GSK plc (GSK) Earnings Call Transcript & Summary

Hello, everyone, and welcome to this Haleon fireside chat. My name is Guillaume Delmas. I head the European food and HPC team here at UBS. So today, absolutely delighted to have with us Haleon's Chief Financial Officer, Tobias Hestler. Tobias, thank you for your time today. Plenty to discuss. As you know, Haleon had its Capital Markets Day last week and the planned demerger should occur in July of this year. So for the purpose of this fireside chat, I thought I would mostly focus on your medium-term prospects, both at the group level, but also for each of your 3 divisions. And then maybe spend the last 5 to 10 minutes focusing more on short-term priorities, potentially challenges.

[Operator Instructions] And with that, let's start. So Tobias, on your medium-term organic sales growth ambitions, you are targeting 4% to 6%. Your category growth, you estimate is going to be around 3 to 4. So my first question is, what are the factors that should be driving your outperformance relative to category growth. So that's 1.3, 1.5x the level of outperformance. And of your 3 segments, OTC, VMS, Oral Care, where do you see the biggest opportunity to grow in excess of category growth?

Good. Thanks, Guillaume. So look, exciting to be here, fantastic time of being able to launch Haleon with the Capital Markets Day last week and being able to engage with all of you today. So thanks for having me here, I appreciate that. We -- let me just approach your question from 2 different angles. So one is we have significantly reshaped our portfolio. We've integrated the business. We've divested. So we've created, through the integration of Pfizer, a new company that has its portfolio reshaped, both from a geography and from a category perspective. And that allowed us to grow 4.4% over the last 2 years in a market that grew 2%. So we've outgrown the market about 2x. And we've done that, I think, bringing this model that we explained at the Capital Markets Day to life of investing into A&P ahead of sales growth, and we've done that over the last 2 years, and we started to see the momentum come from that. So I think that's the first thing. And by the way, we've done all that while integrating and separating. So there was, without a doubt, an internal focus, given the energy that needed to get the integration completed through a pandemic. So I think that gives me, I think, pretty good confidence around the 4% to 6% range because we're in that range, and we delivered in that range with all the other things that were going on around us. And then you asked around, I mean, the 3% to 4% is the average across the categories. We've given an outlook that says combined oral health and VMS will grow mid to high single digit and be about 50% of our revenue by 2025. Those are the 2 categories where we play that grow a bit more. They grow 3% to 4% and 4% to 5%, whereas OTC grows 2% to 3%. And then I think the overall 4% to 6% is, again, against the 3% to 4% across the categories we play in.

And to follow up on that, and maybe for now putting aside 2022, how do you think about the mix volume, price contribution to get to that 4% to 6%?

Yes. So what -- let me start what we've delivered. So last year, we had price increase of 2.2%. Volume mix was 1.7%, so we grew 3.9%. So pretty balanced between volume mix and price. And that's also a balance we've had in the past. And we really believe for a business to be strong, it needs to have a balance of both. Is it every year exactly what we had last year, it's not, right? It might range a bit more volume, a bit more price. I mean Q4, we grew 11%; 8% was volume mix, 3% was price. I mean, given respiratory was coming back, so of course, you have quarterly fluctuations. But overall, a balance between those 2 is what we target and we want to have, and we believe we have the opportunities to drive volume through increase in penetration, entering new segments, and we have the ability to take price, again, through innovation that we bring to the shelf and also meeting consumer and customer needs.

And if we were to zoom in on the -- your largest category, OTC, 55% of your sales last year, I was surprised to see that you expect 2% to 3% category growth for this segment. So it should be, in theory, the lowest growth in your portfolio. Why is that? When we think about all the mega trends of aging population, self-medication, more health-conscious consumers, even premiumization, one would think that OTC has stronger prospects as a category than that 2% to 3%. So what's holding back do you think the growth of that segment scope to see an acceleration potentially?

So I think we've seen OTC category grow pretty consistently over a very, very long period of time. And the growth has been consistent. You didn't have rollercoasters in it. And the reason it's been pretty consistent is the regulatory hurdles you have, it's a regulated business. So you have to go -- innovation rates are slower. You need to get government in most of the countries in the world. You need to go through a formal approval process to get your products to the market, and that takes time. Of course, that gives a lot of stability and also quite some hurdles of entry into that category. So it's a long-term growth category, and it's driven by -- I mean, the underlying factors are all positive, but it just takes simply time to do that, and we don't see that dramatically changing. So I think a very stable but growing business and one where I think we very successfully built the business over a very, very long time. So look -- and then, yes, there is probably a part of the business that has some seasonality, cold and flu, allergy. But if you take those small movements out, long-term positive growth trends, and we have the capabilities to grow and grow ahead of the market.

