Morning Note: Market news and updates from Heineken and Marriott.

Market News

US equity markets slumped last night – S&P 500 (-1.4%), Nasdaq (-1.8%) – as the inflation data dashed hopes for Fed easing in the early part of the year. CPI came in at 3.1%. Although this was down from 3.9% in the previous month, it was above the market’s expectation for a print below 3%. Treasuries added to overnight losses, with the 10-year currently yielding 4.28%. Inflation-adjusted Treasury yields jumped to a 2-month high – yields on 10-year TIPS hit 2% for the first time since December. Gold slumped to $1,988 an ounce.

This morning in Asia, markets were mixed: Nikkei 225 (0.7%); Hang Seng (+0.8%, playing catch-up after the holiday); Shanghai Composite (closed). The FTSE 100 is currently trading 0.4% higher at 7,542.

Sterling slipped to $1.2547 and €1.1720 after January inflation came in slightly below expectations, with CPI holding steady at 4%, when a rise was forecast. The 10-year gilt rose and currently yields 4.07%.

Brent trades at $82.36 a barrel. US crude inventories gained by 8.5m barrels last week, while fuel supplies dropped, API data is said to show. That would be the biggest increase since mid-November if confirmed by the EIA.

Source: Bloomberg

Company News

Heineken has this morning released its full-year 2023 results, which were slightly better than the market estimate as the group cut costs faster than expected. However, in the face of ongoing market uncertainty, the guidance for 2024 is below the market forecast. Ahead of this afternoon’s analysts’ meeting, the shares are down 5%, and remain at a valuation similar to the pandemic induced 2020 low. 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 net revenue of €30bn 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.

We believe the company is well placed to benefit from long-term growth opportunities in emerging markets (which generate more than 50% of revenue), 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.

We believe the shareholding structure, supported by family ownership, ensures the company is run for the long term and in the best interests of all shareholders.

However, in the near term, the group has faced a challenging environment. Strong pricing to offset very high input and energy cost inflation and volatile macro-economic conditions in some key markets affected the group’s volume momentum. That said, the group gained or held volume market share in over half of its markets as volume performance moderately improved quarter by quarter.

In 2023, net revenue grew by 5.5% on an organic basis to €30.3bn. Growth was driven by a 10.8% increase in net revenue per hectolitre as pricing was used to mitigate inflationary pressure. This was offset in part by a 4.7% decline in total consolidated volume. The underlying price-mix was up 10.2%, driven by pricing for inflation and positive mix effects.

In Q4, net revenue grew by 4.7%, driven by 8.2% growth in net revenue per hectolitre. Total consolidated volume declined by 3.2%, improving sequentially relative to the third quarter. The exit decline was in the low single digits.

Beer volume fell by 4.7% in organic terms with the group growing ahead of the beer category in most of its markets. Vietnam and Nigeria represented over 60% of the decline, with both markets affected by challenging economic conditions. In Q4, beer volume fell by 3.2%.

By region, revenue growth was Europe (+6.3%); Asia Pacific (-5.9%); Africa, Middle East, and Eastern Europe (+11.6%); and The Americas (+7.4%).

The group continues to benefit from an ongoing shift towards product premiumisation, although in 2023 premium beer volume fell 5.9% organically, mainly driven by Vietnam and the exit from Russia. The Heineken brand itself grew volume by 2.5%. Heineken Silver is now in 50 markets and grew volume in the high 30s.

In the low & no-alcohol category, Heineken 0.0 saw continued momentum although the overall portfolio was broadly stable. The group’s e-commerce platforms continued to grow, with gross merchandise value captured via B2B digital platforms up 28% to c. €11bn.

The group significantly beat its productivity commitment, delivering €800m of gross savings in the year. As a result, the group achieved €2.5bn of its EverGreen savings in 2023, significantly ahead of its €2.0bn target. Adjusted operating profit grew by 1.7% to €4,333m, versus guidance to be at the lower end of stable to mid-single-digit organic growth, and a downbeat market forecast for a flat result. The margin fell from 15.7% to 14.7%.

Heineken has a strong balance sheet and generated free cash flow of €1,759m during the year, reversing the first half outflow. At the end of 2023, financial gearing rose from 2.1x to 2.4x net debt to EBITDA, driven by the purchase of FEMSA’s stake in the company. However, gearing was in line with the long-term target to be below 2.5x. On a disappointing note, the group has taken an impairment of €491m related to its acquisition of Distell and Namibia Breweries, or 16% of the carrying amount. The dividend policy is to pay a ratio of 30% to 40% of full-year net profit, with the 2023 payment maintained at €1.73 (2% yield).

