- Q3 like-for-likes down 0.5%
- Robust performance from health brands
- Operational separation on track
Reckitt Benckiser’s (RKT) shares bounced up 3.3% to £49.20, extending their recent rally off of five-year lows, after the consumer goods goliath’s third quarter sales beat subdued expectations.
An organic sales decline of 0.5% proved better than the 1.8% drop called for by consensus, as a beat from the health business offset a miss in hygiene and a US tornado in July had less of an impact on Reckitt’s embattled nutrition arm than feared.
There was also relief as the Air Wick, Dettol and Durex maker promised investors that all its businesses are ‘well placed’ to generate strong growth in the final quarter.
Reckitt Benckiser continues to target group full year like-for-like revenue growth in the 1% to 3% range.
IN RUDE HEALTH
Reckitt’s health business delivered 3.2% like-for-like growth in Q3 as key brands such as Nurofen, Dettol and Gaviscon performed strongly and offset a slow end to the cold and flu season.
Hygiene turned in what CEO Kris Licht dubbed ‘a solid quarter of growth despite a more competitive market backdrop in developed markets’, with like-for-like sales up 2.1% driven by the likes of Lysol, Air Wick and Harpic.
NUTRITION KNOCKED OFF COURSE
A 17.4% sales plunge in nutrition reflected the Mount Vernon tornado in July, which destroyed finished goods and raw materials and meant Reckitt struggled to get products on shelves, though the disruption wasn’t as bad as initially feared.
In July, the FTSE 100 firm announced plans to sell off non-core brands and simplify its management structure.
By way of this strategic pivot, Reckitt Benckiser will focus on its high growth, high margin Powerbrands – these include the likes of Lysol, Gaviscon, Durex and Nurofen - and sell its portfolio of non-core homecare brands, among them Air Wick, Calgon and Cillit Bang, then return the sale proceeds to shareholders.
Mead Johnson Nutrition, which makes baby formula brand Enfamil and allergy brand Nutramigen, is also considered ‘non-core’ and a sale of the troubled unit will draw a line under a sorry episode in Reckitt Benckiser’s history.
The group continues to face product liability lawsuits in North America relating to allegations that preterm infant formulas cause necrotizing enterocolitis (NEC), though Reckitt Benckiser continues to vigorously defend these claims.
AN UNCERTAIN INVESTMENT
Chris Beckett, head of equity research at Quilter Cheviot, stressed that while the quarterly figures were better than expected, sales still fell 0.5% as a result of less volume.
‘Management is keen to stress that this is carry over and innovation led pricing rather than general inflation,’ explained Beckett. ‘Meanwhile sales are growing well in developing markets with contributions from Greater China, Latin America and South Asia. The core health and hygiene business combined are broadly performing in line with expectations.’
Beckett continued: ‘The operational separation of the business (on track for the end of the year) and the potential sale of the nutrition and non-core brands continues to make Reckitt an uncertain investment and contributes some of the discount to peers. However, the larger overhang is due to ongoing NEC litigation. The company is appealing the initial award against them and a second trial in St Louis is ongoing. Management cite support from three US Federal agencies for the continued use of infant formula for premature infants.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.
