Morning Note: Market news and updates from Unilever and Compass.
Market News
US equity markets traded higher last night: S&P 500 (+0.8%), Nasdaq (+1.0%). The 10-year Treasury currently yields 4.12%. The cost to service the US government’s debt load will climb to 3.1% of GDP next year — the highest level in records going back to 1940 — and then go on to hit 3.9% in 2034, the CBO said.
This morning in Asia, markets were mainly higher – Nikkei 225 (+2.1% on dovish Bank of Japan comments), Shanghai Composite (+1.3%). Softbank returned to profit after four quarters of losses and beat estimates handily. Shares of Masayoshi Son’s flagship company surged 11% today after Arm soared on a bullish forecast. Its Vision Fund business also swung to profit. China CPI fell 0.8% in January, its fastest decline since 2009, while PPI dropped for a 16th straight month. Bloomberg Economics said Beijing needs “aggressive policy” to boost demand.
The UK’s residential property market is picking up steam. Rightmove said the number of people getting in touch with an agent to sell their home surged 23% to a record from a year ago in January. New buyer inquiries reached the strongest level in two years, the RICS said. Inflation-busting pay raises for those who change jobs are fading in Britain, with starting salaries climbing at the slowest pace in 34 months, according to a survey by the REC and KPMG. Sterling trades at $1.2616 and €1.1712. The FTSE 100 is currently trading 0.2% higher at 7,644.
Brent rose to $79.20 a barrel. US oil exports advanced to a record more than 4m b/d last year on surging shale output and European demand. Gold trades at $2,030 an ounce.
Source: Bloomberg
Company News
Unilever has today released its full-year 2023 results and provided new guidance for 2024. The statement highlights an improving financial performance, with the return to volume growth and margins rebuilding. It represents a good start for the new CEO and in response the shares have been marked up by 3% in early trading.
Unilever is one of the world’s leading suppliers of consumer goods, with annual sales of around €60bn across five business groups: Beauty & Wellbeing (21% of 2023 sales), Personal Care (23%), Home Care (20%), Nutrition (22%), and Ice Cream (13%). Its products are low-ticket, repeatable purchases, with 3.4bn people using a Unilever brand every day. With unique routes to market, the company has an unrivalled emerging market presence and generates more than half of its sales from those parts of the world expected to experience strong long-term growth in demand.
At the end of last year, new CEO Hein Schumacher set out an action plan to address the gap between the group’s past performance and its potential. The focus is on:
1. faster growth: focus first on 30 Power Brands (75% of turnover), scale multi-year innovation, increase brand investment and returns, and selectively optimise the portfolio. Recently the group has announced acquisitions of Yasso (premium frozen Greek yogurt) and K18 (premium biotech haircare brand) and the disposals of Elida Beauty, the majority of Dollar Shave Club, and Suave. On a positive note, there will be no major or transformational acquisitions.
2. greater productivity and simplicity: to build back the gross margin and drive the benefit of the new organisational structure.
3. a stronger performance culture – there has been a raft of senior management changes and a new incentive framework.
It is hoped the action plan will strengthen the group’s performance within its existing multi-year financial framework: underlying sales growth of 3%-5%; modest margin expansion; 100% cash conversion; mid-teens return on invested capital; EPS growth; an attractive dividend; and delivering total shareholder returns in the top third of the peer group. The idea is to generate the most from its existing brands and its unparalleled distribution capability.
In 2023, reported sales fell 0.8% to €59.6bn. Underlying sales growth (USG) – adjusted for the impact of currency fluctuations (-5.7%) and M&A (-1.7%) – was 7.0%. The result compares to guidance to be ‘above 5%’. Growth was driven almost entirely by price increases (+6.8%) in response to continued high input cost inflation. However, as expected, price growth moderated as inflation eased. Despite the price increases, volume only fell by 0.2%, with the resilience driven by innovation and investment behind the group’s brands. The 30 Power Brands grew by 8.6%.
In the final quarter, USG was 4.7%, a touch above the market expectation, with price up 2.8% and volume up 1.8%. Q4 saw 3.9% volume growth from the 30 Power Brands.
In emerging markets, full-year USG was 8.5%. However, China grew low-single digit led by volume while the market recovery continued to be uneven and slower than expected. Developed markets grew 4.8%, with North America and Europe up 5.8% and 4.1% respectively.
The performance by business segment in the year was Beauty & Wellbeing (+8.3% to €12.5bn); Personal Care (+8.9% to €13.8bn); Home Care (+5.9% to €12.2bn); Nutrition (+7.7% to €13.2bn); and Ice Cream (+2.3% to €7.9bn).
The group’s competitiveness remains disappointing – only 37% of the business is winning market share, versus the group’s target be over 50%. This reflects the significant (planned) net SKU reduction (20% over the last 12 months), share losses to private label in Europe, and consumer shifts to super-premium segments in North America where the group currently under indexes. Improving competitive performance is a key focus of the group’s action plan and management are moving quickly to address it.
The gross margin rose by 200 basis points to 42.2%, and by 330bps in the second half. The group more than mitigated net material inflation of €1.8bn (vs. €2bn expected) through improved productivity, price and mix while stepping up brand and marketing investment by 130bps to 14.3% of turnover. The underlying operating margin rose by 60 basis points to 16.7%, versus company guidance for a modest increase. Underlying EPS grew by 1.4% (or 11% on a constant currency basis) to €2.60.