So would it be fair to assume that this business will be more managed for margin optimization, cash generation rather than aggressive market share gains? Or you still have high ambitions for OTC?

So for us, I think we run this business and the model we laid out, this is a growth company. This is about delivering above-market growth in all the categories we play. And I think -- and we were very, very conscious in the portfolio rationalization we have done, which was material, around focusing on the areas we want to play in. And this model applies to all the businesses we run in. So it is driving sales growth and winning share in the categories we play in. And doing that, while investing in A&P and R&D ahead of the rate of sales growth. Now is this going to be every category every quarter? Probably not, because you want to do -- you want to reallocate your resources where you can deliver the best results. So we might choose to overinvest in OTC in 1 year and pull something back as we've launched a broader new innovation somewhere, and then use those funds to drive more growth out of oral health 1 year. So I think I see it as the overall portfolio. And also, by the way, this is how we run the business. We run the business -- yes, we have these global categories we play in. But we run our business by country and by region, and that's where the resource allocation decisions are made.

And when we think about the 3 subdivisions within OTC. So you've got pain relief, respiratory digestive. Do you see homogenous prospects for these 3 businesses? Or one maybe stands out more?

Yes. So I think they grow over time. I think it depends on the amount of Rx OTC switches you get. If you get a bigger Rx OTC switch in a certain category or subcategory, then the growth gets bigger. Like, for example, introduced Voltaren, did a Voltaren switch in the U.S. about 2 years ago. That drives category growth, and that's where you get more growth, or you have a -- you bring a new innovation in place like here, Advil Dual Action, something -- a new development we did with an NDA approval in the U.S. That, I think, is -- the innovation is driving growth. Respiratory is a little bit more up and down because you have the seasonal elements in it. And then I think Digestive Health, we're the market leader. We've drawn strong innovation and growth. I mean TUMS, I think, 80-year-old brand, massive amount of innovation, new forms and keeping the brand alive. And then we also have businesses in smokers health and certain dermatology pharmacy brands that we play in. But I think growth is probably across all of them and then more driven by new innovations, which then impacted the growth rate in these categories. And then maybe slash couple a little bit with geographic expansion opportunities where you can do more in one country where you haven't rolled out a brand yet.

So moving from growth to even higher growth, Oral Care. In oral health, I mean, the power brand that has been consistently growing in double digits has been Sensodyne. So my first question on this is, what is the single most important competitive advantage of Sensodyne which has enabled the brand to grow consistently and significantly in excess of category growth for the past decade?

Yes. Look, I think it solves a therapeutic need. You have a sensitive teeth, so you drink a hot tea, ice cream, it hurts. And you want that issue to go away, right? It's not about cleaning your teeth. It is about a therapeutic need you have. And that's what Sensodyne does, and it does it very well. And we believe it's the best sensitive toothpaste -- sensitive teeth treatment that you can have. And we innovate, and then you build on that. Then you say, okay, you, as a consumer, have sensitive teeth, do you have another need? Whitening, or you want fast action. So we brought Sensodyne Rapid to the market. You want animal protection. That's how Sensodyne Pronamel was created. So you look at where our incremental consumer needs. And with that, you build the category and you solve, a, a consumer need, you grow the category. That's why the retailers like to work with us, and that's how we've built the brand. And then all of that is based on very, very strong expert recommendations.

Oral care is the land of giants. This is where you compete against the likes of Procter & Gamble, Colgate, Unilever. Increasingly, they're noticing the success of Sensodyne and the faster growth of this niche therapeutic oral health. Are you concerned about these larger companies increasingly going after this segment? And would you see an increased cost of doing business as a result?

