Morning Note: Market news and updates from Unilever and Atlas Copco.
Market News
US equity markets were little changed last night – S&P 500 (flat), Nasdaq (+0.1%). Nasdaq fell after hours, with Meta down 15% after it boosted spending projections for the year. Alphabet (Google) and Microsoft release earnings this evening. This morning in Asia, markets were mixed: Nikkei 225 (-2.2%); Hang Seng (+0.5%); Shanghai Composite (+0.3%). The yen briefly weakened past 155.50, putting traders on high alert as the BOJ’s two-day meeting got underway.
The FTSE 100 is currently trading 0.5% higher at 8,079. Companies trading ex-dividend today include Legal & General (5.78%), Spirax Sarco (1.22%), and Rightmove (1.09%). Anglo American confirmed it is has received an unsolicited, non-binding and highly conditional combination proposal from BHP Group. The proposal comprises an all-share offer for Anglo American by BHP and would be preceded by separate demergers by Anglo American of its entire shareholdings in Anglo American Platinum Limited and Kumba Iron Ore Limited to Anglo American shareholders. The Anglo Board is currently reviewing this proposal with its advisers. With Anglo currently valued at £29bn, this would be the biggest deal this year.
The 10-year Treasury yield moved up to 4.65%, while gold drifted to $2,321 an ounce. Demand for Treasuries is holding up as the US government floods the market with more than $180bn of new debt this week. Investors absorbed $70bn of five-year notes yesterday and another $44bn sale of seven-year notes is due today. Still, investors may be less receptive to the longer-dated securities ahead of the Treasury’s quarterly funding announcement and the FOMC meeting next week.
Source: Bloomberg
Company News
Unilever has today released Q1 results which were slightly better than expected driven by improved volume growth, particularly in the group’s ‘Power Brands’ The company has reiterated its guidance for the full year and in response the shares have been marked up 4% 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. In particular, the group’s 62% holding in India-listed Hindustan Unilever Limited provides exposure to the largest consumer goods company in India.
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.
2. greater productivity and simplicity: to build back the gross margin and drive the benefit of the new organisational structure. The group is confident it can return to pre-covid level of gross margin (44%).
3. a stronger performance culture – there has been a raft of senior management changes and a new incentive framework.
In March, the group announced an acceleration of its growth action plan through the separation of its ice cream unit and the launch of a productivity programme to drive faster growth and a higher margin.
Ice cream accounts for 13% of group sales and has distinct characteristics compared with Unilever's other operating businesses. These include a supply chain and point of sale that support frozen goods, a different channel landscape, more seasonality, and greater capital intensity. A demerger is the most likely separation route, although other options will be considered to maximise returns for shareholders. The group’s remaining four units have complementary routes to market, and/or R&D, manufacturing and distribution systems, across both developed markets and Unilever’s extensive emerging markets footprint.
The productivity programme is being accelerated and is anticipated to deliver total cost savings of around €800m over the next three years, more than offsetting estimated operational dis-synergies from the separation of Ice Cream. Overall, these actions will leave Unilever with a structurally higher margin. Post separation, the aim is to deliver mid-single digit underlying sales growth (vs. the previous target of 3%-5%) and modest margin improvement. The group will continue to target total shareholder returns in the top third of the peer group.
This morning, the company has highlighted that although its transformation is at an early stage, management have increasing confidence in its ability to deliver sustained volume growth and positive mix as the company accelerates gross margin expansion.
Back to today’s results. In Q1, turnover grew by 1.4% to €15.0bn. Underlying sales growth (USG) – adjusted for the impact of currency fluctuations (-2.0%) and M&A (-0.9%) – was 4.4%. This was better than the market expectation of 3.6% and more balanced between price and volume than in recent quarters. Volume grew by 2.2%, a slight improvement from 1.8% in the previous quarter, while underlying price growth of 2.2% moderated slightly from 2.8% in Q4.
The 30 Power Brands grew by 6.1%, driven by a 3.8% increase in volume, with strong performances from Dove, Knorr, Rexona, and Sunsilk.
In emerging markets, USG was 5.4%, with good results in Latin America, China, Turkey, and Africa, held back by lower pricing in India and a sales decline in Indonesia. Developed markets grew by 3.0%, with North America and Europe up 3.6% and 4.0% respectively.
All five businesses reported growth: Beauty & Wellbeing (+7.4% to €3.2bn); Personal Care (+4.8% to €3.4bn); Home Care (+3.1% to €3.2bn); Nutrition (+3.7% to €3.4bn); and Ice Cream (+2.3% to €1.8bn).
The group is no longer providing an update on market share on a quarterly basis. On the call, the CEO said competitiveness remains disappointing but reiterated that improving performance is a key focus of the group’s action plan and management are moving quickly to address it. A sequential improvement is expected in the second half of the year.
As this was only a sales update, there was no detail in the statement on profitability or the group’s financial position. As a reminder, in 2023 the group generated a gross margin of 42.2% and an underlying operating margin of 16.7%. Free cash flow was €7.1bn, leaving year-end net debt at €23.7bn, 2.1x EBITDA and in line with guidance of around 2x. The group will commence a share buyback programme of up to €1.5bn during 2024, which is expected to commence in the current quarter. The quarterly dividend has been maintained at €0.4268, although in sterling terms it is down 3% to 36.47p.
