¼ of $1B, is a lot of upset babies (PRGO, ABT)
Abbott lowered its sales guidance from +HSD% to +mid to HSD due to the infant formula product recall. Abbott said it is working closely with the FDA and has begun implementing corrective actions at one of its infant formula facilities. The company said testing has revealed that the retained samples do not show the presence of the bacteria that caused the illness at the center of the recall. Pediatric nutrition sales decreased 33.6% to $338M in the U.S. Management said, “We know the situation has further exacerbated industry-wide infant formula supply shortages. That’s why we are doing everything possible to mitigate supply constraints by bringing in product from our FDA registered facility in Europe and ramping up production at our other U.S. plants. And of course, we are working very closely with the FDA on proactive actions and enhancements so that we can restart operations at the facility.” The recall seems to have cost Abbott nearly $250M in sales in Q1 alone. As a manufacturer of the store label that is similar to Abbott’s product Perrigo stands in line to be a key beneficiary. Earlier in the week, we wrote about how Perrigo’s infant formula business has two new tailwinds.
The coming margin inflection (PG)
PG’s organic growth of 10% in FQ3 accelerated from 6% in Q2 and was above expectations of +6.2%. Volume added 3% points, pricing added 5% points, and mix added 2% points. U.S. organic sales grew 11%. Management said price elasticities are 20-30% better than the historical data would have indicated. Core gross margins contracted 400bps YOY and were 200bps lower than expectations. Commodity and freight costs were a combined 490bps headwind while pricing and productivity gains were a 260bps tailwind. Core gross margins contracted 400bps in Q2 when commodity and freight costs were a combined 460bps headwind and productivity gains were a 150bps tailwind.
Management raised organic revenue guidance for the year to 6-7% from 4-5% previously. Compared to F2021 there is a $3.2B after tax headwind or $1.26 per share. The headwinds include $2.5B from higher commodity costs, $400M from higher freight costs, and $300M from Fx. That is up $400M from the previous quarter, $200M attributable to higher commodity costs, $100M attributable to higher freight costs, and $100M from Fx. EPS is now expected to be at the low end of the 3-6% range.
Pricing accelerated sequentially by 2% to 5%, outpacing the 0.9% sequential increase in inflationary pressure. The pricing growth also led to further SG&A leverage resulting in core operating margin contraction of only 10bps. We see an inflection in margins for most CPG companies with pricing actions offsetting inflationary cost increases in the next two quarters depending on the COGS basket and pricing power.
Q1 sales update (HEIA)
Heineken reported beer sales in Q1 up 5.2% on a like-for-like basis, 1.7% better than expected. Organic revenue growth was 24.9%. Revenue per liter increased 18.3% driven by pricing, premiumization, and a positive channel mix. Heineken benefited from the reopening in Europe, improving the channel mix. Beer volumes grew 5.2% organically. The Americas region had the slowest growth rate of 1.3% while Europe grew 11.5%. In Q4 beer volumes grew 6.2% organically with Europe up 15.0%, the Americas up 6.5%, and Asia Pacific down 9.0%. Input costs are expected to increase in the mid-teens%. Management maintained their guidance for stable to modest improvement in operating margins. Europe’s reopening will be of greater magnitude in 2022 than in the U.S. and the benefit to margins will be larger. At the same time, the impact of Ukraine on COGS is greater than it is in the U.S.
