Morning Note: Results from Visa, Assa Abloy, Reckitt Benckiser, and Heineken.

Market News

US Stocks climbed on Tuesday, with the Dow Jones Industrial Average closing at 38,503.69 +263.71 (+0.69%), while the Nasdaq closed at 15,696.64, +245.33 (+1.59%). Asian and European stocks responded positively. In Japan, the Nikkei closed at 38,460.08 +907.92 (+2.42%). The FTSE 100 is currently up 0.4% to 8,073.

Treasuries fell and Brent steadied at 87.50 a barrel. The yen remained weak, around the key 155 level to the dollar. Sterling trades at $1.2430 and €1.1630.

Tesla soared 13% post market after pledging to speed up the launch of more affordable models. First-quarter profit and sales missed. The EV maker plans to release the cheaper cars as soon as this year, well ahead of its previous late-2025 timing.

Kering’s ADRs slumped more than 8% after the company warned first-half profit will drop 40-45% as sales at Gucci tumbled on slack Chinese demand.  Citi expects 10-15% downgrades to full-year EBIT projections.

Roche’s first-quarter sales missed expectations. Texas Instruments jumped after-market on a bullish revenue forecast. Boeing’s cash burn and capital reserves will be in focus when results drop before the open. Meta, Ford, and IBM are also due later today as S&P 500 reporting season gets into full swing.

The US Senate passed the $95bn foreign-aid package, clearing the way for resumed arms shipments to Ukraine within days.  Joe Biden will sign the bill today.  Included in the bill is the ownership ban of TikTok by ByteDance.

Source: Bloomberg

Company News

Yesterday evening, Visa released results for the three months to 31 March 2024, the second quarter of its FY2024 financial year. The figures were higher than the market forecast, and the group maintained its guidance for the full year. The shares rose by 3% in after-hours trading post the announcement.

Visa is the world’s largest electronic payments network. It connects 14,500 financial institutions, 130m merchant locations, and 4.3bn cards. Visa is not a bank; it doesn’t lend or take on credit risk. It doesn’t issue cards or place the terminals at the merchant locations. Instead, the company earns a small fee from more than 200bn transactions processed on its network to generate annual revenue of more than $32bn.

The company is benefiting from the ongoing shift from cash and cheques (which still amounts to c. $18tn, growing at 2% p.a.) to electronic means of payment, and the growth of online retail, contactless, and mobile payment systems. We believe the industry is at an inflection point in terms of sales growth driven by the global proliferation of smart devices which provide a way to pay and to be paid. In emerging markets, a lack of physical communication infrastructure traditionally provided a barrier to payments growth, but that has been removed by the emergence of mobile phone technology and a government focus on digitalising cash to reduce the black economy. In 2023, the company grew its acceptance locations by 17% as mobile phones and other devices became payment terminals.

During the latest quarter, Visa enjoyed solid trading, reflecting stable consumer spending. International travel volumes remained strong, although the travel recovery in Asia has been slower than expected. This generated growth in payments volume (+8%) and processed transactions (+11% to 55.5bn). Cross-border volume growth (which includes a lot of e-commerce) remained strong (+16%). The group enjoyed continued growth across its new flows, where the long-term revenue opportunity is estimated at 10x the size of existing consumer payments. Visa’s largest 265 clients now use an average of 22 of Visa’s value-added services products, such as cybersecurity, fraud, data analytics, and AI, all of which enhance the group’s competitive advantage.

Net revenue grew by 10% on a constant currency basis, to $8.8bn, better than the market expectation of $8.6bn, and the company guidance for upper mid to high single-digit growth. Revenue was made up of service revenue (based on prior-quarters payment volume, +7% to $4.0bn); data processing (+12% to $4.3bn); international transaction revenue (+9% to $3.0bn); and other revenue (+37% to $756m). Client incentives, a contra-revenue item, were up 12% to $3.3bn.

The group continued to keep a tight rein on costs – operating expenses were up 11%, primarily driven by increases in personnel and admin expenses, and compared to guidance for a low double-digit increase. Adjusted EPS was up 20% on a constant currency basis, to $2.51, versus the market expectation of $2.44 and company guidance for high teens growth.

