Morning Note: Market News and updates from Assa Abloy and Reckitt Benckiser.
Market News
Gold prices have eased to $3,310 per ounce, extending its short-term retreat after briefly hitting a record high of $3,500 yesterday. The decline came as Treasury Secretary Scott Bessent said he expects a de-escalation in the trade conflict with China soon, calling the prolonged tariff standoff unsustainable. The White House is also close to agreements with Japan and India, according to Politico, while the WSJ reported the US is negotiating terms for UK talks.
Meanwhile, President Trump backed away from threats to dismiss Fed Chair Jerome Powell after days of intensifying criticism over the central bank’s reluctance to cut interest rates. The dollar firmed and 10-year Treasury yields slipped to 4.35%. The Treasury curve flattened sharply, with the 30-year yield down almost ten basis points.
US equities rose last night – S&P 500 (+2.5%); Nasdaq (+2.7%). Tesla climbed after hours despite weak results after Elon Musk said he’ll pull back “significantly” from DOGE in May to devote more time focusing on the company.
In Asia this morning, the risk-on mood continued: Nikkei 225 (+1.9%); Hang Seng (+2.2%). The offshore yuan strengthened amid trade deal optimism. The FTSE 100 is currently 1.2% higher at 8,431, while Sterling trades at $1.3310 and €1.1685.
Brent Crude moved up to $67.60 a barrel. BP is outperforming its peer group this morning following a report in the FT that activist investor Elliott Management has urged the company to boost its free cash flow by an additional 40% through significant spending reductions. Elliott now holds a little over 5% of voting rights in BP.
Putin has offered to halt his country’s invasion of Ukraine across the current front line as part of efforts to reach a peace deal with President Trump, the Financial Times reports, citing unidentified people familiar with the matter.
Source: Bloomberg
Company News
Assa Abloy has today announced its Q1 results which were better than market expectations. Ahead of this morning’s analysts’ call, the shares have been marked up by 4% in early trading.
Assa Abloy is the global leader in access solutions to physical and digital places, with a portfolio of well-known global and local brands, such as Yale, Union, HID, and Lockwood. Products include doors, sensors, locks, alarms, fencing, gates, and identity systems. The key long-term drivers of the $100bn industry are increased demand for safety and security; growing urbanisation; increased emerging market wealth; the shift to new digital and electronic technologies; the development of sustainable buildings to meet climate change objectives; and changing market regulations. Furthermore, one of the legacies of the pandemic is likely to be a shift towards touchless (hygienic) activation points, automated doors, and location services, which also provide recurring revenue from licenses and software. As the brand leader in most markets, with a large installed base and strong distribution channels, we believe Assa Abloy is well placed to take advantage of these trends.
The long-term financial target is to generate annual sales growth of 10%, half organically and half from acquisitions, and to earn an operating margin of 16%-17% over the business cycle. The aim is to actively upgrade the installed base, generate more recurring revenue, increase service penetration, and expand exposure to emerging markets. The group is on track to exceed its target to generate SEK 25bn of profit from SEK 150bn of sales by 2026, with new 2028 targets – SEK 35bn of profit from SEK 220bn of sales – outlined at the last Investor Day.
The group has previously said it needs to generate organic top-line growth of 3% to offset inflation and drive the margin forward, although clearly more was needed to recoup the elevated raw material cost increases experienced over the last couple of years. The group has a strong track record of innovation – 550 new products were launched in 2024 – and aims to generate 25% of sales from products launched in the last three years.
The company also has a very strong track record on cost control. A new Manufacturing Footprint Programme, the group’s tenth, was launched during the first quarter. The expected restructuring cost is SEK 1,332m, with a pay-back time, including capital expenditure, of less than two years. The programme is expected to generate annual savings of about SEK 1bn and comprises almost 60 projects and, similar to previous programmes, includes factory, warehouse and office closures across all divisions.
During the first quarter of 2025, the macroeconomic environment remained challenging, with geopolitical uncertainty fueled by tariff concerns and high interest rates. However, strong exposure to the aftermarket continues to demonstrate its value.
Net sales rose 8% to SEK 37.9bn, a touch ahead of the market forecast of SEK 37.7bn. In organic terms, which strips out the impact of acquisitions & disposals (5%) and currency (1%), sales rose by 2%. with growth made up of a 1% volume and 1% price growth.
By business division, Global Technologies (a separate global division) delivered strong organic growth of 8% supported by strong growth in HID and very strong growth in Global Solutions. Entrance Systems (also a separate global division) was also flat, impacted by continued weakness in the Industrial and Doors & Automation segments.
