Market news and results from Heineken and P&G.

US equity markets ended last week on a positive note – S&P 500 (+1.0%); Nasdaq (+1.9%) – as another round of economic data bolstered bets on the so-called Goldilocks scenario of an economy that’s neither running too hot nor too cold. In Asia this morning, Chinese stocks (Shanghai Composite, +0.5%) built on last week’s gains as the government announced new steps to boost consumption and major cities pledged measures to support the property market. A gauge of real-estate shares was set to enter a bull market. China’s official manufacturing PMI climbed to 49.3 in July, remaining in contractionary territory but ahead of expectations of 48.9. The services index weakened to 51.5 from 53.2. Elsewhere in Asia, equity markets also rallied: Nikkei 225 (+1.3%); Hang Seng (+0.9%). In Europe, the FTSE 100 is currently trading 0.2% lower at 7,672.

Yields on 10-year JGBs retreated from a nine-year high after the BOJ held a surprise bond buying operation. The yen also weakened, reversing earlier gains. The US 10-year Treasury yields 3.99%, while gold is $1,955 an ounce.

Volatility is rising in UK markets ahead of a knife-edge decision from the Bank of England on Thursday, just as dollar and euro volatility subsides. Money markets are pricing in a 25-bp hike, though Goldman, HSBC, and others predict a 50-bp move. Sterling trades at $1.2860 and €1.1666.

Christine Lagarde said the ECB may or may not hold in September and may hike again afterward. “A pause, whenever it occurs, in September or later, would not necessarily be definitive,” she told Le Figaro. Decisions will be made “on a meeting-by-meeting basis.

Blackstone’s REIT sold over $10bn in property assets, creating $2.5 bn in gains and raising liquidity to help meet redemptions, the FT reported. The sales will also fund plans to spend more than $8bn to build new data centres for large tech companies catering to the AI boom.  

Source: Bloomberg

Company News

Heineken has this morning released its first-half results, which highlight a soft performance in Asia Pacific, and in response, the group has lowered its full-year profit guidance. Ahead of this afternoon’s analysts’ meeting, the shares are down 5% in early trading, with the extent of the fall tempered somewhat by the fact that the stock was already trading on a discount to the consumer staples peer group. Although near-term trading remains challenging, we believe this does little to affect the long-term value of the business.

Heineken is the world’s second largest brewer, generating sales of €22bn from a portfolio of iconic brands, many of which have been quenching the thirst of consumers for decades. In addition to the core Heineken brand, the company owns several well-known beers and ciders, including Sol, Tiger, Amstel, and Strongbow, as well as 300 or so local brews. The company also owns around 3,000 pubs in the UK, runs a wholesaling operation in Europe, and has a strong global distribution capability. Over time, the group has expanded and developed its global footprint through investment in new breweries, partnerships, and acquisitions. Most recently, the group completed the purchase of Distell and Namibian Breweries, adding more than €1bn in revenue and €150m of operating profit to its African footprint. The group highlights today that it is advancing well on the integration of these assets.

We believe the company is well placed to benefit from long-term growth opportunities in emerging markets (which generate 70% of group profits), where young and growing populations, low per-capita beer consumption, and increased wealth are expected to drive growth.

The group generates more than 40% of its revenue from premium brands, where volume is growing twice as fast as mainstream beer because consumers turn to better brands as they grow older and wealthier. Finally, the group is benefiting from the growth of low and no-alcohol products and is exploring markets ‘beyond beer’ such as cider, wine, seltzers, and flavoured malt beverages. The group is aiming to generate a greater level of growth from price increases and mix (relative to volume), while productivity and capital efficiency is being increased, with at least €2bn of cost savings expected by the end of 2023 and €400m p.a. thereafter. The overall aim is to ensure the internal pace of change within the organisation matches to pace of external market change.

However, in the first half of 2023, the group faced a challenging and volatile environment, with notable headwinds in Vietnam and Nigeria.

Net revenue grew by 6.6% on an organic basis to €14.5bn. Growth was driven by a 12.7% increase in net revenue per hectolitre, as pricing was used to offset unprecedented input and energy cost inflation. However, this had an impact on total consolidated volume which fell by 5.4%.

The underlying price-mix was up 11.8%, driven by pricing for inflation and by premiumisation. Beer volume fell by 5.6% in organic terms in the half-year, with the cumulative effect of pricing actions and a challenging economic backdrop driving a 7.6% organic decline in the second quarter.

Business performance in Europe (net revenue up 8.9%) was mixed, with volume (-4.8%) broadly in line with management expectations for the first six months. The group gained or held market share in more than half of its markets. Results were weak in the Asia Pacific (down 6.9%) with a disappointing performance in Vietnam. Africa, Middle East and Eastern Europe (up 9.7%) was impacted by socio-economic volatility in Nigeria affecting consumer off-take. Finally, the Americas region (up 8.6%) was impacted by a soft beer market, notably in the second quarter, combined with the continuing impact from OXXO in Mexico.

The group continues to benefit from an ongoing shift towards product premiumisation, although premium beer volume fell by 6.5% in the first half, driven by the decline in Vietnam and stopping sales of Heineken in Russia. Outside these markets, premium volume grew by a low-single-digit. The Heineken brand itself grew volume by 1.7% and by 3.7% excluding Russia. Heineken Silver grew volume by 45% and is now available in 45 markets.