During the quarter, the group generated $4.3bn of free cash flow. The group’s balance sheet remains strong, with cash, cash equivalents, and available-for-sale investment securities of $20.8bn at the end of March. The main capital allocation priority is to invest to grow the business, both organically and via acquisition.

Visa also has an ongoing commitment to return excess cash to shareholders. The group has a record of strong dividend growth, with the latest quarterly payout raised by 16% to $0.52. During the quarter, the company also bought back $2.7bn of its stock, leaving $23.6bn of remaining authorisation for shares repurchases.

On the regulatory front, Visa has a long-term track record of coping with change. Most recently, in March, after nearly 20 years of litigation, Visa (and Mastercard) announced it has agreed to a landmark settlement with US merchants, more than 90% of which are small businesses, lowering credit interchange rates and capping those rates until 2030. The settlement also provides updates to several key network rules giving merchants more choice in how they accept digital payments. The deal should increase card adoption and ease the overhang from other litigation.

We believe the long-term growth prospects for Visa remain very attractive, more so given the acceleration in recent years in the shift to e-commerce, tap-to-pay, and new digital payments, and in the number of acceptance points at SMEs. In addition, the broad application of digital payments by businesses and government provides a huge market opportunity.

The group has reiterated its guidance for the financial year to 30 September 2024: low double-digit revenue growth on a constant dollar basis and low teens EPS growth. The company still expects the year to be more second-half weighted due to tough year-on-year comparatives. For the current quarter, the company expects to generate low double-digit revenue growth and high end of low double digit EPS growth.

In the near term, while some short-term uncertainty persists, the group remains confident in its ability to execute its strategy and expand Visa’s role at the ‘centre of money movement’. Persistent inflation and the ongoing shift to digital payments also provide a tailwind to growth, although a slowdown in overall consumer spending could be a drag. Spending across the network is very diversified, be it credit/debit, overseas/ domestic, discretionary/non-discretionary spend, and low/high ticket spend.  However, the company has previously said that if we do go into a recession, Visa is now stronger in debit – the card of choice in tougher times – than it was in the 2008/09 financial crisis. The group also highlights that if there is a recession, they have plenty of flexibility on costs and client incentives. Note that half of the group marketing spend is variable.

Source: Bloomberg

Assa Abloy has today announced its Q1 2024 results in line with market expectations. Ahead of the analysts’ call, the shares are trading slightly lower.

Assa Abloy is the global leader in access solutions, with a portfolio of well-known global and local brands, such as Yale, Union, and Lockwood. Products include doors, sensors, locks, alarms, fencing, gates, and identity systems. The key long-term drivers of the industry are increased demand for 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 generate SEK 25bn of profit from SEK 150bn of sales by 2026. 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 more recently to recoup more elevated raw material cost increases. The group has a strong track record of innovation and aims to generate 25% of sales from products launched in the last three years.

A ninth Manufacturing Footprint Program (MFP9) is currently underway to further increase efficiency and optimise operations. The target savings are SEK 0.8bn (4% of operating profit).

In the three months to 31 March 2024, net sales rose 9% to SEK 35.2bn, a touch below the SEK 35.5bn forecast. In organic terms, which strips out the impact of acquisitions & disposals (+11%) and currency (zero), sales were down 2%. The group faced tough comparatives with the same quarter last year, which was up 8%, particularly in the Global Technologies and EMEA divisions. Organic sales were also affected by three fewer working days in March, the most important month of the quarter and a continued weak residential market.

Growth was made up of a 4% volume decline and 2% price growth as the group continued to recoup higher raw material costs. The group continued to raise prices in January and February, adding to the pricing contribution from last year.

By business division, organic sales growth was stable in Entrance Systems, with strong growth in Perimeter and the Pedestrian segment, offset by a decline in Industrial and Residential. Sales fell slightly in Americas (-1%), Asia Pacific (-3%), and EMEIA (-3%). Global Technologies declined by 9% against a high corresponding figure last year due to the significant reduction of the backlog a year ago.