So I think from where I sit, if I look at, we've successfully competed with the giants for 10-plus years, right? I mean it's -- we've been successful in Sensodyne, been successful in Parodontax. We don't take this lightly. But I think we have the capability, we have the resources, we have the skills. And this is -- I mean, this has been an industry that is pretty consolidated, and we've always had these competitors. And with, I think, the model I explained earlier, I think we have the ability to continue to win there. And I think we see much more penetration opportunities. And look, we've also -- when some of the -- some players came and they moved more into therapeutic, we still gained share because there's a huge penetration opportunity. And for Sensodyne, it's pretty -- it's very big because about 1/3 of the world's population has sensitive teeth, but only about 1/3 of people do something about it by using a sensitivity toothpaste. So there is a huge penetration potential there that you can grow. And I think we believe we can grow above the market by bringing more people into the category and solving the needs.

And in oral health, above and beyond the power brand that Sensodyne is, are there smaller brands? I don't know, I'm thinking Polident, Parodontax, that have strong potential going forward?

Yes. So Parodontax is a power brand for us. I mean it's much smaller in size than Sensodyne, right? So -- and Parodontax is one where I think we have geographic expansion opportunities. We've only launched it in the U.S. several years ago. We just launched it in India. So there is much more potential for the brand to grow. And we've built the infrastructure, we get dental -- dentist recommendation for it. So we built the business with Sensodyne, and then usually introduce Parodontax second and builds then on a gum health franchise. And then we have, I think, and you mentioned Polident/Polifix denture care brands. I think those have some very consolidated subsegment of the market, high market shares, but also a big consumer need, a much more stable business. So that is one that there is growth. I mean, we had a bit of a dip in COVID, but overall, it grows, and we believe we continue to grow it. But very stable growth contributor, but then the high-growth brands in this category are Sensodyne and our Parodontax.

You mentioned COVID. So that's a perfect transition to talk about VMS. It's been the fastest-growing business for you in the past few years. You did mention last week that COVID had positive sales on category growth. So first question, big picture on VMS, what underpins your confidence that this is a category that can grow 4% to 5%, that we're not going to see imminently some kind of normalization as we hopefully get out of COVID?

Yes. So let me take maybe the very big step back on VMS. So VMS, I don't know, 20-plus years ago was single letter of the alphabet vitamins. Then it moved to multivitamins, then the multivitamins evolved to multivitamins for a certain age group. And then from there on, now it moves to what is called benefit-focused VMS. So there has been a huge amount of innovation in the VMS space. And I think we have the right brands. I mean, there's a -- you talked about the market, let me do the market first. So we believe that trend will continue by maybe also bringing natural ingredients in it that solve a benefit in addition to the vitamin. So I think -- and we see this as a trend that will continue. What we have seen through COVID now is in '20, there was a significant growth in the category. The category grew more than 10%, about 22% in the U.S. We have data, more consumers coming in the category. We thought actually some of them will leave. So we thought the category is going to take a dip in '21 and then it grows again. It didn't. The category grew on top of the 10 another, I think, low single digit, and we grew 19, and then mid-single digit on top of that. Now where we've seen a bit of more of a rollercoaster is on emergency immunity claim. Category grew strong double digit, but we nearly doubled the business. That business declined a bit in '21, but now we're growing off that base again. Whereas in Centrum actually, people went to -- there was a small dip in '20, and now more people moving back to the offerings that Centrum has. So we feel overall good about the longer-term growth in VMS to continue the portfolio we have. Yes.

And on your brands, I mean, can you talk about your medium-term ambitions for what I think, and correct me if I'm wrong, your 2 most -- not promising, well-established brands that are Centrum and Caltrate. What is the plan for both brands in terms of geographical rollout, adjacencies? What could support a consistent high single digit, even double digit growth for these 2 brands?

So I think -- I mean, overall, I think from where we see growth potential in -- let me start with Centrum first. So in Centrum, geographic expansion, and that is predominantly across the EMEA and LatAm region. And the reason that is, is Pfizer focused predominantly on the U.S. and China. That's where they had a significant presence. That's where they -- I mean, and I would have done the same if I would have been in Pfizer. That's where they made their resource allocation decisions. had a very small business in Europe, so they didn't activate the brand. The brand exists, right? Centrum is registered, I think, in 68 countries. So you find it on shelf, but it has not been activated. Now Filippo and the team in Europe and EMEA and LatAm are doing great work to activate the brand and build and support it. So we see growth potential from there. And then there's a few markets where it hasn't -- where it's very small, it hasn't been launched and bringing it into those markets, so with the existing offering. And then where the brand is already there, I think it's innovation. Innovation around moving into more benefit-focused VMS by bringing other ingredients in. It is new forms. So Centrum minis, consumers told us they don't like to swallow these huge pills. They rather take smaller pills more often throughout the day, so we introduced Centrum Minis. You have gummies, so new forms as well. So I think that's how the brand has, I think, for us, much more room to grow. And we also think we built quite an innovation pipeline behind Centrum over the last few years. Caltrate is our biggest brand in China. Lots of calcium deficiency in China and the Chinese population, a big health topic also for the government. So we're collaborating with the government as well, really educating about the need for calcium supplements. And also here, we've innovated and brought the product to younger consumers in a drinks form, adding private probiotics so there's line extensions, but it's both more awareness about calcium deficiency, so I think that has further growth potential as well. But I think that's probably more a local strategic brand in China. I mean, it exists in the U.S., but I think the calcium deficiency is more of a Chinese topic.