In the low & no-alcohol category, volume was stable for the first half, with double-digit growth in 15 markets. Heineken 0.0 was up mid-single-digit excluding Russia.

The group’s e-commerce platforms continued to grow, with gross merchandise value captured via B2B digital platforms up 36% to €5.2bn.

Operating profit fell by 8.8% in organic terms to €1,939m, as revenue growth and improvements in productivity were more than offset by the significant inflationary pressures in input and energy costs and the front-loaded incremental investment in the business. As a result, the margin fell from 16.0% to 13.4%.

In February of this year, Mexican multinational company FEMSA announced that following a strategic review it intended to divest of its 14.76% shareholding in Heineken to focus on its core business.  At the time, FEMSA sold half of its holding, with the remainder sold in May. Heineken participated in both the share offers to the tune of €1.3bn, effectively using its strong balance sheet to buy back its own shares. Not only was the purchase accretive, but we believe it sends a strong signal regarding management’s view of the company’s valuation. Interestingly, Bill Gates and his Gates Foundation also bought a 4.8% stake.

Heineken has a strong balance sheet. At the end of June, financial gearing rose to 2.7x net debt to EBITDA, driven by the impact of the FEMSA stake purchase, slightly above the long-term target to be below 2.5x, which it expects to return to by the year-end.

The dividend policy is to pay a ratio of 30% to 40% of full-year net profit, with half-year interim payment fixed at 40% of the total dividend of the previous year. As a result, the group has today declared an interim dividend of €0.69 per share, up 38%, to be paid on 10 August.

In the second half of the year, the group expects pricing to moderate with volume trends gradually improving to a low-single-digit decline. The group previously expected stable to modestly growing volume in the full year. On productivity, the company expects a significant acceleration relative to the €200m in gross savings of the first half, leaving the group well ahead of its €2bn target. However, full-year guidance has been downgraded and the company now expects stable to mid-single-digit organic growth in operating profit, versus mid- to high-single-digit previously. Although the profit reset is disappointing and not totally unexpected, the size of the downgrade is a little more than expected.

Looking further ahead, the group believes unprecedented commodity and energy cost inflation in recent years will be partially reversed next year, easing the pressure on pricing. Together with the structural changes the group is making, management is confident this will set Heineken up for a balanced growth delivery in 2024.

Source: Bloomberg

On Friday lunchtime, Proctor & Gamble released results for the financial year to 30 June 2023 and posted new guidance for FY2024. The figures were a touch better than the market expected and the shares were little changed in response.

P&G is a global consumer goods company with annual sales of $82bn across a broad range of iconic brands including Gillette, Crest, Ariel, Head & Shoulders, and Pampers. The group generates around half of its sales in North America, a fifth in Europe, and the remainder in emerging markets.

In what was a very difficult cost and operating environment, the group met or exceeded its going-in plans for sales, earnings, and cash. Net sales grew by 2% to $82.0bn. Organic growth, which excludes the impact of acquisitions, disposals, and negative currency movements, was up 7%. Growth was driven by a 9% increase in pricing and a 1% increase from positive product mix, partially offset by a 3% decrease in volume. The price increases helped offset the significant commodity and other input cost increases. Growth was broad-based, with all 10 product categories growing organic sales. Global aggregate value share was in-line with the prior year, with 29 of the group’s top 50 category/country combinations holding or growing share.

In the group’s final quarter, organic growth was 8%, versus 7% in the previous quarter. This was made up of 7% price and 2% mix, partly offset by a 1% volume decline. The group operates across five divisions:

·        Fabric & Home Care (34% of sales) grew by 8% in organic terms in the final quarter, driven by all categories.

·        Baby, Feminine & Family Care (25% of sales) grew by 9%, driven by strength in feminine care.

·        Beauty (18% of sales) grew 11%, with hair care growing high single digits.

·        Health Care (15% of sales) grew by 5%, with growth driven personal health care.

·        Grooming (8% of sales) grew by 8%.

On a currency-neutral basis, the gross margin grew by 100 basis points in the full year to 48.4%, driven by higher pricing and gross manufacturing productivity savings, offset by higher commodity and input material costs, unfavourable product mix, and product reinvestments. The operating margin grew by 100bps to 23.2%. Core EPS grew by 11% at constant currency to $5.90, with the final quarter up 13% to 1.37, versus the market forecast of $1.32.

During the year, operating cash flow was $16.8bn and adjusted free cash flow productivity was 95%. The group ended the year with $8.2bn of cash and cash equivalents and returned $16.4bn of cash to shareholders through dividends ($9.0bn) and share repurchases ($7.4bn). The dividend increase declared earlier this month – up 3% to $0.9407 – marked the 67th consecutive year the company has increased its payout.

The company posted new guidance for the financial year to June 2024. It expects to deliver strong organic sales growth (4%-5%), EPS growth (6%-9%) and free cash flow productivity (90%), each in line with the long-term growth algorithm, despite continued macroeconomic and geopolitical challenges. 

Source: Bloomberg