Free cash flow rose by €1.9bn to €7.1bn, with cash conversion of 111%. Growth was driven by higher underlying operating profit, significantly improved working capital, and €0.4bn linked to a tax refund in India. Net debt was little changed at €23.7bn, 2.1x EBITDA and in line with guidance of around 2x. The group recently completed a €3bn share buyback programme, with a new programme of up to €1.5bn to commence in Q2, reflecting the group’s strong cash generation. In addition, the quarterly dividend has been maintained at €0.4268, although in sterling terms it is down 4% to 36.47p.
The group has provided guidance for 2024. It expects underlying sales growth to be within the multi-year range of 3% to 5%, with more balance between volume and price. A modest improvement in underlying operating margin is anticipated, delivered through gross margin expansion, driven by a step-up in productivity and net material inflation back to more normal levels.
Source: Bloomberg
Compass Group has this morning released a brief but positive trading update ahead of its AGM which covers the first quarter of its financial year to 30 September 2024. The company has made a strong start to its year, although for now it has left its full-year guidance unchanged. In response, the shares are up 3% in early trading.
Compass is the world’s largest foodservice company, operating in around 30 countries, serving over 5.5bn meals a year. The group also operates a targeted support services operation that accounts for 15% of revenue. From this financial year, the company is reporting in US dollars.
In the three months to 31 December 2023, organic revenue – a combination of like-for-like volume growth, price, new business, and client retention – grew by 11.7%. This is ahead of the run-rate for the company’s full-year guidance of high single-digit growth.
Like-for-like volume was better than the company anticipated, especially in the Business & Industry division, with all other growth drivers in line with management expectations when the group reported its full-year results back in November. The “flight to trust” continued and the group benefitted from strong outsourcing trends despite continued inflationary pressures and some macroeconomic uncertainty.
The group’s largest region, North America (c. two thirds of revenue), grew by 11.3% in organic terms.
In Europe, the group has continued to enjoy a step change in its performance – organic revenue was up 13.0% – which has benefited from growth initiatives as well as favourable outsourcing conditions.
The Rest of World region grew by 11.8%.
The group has continued to reshape its portfolio to focus on growth opportunities in attractive markets. Last year, it exited nine tail countries and today has announced the disposal of its small operations in China.
As expected, there is no update on profitability or the group’s financial position at this stage. The group’s flexible cost base has helped the margin to recover from pandemic lows despite re-opening expenses, the cost of mobilising new contracts wins, and inflationary pressures.
At the last balance sheet date (30 September 2023), financial leverage was 1.2x net debt to EBITDA, in the middle of the medium-term target of 1.0x-1.5x. In response, the group is buying back its shares and has completed $100m of its $500m (£410m) programme, which is expected to be completed in 2024 subject to M&A activity. The group is also paying an attractive dividend – a full-year payout of 43.1p was announced in November, up 36.8% versus last year.
As the group focuses on the significant structural growth opportunities in its core markets, it has stepped up its M&A activity to expand its portfolio of brands, focused on digital innovation and delivered-in solutions. Net acquisition expenditure in the latest quarter was $352m, of which most related to the completion of Hofmanns in Germany. Most recently, the group announced the acquisition of CH&CO, a provider of premium contract and hospitality services in the UK and Ireland for an initial enterprise value of $600m. The company generates revenue of $570m across a range of sectors, including Business & Industry, Sports & Leisure, Education, and Healthcare, and will complement the group’s existing footprint. Although a deal of this size may reduce the amount of excess cash flow available for share buybacks, we believe reinvesting in the core business is good capital allocation and will generate upward pressure on earnings forecasts.
Overall, Compass continues to show it has the flexibility to weather the uncertain macro-economic environment whilst continuing to invest in the business to enhance its competitive advantage, support long-term growth prospects, and further consolidate its position as the industry leader in food services. Investment in digital expertise is bringing benefits of increased new business wins, higher customer participation and transaction spend, reduced food waste and food cost, and increased productivity and staff retention. Although there are threats – permanently increased levels of working from home and online learning, higher unemployment in a downturn, and increased competition from delivery providers – we believe the company is well placed to cope as the more cyclical Business & Industry unit is now a smaller percentage of revenue (a third vs. a half) and there is a higher level of volume protection in contracts.
The scope for growth from first-time outsourcing and share gains is significant, and the group currently has an excellent pipeline of new business. As the largest player (albeit with only a 15% share) in the £250bn global market, Compass is well placed to consolidate its position as a trusted provider, able to offer clients and consumers safe and innovative solutions. Scale provides a vital advantage over smaller players, while corporations and other institutions will be more open to outsourcing as they seek improved health and safety protocols, resilient food supply chains, and financially strong suppliers. This is especially the case in the health and education sectors which previously used in-house catering providers. Looking forward, management is confident the company can deliver net new business growth of 4%-5%, significantly above the historical rate of around 3%.
The company has reiterated its guidance for the financial year to September 2024: underlying operating profit growth ‘towards 13%’ on a constant currency basis delivered through high single-digit organic revenue growth and ongoing margin progression. Net new business growth is expected to be slower in H1 than H2. Given the growth opportunities, the group expects capital expenditure to be around 3.5% of underlying revenue in 2024, with net M&A expenditure likely to be higher than in 2023.
Overall, the company remains ‘excited’ about the significant structural market opportunity globally. It expects to sustain mid-to-high single-digit organic revenue growth (i.e., 5%-8%) and return to its historical pre-Covid margin (7.5%). This will drive profit growth above revenue growth, allowing shareholders to be rewarded with further returns.
Source: Bloomberg