Notable quotes from yesterday
“I think the cost for inflation, no question; it’s accelerated. I think we’re now looking at it being in the high end of the mid-single-digit range for 2021. We’re seeing it across our cost basket from exchange-traded commodities to diesel and energy, ocean freight.” - Amit Banati, CFO of Kellogg Company May 6.
“We are continuing to monitor the alcoholic energy seltzer category. And we may well do something in that. But how we do it and what we do… we don’t have a firm direction. So all I can really say is just that we are addressing it, but we shouldn’t assume that we are definitely going to go ahead or definitely not going to go ahead or how.” - Rod Sacks, Monster Chairman and co-CEO May 6.
Nomad Foods has inflation-fighting tools (NOMD)
Nomad Foods reported Q1 EPS of €.47 vs. consensus expectations of €.39 driven by better than expected margins. Organic revenue growth was 1.8% lapping 7.7% in the prior year. Total revenue grew 3.6%, benefiting 3% from closing the Findus Switzerland acquisition while lapping the Leap Year was a similar headwind. The branded retail business grew MSD% while foodservice and private label decreased double digits. Demand exceeded supply in fish, so the company is adding a new production line at its U.K. factory.
Gross margins expanded 130bps due to a favorable mix and lower promotional activity. Findus Switzerland has a lower gross margin and was a 30bps drag in the quarter. Management expects LSD% inflation this year. Gross margins are expected to contract 30bps going forward from Findus Switzerland, while the base business is expected to be flattish. Nomad Foods purchases about 20-25% of COGS in dollars, have productivity improvements and raises prices this year. Operating expenses declined 2% against heightened spending last year. Adjusted EBITDA grew 15% as margins expanded 180bps.
Management reaffirmed EPS guidance for the year of €1.50-1.55, which we view as prudent given the comparisons. The guidance does not include the Fortenova acquisition, which will be accretive to EPS in the 2H. The acquisition will raise 2021 EPS in dollars above $2. The P/E multiple should expand further with the visible organic growth supplemented by capital returns/acquisitions. Nomad Foods is on our long list.
On-premise improvements on the come (BUD)
Anheuser-Busch InBev reported Q1 EPS of $.51 vs. consensus of $.49 driven by better sales and margins. Higher-income taxes and non-controlling interest expense were a combined $.16 drag. Revenue grew 17.2% with pricing/mix up 3.7%. Total volumes increased 13.3%, with beer volumes up 15% YOY and 2.8% vs. 1Q19.
- North American volumes grew 2.9% YOY, accelerating from -0.7% in Q4. In the U.S., sales to wholesalers grew 5.4%, with a price/mix of 2.4%. Sales to retailers were down by 0.8%. April volumes have accelerated from difficult March comparisons. U.S. EBITDA grew 1.3%. In Canada, growth was driven by the Beyond Beer portfolio, and revenue and volumes grew LSD%.
- Middle Americas volumes increased 10.4% YOY, accelerating from 2.1% in Q4. Revenue grew HSD% in Mexico.
- South America volumes increased 12.1%, accelerating from 9.5% in Q4. Revenue grew 24% in Brazil, and EBITDA grew 20.3%.
- EMEA volumes decreased 2.1%, YOY improving from -6.5% in Q4. The business continued to be impacted by on-premise restrictions in Europe. EBITDA declined double digits due to the higher margins in on-premise. Despite the overall weakness, the company saw strong performance in the U.K., Belgium, Italy, and France. In South Africa, volumes declined slightly despite the one-month shutdown.
- Asia Pacific volumes increased 63.3% YOY, driven by China’s 90%+ accelerating from -3.0% in Q4.
The “Beyond Beer” product portfolio (hard seltzer, cider, RTDs) grew 40% in Q1 to $1.2B. The U.S. represents half the company’s Beyond Beer volume. The Corona brand outside of Mexico grew 43% YOY and 35% compared to 1Q19.
EBITDA grew 14.2%, with margins contracting 90bps. The Beyond Beer portfolio has a 20% higher gross profit per hl than beer, making it accretive to margins. Management expects EBITDA to grow between 8-12% this year, with revenue growth exceeding EBITDA growth. The company remains levered, but its target of 2x remains its commitment. There are no meaningful maturities until 2024, but the bond maturations are spread out over the next few decades.
Carlos Brito, the long-time CEO and architect of the beer giant is stepping down in July. The company has named Michel Doukeris, current North American zone President, as the successor. It is unclear what changes to expect. Doukeris has overseen Michelob Ultra, becoming the #2 beer, the successful launch of Bud Light Seltzer, the growth of several regional craft brands into national brands, but also the volume declines of Budweiser and Bud Light. BUD is on our long list.
Removing from short list (SAFM)
We are removing Sanderson Farms from our short list. We underestimated the tightness in supply for poultry. The tightness in the labor market has been a challenge for many sectors, including the chicken producers. The chicken sandwich war among the QSR chains has added to demand. The “war” has helped drive boneless chicken breast prices to $2.04 per pound, double last year's prices. We had been concerned by the rocketing prices for corn and the impact on chicken producers' margins. However, the reopening demand from the foodservice channel has readily absorbed the higher prices.
Among the various types of animal protein, the poultry growing cycle of seven weeks is best able to respond to price increases with additional supply. However, the chicken producers have been slow to increase supply. In Q1, chicks hatched were down YOY. The February winter storm was a setback for farmers. Supply looks to increase, but not enough to meaningfully lower prices in the intermediate-term. Eggs in incubation were up 4% YOY on April 1. We have become increasingly bullish on the long-term outlook for beef prices due to the shrinking herd. China's pork supplies are more challenged than we anticipated boosting exports. Poultry will likely see a continued tailwind from protein switching. With foodservice demand still accelerating and a near-term outlook for chicken supply growth to be tepid for months, we think it is best to remove SAFM from our short list. Our updated position monitor is below.