The group’s restructuring programme proceeded according to plan. Operating income increased by 5% to SEK 5.4bn, in line with the market forecast, and the operating margin slipped from 16.0% to 15.4%. Excluding the acquisition of HHI and divestment of Emtek (see below), the margin was 16.3%, a record-high for the quarter. The operating leverage of the business was strong, driven by lower direct material costs, more cost savings, and price realisation. EPS fell by 6% to SEK 3.12, vs. SEK 3.15 expected.

Operating cash flow fell by 24% to SEK 3.1bn, with the cash conversion rate at 67%. The group’s financial position remains robust, although net debt to EBITDA rose from 1.2x to 2.4x following the completion of the HHI deal (see below). Looking forward, gearing is expected to fall rapidly thanks to strong free cash flow generation. In 2023, the group declared a larger dividend than expected – up 12.5% to SEK 5.4, equal to a yield of 1.7%.

In 2023, the group completed the $4.3bn acquisition of the HHI division of Spectrum Brands. As part of the regulatory process, Assa Abloy agreed to sell assets in North America for $800m. The company believes HHI is a good strategic fit – it fills a gap in its US residential business – and has said the business is performing in line with expectations. The integration process continues to proceed according to plan, and the group is gradually realising more synergies on the road to its five-year target of $100m.

Elsewhere, M&A activity remained buoyant with three deals completed in the first quarter with combined annual sales of SEK 2.0bn. The pipeline remains strong, and the group still plans to make its usual 15-20 acquisitions per year. Last month, Assa acquired Nomadix and Global Reach, leading US and UK based providers of Wi-Fi access and engagement platform solutions for the hospitality and commercial real estate industry. The company generates sales of $30m and the deal will be accretive to EPS from the start.

Assa Abloy doesn’t usually provide guidance. The company points out that the macroeconomic environment remains uncertain, and 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. To further optimise its operational footprint, the group has started to work on its next manufacturing footprint program, with a launch expected towards the end of 2024. 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.

Source: Bloomberg

Reckitt has today released its Q1 Trading Update which highlighted a good start to the year and leaves the group on track to meet its full-year guidance for 2024. In response, the shares are up 4% in early trading.

Reckitt is a global leader in health, nutrition, and hygiene. Trusted brands, such as Dettol and Lysol, are well placed to benefit from the 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 a 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 greater 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).

New CEO Kris Licht believes the company operates in ‘attractive growth categories’ which should deliver sustainable mid-single digit like-for-like (LFL) net revenue growth over the medium term (i.e. 4%-6%). The group is investing in product superiority and extending its productivity programme to focus on reducing fixed costs. As a result, adjusted operating profit is expected to grow ahead of net revenue in the medium term. Strong free cashflow generation and a healthy balance sheet should finance sustainable dividend growth and a share buyback. This should help generate EPS growth in the high single digits.

However, in the near term the company (and the shares) have struggled as a result of a string of operational issues, compliance problems in the Middle East, and a negative legal outcome in the US.

During the first quarter, reported revenue fell by 4.6% to £3.74bn, including a currency headwind (-5.7%) and disposals (-0.4%), slightly better than the market forecast of £3.67bn. Stripping out these impacts, LFL growth was 1.5%. Performance was in line with management expectations, although better than the market forecast. However, we note part of this beat was due to the pull-forward of sales in Brazil which will reverse in the current quarter.

Following a period of price-led growth, the group is now returning to a more balanced contribution from price, mix and volume. Price/mix grew by 2.0% as the group benefitted from strong carry-over pricing from 2023 as it sought to pass on higher input costs. Pushing price increases through was made easier by strong product innovation, with consumers trading up to premium innovations. Volume fell by 0.5% but grew in many of the group’s power brands, including Lysol, Dettol, Durex and Finish, as well as the non-seasonal OTC portfolio.

By division, Hygiene 7.1% in LFL terms to £1,608m. Two percentage points of the growth was due to additional sell-in ahead of a SAP implementation in Brazil which will unwind in Q2. Health was up 1.0% to £1,538m, with good growth across many brands, reduced by a tough comparator in cold & flu OTC brands. Nutrition fell by 9.9% to £591m as the North America business continued to rebase due to lapping of the prior-year competitor supply issue, in addition to the voluntary recall of Nutramigen. However, the group has maintained its value market share leadership.

