for key raw materials that may not be passed on in the sales price of Danone’s products, as well as, (ii) reduced availability of key raw materials which could adversely affect Danone’s ability to meet consumer demand for its products.

Currency fluctuations: Most of Danone’s subsidiaries operate locally and therefore in the currency of their country. As of December 31, 2019, the main currencies exposed to transactional currency risk were the British pound, the Chinese yuan, the Australian dollar, the Mexican peso and the Hong Kong dollar.

Competition The packaged food and beverage sector is highly competitive due to the large number of national and international competitors. Since Danone operates in several segments all across the world, is has both multinational and local competitors. The multinational ones are the following:

EDP Specialized Nutrition Waters Fresh dairy Plant-based products Coffee Creamers Early Life Nutrition Medical Nutrition products and beverages Nestlé Campbell Nestlé Abbott Nestlé Coca-Cola Reckitt/ General Mills Hain Celestial - Abbott Pepsi Mead Johnson Coca-Cola Unilever - - - Nestlé

Source: Company’s data

Analyst:

12 FLASH NOTE – DANONE AUGUST 31ST, 2020

Relative Valuation Market Cap Div. NetDebt/ Margin Name Country P/E 2020 EV/EBITDA YTD ROA CFO/Capex FCF / Price (mn) Yield EBITDA EBITDA COCA-COLA CO/THE UNITED STATES 208,565 26.6 20.7 -12.3% 3.3% 10.0% 3.0 5.1 31.2% 3.3% NESTLE SA-REG SWITZERLAND 318,869 26.1 16.7 5.6% 2.4% 10.7% 1.6 4.3 23.4% 3.7% UNILEVER N V -NY SHARES BRITAIN 157,456 20.4 13.8 3.1% 3.1% 8.8% 2.1 5.9 20.9% 5.4% GENERAL MILLS INC UNITED STATES 39,673 18.3 14.0 21.2% 3.0% 7.2% 3.3 8.0 20.9% 8.1% DANONE FRANCE 38,753 16.6 11.5 -23.6% 3.7% 4.1% 2.7 3.6 18.4% 6.7% Average exc. Danone 22.9 16.3 4.4% 3.0% 9.2% 2.5 5.8 24.1% 5.1%

Source: Company’s data

Danone is trading with cheaper multiples, considering both P/E and EV/EBITDA (16.6 vs 22.9 and 11.5 vs 16.3, respectively). Partially, that can be explained with the company’s lower ROA, EBITDA Margin and a CFO/Capex. Nevertheless, Danone pays a higher dividend yield (3.7% vs 3%) and has a higher FCF yield (6.7% vs 5.1%).

Environmental, Social, and Governance (ESG) Environmental: Danone defined its environmental strategy based on four main priorities: • Fight against climate change: cutting emissions, keeping more carbon in the ground, keeping more carbon in the ground, eliminate deforestation from its supply chain by 2020

Source: Company’s data

• Transition toward regenerative agriculture that includes organic agriculture: protecting soils, water and biodiversity, empowering a new generation of farmers (main players in the transition toward regenerative agriculture) and respecting animal welfare • Circular economy: – Packaging: design all its packaging so that it is 100% recyclable, reusable or compostable (vs 81% in 2019) and develop alternatives to plastic packaging or single use packaging in all principal markets of the Waters, by 2025), – Waste Management: eliminating waste through optimized production and distribution processes and increasing the volume of donations to food banks and alternative food distribution channels with a social purpose. • Water stewardship: preserve and restore water resources in agriculture and water sheds, ensure that not a drop is wasted in operations and enable access to water

Social: • Danone Communities: In 2007, Danone created the Danone Communities SICAV and the Danone Communities FPS. The SICAV invests (i) at least 90% of its assets in money market instruments, bonds and other vehicles that emphasize socially

Analyst: responsible investment, and (ii) no more than 10% in the FPS.

13 FLASH NOTE – DANONE AUGUST 31ST, 2020 • Danone Ecosystem Fund: The Company created the Danone Ecosystem Fund in 2009, with initial funding of €100 million. Since its creation, the Fund has supported projects in five key areas: sustainable sourcing, micro-distribution, recycling, personal care, and sustainable management of land and catchment areas • Livelihoods Carbon Fund: Dedicated to restoring ecosystems and carbon assets. It seeks to invest in three types of projects in Africa, Asia and Latin America: (i) restoration and preservation of natural ecosystems; (ii) agroforestry and soil restoration through sustainable agricultural practices; and (iii) access to rural energy to reduce deforestation. • Livelihoods Fund for Family Farming: It enables small farmers to adopt more sustainable practices and boost revenue. These projects also help to preserve ecosystems through farming practices combining productivity and respect for the environment.

Graph

Source: BiG Global Trade

Calendar October 30th, 2020: 3Q Earnings release

Appendix

Analyst: Source: Company’s data

14 FLASH NOTE – DANONE AUGUST 31ST, 2020

Source: Company’s data

Analyst:

15 FLASH NOTE – DANONE AUGUST 31ST, 2020

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Analyst: