July CPI accelerates again (PPC, BRCC, KDP)
The headline CPI was flat MoM and increased 8.5% YoY. Food at home CPI continued to accelerate despite the higher base effects in July. The Food category had a 10.9% YoY increase in CPI in July, accelerating 50bps from June. Food at home CPI increased 13.1% YoY in July, accelerating 90bps from June, with the two-year average accelerating 120bps to 7.8%. Food away from home decelerated 10bps YoY to 7.6%.
Every subcategory of food at home accelerated in July except the meat category. Meats, poultry, fish, and eggs CPI decelerated 90bps to 10.9% YoY in July. However, the two-year average accelerated 220bps to 8.4%. The meat category has led food at home inflation since the pandemic outbreak. June was the first time “Big Meat,” as the Administration termed it, due to the high level of price increases, did not see a CPI increase above the rate for food at home. The slower rate of inflation is due to the higher base effects and trading down by consumers, which several companies have begun to cite in Q2 earnings reports.
The coffee category saw a significant acceleration in July, with the YoY increasing 20.3% in July from 15.8% in June.
Consumers have not seen a significant increase in coffee prices in a decade, but companies across the board have had to pass on higher green coffee bean costs due to inflationary pressures in other parts of their businesses. The coffee companies had used purchasing contracts and reductions in other costs to avoid raising prices until late in 2021, which has led to a sudden ramp-up in prices in 2022.
Q2 results - Coming together (STKL)
SunOpta reported Q2 EPS of $.03 vs. consensus of breakeven due to better sales and margins. SunOpta’s Q2 report showed a number of initiatives coming together at the same time. Both the Plant-Based and Fruit-Based segments have been in transition with new manufacturing facilities, products, customers, and pricing plans. The Q2 results signaled that the transition phase is over. Revenue growth of 20.4% was 10% above expectations. Plant-based revenue grew 31%, with volume growth of 17.3% and pricing of 13.7%. Fruit-based revenues were 7.4%, with pricing of 10.4% and volume declines of 3%.
Gross margins expanded 130bps YoY. In the Plant-Based segment, gross margins contracted 150bps due to 215bps of dilution from pass-through pricing. Most of the segment’s customers are responsible for costs, including freight and oats, but cost increases are passed on in dollars, not markup rates. In the Fruit-Based segment, gross margins expanded 410bps with a 70bps headwind from pass-through pricing. The changes to the segment’s packaging, sourcing, and customer base drove the improved margins.
Management raised guidance for revenue and margins, as seen below.
Through the worst, but lowering the outlook (NOMD)
Nomad Foods reported EPS of €.40 vs. consensus of €.42. Revenue was 2% above expectations, but margins were slightly below. Reported revenue grew 17%, but organic revenue decreased 3.2% with volume/mix down 5.9% and price up 2%. EBITDA increased 2.9%.
Gross margins contracted 250bps due to higher raw material costs somewhat offset by pricing and the Fortenova acquisition. Management believes they are past the most challenging period of input cost increases and have covered nearly all of the raw material costs for 2022. Operating costs deleveraged 30bps due to the acquisition.
Management lowered EPS guidance for the year to €1.65-1.71 from €1.71-1.75 citing a more cautious outlook in Europe from the war in Ukraine and consumer sentiment. The combination of a lag in raising prices for COGS inflation as well as Ukraine has made 2022 a difficult year. The sequential improvement in the 2H from accelerating price increases and covered costs should lead to an inflection in top and bottom line growth. Q3 pricing was said to have accelerated by 5% with double digit increases still to come to reach mid-teens for the year. However, the elasticity of accelerating price increases in the 2H presents some unknowns. The valuation is undemanding and attractive for patient investors with less visibility in the inflection. Nomad Foods is on our long list, with the acceleration in pricing and inflection in margins and growth we think there is a reason to be more constructive despite the backdrop in Europe.