And similarly, when I was asking about competition in oral care, I mean, VMS, what we are seeing, it's almost the other way around, the giants entering VMS recently. We've heard deals from Nestle, Unilever, Procter & Gamble, so growing interest from traditional food and HPC companies for the VMS segment. What do you think the impact will be? Is it going to be positive because it's such a fragmented space, they're going to bring consolidation, penetration, premiumization? Or do you also see that as a potential threat for your established franchise there?

Yes. So I think not too concerned about it because I think it's so highly fragmented. I mean we have -- we're the largest players, we have a 3 share. So there is an enormous -- there is enormous growth potential. And also the players also come a little bit from different directions, right? We come from the, I would say, core of VMS with vitamins and pills. I think Nestle comes from the food side and adding vitamins and mineral and supplement solutions to it. And I think the space is also not -- the lines aren't clear on that space, right, where OTC is very clearly defined. Oral health is very clearly defined. On VMS, the boundaries to food, nutrition, drinks are much more fluid. And that's why I think there is a lot of potential for all the players. And look, we've competed with -- very successfully in oral health for many years. We talked about it before. So I think, confidently, we can and will compete, and I think we have very strong plans on Centrum, on Caltrate and on emergency as well.

Last question on organic sales growth, maybe touching on digital. 8% of your sales last year.

Yes.

If I were to compare that, and maybe it's an unfair comparison, but traditional food and HPC companies...

Are higher.

You would probably be in the bottom quartile with 8%. So maybe a bit of a candid question, but that 8%, is it just reflective of your category exposure? Or does it signal maybe a need to step up your investment in your digital capabilities over the next few years?

No, it's very clearly the first. It's just a reflection of the categories we play in. And predominantly, our strength in OTC, 55% of our revenues. There is -- in some markets, you cannot sell OTC drugs via an e-commerce channel. So I think there is just much bigger -- there are certain regulatory hurdles to do so, and/or a lot of consumer behavior that actually do not yet want to buy these products because you have a pharmacy or a pharmaceutical outlet around the corner and you go and buy it there. We made a lot of investment upfront into building our digital and e-commerce capabilities. And if we would have not done that, we would not have been able to grow that business from 4% to 8% of revenue through the last 2 years. So I think there was quite a shift happening through COVID with more people testing out and trying the category. And the investments we've made helped us in order to capitalize on that and we've grown more than the category. We've always outgrown the categories. And if you look at that and many brands actually, and I think where we track it is, we have a higher share online than offline. I mean Sensodyne, 28 share on Amazon in the U.S., 20 in bricks-and-mortar. So for us, I think the measure is at a brand level, are we getting equal or higher share on e-commerce. If we do, we're happy. If not, we keep investing in the brands. One brand where it is in the case of Centrum, tends to be a population that does less online purchasing. Now we're seeing how we can do more to promote Centrum online in order to get also to an equal or higher share there, but ultimately comes back down to the category mix. And I think much further potential as the consumer behaviors change, as regulations change outside of the U.S. and China. And then last but not least, we have high online shares. So in China, it's 20% of our business. Strong double-digit growth on that, that we would see in forecast. In the U.S., it's 12%. I think U.S., Germany and U.K. are in the mid-teens. And then all the other countries, it's about 3%, but that's a reflection of where the categories are.

So moving on from top line to margins, starting with your gross margin, which last year, stood at 63%. Your ambition over the medium term is to expand your operating margin in a sustainable, moderate way. But it seems that in your margin expansion algorithm, you will rely on gross margin improvement. So my first question on that is what is driving this gross margin improvement?

