Morning Note: Market News and updates from Atlas Copco and Remy Cointreau

Friday 28th April 2023

Market News?

US equity markets moved higher last night – S&P 500 (+2.0%); Nasdaq (+2.4%) – lifted by the technology mega-caps as strong earnings offset worries over the economy. This morning in Asia, markets were well supported: Nikkei 225 (+1.4%); Hang Seng (+0.6%); Shanghai Composite (+1.0%). The FTSE 100 is little changed at 7,830.

On another busy day for corporate earnings, Amazon surrendered post-market gains of as much as 12% after executives said cloud sales growth this quarter is slowing. That’s after earnings beat in the previous period. Shoppers are also buying less expensive items. Other cloud stocks including Datadog, Snowflake, and MongoDB sagged in late trading. Intel rallied 5% after it promised a recovery in the second half and said gross margins will begin to widen, while Snap slumped 18% on its first-ever decline in quarterly revenue after changes to its ad tools.

The yen weakened the most in over a week and JGBs rebounded after the Bank of Japan kept its policy settings intact. Treasuries and the dollar advanced, with the 10-year currently yielding 3.50%. Gold slipped back to $1,984 an ounce. Later today, the Federal Reserve gets a look at its go-to inflation gauge with the core PCE deflator, which is expected to hold at 4.6% in March, backing the case for an FOMC hike next week.

UK business confidence rose to an 11-month high in April with companies optimistic about their plans to raise prices over the next year, a Lloyds survey found.?But that will feed concerns at the Bank of England that upward pressures on prices may become more persistent. Sterling currently trades at $1.2477 and €1.1335.

?According to the World Bank, global commodity prices will probably plunge the most since the start of the pandemic in 2023. Energy costs will hold at lower levels into 2024 and food prices will ease both this year and next. It sees its commodity-price index falling 21% this year, more than it projected in October. Oil is heading for a sixth straight monthly decline, its longest run of such losses in more than eight years. WTI steadied near $75 a barrel.

Company News - Atlas Copco

Yesterday lunchtime Atlas Copco released its Q1 results, which highlighted record order intake and an upbeat tone on the outlook. In response, the shares, which are listed in Sweden, bounced by 12%.

Atlas Copco is a world-leading manufacturer of innovative compressors, vacuum solutions, generators, pumps, power tools, and assembly systems. The group has a diverse customer base made up of general manufacturing (22%); process industry (20%); electronics/semis (16%); construction (12%); auto (10%); and other (20%). The products help the customer to increase operational performance, save energy costs, reduce contamination, cut down on failures in the field, lower noise levels, and extend service intervals.

As a result, the company provides exposure to a broad range of trends: demand for increased energy efficiency and reduced emissions; increased use of lightweight materials in transport industries; the transition from petrol to electric vehicles; increased use of demanding materials and production environments in processes for semiconductor and industrial production; increased production automation and smart factories; demand for improved ergonomics; and increased demand for digitally-supported service offers.

The target is to grow revenue by 8% per annum, primarily through organic means, complemented by selective acquisitions of companies in or close to existing core competencies. The group operates an asset-light strategy – only components that are critical to the performance of the equipment are manufactured in-house. 36% of revenue (and 50%+ of operating profit) is generated from service (i.e., spare parts, maintenance, repairs, consumables, accessories, and rental). This is more stable than equipment sales (64%) and provides a strong base for the business and greater resilience in difficult times. The cost of the group’s equipment is low relative to the customer’s operating costs and, as a result, the company has strong pricing power, important at a time of raw material cost inflation. Atlas Copco is based in Sweden and reports in Swedish Krona (SEK).

In the first three months of 2023, the overall demand for Atlas Copco’s products and services remained strong. The group’s order intake increased more than expected and reached a record level, primarily because of several significant orders and very strong project-related business. Revenue grew by 32% to a record SEK 39.9bn, well above the market forecasts of SEK 37.2bn. In organic terms, which exclude M&A (+6%) and currency (+8%), growth was 18%. Order intake increased by 5% in organic terms to SEK 47.7bn, ahead of the SEK 38.2bn forecast and a return to growth following the 7% decline in the previous quarter.

