Morning Note: Market news and updates from Becton Dickinson and Richemont.
Market News
US equities continued to march higher in the wake of the election – S&P 500 (+0.7%); Nasdaq (+1.5%). As expected, the Fed lowered benchmark interest rate by 25 basis points to a 4.5%-4.75% range. Chair Powell said even with the cut, policy is still restrictive but that the Fed is not in a hurry to get to a neutral rate. Markets continued to price a 25 basis points reduction in the Fed’s last decision of the year in December. Treasury yields fell, with the 10-year currently at 4.33%. Gold rallied from its lows and currently trades at to $2,688 an ounce.
In Asia this morning, equities were mixed – Nikkei 225 (+0.3%); Hang Seng (-1.1%); Shanghai Composite (-0.5%) – as investors awaited the outcome of a key legislature meeting in China that’s expected to unveil policy support to boost flagging growth. The debate will be whether the measures will be enough to counter the threat of higher tariffs under a second Donald Trump presidency.
The FTSE 100 is currently little changed at 8,143. UK interest rates were cut by 25 basis points to 4.75%; traders currently see no more easing until next year. Gilt yields remain elevated – the 10-year is currently 4.44%. Sterling trades at $1.2943 and €1.2024.
Volodymyr Zelenskiy warned a quick end to the war in Ukraine would be a loss for his country, and said he seeks a “fair ending” to the conflict. Meanwhile, Vladimir Putin reiterated his readiness to hear out Trump’s ideas for ending the war.
Source: Bloomberg
Company News
Yesterday lunchtime, Becton Dickinson released results for the financial year to 30 September 2024 which were in line with expectations, with a particularly strong performance on free cash flow. In response, the company is launching a share buyback programme. Guidance for FY2025 was a little underwhelming and the market will want to see consistent proof of execution before pushing the shares higher. In response, the shares were marked down by 4%.
Becton Dickinson (BD) is a leading global supplier of medical devices and instrument systems. The group’s products help achieve better healthcare outcomes, mitigate healthcare cost pressures, and improve healthcare safety. 90% of revenue comes from products where the group is the market leader, with 85% from recurring or non-capital related purchases. As a result, the company is well placed to benefit from increased demand for healthcare from an ageing population and in emerging markets. In the near term, revenue growth will be, in part, dependent on improving patient admissions and surgical volumes and a stable capital investment environment.
The BD 2025 Strategy is targetting sustainable mid-single-digit revenue growth (i.e., 5.5%+), margin expansion of 540bps (to 25%), and double-digit earnings and free cash flow growth. The group is actively managing its portfolio – the diabetes care unit has been spun off and the surgical instrumentation platform sold. In addition, the group is exiting lower margin products and markets – the number of stock lines has been cut by 20%, achieving the 2025 target a year early, with a further reduction expected. The result is a more simplified portfolio and increased efficiency able to drive improved operating leverage. The focus is now on operational simplification via a 20% reduction in manufacturing plants.
Becton continues to shift toward faster growth markets via the launch of innovative new products and through acquisitions. Earlier in the year, the group acquired the Critical Care unit of Edwards Lifesciences for $4.2bn. The business is a high-growth, innovative industry leader in advanced patient monitoring with AI algorithms serving millions of patients globally. The company invented the hemodynamic monitoring category, and its solutions are currently used in more than 10,000 hospitals globally to better understand the cardiovascular condition in real-time for critically ill patients to help improve outcomes. The business will operate as a separate unit within BD’s Medical division. It has grown by 7% p.a. over the last five years, with 80% of revenue recurring. An adjusted operating margin of 25% is expected to increase over time. Although the deal is larger than the guidance spend for M&A ($1.5bn-$2.0bn per year), it is in line with the group’s strategy and represents an attractive addition to its stable of innovative products.
During the year to 30 September 2024, Becton’s revenue from continuing operations grew by 4.6% on a currency-neutral basis to $20.2bn. In the final quarter, revenue was up 7.4% to $5.44bn, versus the market expectation of $5.38bn.
Organic growth (i.e., excluding acquisitions) was 5.0% in the year, at the lower end of the company guidance of 5.0%-5.25%. In the final quarter, growth was 6.2%, just below the guidance range of 6.5%-7.0%.
By region, in the final quarter growth in the US (+8.3% to $3,117m) outpaced the International business (+6.3% to $2,320m). By division in the final quarter:
• BD Medical (52% of sales) grew by 8.6% in organic terms, driven by strength in Medication Management Solutions.
• BD Life Sciences (25% of sales) was up 1.4%, driven by growth in Specimen Management offset by lower demand for Biosciences instruments.
• BD Interventional (23% of sales) rose by 6.6%, driven by strength in Urology & Critical Care.
The macro environment in China remained a challenge, stemming from value-based pricing as government buyers look to control costs, a slowdown in biotech research spending, and a clampdown on corruption. Elsewhere, growth was also impacted transitory market dynamics which resulted in lower market demand for research instruments and customer inventory de-stocking in anti-coagulants and vaccines. Both these issues are expected to continue to impact the company into the current financial year.
During the year, the company enjoyed an accelerated margin expansion driven by the BD Excellence operating system and moderating inflation. The full-year gross margin slipped by 20 basis points at constant currency to 53.3%, while the adjusted operating margin increased by 70 basis points to 24.2%, better than the management guidance for growth of over 50 basis points versus FY2023. In the final quarter, the margin was 26.6%, sequentially up by 140 basis points versus the previous quarter.
