GSK plc (GSK) Earnings Call Transcript & Summary

Hello. Good afternoon, everybody, and thank you very much for joining this session. I'm Tom Sykes, Head of the European Consumer Research at Deutsche Bank, and it's my great pleasure to welcome Tobias Hestler, the CFO Designate of Haleon, obviously soon to be listed. Good...

Okay.

Good afternoon, Tobias.

Good afternoon. Hello, everyone.

So you've just released your circular for the demerger with an expected listing of your shares on July 18 this year. In your view, being a separately listed -- how will being a separately listed business benefit the group compared to your previous structure?

Yes. So first of all, let's look a little bit at the history of the company, right? I mean what we've done over the last 5-plus years has really created a world leader in consumer health care. And we've done that by bringing together the Pfizer consumer business, the GSK and the Novartis Consumer Healthcare business and then couple that with a major portfolio rationalization. So I think we really created a purely dedicated, focused consumer health care business. And I think that's, I think, is very different and I think a market-leading business as well as such. And I think where the difference is going to be, this is a company that's going to be entirely focused on consumer health care. It starts with a Board, a diverse Board. It starts at capital allocation priorities that the Board has only to worry about what's right for the Consumer Healthcare business. Today, I compete with capital against vaccines and R&D and pharma, and rightly so across GSK, and the GSK Board has to do what's right for GSK as a company overall. Haleon will have to do what's right for the Consumer Healthcare business. And then I think there is opportunities in us becoming more agile, faster consumer health care company. We are part of a bigger pharma group. We have pharma -- we follow pharma policies, which is right to do given we're part of GSK. But some of them aren't fit for purpose for a consumer health care company, and I think there's opportunity in speeding that up. And I think it also will help us attract the new talent and different talents into the group as well.

Okay. Fantastic. And if we can maybe, just for everybody -- in order to perhaps just set out a brief background, I think that would be helpful, please, could you maybe outline how the profile of the business has actually changed over the last 6 years, thinking in terms of category, the channel exposure that you have and now the geographic exposure and how that's changed?

Yes. So happy to do it. So we are now a market leader in five categories and have leading positions there. So oral health care, we're the third largest player overall, #1 in therapeutic oral health care. We're a leader in pain relief, respiratory health, digestive health and also in vitamins, mineral and supplement. And this last one, vitamins, mineral and supplements, we did not have a position there. That came to us from the Pfizer side. And so we had a gap in the portfolio in a higher -- in a high or very high-growth subsegment of the market, for example. Secondly, as I mentioned before, we divested a number of brands. So we got out of nutrition, we got off dermatology assets. So I think we really streamlined the portfolio to be a purely consumer health care-driven portfolio. And then thirdly, from a geography point of view, we strengthened our position. We are now the second largest player in China, the largest multinational player. Before, we were #20, 20-plus in that. We had #5 to #10 positions in the U.S. We're the largest player in the U.S. So we're #1 or 2 in OTC and VMS in over 70% of the markets in the world. So I think we have a pretty complete geographic map, which we didn't have before. So bringing those businesses together solved strategic issues, both from either a geography or a category point of view, that each of these businesses had, and I think that's what's significantly different than what the predecessor businesses have been.

Okay. And your targets are for 4% to 6% medium-term annual organic revenue growth, a combined sustainable moderate adjusted margin expansion on a constant currency basis and strong cash generation and conversion. So maybe if we could look into some of the details of those. First of all, can we maybe go into the building blocks of the 4% to 6% medium-term annual organic growth guidance? Perhaps you could outline how you think your -- or what the balance of price versus volume may be. And then obviously, there are some rebalancing impacts at the moment as we unwind some of the effects from COVID over the last couple of years. Which categories in the medium term do you see as having the biggest growth opportunities for you?