Looking forward, the group remains cautious about the global economic and geopolitical outlook. The focus will be on revenue growth, balanced between volume and value, by continuing to invest behind its brands to deliver long-term sustained value creation. Variable costs are expected to increase by a low-single-digit on a per hectolitre basis, benefitting from lower commodity and energy prices, but more than offset by local input cost inflation and currency devaluations. The group also expects higher than historical average wage inflation to impact its cost base. However, the productivity programme will deliver at least €500m of gross savings, ahead of the medium-term commitment of €400m. For 2024, the group is guiding to low- to high-single-digit operating profit organic growth, with the wide range a reflation of the ongoing uncertainty. However, this is below the current market forecast for a 10% increase.

Source: Bloomberg

Yesterday afternoon, Marriott International released its Q4 results. Although the print was in line with expectations, guidance for 2024 was lower than the current market forecast on the back of normalising growth rates versus post-pandemic highs. The shares have been a strong performer over the last year (+40%) but saw some profit taking (-6%) in response to yesterday’s update which also provided a subdued read-across for industry peer InterContinental Hotels (-2%) which reports next week.

Marriott is the world’s largest hotel company, with nearly 8,800 properties in 140 countries and territories. The company is a fee-driven, asset-light operator with a focus on franchising and management contracts. The group’s 31 leading brands are skewed toward the mid-scale to luxury end of the market, and include: Ritz-Carlton, Marriott, St Regis, Le Meridien, Sheraton, and Le Meridien. At the end of 2023, the company had more than 1.6m rooms, around a 7% global market share. Last June, the group announced its planned entry into the affordable midscale extended stay space in the US and Canada.

During the year, adjusted EPS rose by 49% to $9.99. Stripping out the impact of a one-time tax benefit (75c) and international intellectual property restructuring transactions (77c), the result was just above the top end of the group’s $8.36-$8.65 guidance. In the final quarter, EPS grew by 35% to $3.57.

Global revenue per available room (RevPAR) – the key measure of industry performance – grew by 14.9% in constant currency, above the 12%-14% guidance range. Occupancy grew by 5.5 percentage points to 69.2% and average daily rate (ADR) was up 5.8% to $180.24. In Q4, RevPAR growth was 7.2%.

In the US & Canada, RevPAR grew by 8.9% in the full year and by 3.3% in Q4. Group revenue at hotels increased 7% in Q4, driven by solid rate increases.  While already significantly above 2019 levels, hotel leisure revenue rose again by 2%.  Business transient revenue grew 3%, with demand from large corporate customers continuing to make gains.

International markets RevPAR rose by 32.6%, with standout growth in the Asia Pacific ex-China region (+43.2%) and Greater China (+78.6%).

Full-year group total revenue grew by 14% to $23.7bn. Q4 revenue was up by 3.1% to $6.1bn, a touch below the market forecast of $6.2bn.

The group continued to expand its estate, adding around 81,218 rooms in the year, including 17,500 rooms associated with the City Express transaction and roughly 43,000 other rooms in international markets. Rooms converted from other brands accounted for one in four additions. Net room growth was 4.7%

The group signed a record 164,000 organic rooms globally in the year, including 37,000 rooms from the deal with MGM Resorts International. The pipeline reached more than 573,000 rooms, of which 40% were under construction at the end of the year.

During the year, net debt rose from $9.6bn to $11.6bn. The group continued to buy back its shares, with $3.9bn repurchased in the year. Including dividends, the group returned $4.5bn to shareholders, at the top end of its $4.1bn-$4.5bn target range.

The company has issued new guidance for 2024 which was lower than the market had expected as RevPAR growth normalises from post-pandemic highs. Worldwide full-year RevPAR is expected to increase by 3% to 5%, with net room growth of 5.5% to 6.0%. The group expects this to yield adjusted EPS of $9.18 to $9.52, below the market forecast of $9.69. The group expects to return $4.1bn to $4.3bn to shareholders after factoring in $500m to purchase the Sheraton Grand Chicago.

In the medium to long term, we believe the industry has attractive long-term growth potential, and with its scale and strong brands, Marriott should benefit from a ‘survival of the fittest’ bias as many smaller competitors continue to exit the market.

Source: Bloomberg