Yes. So 3 things that drive the margin improvement. One is this healthy balance between volume, mix and price. So the ability to take and continue to take price, given the premium -- maintaining our premium positioning in the products. And then mix, where we introduce innovations, when you bring innovation to the category, that also allows you to take price indirectly. So continuing on that. Secondly, higher share of power brands. So our larger brands grow ahead of the sales growth of the group overall. And power brands have a higher margin, just given the economies of scale and the size they have. So -- and then thirdly, further optimization potential in our supply chain, so in our footprint, but also optimizing the factories. And don't forget, we just integrated last year to hold the Pfizer footprint. We did that at the end of the integration because it took us a bit more time doing that through COVID. And in order to optimize manufacturing, more in-sourcing, shifting products from one factory to the other, that is usually a several-year process because most of the products we make are regulated. So there is more to come from a from an optimization point of view. And as a combination of these activities, we believe, and we target gross margins over time to increase.

And you also mentioned that you expect VMS, Oral Care to be a bigger proportion of your total turnover by 2025. How does the mix impact played out? Like do you have higher gross margins in VMS and Oral Care than in OTC? Or this is the wrong way to look at it and you have to look at it from a power brand standpoint?

Yes, I think it's the only distinct difference so far between the power brand and the rest of the brands. The others across the categories is broadly the same. These are premium products across all the segments. So from that point of view, really good margin profile. So no significant mix impact from a category shift perspective.

And you've considerably reduced the number of manufacturing plants in the last few years. I think you had 41...

41, yes.

Back in 2015. Last year, 24. Scope for more? Or do you think like you've rationalized enough your manufacturing footprint at this stage?

So look, the heavy lifting is done. Is there always something you can do here or there? Maybe. But I think the heavy lifting is done. I think we feel we're in a good place. And now there's more optimization to be done to optimize inside those factories. So where you had factories that made -- can you focus a factory on just making tablets versus 2 or 3 out of 4. So I think that work is still ongoing. So that's a predominant -- the predominant activity. But I think we were very strategic about that. I mean some factories are needed also for local market access. And ideally, we want to manufacture locally. So locally means in the same region where we also sell, which also gives us a bit of a natural currency hedging as well.

So 63% gross margin, what do you think is the natural ceiling from a gross margin standpoint for your current portfolio? So as in -- would it be realistic to assume that you could get to a high 60s gross margin over time?

So when you look at the model we've built, we don't have margin targets by line item. In our mind, I think for us, it comes down to the high gross margins we have and the positive mix and the optimization allows us -- frees up money to reinvest back into business in A&P and R&D, and that's what we're after. So we want to use the incremental funds we create to invest in the business in order to drive the 4% to 6% sales target. And I think that's the virtuous circle that we're driving and that we're after. And look and then we decide where we allocate those funds, yes? But in principle, gross margin will increase. And then it depends on, of course, which markets you enter, and I think how quickly that goes.

So if we move down further the income statement, let's talk about advertising and promotional spend. So your ambition is to grow A&P faster than sales. Last year, you had a ratio of 20.3% of A&P as a percentage of sales. So my question here is, these incremental investments, where do you think you're going to be allocating them, like the big buckets?

Yes. So the big buckets are really executing on the sources of growth. So we have a very good understanding of where we believe incremental sources of growth are. So when you look at penetration opportunities, so how can you get more people to understand that there is a sensitivity toothpaste that treats your sensitive teeth. That's a source of growth. You drive household penetration to do that. Then it is geographic expansion, like what I mentioned around entering Parodontax into India and in a few other markets in order grow, or Filippo in his region activating Centrum and investing in that. And then I think given these are very clear sources of growth, you say, I activate, put A&P behind Centrum in a certain group of markets, then you can track the ROI and see, is it working? Is it not? If it's working, you might double down on it. If it's not working, you pull it back. If the brand is reacting, then you start getting efficiencies off it. And then you reinvest it in other places to drive further growth, and that's, I think, where I think a pretty agile model on investing. And then, of course, if you have a big launch like you have a switch in the U.S. like Voltaren, that's what you fund. And then as the brand then grows, you get more efficiencies. The gross margin you get from it, you then start reinvesting in other places again.

And compared to traditional food HPC multinationals, how would you rate your marketing capabilities? Being part of a large pharmaceutical group, do you feel like there is still some catch-up to be done on the marketing front?

