Morning Note: Market news and an update from Nestle.
Market News
Most Federal Reserve officials were more concerned about moving too quickly to cut rates than about keeping them too high for too long, last month’s FOMC meeting minutes showed. Separately, Michelle Bowman argued that the time to lower rates was “certainly not now.”
In response, US equity markets were mixed: S&P 500 (+0.1%), Nasdaq (-0.3%). Nvidia rose 9% after hours as its sales guidance came in ahead of market expectations. Other chip stocks rose in response.
This morning in Asia, stocks were strong driven by gains in technology shares and chip-gear producers: Nikkei 225 (+2.2% to 39,098, topping its all-time high after 34 years); Hang Seng (+1.5%); Shanghai Composite (+1.3%). The FTSE 100 is currently little changed at 7,668. Companies trading ex-dividend today include GSK (0.96%), Unilever (0.90%), Land Securities (1.44%), AstraZeneca (1.54%). Sterling trades at $1.2701 and €1.1680.
Brent trades at $82.50 a barrel as API data showed US inventories increased by 7.2m barrels last week. Chinese coal stocks jumped following a crackdown on excessive mining. Traders are selling European natural gas for next winter. Contracts for the first quarter of 2025 have slumped by about 20% since the start of the year, signalling confidence the region will continue to receive Russian shipments via Ukraine after the current transit deal expires at the end of the year. Gold trades at $2,033 an ounce.
Source: Bloomberg
Company News
Nestlé has this morning released 2023 full-year results that were a touch below the market forecast and issued guidance for 2024 that was slightly more subdued than the market had expected. In response, the shares have been marked down 4% in early trading.
Nestlé is the world’s leading food and beverage company with sales of more than CHF 93bn (c. £84bn). 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. In particular, the group is now targetting sales growth from its more nutritious products of CHF 20-25bn by 2030. Through improved operational efficiency, the goal is to return to an operating margin of 17.5%-18.5% by 2025. 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 2023, reported sales fell by 1.5% to CHF 93bn, held back by M&A (-0.9%) and currency (-7.8%). Organic growth was 7.2%, at the lower end of the company’s guidance range of 7%-8%.
Price growth was 7.5%, reflecting the impact of cost inflation over the last two years. Real internal growth (RIG, i.e. volume) was down 0.3%, impacted by soft consumer demand, capacity constraints, and a temporary supply disruption for vitamins, minerals, and supplements in the second half. As expected, RIG turned positive in the second half.
Growth was broad-based across geographies and categories, with emerging markets (+8.4%) outpacing developed markets (+6.4%). By channel, organic growth in retail sales was 6.4%. Within retail, e-commerce sales grew by 13.4%, to reach 17.1% of group sales. Out-of-home channels continue to see strong momentum, with organic growth of 15.9%. 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 high single-digit rate, with double-digit growth for KitKat.
- Infant Nutrition posted high single-digit growth, based on a strong contribution from infant formula.
- Dairy reported mid-single-digit growth, led by fortified milk, coffee creamers and home baking products.
- Prepared dishes and cooking aids grew by mid-single-digits, with strong demand for Maggi.
- Nestlé Health Science recorded low single-digit growth despite the temporary supply constraint at vitamins, minerals, and supplements.
- Water posted mid-single-digit growth, led by S.Pellegrino and Acqua Panna.
The gross margin increased by 70 basis points to 45.9% as pricing, cost efficiencies, and portfolio optimisation more than offset significant cost inflation. Underlying trading operating margin rose by 40 basis points in constant currency to 17.3%, in the middle of the guidance range of 17.0%-17.5%. This is despite increased marketing and other growth investments. Underlying EPS grew by 8.4% in constant currency to CHF 4.80, helped in part by the share buyback programme. Guidance was 6%-10% growth.
Free cash flow rose by CHF 3.8bn to CHF 10.4bn, following a significant reduction in working capital. The group aims to increase its dividend year-on-year in Swiss francs. The payout for 2023 has been raised by 1.7% to CHF 3.00 (3% yield), marking 29 consecutive years of growth.
During the year, the group also purchased CHF 5.0bn of its shares as part of a 3-year CHF20bn programme. Net debt rose from CHF 48.2bn to CHF 49.6bn, largely reflecting the share buybacks. Underlying return on invested capital rose by 170 basis points to 13.9%.
For 2024, the group is guiding to organic sales growth of around 4% – below the current market expectation of 5% – and a moderate increase in underlying trading operating profit margin. Underlying EPS is expected to increase between 6% and 10%. The 2025 aspiration set out above has been reiterated. Despite a slightly muted print this morning, we believe Nestlé continues to offer defensive characteristics in an uncertain world.
Source: Bloomberg