Good. So let me just unpack those a little bit. So price/volume. We target balance between price and volume. It's something we've achieved in the past. Now balance, is it 60-40, 40-60? It depends a little bit on what you launch, when you do your price increases. But that's the overall -- that's the goal, and I think we have the ability to do that and also having to -- we also believe we can do that in a higher inflation environment. So I think that's on price and volume. And I think -- and that is largely driven by our therapeutic portfolio. It's also therapeutic needs. It allows the ability to take price. It's therapeutic products. It solves a therapeutic need that you have as a human being. Then when you think of -- when we look at the growth rate in the category, so overall the markets we play in, about GBP 250 billion in revenue, we believe grows between 3% and 4%. And in those -- or in the subsegments, OTC is the lower growth, 1s -- 2% to 3%; VMS grows 4% to 5%; oral health, 3% to 4%. And when your sales weigh that with our positions, you get to about 3% to 4%, and we believe we can outgrow the market over -- the market and the categories overall with 4% to 6%. And at the Capital Markets Day, we've given a bit of guidance on what that is. So in oral health and VMS, we said high to single -- high to -- mid- to high single-digit growth and both of these businesses together approaching 15 -- about 50% of our business by 2025. That's a key growth driver for us given there's penetration, further penetration opportunities and also geographic penetration opportunities in those categories. And on oral health we've delivered that performance over the last 10 years, so I think there is a strong track record of doing so. Then that's underpinned by e-commerce, that continues to grow. E-commerce is now -- last year, it was 8% of our business. That doubled compared to 2019 and up from being virtually nothing back in 2015. So I think we've invested heavily in building those structures. And then we have a, I think, a strong emerging market footprint. 32% of our business is in emerging markets. It's a broad-based footprint. And these emerging markets have also been growing for us high single digits, sometimes double digits in the past, and we've also given an outlook of -- that we expect them to continue to grow in the high single digits. So when you put these building blocks together, that gives us confidence in the 4% to 6% sales outlook overall for the business.

Okay. And your power brands are now 60% of the group, and you've stated they'll provide about 80% of the growth. Maybe just it'd be good to explain what you mean by the power brands. As well as, do you see them just operating in fast categories? Or do you also see them having the ability to take market share? And particularly for these power brands, are there still distribution gains that you can make in developed markets?

Yes. So the power brands for us are the nine brands that are probably -- not all of them are truly global brands yet. Some of them are. Some are -- have the potential to get there and become truly global or multi-regional brands. These are the brands that for us have -- are driving a significant part of the growth, but they're not all made -- they're not all made equal. So -- and if I give you a few example. I mean, Sensodyne is a truly global brand. It exists everywhere in the world, but it still has penetration opportunities. It's over GBP 1.5 billion in revenues. It has grown over 10% in the last 10 years, but it can't grow further. And the reason is about 1/3 of the world's population have sensitive teeth. Only 1/3 of those treated was a sensitivity toothpaste. So there's a huge penetration opportunity by somebody that suffers from sensitive teeth. So it hurts when you eat an ice cream and you drink a tea by just switching out your toothpaste. And so that's why we believe we can further grow Sensodyne, although it's global in nature overall. Our second toothpaste brand is Paradontax. Treats bleeding gums. Bleeding gum is also a global problem, but we've only launched that product in -- not in all the markets in the world. We only did the U.S. a few years ago. We launched it in India last year. So there is -- that is a brand that can be a global brand. So that's probably more of a geographic expansion opportunity. Or when you take a brand like Centrum, which we picked up from the Pfizer combination. Pfizer focus on the U.S. and China because they had sizable positions there, but they've had a pretty weak go-to-market model and scale in Europe. So we can activate Centrum through our strengths in Europe being the largest player in pharmacies in Europe. And then also, there are some brands that aren't in other markets. When I go to Middle East/Africa, very successful business for us, two of the brands make up about half of the revenue there. We have a potential bringing more brands to those markets with the base infrastructure we already have in place in those markets. That's just a few examples.

And as you mentioned earlier in giving the background, the geographic exposure has changed over the last few years. You now have 8% of sales in China, Which, as you mentioned, is double where you were in 2015.

Yes.

And at your Capital Markets Day, you outlined significant growth opportunities across LatAm, Asia Pac and the Middle East. So these are obviously very diverse markets. But what are the strongest structural drivers in the EM businesses? And are the drivers of premiumization, things like self-diagnosis, are they equally as powerful in -- across EMs as they are in DMs?

