Morning Note: Market news and an update from Brown-Forman.

Market News

US equities fell last night – S&P 500 (+0.5%); Nasdaq (+0.7%) – as traders weighed higher-than-expected jobless claims against too-hot producer price data. Core PPI rose by 3.4% vs 3.2% expected, strengthening lingering concerns of stubborn inflation. Gold pulled back to $2,684 an ounce, while the 10-year Treasury yield moved up to 4.32%. Markets continued to price multiple rate cuts by the Fed next year due to risks of a softening labour market, most recently underscored by the unexpected surge in unemployment claims.

The ECB cut rates by 25 basis points to 3% and forecast growth will be weaker than forecast. Policymakers expect to lower rates by another quarter point in January and probably also in March as inflation stabilises and growth remains sluggish, officials familiar said. A half-point cut remains an option. Swiss interest rates were cut by more than expected, down from 1.0% to 0.5%. President Macron is set to name a new French PM this morning.

In Asia this morning, equities followed the US lower as a lack of details from a Chinese economic conference disappointed some traders and risk appetite weakened: Nikkei 225 (-1.0%); Hang Seng (-2.2%); Shanghai Composite (-2.0%). Bank of Japan’s quarterly Tankan survey showed the large manufacturer index of sentiment rose to 14 in December, beating estimates.

The FTSE 100 is currently little changed at 8,311. Kosmos Energy has confirmed it is in the early stages of a possible all-share offer for Tullow Oil. Sterling fell to $1.2632 and €1.2066 after data highlighted the UK economy unexpectedly shrank 0.1% in October, following a similar contraction the previous month. Economists had forecast a 0.1% gain.

Source: Bloomberg

Company News

Last week, Brown-Forman released results for the six months to 31 October 2024, the first half of its fiscal year to end-April 2025. The figures were better than market expectations as a result of steady demand for its ready-to-drink beverages and spirits. Guidance for the full year was reiterated and, in response, the shares were marked up by 13%.

Brown-Foreman is a US-listed spirits producer, which owns a portfolio of more than 40 premium brands including Jack Daniels. To take advantage of the premiumisation trend, the group has upgraded its portfolio over time towards the American whiskey and tequila categories and sold off non-core brands (such as Finlandia and Sonoma-Cutrer).

In the latest half-year, net sales, excluding excise taxes, fell by 5% to $2,046m, largely due to divestitures. The second quarter was down 1% to $1,095m, a touch above the market forecast of $1,080m. On an organic basis, sales were flat in the first half, and up by 3% in the second quarter.

Net sales for whiskey products were flat on an organic basis. Growth from Woodford Reserve and Old Forester in the US was more than offset by declines of the other super-premium Jack Daniel’s expressions, The Glendronach, and Glenglassaugh. An estimated net increase in distributor inventories positively impacted on net sales.

Net sales for the Tequila portfolio decreased by 17% in organic terms, with Herradura down 13% and el Jimador down 16%. Diplomático and ready to drink (RTD) products both grew.

Net sales declined across all geographic aggregations but improved sequentially in international markets and the Travel Retail channel. By region, the US fell by 3% in organic terms, driven by lower volumes in a challenging economic environment. An estimated net increase in distributor inventories positively impacted on net sales. Elsewhere, emerging markets grew by 6%, developed international markets fell 3%, and the travel retail channel was down 3%.

The gross margin remains high, albeit down by 240 basis points in the half-year to 59.2%, largely related to the timing of input cost fluctuations coupled with high inventory levels and the impact of the transition services agreements (TSAs) related to the divestitures of Finlandia and Sonoma-Cutrer, partially offset by favourable price/mix.

Operating expenses declined by 4% in organic terms in the half-year, to leave operating income down 3% in organic terms at $622m. Diluted EPS fell by 3% to 96c but rose by 9% to 55c in the second quarter, versus the market forecast of 49c.

The company has a strong balance sheet, with net debt of $2.8bn. A regular quarterly cash dividend has been paid for 81 consecutive years and has increased for 41 consecutive years. For the latest quarter, a payout of 22.65c has been declared, up 4% on last year.

Looking forward, the company still anticipates a return to growth for organic net sales (2%-4%) and organic operating income (2%-4%) in the financial year to April 2025 driven by gains in international markets and the benefit of normalising inventory trends. This outlook is still tempered by management’s belief that global macroeconomic and geopolitical uncertainties will continue to create a challenging operating environment.

Source: Bloomberg