Shares in global consumer-health products maker Reckitt Benckiser (RB.) top the FTSE 100 this morning, rising 4% to £62.78 after the firm reports forecast-beating fourth quarter sales.
On a like-for-like basis revenues in the three months to December were up 4% compared with just 2% in the previous quarter.
This takes the full year growth rate to 3%, at the top end of its target range and a step up from the 2% recorded in the first nine months.
CONSUMER HEALTH THE DRIVING FORCE
The fourth quarter gains came from strong sales of baby formula in the US and demand for household products like Air Wick and Harpic in developing markets.
Since Rakesh Kapoor took over the chief executive (CEO) role eight years ago, Reckitt has been on a mission to increase its healthcare credentials.
This culminated in the acquisition of US baby-milk formula maker Mead Johnson Nutrition (MJN) for $16.6bn in 2017.
The MJN deal was intended to spearhead Reckitt’s sales drive in China but it has constantly under-delivered due to poor execution and now China is experiencing a slowdown in birth rates.
Fortunately demand has picked up in the US not just for infant formula but for specialist allergy products and the Enfamil and Nutramigen brands are well known and trusted by consumers.
The US also showed good demand for vitamins and supplements, while sales of Durex expanded in emerging markets and Dettol saw strong sales growth in India.
The over-the-counter (OTC) business, which includes well-known brands such as Gaviscon, Mucinex, Nurofen and Strepsils, did less well with a marked sales slowdown in the final quarter.
It is debateable whether consumers will continue to pay a premium for products like Nurofen which have become commoditised and supermarkets sell own-brand Ibuprofen for a fraction of the price of branded versions.
Like-for-like growth in ‘Hygiene Home’, as the household products division is known, were up 4% in the final quarter with the US again showing strong demand and Air Wick, Finish and Vanish all selling well.
Europe was disappointing with a 2% fall in like-for-like sales last quarter due to a ‘tough pricing environment’, which suggests consumers are less willing to pay up for brands than they were in the past.
Fortunately developing markets like India and Brazil are growing fast and consumers are latching onto big brands as their living standards and disposable incomes rise, so Finish, Harpic and Vanish showed strong growth.
MORE OF THE SAME, FOR NOW AT LEAST
For 2019, Reckitt is targeting a pick-up in like-for-like sales growth to 3-4% and a flat operating margin despite its never-ending restructuring programme continuing to grind out costs.
The cold and flu season is off to a slow start due to mild weather in Europe while slow growth in China will continue to crimp sales growth, so meeting its targets will depend heavily on the second half of the year.
Total cost savings from the MJN acquisition are on track to meet the target of $300m by 2020 although given the cost of the deal this still seems like a low hurdle.
MJN has clearly lowered Reckitt’s profitability, not raised it: after a full 12 months of consolidating MJN, group return on capital employed (ROCE) fell to 10.8% last year against 12.9% in 2017 when MJN was only consolidated for six months.
On the plus side the MJN deal has led the company to split itself into two distinct businesses, Health and Hygiene Home, with separate legal structures and operating models.
This raises the prospect that at some point in the future, likely after Rakesh Kapoor steps down as CEO at the end of this year, Reckitt might divest itself of the Hygiene Home business and focus exclusively on Consumer Health.
