Shares in consumer goods giant Reckitt Benckiser (RB.) fell close on 3% to £64.80 after the company reported flat like-for-like second quarter sales and, importantly, lowered its full year growth target.
As in the first quarter, growth in the Health business continues to disappoint leading the firm to cut its target of group like for like revenue growth to 2% to 3% from 3% to 4% previously.
NOT QUITE RIGHT IN CHINA
The slowdown in Health sales is partly due to slower growth in Infant Formula and Child Nutrition (IFCN) in China and partly to poor execution in other products such as Dettol where the company hiked prices to offset cost inflation causing sales to fall.
Meanwhile the Scholl foot-care business remains a basket case and Durex is facing growing competition from local manufacturers in China.
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We questioned whether Reckitt would cut its guidance after the first quarter results. Despite the chief executive’s assurance, meeting its target always looked heroic and would have required a major acceleration in the second quarter.
As it is the Health business, which makes up around 60% of revenues, is seeing organic growth in its markets of between 3% to 5% but the IFCN business is only growing at 2% so far this year.
BULKED-UP BORROWINGS
Pushing into the IFCN market, particularly in China, was one of outgoing chief executive Rakesh Kappor’s top priorities. In 2017 he orchestrated the takeover of US infant formula firm Mead Johnson Nutrition for $18bn, saddling Reckitt with heavy debts, in the hope that it would boost sales growth.
In the event sales growth in China is running at the bottom of the group’s target range of 3% to 5% due to tough competition and a decline in birth rates. Thankfully sales growth in North America is ahead of the market thanks to new products and increased volume share.
Over-the-counter (OTC) Health sales are up 1% like for like in the second quarter after a weak first quarter with ‘powerbrands’ such as Gaviscon, Nurofen and Stepsils performing well.
However like for likes in Other Health fell 3% in the quarter due to weak sales of Dettol following price hikes in developing markets (prices are now being ‘rolled back due to competitive pressures’) and ‘increased competitive pressures’ for Durex in the Chinese market.
Capping this performance, the Scholl ‘brand re-focus’ continues with little to show for the ongoing investment so far.
In contrast the Hygiene Home business, which makes up the other 40% of sales, generated 3% like for like growth in the second quarter which is at the top of the firm’s 2% to 3% expectation for growth in its markets.
PRICES & VOLUMES
Growth came from a 4% increase in prices and a 1% drop in volumes with strong growth in developing markets such as Brazil and India where home hygiene products like Finish and Harpic are ‘relatively underpenetrated’.
Operating margins also improved in the second quarter, up 1.9% to 21.9% thanks to better pricing and product mix.
Growth is expected to be ‘back to more normal levels’ in the second half but as we wrote last month, incoming chief executive Laxman Narasimhan has plenty to do when he arrives in September.