Americas delivered organic growth of 2%, with continued strong growth in the North America Non-Residential segment and Latin America. The North America Residential segment saw sales decline, where persistently high interest rates and uncertainty weighed on consumer confidence. The EMEIA region was flat, as strong growth in Central Europe and in the Nordics was offset by sales declines in South Europe and the Middle East. Asia Pacific suffered a 5% decline, with continued weak demand in the Chinese residential market.
Operating income increased by 4% to SEK 5.6bn, well above the market forecast of SEK 4.8bn. The operating margin fell from 15.4% to 14.9%, driven by dilution of 140 basis points due to acquisitions and divestments. These effects are largely temporary and mainly related to transaction and integration costs, seasonal impacts, and divestment results. This was partly offset by very strong operating leverage of 60% from price realisation and cost management. EPS rose by 3% to SEK 3.20.
Operating cash flow fell by 22% to SEK 3.1bn due to an inventory build-up in preparation for tariffs. The corresponding cash conversion was 51%. The group’s financial position remains robust, with net debt to EBITDA at 2.4x. Looking forward, gearing is expected to fall rapidly thanks to strong free cash flow generation. For 2024, the group declared a dividend up 9% to SEK 5.90, and equal to a yield of 2%.
M&A will continue to be a core driver of growth, with over 900 potential acquisition targets identified globally. The focus is on acquiring new customers in the core business, extending the core offering, accessing new technologies to deepen the group’s competitive position, and increasing service capacity. However, there is some concern that recent M&A has been skewed towards lower value-added segments (e.g. DIY, window and door hardware components, fencing products, gates, padlocks, cylinders, etc). Although these acquisitions fit the purpose of growing earnings at lower multiples than the group average, they also dilute the group’s exposure to the fast-growing and structurally more attractive electromechanical and mobile segments, potentially posing a risk to long-term valuation multiples.
In 2023, the group acquired the HHI division of Spectrum Brands for $4.3bn to fill a strategic gap in its US residential business. The unit is performing well, with integration proceeding to plan and the company is confident it will be able to realise the five-year synergy target of $100m. Elsewhere, M&A activity remained buoyant with six deals completed in the first quarter with combined annual sales of about SEK 3.6bn. The pipeline remains strong, and the group still plans to make its usual 15-20 acquisitions per year. The group has also competed the sale of its under-performing Citizen ID business.
Assa Abloy doesn’t usually provide guidance but highlights that prevailing market conditions are ‘challenging and uncertain’. Management is dedicated to mitigating any impact from potentially negative changes in demand, through local agility and focus on cost-control. Assa has previously said that during both the global financial crisis in 2008/09 and the Covid-19 pandemic, its decentralised operational model and agile cost base provided flexibility. In addition, the group’s large exposure to after-market service and its structural pricing power leaves the business better positioned to navigate through these uncertain times. This leaves the group relatively well protected in a world of increased tariffs.
Source: Bloomberg
Reckitt Benckiser has today released its Q1 2025 results which were slightly below market expectations. However, guidance for the full year has been reiterated, whilst recognising the more challenging macroeconomic outlook. With regard to potential tariffs, the company sees an immaterial annualised impact on its cost base. In response to today’s update, the shares have been marked down by 4%.
Reckitt is a global leader in health, hygiene, and nutrition. Trusted brands, such as Dettol and Lysol, are well placed to benefit from the ongoing shift to healthier and more hygienic lifestyles, particularly in emerging markets. To help ease the pressure on state-funded healthcare systems, we expect to see an ongoing transition to self-care and growth of over the counter (OTC) brands such as Mucinex, Nurofen, and Gaviscon, all of which are owned by Reckitt. A focus on immunity, mental health, and overall well-being is expected to drive growth of the group’s preventative treatments, such as vitamins, minerals, and supplements (VMS).
Last year, Reckitt announced plans to significantly sharpen its portfolio focus and simplify its organisation to drive accelerated growth and value creation. The new operating model and structure went live on 1 January 2025.
• Core Reckitt (71% of revenue) will focus on a portfolio of 11 market-leading, high margin Powerbrands across four categories including Mucinex, Strepsils, Gaviscon, Nurofen, Lysol, Dettol, Harpic, Finish, Vanish, Durex, and Veet. Over the last three years this portfolio has delivered a 5% net revenue CAGR and in 2024 generated a gross margin above 60%.
