Morning Note: Market news and updates from Brown-Forman and DS Smith.

Market News

US equity markets drifted lower last night – S&P 500 (-0.4%); Nasdaq (-0.6%) – led by weakness in energy, technology, and financials. This morning in Asia, markets were followed Wall Street lower with ongoing concern around China’s economy: Nikkei 225 (-1.8%); Hang Seng (-0.7%); Shanghai Composite (-0.1%). The FTSE 100 is currently trading 0.4% lower at 7,488. UK house prices rose by 0.5% month-on-month in November according to mortgage provider Halifax. Compared to the same month last year, prices were down 1.0%. Sterling trades at $1.2495 and €1.1670.

Bonds enjoyed another strong day – the 10-year Treasury currently yields 4.17%, while Gilts now yield only 3.95%. Gold trades at $2,033 an ounce.

Traders increased wagers on a policy change at the Bank of Japan’s December meeting after recent comments from the governor and his deputy. “It will become even more challenging from the year-end and heading into next year” to manage policy, Governor Kazuo Ueda said. Overnight-indexed swaps at one point showed an almost 45% chance that the BOJ would end negative rates at its 18-19 December meeting, up from just 3.5% two days ago.

The oil price continued its recent decline – it currently trades at $74.50 a barrel, close to the lowest levels since late June after falling for five straight sessions amid robust global supplies and softening demand. Citi said the sell-off boosts chances that OPEC+ will hold an emergency meeting in the next few weeks.

AMD CEO Lisa Su introduced a new line of AI accelerator chips and predicted the market may explode to more than $400bn in the next four years. Meta & Microsoft say they will buy AMD’s new AI chip as an alternative to Nvidia’s.

Source: Bloomberg

Company News

Last night, Brown-Forman released results for the six months to 31 October 2023, the first half of its fiscal year to 30 April 2024. The results were slightly below market expectations and the group trimmed its full-year guidance. The market reacted by marking the shares down by 10% in US trading yesterday.

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. In the last financial year, the company generated sales of $3.9bn and an operating margin of more than 30%.

During the latest half-year, the business had to cope with dynamic market conditions and very strong comparisons from the prior-year period. While the business grew at a slower pace than anticipated, the group delivered strong gross margin expansion and continued to invest strongly behind its brands.

Net sales, excluding excise taxes, increased by 2% to $2.1bn, with the second quarter up 1% to $1.1bn, a touch below the market forecast of $1.15bn. The recently acquired Gin Mare and Diplomático Rum brands collectively increased net sales by 2%. On an organic basis, sales grew by 1% in the first half, but fell by 1% in the second quarter.

The Jack Daniels family of brands were flat on an organic basis, driven by lower volumes for Jack Daniel’s Tennessee Whiskey, Jack Daniel’s Tennessee Honey, and Gentleman Jack, partially offset by the growth of Jack Daniel’s Tennessee Apple. Faced with tough year-on-year comparatives, organic sales of Woodford Reserve’s and Old Forester’s fell by 3% and 5%, respectively. The tequila portfolio fell by 1% in organic terms, with Herradura down 9% and el Jimador up 7%. New mix ready to drink (RTD) delivered very strong sales growth of 22% in organic terms, boosted by higher prices and volumes.

By region, the US fell by 5% in organic terms, driven by lower volumes due to lapping the significant inventory rebuild in the same prior-year period largely related to the recovery from supply chain disruptions. Elsewhere, emerging markets grew by 19%, developed international markets fell 2%, and the travel retail channel was flat.

The gross margin remains high and rose by 280 basis points to 61.6%, fuelled by favourable price/mix and lapping of costs related to supply chain disruptions in the same prior-year period, partially offset by higher input costs. Reported operating income of $666m was 1% higher, with advertising spend up 12% in organic terms. Diluted EPS fell by 1% to 98c but rose by 6% to 50c in the second quarter, a touch below the market forecast of 51c.

The company has a strong balance sheet, with net debt of $2.7bn. A regular quarterly cash dividend has been paid for 80 consecutive years and has increased for 40 consecutive years. For the latest quarter, a payout of 21.78c has been declared, up 6% on last year. The company has also authorised a $400m share repurchase programme.

Looking forward, while the group remains optimistic about its prospects for growth in FY2024, evolving global macroeconomic conditions continue to create a challenging operating environment tempering management expectations. Accordingly, the group now expects organic net sales growth in the 3%-5% range, versus 5%-7% previously. Based on an expectation that continued input cost pressures will be partially offset by lower supply chain disruption costs, the group expects organic operating income growth in the 4%-6% range, versus 6%-8% previously.

Source: Bloomberg

DS Smith has today released results for the half-year to 31 October 2023 in line with market expectations. The group has also announced its longstanding CEO will step down after an orderly succession process. In response, the shares are trading 2% lower this morning.

DS Smith is a leading international supplier of paper and packaging with annual revenue of more than £8bn. The focus is on value-adding packaging for consumer goods customers where the main structural growth drivers are growth in e-commerce, the drive for sustainable solutions to replace plastic packaging, and the requirement for more sophisticated packaging from retailers. The group has built a market leading multinational business through the acquisitions of Interstate in the US and Europac in Western Europe. It generates four fifths of its volume from more resilient fast moving consumer goods and other consumer related sectors. The group is also a leader in sustainability and operates a circular business where it collects and recycles more packaging than it produces. The medium-term target is to deliver organic volume growth of at least GDP +1% (although this is currently being heavily distorted by inflation) and a margin of between 10% and 12%.

During the latest six months, the macro-economic environment has remained challenging with overall market demand continuing to be weak. As a result, like-for-like box volumes declined by 4.7%. Encouragingly, with destocking amongst customers now largely over, the company is seeing signs of volume improvement – there was a sequential quarter-on-quarter improvement, and the second half is expected to show continued positive momentum.

The largest decline in volume was in Northern Europe, which includes the UK and Germany, where the company has a greater weighting to industrial and e-commerce customers, respectively. Eastern Europe was relatively resilient, while the North American division delivered volume growth for the period.

Revenue fell by 18% at constant currency (CC) to £3.5bn, driven by a decline in box volumes (£142m) and lower selling prices (£615m). Packaging prices were down 9% per cent, with the balance reflecting lower external paper, recyclate, and energy sales. Pricing has been fairly resilient, with downward pressure offset by lower input costs and productivity initiatives.

Adjusted operating profit fell by 12% at CC to £365m, slightly ahead of management guidance of £360m. The operating margin rose by 70 basis points to 10.4%, helped by a reduction in raw material costs and cost mitigation actions.

As previously announced, free cash flow was impacted by several one-off items and led to an outflow of £54m versus an inflow of £494m last year. Over the last six months, the group’s financial leverage increased from 1.3x to 1.7x net debt/EBITDA but is still below its target of 2.0x. The interim dividend was maintained at 6p.

In a separate release, the company has also announced that, following 13 years with the company, Miles Roberts intends to retire from the board and from his role as CEO. It is intended that Miles’ formal notice period will start on 1 December 2024, which means that he would retire from the board and step down as CEO no later than 30 November 2025. This will give the company an appropriate amount of time to identify and appoint his successor.

While markets are anticipated to remain challenging, the group remains focused on its cost base and expects to deliver full-year results in line with management expectations.

Source: Bloomberg