As expected, today’s statement was only a revenue update with no detail on margins or the group’s financial position. As a reminder, in 2023 the gross margin was 60%, while the operating margin was 23.1%. Free cash flow generation was strong, and the group ended the year with financial gearing of 1.9x net debt to adjusted EBITDA, in line with the guidance ‘below 2x’. The dividend was raised by 5% to 192.5p (4.5% yield), with the aim to deliver sustainable growth in future years.

In 2024, the group is looking to further increase cash returns to shareholders, aiming to double what it returned in 2019 (i.e. pre-pandemic). In light of the recent share price fall, the group recently announced the acceleration of its £1bn share buyback programme to reflect the Board’s confidence in the continued strong free cashflow generation of the business. The final £500m tranche will now be completed in July, three months earlier than previous guidance, following which a new programme will be announced.

The group has reiterated its guidance for 2024. LFL revenue growth is expected to be 2%-4%, but still below the group’s medium-term aspiration. Health and Hygiene portfolios are both expected to generate mid-single-digit growth. The Nutrition business is expected to suffer a mid- to high-single-digit decline as it continues to rebase in the first half of the year and returns to growth later in the year. Adjusted operating profit is expected to grow ahead of net revenue growth (i.e. a slight margin increase). Revenue and profit growth will be second half weighted as the group laps high OTC comparatives from Q1 last year and most of the rebasing of the US Nutrition business is seen in H1.

The shares suffered another large fall in March on concerns over litigation in the US against the group’s Enfamil baby formula. Although there is little visibility over the potential size of the damages, the extent of the valuation decline appears excessive. A trial in one of these actions is currently scheduled to begin in September in St. Louis, Missouri. In the meantime, the company has stated the allegations from the plaintiff's lawyers in the case were not supported by the science or experts in the medical community. Whatever the outcome, this issue is likely to overhang the shares for a while.

Source: Bloomberg

Heineken has this morning released Q1 results which were slightly better than expected and reiterated its guidance for 2024. Ahead of this afternoon’s analysts’ meeting, the shares are trading slightly higher.

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 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.

In 2023, 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 impacted volume. However, the group has made an encouraging start to 2024, with all regions growing volume and net revenue in the first quarter. The group continued to see a sequential improvement in the performance of the business, growing in line or ahead of the category in the majority of its markets. We note, however, Q1 was boosted by an earlier Easter and cycling negative one-off effects from last year.

Net revenue grew by 9.4% on an organic basis to €6.8bn, versus the market forecast for growth of 7%. Growth was driven by a 4.9% increase in net revenue per hectolitre as pricing was used to mitigate inflationary pressure. Total consolidated volume grew by 4.3%. The underlying price-mix was up 6.0%, mainly driven by pricing and in line with inflation.

Beer volume grew by 4.7% in organic terms with the group growing ahead of the beer category in most of its markets. This was a sequential improvement in the performance of the business, boosted by calendar and one-off effects.

By region, the change in revenue was: Europe (+0.4%); Asia Pacific (+11.3%); Africa, Middle East and Eastern Europe (+32.9%); and The Americas (+6.5%).

The group continues to benefit from an ongoing shift towards product premiumisation, with volume up 7.3% organically. The Heineken brand itself grew volume by 12.9% and became the number one brand by value in Brazil. In the low & no-alcohol category, volume grew in the mid-teens led by Heineken 0.0. The group’s e-commerce platforms continued to grow, with gross merchandise value captured via B2B digital platforms up 17% to €2.7bn.

As is usual at this stage, there is no update on the group’s financial position, although we would highlight Heineken has a strong balance sheet. At the end of 2023, financial gearing was 2.4x net debt to EBITDA, in line with the long-term target to be below 2.5x. 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).

Despite the solid start to the year, management highlights it cannot extrapolate the reported top-line growth to the rest of the year. As a result, the group is maintaining its guidance for the full-year: low- to high-single-digit operating profit organic growth, with the wide range a reflection of the ongoing macroeconomic uncertainty. The focus is on revenue growth, balanced between volume and value, through brand investment to deliver long-term sustained value creation. Variable costs are expected to increase by a low-single-digit on a per hectolitre basis in 2024, 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.

Source: Bloomberg