So I don't think so because I think we've competed and are competing very, very successfully with the big players, especially in oral health and also in VMS. When I look at the talent that we have, the talent comes from all these names that you mentioned. We get very positive external recognition on the quality of our marketing and advertising. Now of course, it is staying agile, very, very alert on are there new things happening that you can learn. But I feel good about when I look at the talent and the people we get and also the interest of people wanting to work for us. So I think that this -- when I look at the CVs of people, this reads -- it's the CPG names that you mentioned as well. And then if this gets then externally recognized in awards, that's something apparently we're doing right. And of course, with all of that, if we're winning share, then I think we're doing the right things.

And my last question on your SG&A. Research and development, 2.6% of sales. Not unusually low for a consumer health care company. But do you still think R&D is one of the many sources of competitive advantage for Haleon? And going forward, how are we thinking about R&D as a percentage of sales? Is it another area where you would be thinking of accelerating stepping up investments?

Yes. So I think, again, also R&D growing ahead of the rate of sales growth. Why? One, funding opportunities like the 2 Rx OTC switches that we said we had in the pipeline, they go into clinical trial phases which will need money, but also to really maintain the strong flow of innovation, which I think has successfully built the businesses we have across all the categories. And so from that point of view, also we'll continue to invest. We believe where we are is top quartile of the industry. We absolutely want to stay there. And again, you apply the same return on investment metrics around where you put your funds. Innovation rates need to stay very high in oral health and VMS. These are very, very fast-moving categories. And then continue to invest in the OTC portfolio, where you know development times and regulatory times are several years. So these are much longer-term projects than the ones you would have in oral health and VMS.

So now moving on to -- I mean one quick question on your level of gearing. So after the demerger, in July, your net debt-to-EBITDA should be around 4x. Should we therefore assume that you're not going to be looking at making any large or medium-sized acquisitions until probably 2025 when your net debt-to-EBITDA will probably be closer to 2x?

Yes. So you look at the capital allocation priorities, we said it's 3 things. One is continue to invest in the business. Two, paying a dividend at the lower end of the 30% to 50% payout range. And to do M&A, and what we mean by M&A is bolt-on acquisitions. And with the cash flow we had, around 1.5 billion underlying cash flow over the last 2 years, I think we absolutely have the ability to do all of these 3 things, and still meet the deleveraging commitment to less than 3x EBITDA that we made, and then also while maintaining a strong investment grade rating right from the outset. So I am very confident. I think this is a very strong cash flow business. It's very well invested in from a capital expenditure point of view. It has some opportunities on the working capital side. So I think I feel good about being able to do all these 3 things. And again, on M&A, bolt-on M&A is something we would be looking to do, of course, if it makes sense strategically, commercially compelling.

So for the last 8 minutes of this fireside chat, I thought we could touch on more like short-term priorities, challenges as well to 2022. I mean, I guess the first question I wanted to ask you was about your percentage of turnover derived from Russia and Ukraine. Also, if you've got manufacturing facilities there and what kind of direct and indirect impact this conflict could have on your 2022 financial performance?

Yes. Look, I mean, the first thing to say is really, I mean, it's human catastrophe. And I think when I'm on calls with the team there, and then the first message is all our people are accounted for and alive, you really hold and hold your breath, right? I think that's sort of in the situation I've personally not been in, in my career. And I think that's, I think, that's where our first focus is on, ensuring the health and safety of our people, what can we do to help people leave the Ukraine, host them in other countries. So I think that's where the main effort of the business has been and is at the moment. And then to your question, Ukraine is a very small business for us. Russia is around 2% of revenue. We do not have manufacturing in the country. So relatively small percent of our business. But I think what we're now working through is really understanding the secondary and territory impact of raw material and other supply that is coming out of Russia, agricultural goods that are then going into raw materials that are needed, sorbitol, glycerin, et cetera, aluminum, which goes into aluminum foil. So I think really understanding those impact. So no direct impact from manufacturing or third-party manufacturer side there, but I think it's the wider repercussions that has on the business, but a very fluid situation.

And so on that, what kind of inflation do you expect on your cost of goods sold for 2022?