Full-year adjusted EPS grew by 7.6% on a currency-neutral basis to $13.14, at the upper end of the group’s guidance range of $13.05 to $13.15. In the final quarter, EPS grew by 11.4% to $3.81, a touch above the market forecast of $3.77.
Free cash flow performance was very strong – up 47% to $3.1bn in the financial year. Following the Critical Care acquisition highlighted above, Becton’s financial leverage has risen to 3x net debt to EBITDA, in line with expectations. The aim is to de-lever back down to its long-term target of 2.5x within 12 to 18 months. Although free cash flow will mainly be used for debt repayment, the group is also planning to deploy around $1bn toward share repurchases over the next 12 to 18 months – on the call, management said this was justified given the cash flow performance and the ‘strong intrinsic value’ in the shares. Talking of which, the company has previously disclosed that in light of the level at which similar independent businesses are being valued on the stock market, it would consider a sale or demerger of its Life Sciences division (25% of sales) if it generated shareholder value.
Cash flow will also be directed to internal growth opportunities, bolt-on M&A, and the dividend. The group currently spends just below 6% of revenue on R&D, with 60% directed towards what the company calls transformative solutions. More than 20 key new products were launched during the year, on the way to the group’s target to launch 100 new products by FY2025. In particular, the company notes that the GLP1 market is a $1bn opportunity as its devices are used for the delivery of weight-loss drugs. The group also highlighted how AI is being used to make the most of the data generated by the companies three million smart devices. There will be more on this at the Investor Day next February.
A progressive dividend policy has been maintained for 53 consecutive years, with an indicated annual payout for FY2025 of $4.16, up 9.5%, and equal to a yield of 1.7%.
The group has provided guidance for the financial year to September 2025:
- Organic revenue of 4.0%-4.5%. This is slightly below the mid-single digit expectation and includes absorbing an impact of 125 basis points from an expected decline in revenue in China and the Bioscience/Pharma market dynamics.
- By segment, growth expectations relative to the group organic growth range are: Medical in-line, Life Sciences below, and Interventional above.
- Adjusted revenue (including the impact of M&A) is expected to growth by 8.8% to 9.3% to $21.9bn-$22.1bn.
- The operating margin is expected to grow by around 100 basis points, implying the ‘25% in 2025’ target remains in place.
- Adjusted EPS is expected to be $14.25 to $14.60. The company had previously highlighted that 10% growth should be seen as a floor, so the 8.5% to 11.0% guidance is a little disappointing. However, the mid-point of the EPS guidance is slightly above the current consensus estimate of $14.34.
Source: Bloomberg
Richemont has this morning released results for the half-year to 30 September 2024. In a challenging environment, the group generated sales and operating profit slightly below market expectations. In response, the shares are down 3% in early trading.
Richemont is a Switzerland-based luxury goods group which generates annual sales of around €20bn, split between retail, wholesale, and online distribution. The group owns a portfolio of leading international ‘Maisons’ which are recognised for their distinctive heritage, craftsmanship, and creativity. Jewellery Maisons include Buccellati, Cartier, and Van Cleef & Arpels. Specialist Watchmakers account for 16% of sales. Fashion & Accessories ‘Maisons’ (termed ‘Other’) include leather goods, clothing, and writing instruments, etc. This division now includes Watchfinder, a leading omni-channel platform for premium pre-owned timepieces. The group expects to complete the sale of its stake in YOOX Net-A-Porter (YNAP), the leading online luxury retailer, in the first half of 2025.
The company’s products are discretionary purchases. Currency movements, and their impact on tourist flows, can also have an impact on sales at the regional level. As a result, sales were impacted by the pandemic and remain vulnerable to a global economic downturn. Over the last year, the industry has faced a persistently challenging environment.
In the six months to 30 September, sales were flat at constant exchange rates (CER) at €10.1bn, slightly below market expectations. Sales fell 1% in the second quarter.
By distribution channel, Retail sales increased by 2% at CER, led by the Jewellery Maisons. Wholesale fell 6% as a result of a double-digit decrease in Specialist Watchmakers and Asia. Online Retail up 7%. As a result, online sales now account for 6% of group sales.
By segment, growth was robust at the Jewellery Maisons, up 4% at CER to €7.1bn. Specialist Watchmakers fell by 16%, driven by a 29% decline in Asia Pacific. The Other division grew 4%.
The group achieved growth at CER in all regions except Asia Pacific (-18%), driven by weakness in China (-27%). Elsewhere, Japan grew by 45%, Europe rose 5%, and the Middle East & Africa and the Americas were both up by 11%.
Operating profit fell by 12% at CER to €2.2bn, with the margin slipping by 410 basis points to 21.9%. Operating profit from continuing operations fell by 12% to €1.7bn. The decline largely reflected a sales decline at Specialist Watchmakers, the gross margin erosion (200bps to 68.7%), and ongoing investment for long-term growth. The company also incurred a €1.3bn loss from discontinued operations mainly due to the non-cash write-down of YNAP.
Cash flow from operations of €1.2bn was 25% below last year and net cash ended the period at €6.1bn.
Looking forward, the company remains cautious and has sought to strengthen its corporate governance with the appointment of a new CEO and new leadership at Cartier and Van Cleef & Arpels.
Source: Bloomberg