?Atlas Copco operates through four divisions or ‘Techniques’, the performance of which was as follows:

• Compressor Technique (45% of sales): organic revenue and orders grew by 22% and 19%.
• Vacuum Technique (23% of sales): organic revenue grew by 9% but orders fell by 27%.
• Industrial Technique (17% of sales): organic revenue and orders grew by 19% and 20%.
• Power Technique (15% of sales): organic revenue grew by 24%, with orders up 11%.

?Order volumes for industrial compressors increased, and extraordinary growth was achieved for gas and process compressors. The order intake for equipment to industrial vacuum applications increased, while orders for vacuum equipment to the semiconductor industry decreased sharply. Order volumes for industrial assembly and vision solutions increased markedly, driven by several investment projects related to customers’ production of electric vehicles. The demand for power equipment was strong, resulting in significant order growth, primarily for portable compressors. The specialty rental business achieved solid order growth in the quarter, and the service business continued to grow with increased order intake in all business areas.

?Atlas Copco generates attractive margins, with gross above 40%, providing some shelter against rising raw material costs, and operating above 20%. In the first quarter of 2023, the adjusted operating margin was flat at 21.7% as the impact of increased revenue was offset by increased costs related to continued supply chain constraints and dilution from recent acquisitions.

?Adjusted operating profit grew 33% to SEK 8.7bn, well above the SEK 7.7bn market forecast. EPS grew by 25% to SEK 1.34, better than the market forecast of SEK 1.20. The return on capital employed during the previous 12 months increased from 27% to 29%, well above the group’s 8.0% cost of capital.

?The company has a robust balance sheet and continues to generate strong cash flow (doubling to SEK 4.9bn in the quarter). Net debt fell from SEK 26.6bn to SEK 24.1bn, leaving financial gearing at a very comfortable 0.6x net debt to EBITDA. The dividend policy is to pay out 50% of net income.

The group’s near-term outlook is for ‘underlying customer activity level to remain at the current level’.

Company News - Remy Cointreau

Rémy Cointreau has this morning released a muted full-year revenue update which highlights a normalisation of consumption in the US. In response, the shares have been marked down by 8% in early trading.

Rémy Cointreau is a global alcoholic beverages business, with iconic brands including Rémy Martin, Cointreau, Greek spirit Metaxa, Mount Gay rum, and The Botanist gin. The group’s strategy is to move upmarket through portfolio streamlining at the expense of low-end products, adaptation of its distribution network, and expiration of distribution agreements with partner brands. The target is to become the world leader in ‘exceptional spirits’ – described as retailing at more than $50. The business plays well to the increased global demand for premium and luxury products, the rise of mixology and at-home consumption, and strong growth in online sales. The group is targeting a gross margin of 72% and a current operating margin of 33% by 2030.

In the financial year to 31 March 2023, reported sales were up 17.9% to €1,548m, including a positive currency impact of 7.8%. In organic terms, sales grew by 10.1% and were 43.6% above the same period three years ago (i.e., pre-pandemic). The strong performance was driven by a 10.1% rise in price/mix and steady sales volume. In the final quarter, organic sales grew by 10.2%.

?By product type, sales of Cognac were up 7.6% on an organic basis in the year to €1.1bn. However, in the final quarter, sales were only up 2.9%. In the US, activity was affected as the normalisation of consumption gathered pace. In an increasingly promotion-driven environment, Rémy Martin maintained its value-based strategy and held prices firm. In contrast, in China the group delivered very strong growth reflecting a marked rebound in the business since February. The Liqueurs & Spirits division saw sales grow by 18.7% to €419m, with good growth across all regions. The group enjoyed a sharp rebound in the Travel Retail segment, buoyed by the return of international travel in Asia.

?The group has confirmed its guidance for strong organic growth in operating profit, leading to an improvement in margin. This performance reflects a sizeable improvement in gross margin despite the inflationary environment, and increased investment in marketing, and tight control over other costs.

?For the financial year to March 2024, the group is targeting stable sales on an organic basis, reflecting continued normalisation in the US and a steep rise in China and the rest of the world. Sales will remain significantly higher than 2019-20 (i.e., pre-pandemic). In the first half, sales will decline, reflecting a very strong fall in the US against a tough year-on-year comparison. The second half will see a strong recovery. Gross margin is expected to remain resilient over the year.