Danone Shareholders Publish Letter Calling for Changes in the Company

Daniel J. O'Keeffe, Senior Portfolio Manager, Artisan Global Value Strategy, and N. David Samra, Senior Portfolio Manager, Artisan International Value Strategy, sent an open letter to Gilles Schnepp, Senior Independent Board Member elected to Danone, Inc.

The shareholders, who represent 3% of the company, expressed their opinion on the results of the company's performance and the proposed development path for Danone.

The letter notes the company's positive environmental record but criticizes the company's financial performance and calls for changes, including separating the roles of the CEO and chairman.

“As you know, over the past year, the Artisan Partners International Value and Global Value teams have invested heavily in Danone, around $1.6 billion – more than 3.0% of the company’s shares, making us one of the top three shareholders,” the letter begins.

“Both teams are long-term investors, jointly managing over $45 billion in long-term capital. Our teams are proud of their track record of supporting the company's European operations as constructive shareholders with a very long-term investment horizon. For example, over a decade we have invested in companies such as Diageo, Unilever, Novartis and Sodexo.

“For us, Danone's appeal is very simple: the company has one of the best collections of assets in the global food industry. The company's brands are popular with consumers, have a strong market position, and are in categories that have natural growth rates above industry averages. Danone is truly a star and a well-deserved French icon of the industry.”

The letter, however, says that Danone's financial performance does not match the quality of its assets.

“By almost every measure, Danone is lagging behind,” the letter continues.

“Revenue lags the growth rate of the respective category, margins are lower than in the peer group, and profitability is flat or declining. As a result, the company is in a weakened position, as evidenced by job losses and poor stock returns over the past one-, three-, five-, and ten-year periods.”

The letter states that Schnepp, as the future lead independent DIRECTOR, will oversee the further development of Danone.

“Your operating experience and track record of success is welcome and much needed. Our analysis shows that Danone's problems have been around for several years. While the covid-19 pandemic has had a negative impact on some products in the short term, the larger, longer-term challenges stem from insufficient investment in product innovation, development, and support. In addition, the company allocates resources inefficiently, and the allocation of capital destroys value, creating a lack of resources for the necessary investment in growth.

“These problems have led to the creation of operating structures and dependence on certain financial results that are deeply ingrained and difficult to change even for the most experienced company managers. A breakthrough requires deep manufacturing and operational experience outside the company, not financial leadership. We hope you share our view that changes are urgently needed to avoid irreparable damage to the group's iconic brands and market position."

Investors say they welcome the steps the company has taken to become a more environmentally sustainable and socially responsible enterprise.

“But while the company's environmental efforts are cutting edge, the same cannot be said for its corporate governance. The steps to rectify such a situation are simple and should not cause controversy. The roles of chairman and CEO should be separate. In addition, proper corporate governance standards require the presence of truly independent directors, excluding the former management of the company. it would be wise for the company's management to be able to carry out the new plan without the inertial participation of former leaders.

The letter continues: “It was not an easy decision for us to make our views public. This is neither our preference nor a feature of our investment strategies. But Danone is embarking on yet another reorganization using a new structure that has not proven successful in other global food companies. Danone is also considering a merger, acquisition or sale that could further complicate or weaken the business. Time is of the essence now, and now is the opportunity to make changes that can revitalize the company.

“Given the Board's lack of experience in consumer products, we took the initiative to develop a plan with the advice of Jan Bennink, an industry leader who has held leadership positions in two of Danone's three divisions. Mr. Bennink has a track record of driving growth and innovation, as evidenced by his accomplishments while serving as President of Danone Dairy (now EDP) and CEO of Numico. Our plan is based on fundamental, long-term growth and value creation.

“Our approach is not based on financial engineering, splitting the business or selling the company. It aims to ensure the growth of the company's value for all stakeholders in the medium and long term. We stand ready to share our plan with you and the rest of the Board of Directors at the earliest opportunity and before any fundamental decisions are made regarding the future of Danone or its leadership. We look forward to continuing to work with you and other members of the Board of Directors.”

Regarding this letter, Danone told DairyReporter in a statement that the board of directors and the management team are fully committed to maintaining the company's value in a sustainable and responsible manner.

"We welcome any investment and value constructive views on how to deliver long-term and sustainable value to the company," the statement said.

PioneerProduct based on Jim Cornall, dairyreporter.com