• Essential Home (14% of revenue) is expected to be sold by the end of 2025 with the company considering all options to maximise shareholder value. The portfolio includes brands such as Air Wick, Mortein, Calgon, and Cillit Bang. It was recently reported the company has shortlisted three private equity firms for a potential buyout valuing the business at £4bn-£5bn. The proceeds from any transaction are expected to be returned to shareholders.
• Mead Johnson Nutrition (Enfamil and Nutramigen, 15% of revenue). The company is evaluating opportunities for the business.
The company has moved to a simpler and more effective organisation with fewer management layers operated through three geographies: North America, Europe, and Emerging Markets. It has also expanded and accelerated its existing fixed cost optimisation initiative to unlock cost efficiencies and deliver at least a three percentage points reduction in fixed costs by the end of 2027, of which 60 basis points was achieved in 2024.
In the first quarter of 2025, reported revenue fell by 1.4% to £3,683m. Stripping out the impact of currency and disposals, LFL growth was 1.1%, driven by price/mix (+3.0%) and volume (-1.9%). This was slightly below the market forecast for growth of 1.5%.
Core Reckitt grew by 3.1%, made up of 2.8% growth in price/mix and volume growth was 0.3%. This was below the full-year target run rate of 3%-4%, however growth is expected to accelerate in the current quarter and the full-year target has been confirmed.
By product segment, growth was driven by the Germ Protection (+7.5%) and Intimate Wellness (+16.6%) as a result of improved market execution and market share gains. Performance was weaker in Self-Care (-3.6%) and Household Care (-0.2%). By region, Emerging Markets generated LFL net revenue growth of 10.7%, offset by a decline in Europe (-1.7%, as the company lapped phasing of shipments in the prior year) and North America (-0.9%, against a volatile macroeconomic backdrop and weakening consumer confidence).
In the Essential Home division, net revenue fell 7.0% on a LFL basis, with volume down 7.6% and price/mix of +0.6%. The new management team are focused on improving performance, particularly in US Air Care, and the expect negative LFL net revenue in the first half of the year ahead of a recovery in the second half. Progress on the separation of Essential Home is continuing – the aim is still to seek an exit in 2025, whilst recognising that market conditions may impact this timeframe.
In Mead Johnson Nutrition, net revenue declined 0.5% on a LFL basis, with volume down 6.7% and price/mix up 6.2%. The business continues to recover following the supply disruption caused by the Mount Vernon tornado in the second half of 2024, which impacted on-shelf availability.
As expected at this stage, the group hasn’t provided an update on profitability or its financial position, other than to say the Fuel for Growth programme is on track to deliver a 19% fixed cost base by end of 2027.
At the end of 2024, financial gearing was 2.0x net debt to adjusted EBITDA, versus the guidance of ‘below 2x’. The dividend policy is to deliver sustainable growth in future years – the 2024 payout was raised by 5% to 202.1p (4% yield). In response to the weak share price and to reflect the board’s confidence in the continued strong free cashflow generation of the business, Reckitt is currently undertaking a £1bn share buyback Programme, with £815m completed as of 17 April.
Guidance for 2025 has been reiterated – the group expects LFL net revenue growth of 2%-4%. Despite the muted start to the year, Core Reckitt is still expected to grow by 3%-4% growth. Q2 is expected to be led by Emerging Markets (mid-to-high single digit growth), with low-single digit growth in Europe and low-single digit decline in North America. In H2, growth is expected to be more balanced across all three Areas with North America returning to growth.
Elsewhere, the company expects low-single digit LFL net revenue growth in Essential Home and Mead Johnson Nutrition in 2025, with both being second half weighted. Both businesses will show LFL net revenue declines in H1.
The Fuel for Growth programme is still expected to help drive adjusted operating profit ahead of net revenue growth. The group still expects to deliver another year of adjusted diluted EPS growth, albeit held back by a higher tax rate.
The company is closely monitoring the evolving situation around global tariffs and the potential impacts on its supply chain and cost base. We note that Reckitt has five factories in the US and makes more than half of its US sales volume locally. The company also sources some over-the-counter products from Mexico and condoms from Southeast Asia. In the medium term, the company already has plans in place to increase its US production footprint – when its North Carolina factory comes online in 2027, the percentage of sales manufactured locally could rise to 75%. At present, the company sees an immaterial annualised impact on its COGS base which it is confident in mitigating over the short to medium-term through a number of levers including excellent brand equities with pricing power and limited imports from China into the US.
Source: Bloomberg
