Market news and a robust update from Nestle.
Market News
US equity markets were little changed last night – S&P 500 (flat); Nasdaq (-0.1%) – although they moved higher after-hours following on speculation the Federal Reserve is close to the end of its tightening cycle after the central bank raised rates by 25 basis points and said any further tightening would be data dependent. Jerome Powell welcomed the drop in headline inflation but noted that core prices remain “pretty elevated.” The central bank’s staff is no longer forecasting a recession, he said. The dollar weakened against all its Group-of-10 peers — but was off earlier lows — and gold moved to $1,975 an ounce. The 10-year Treasury currently yields 3.85%. This morning in Asia, markets were mixed as China’s industrial profits dropped at a slower pace in June: Nikkei 225 (+0.7%); Hang Seng (+1.1%); Shanghai Composite (-0.3%). A gauge of China tech stocks now 20% above a May low. The FTSE 100 is currently trading 0.2% higher at 7,692.
The ECB is set to raise rates by 25 basis points, with investors focused on any clues as to the outcome of the following meeting in September. The odds of today’s move being the last in the cycle have risen after traditionally hawkish ECB officials sowed doubts about a further increase. Policymakers will want to retain maximum flexibility by not sending too decisive a signal in either direction.
UK Treasury advisers are increasingly concerned the Bank of England risks raising rates too much in coming months, potentially pushing the country into an unnecessary recession. A majority of Jeremy Hunt’s seven-member Economic Advisory Council believes the bank should slow its hiking cycle given recent soft inflation data, people familiar said. The advisers told Hunt that they expect inflation to fall sharply by year end. The Treasury said the council provides independent advice and its views don’t reflect those of the government. Sterling trades at $1.2966 and €1.1674.
Meta surged 6% postmarket after sales beat, a sign it’s succeeding in migrating advertisers to its Reels rival TikTok service. Macquarie slid 5% after warning Q1 profit is “substantially down” on weak trading conditions. Samsung Electronics rose after profit beat. It plans to cut memory chip output while projecting a rebound in demand in H2.
Source: Bloomberg
Company News - Nestle
Nestlé has this morning released robust first-half results and raised its guidance for the full year. In response, the shares are up 2% in early trading.
Nestlé is the world’s leading food and beverage company with sales of more than CHF 94bn (c. £85bn). The strategy is to offer a portfolio of products that evolve with consumer needs and promote nutrition, health, and wellness. The company owns a wide range of iconic brands across seven product categories, more than 30 of which have sales of more than CHF 1bn, including Nescafe, Nespresso, Cheerios, Perrier, Carnation, KitKat, and Purina.
By increasing growth through brand building, innovation, and digitalisation, Nestlé is aiming to deliver sustainable mid-single-digit organic revenue growth. Through improved operational efficiency, the goal is to return to an operating margin of 17.5%-18.5% by 2025, through efficiency programmes. The company also expects to deliver an annual underlying EPS growth range of 6% to 10% in constant currency over the period 2022 to 2025 and increase its free cash flow to 12% of sales and ROIC to 15%
In the six months to 30 June, reported sales grew 1.6% to CHF 46.3bn, held back by M&A (-0.4%) and currency (-6.7%). The result was slightly better than the CHF 45.6bn market forecast. Organic growth was 8.7%, versus 8.1% expected. Price growth was 9.5%, reflecting the impact of cost inflation over the last two years. Real internal growth (i.e., volume) was down 0.8%, impacted by capacity constraints and portfolio optimisation actions. Overall, demand elasticity was limited in the context of pricing actions.
Growth was broad-based across geographies and categories, with emerging markets (+9.6%) outpacing developed markets (+8.0%). By channel, organic growth in retail sales was 8.0%. Within retail, e-commerce sales grew by 13.5%, to reach 16.7% of group sales. At-home consumption post-Covid has now normalised, removing a growth drag on some categories. Out-of-home channels continue to see strong momentum, with organic growth of 17.1%. By product category:
Purina PetCare was the largest contributor to organic growth, with strong momentum for both wet and dry offerings. Purina ONE, Purina Pro Plan and Friskies all recorded double-digit growth.
Coffee saw high single-digit growth, with positive sales developments for Nescafé, Starbucks, and Nespresso.
Sales in confectionery grew at a double-digit rate, with strong growth for KitKat.
Growth in Infant Nutrition reached a double-digit rate, with broad-based contributions across brands and geographies.
Dairy reported high single-digit growth, with strong demand for coffee creamers and affordable fortified milks.
Prepared dishes and cooking aids slowed to mid single-digit growth, led by Maggi.
Nestlé Health Science recorded low single-digit growth, with a return to positive growth for vitamins, minerals, and supplements.
Water posted mid single-digit growth led by S.Pellegrino, despite temporary capacity constraints for Perrier.
The group made continued progress with its programme of portfolio management with the creation of a joint venture with private equity firm PAI Partners for Nestlé’s frozen pizza business in Europe. Looking forward, Nestle has said it will continue to pursue external growth opportunities in fast growing segments and regions.
Gross margin decreased by 40 basis points to 45.6%, following significant inflation for commodity and packaging costs as well as salaries and wages. Pricing, cost efficiencies and portfolio optimisation helped to partly offset the impact of cost inflation. Underlying trading operating margin was up 30 basis points at constant currency to 17.1%. Operating profit grew by 10% to CHF 7.4bn. Underlying EPS grew by 11.1% in constant currency to CHF 2.43, helped in part by the share buyback programme.
Free cash flow increased from CHF 1.5bn to CHF 3.4bn, mainly reflecting lower inventory levels. In the first half, the group repurchased CHF 2.4bn of its own shares as part of the three-year CHF 20bn programme which began in January 2022. Net debt rose from CHF 48.2bn to CHF55.6bn during the period.
For the remainder of the year, the group is confident it will deliver a positive combination of volume and mix, an improvement in gross margin, and a significant increase in marketing investments. The group has lifted its full-year organic sales guidance and now expects growth of 7%-8%, versus 6%-8% previously. Guidance for underlying trading operating profit margin (17.0%-17.5%) and underlying EPS growth (6%-10%) remain the same. Overall, Nestlé continues to offer defensive characteristics in an uncertain world.