So look, we're working through this at the moment with what happened over the last few weeks. I think we have about 80% of our commodity costs locked in for the year and even beyond that. So I think that gave some planning certainty. And as we had said, we -- our goal is to offset about 50% of inflationary headwinds through price increases, and the other half through efficiencies on the production side. And we've successfully done it last year, our gross margin increased even with the commodity cost increases that were there. And the goal would be to do it this year. But I think we really have to work through now the most recent events. We have a structural advantage, commodity and commodity-related costs at our business are less than 10% of our revenue, given the type of products we make. So we have very small amount of these materials in OTC products. And secondly, they're higher priced. So in terms of revenue, there's a bit of a structural advantage here. But I think too early to say, just, I mean, given the recent news.

And as you are raising prices, what kind of price elasticity are you expecting this year? And of your 3 businesses, any major differences in terms of price elasticity?

So if we give you an example, I mean, we did price increases in the mid- to high-single digits on about 50% of our portfolio in the U.S. in October. What we've seen, price increases went live in October, probably mid of November, December for all of them to hit the shelf. We've not seen any volume declines from that. Now situation right now is, of course, maybe a bit different than it was in the past because everybody is increasing prices. So there isn't -- you don't create a new disparity. More broadly, so if you leave sort of an inflationary environment where everybody increases prices away aside, we have usually seen very low price elasticity. So we have the ability to take price, and you lose very little volume in doing so. And the reason is predominantly, you're using our product for a therapeutic need. You have sensitive teeth. You want your teeth not to hurt when you eat an ice cream, and that makes you a little bit less price-sensitive. Of course, you can't price yourself out of the market and we're very mindful about price increases, looking at it brand by brand or SKU and SKU, market by market in order to see can we price up? But we wouldn't price up at the detriment of losing volume or pricing ourselves out of the market.

Private label? Is it a threat in the current environment?

So I mean, look, the current environment, it's always very hard to say, is this comparable to what happened in the past. But when you went through sort of the last recessions we had, financial crisis and others, very little movement on private label. Private label is a U.S. phenomenon in the OTC space, not in the others, has been relatively flat, right? So from that point of view, I think very little exposure. Again, very hard to say what will evolve from the situation we're in.

And for 2022, you're also guiding for 4% to 6% organic sales growth. Benefit from pricing, benefit from the rebound in cough, cold and flu, is 4% to 6% a conservative guidance?

So look, it's early in the year. So I mean, I think we came out at Capital Markets Day in February. We feel 4% to 6% is the right range. We will update that guidance as the year goes -- as the year goes on. With pricing, I've given -- I said a bit more. I said pricing was 2%, 2.2% last year. I said at the Capital Markets Day, it's going to be more this year given we have the full year impact of the price increases that I just explained in the U.S. and other price increases that are underway. And then we need to see how the economies evolve and what will happen. You'll see the quarter results come out, and then we take it from there.

And my last question, so you reported last year, 22.8% operating margin. You've also indicated last week that the stand-alone cost would amount to GBP 175 million to GBP 100 million , but you also announced at the same time that the synergies coming from the Pfizer acquisition, would -- you found an incremental GBP 120 million. So there's still a GBP 60 million, GBP 80 million gap between these incremental synergies and the stand-alone cost. Any savings productivity programs that could help you bridge that GBP 60 million to GBP 80 million gap?

Yes. Look, so I mean, the reason is I can't give you a margin, I can't give you a profit forecast, given all the regulatory complexities in doing so in a process where we have to do a prospectus ahead of the demerger in July. So that's why I think what I've done is I've given you building blocks in order to help you model the margin for this year. The 2 you described are these the 2 big onetime effects that you have to take and say, look, this is why the business is fundamentally different. More synergies and then cost of operating that. So that's sort of the onetime change to a new base. And then I think I would look at that way, we have driven positive operating leverage across the business. Now that is a little bit less than 1 year, but a little bit more in another. But I think that's the model, and I think we've -- I've given you a bit of the history as well. So from there, I can't give you more guidance on where the margin will land. But I think, yes, what you described, these 2 onetime effects are there. And then I think it's really bringing the model to life of growing 4% to 6%, investing in R&D and A&P ahead of the rate of sales growth. And I think that's the model we want to drive in the short and in the long term.

And with that, it's time to wrap up this fireside chat. Tobias, thank you very much for your time, and thank you to all the people in the room and the people who's been watching online.

Excellent.

Stay safe, everyone.

Thank you. Thanks a lot. Thanks for having me. Thank you.