The group has confirmed its guidance for 2024. It still 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
Yesterday lunchtime Atlas Copco released Q1 results that were ahead of market expectations, particularly in terms of new orders. Looking forward, the group expects customer activity level will remain at the current level. In response, the shares, which are listed in Sweden, rose by 6%.
Atlas Copco is a world-leading manufacturer of innovative compressors, vacuum solutions, generators, pumps, power tools, and assembly systems. The group has a diverse customer base made up of general manufacturing (22%); process industry (20%); electronics/semis (16%); construction (12%); auto (10%); and other (20%). The products help the customer to increase operational performance, save energy costs, reduce contamination, cut down on failures in the field, lower noise levels, and extend service intervals.
As a result, the company provides exposure to a broad range of trends: demand for increased energy efficiency and reduced emissions; increased use of lightweight materials in transport industries; the transition from petrol to electric vehicles; increased use of demanding materials and production environments in processes for semiconductor and industrial production; increased production automation and smart factories; demand for improved ergonomics; and increased demand for digitally-supported service offers. Overall, the company will play a role in the effort to reorganise and improve the resilience of supply chains, bring manufacturing closer to domestic markets, and increase automation in the face of higher labour costs or deteriorating demographics. Finally, over time the vacuum business should benefit from the expansion of the North American semiconductor manufacturing market.
The target is to grow revenue by 8% per annum, primarily through organic means, complemented by selective acquisitions of companies in or close to existing core competencies. The group operates an asset-light strategy – only components that are critical to the performance of the equipment are manufactured in-house. The company has integrated itself with its customers and can provide rapid and extensive services and support of their installed base of equipment. 36% of revenue (and 50%+ of operating profit) is generated from service (i.e., spare parts, maintenance, repairs, consumables, accessories, and rental). This is more stable than equipment sales (64%) and provides a strong base for the business and greater resilience in difficult times. The cost of the group’s equipment is low relative to the customer’s operating costs and, as a result, the company has strong pricing power, important at a time of raw material cost inflation. Atlas Copco is based in Sweden and reports in Swedish Krona (SEK).
During the first quarter of 2024, the overall demand for the Atlas Copco’s equipment and services was solid, although the order intake didn’t reach the high level of the comparison quarter in the previous year.
Revenue grew by 8% to a record SEK 42.9bn, slightly above the market forecast of SEK 42.4bn. In organic terms, which exclude M&A (+3%) and currency (-2%), growth was 7%. Order intake fell by 4% in organic terms to SEK 45.7bn, the market forecast of SEK 41.6bn.
Atlas Copco operates through four divisions or ‘Techniques’, with the performance in the quarter as follows:
· Compressor Technique (44% of 2023 sales): organic revenue grew by 8%; orders fell by 1%.
· Vacuum Technique (25% of sales): organic revenue and orders fell by 3% and 4%.
· Industrial Technique (16% of sales): organic revenue and orders grew by 19% and 3%.
· Power Technique (16% of sales): organic revenue grew by 7% and orders fell 17%.
Order volumes for industrial compressors remained basically unchanged, while orders for gas and process compressors did not reach the previous year’s exceptional level. The order intake for vacuum equipment for the semiconductor industry increased somewhat, whereas the order intake for industrial and scientific vacuum equipment decreased. Orders for industrial assembly equipment and vision solutions for the automotive industry were basically unchanged, while orders for the general industry increased. The order intake for power and flow equipment decreased markedly compared to the previous year’s high level, primarily due to lower demand from equipment rental companies in North America.
Atlas Copco generates attractive margins, with gross above 40%, providing some shelter against rising raw material costs, and operating above 20%. In Q1, adjusted operating profit rose by 9.5% to SEK 9.5bn, versus the SEK 9.3bn market forecast, with the margin up 40 basis points to 22.1%, driven by increased organic revenue and previous year’s high costs related to supply chain constraints, that were not repeated. EPS grew by 10% in Q1 to SEK 1.47, above the market forecast of SEK 1.45. The return on capital employed during the previous 12 months increased from 29% to 30%, well above the group’s 8.0% cost of capital.
The company has a robust balance sheet and continues to generate strong cash flow (SEK 6.7bn in Q1). Net debt reduced from SEK 24.1bn to SEK 20.8bn, while interest-bearing liabilities have an average maturity of 5.4 years. Financial gearing is a very comfortable 0.5x net debt to EBITDA. The group continued to consolidate its industry with acquisitions. The dividend policy is to pay out 50% of net income. For 2023, the group has proposed a payment of SEK 2.80 per share, 22% higher than last year, equivalent to a 2% yield.
At the end of 2023, the group announced that Mats Rahmström, the President and CEO, is stepping down after seven years in the role. He will be replaced on 1 May by Vagner Rego, currently Business Area President for Compressor Technique.
The group provided brief commentary on the near term outlook – it expects ‘customer activity level will remain at the current level’.
Source: Bloomberg