So I mean, first of all, I think the good news for us is it's a very broad-based emerging market footprint. So it's 32%. The biggest market in there is China with bit more than 8%, GBP 800 million, and then followed by Middle East, Africa, Southeast Asia, India and LatAm. So it's broad based, which gives us a little bit of a protection. So we don't have a lumpy risk in one or the other geography. And I think that has that -- having that has played well for us over -- historically, and that's why we believe we can continue to grow these markets in aggregate in high single digit going forward. So where does the growth come from? So I gave you some examples before around just pure geographic expansion opportunities, bringing brands we have to new markets. For example, India, we launched Sensodyne, I know, 4, 5 years ago. We've built it. We've made the investments in expert field forces. Now we just launched Paradontax, bringing the second brand in. So I think -- and then some other things we can do in other markets. And of course, across all the markets, you have the underpin of a raising (sic) [ rising ] middle class, raising importance of health care, people wanting to treat themselves and taking care of themselves much better. So I think we have a role to play. And also a role to play in education about health care, especially in emerging markets. And I think that is something we believe will drive further growth. So -- but that's -- and then I think, yes, making -- if you take again the Sensodyne example, just making it known that there is an easy solution to treat sensitive teeth. Or just talking about sensitive teeth being a therapeutic need you have is not something you have to suffer with -- from and then you can work and use our products. And then you have China, for example. Our biggest product in China is Caltrate. China has a calcium-deficient population, so there's a big need to -- for calcium supplements. And that is a business we've been building. The Chinese government used to give out calcium supplements for free in hospitals. They start ramping that down or stopping it, so we built an OTC business in that and then we're adding additional benefits to Caltrate. So we add probiotics to it, other vitamins, so -- to give people a -- their base need of calcium supplements and then add other benefits to it. So just a few examples around the emerging markets.

Okay, great. And so you also mentioned e-commerce before.

Yes.

So e-commerce is now 8% of sales.

Yes.

How advanced is your e-commerce capability at the moment? And which categories do you think have the most e-commerce potential? And I guess in relation to that, how are you expanding in pure-play online? As well as what's the D2C opportunity you may have?

Yes. Good. Let me start at the end of your questions. So DTC for us is experimentation, trial. We have -- we're doing some tests with ChapStick in the U.S., personalizing ChapStick when you buy a full box. We're testing something on smoking cessation. But this is -- we do some stuff in China where people can order directly. But that is, I think, just to get learnings and see what works. So we don't know yet if there is a direct-to-consumer play for us as a business. But we're experimenting, we're investing because we want to learn from it and see if there's something evolves from that. And that's very similar actually how we started building our e-commerce business. We invested into it in 2014/2015 when it was a tiny part of the business to get the learnings and learn and to make the mistakes that you do when you suddenly launch on Amazon and suddenly your price erodes on it. I think that's part of learning. But when you learn when the business is still small, then you have made those learnings when it's really important and you don't need to catch up. Where the business is quite far evolved is in oral health care. I mean when you look at Sensodyne, our Sensodyne share online versus offline in the U.S. is higher, so I think we're doing well in that segment. And that is across both player like Amazon but also through the omnichannels like a walmart.com, a target.com. And also, I think VMS is evolved, and then I think it's totally underdeveloped in over-the-counter medicines, especially when you leave the U.S. or U.K. and Germany, in many markets. I think it has a lot to do if there's a pharmacy at every corner. If you have a headache, you probably stop -- buy there. So I think that is where we have more work and opportunity to grow it, but we think this is going to be a very small build. By the way, there are some markets where it's not even allowed to do that, so there's also regulatory environments. So OTC, much less exposure. Then the market, much less developed but further potential. Ultimately, it comes down to -- if the consumer wants to buy the product somewhere else, we want to be there for the consumer. And that's important to us. And I think, as you've seen in the numbers you shared, we moved from -- we more than doubled the business over the last 2.5 years, so I think that making the investments is starting to pay off, yes.

Okay. Organic growth or constant exchange rate growth of 16% ex the brands divested, benefiting, of course, from your own actions, but they were favorable comps and a stronger sell-in due to your systems change as well. Are you able to give an update on recent trends across the different categories? You're seeing any stress from consumer budgets at all? And if consumers do trade down within your categories, do you have the product, some price points to be able to catch consumers as they maybe trade up or trade down?

Yes. Good. So look, I mean, we've given an update at Q1, and then we've said at that point we haven't seen any negative movement from a consumer perspective on trading down, we've not seen private labels' shares changing. So I think from that point of view, that's the last update we have shared. From -- look, I mean, from my perspective, when you look at -- we're predominantly in a therapeutic portfolio. So you solve a therapeutic need. So you have a headache, you want that solved. Secondly, most of our products, you make the purchasing decision or you buy them -- once a year, you have a cold and flu. You have allergy in the spring, once a year, maybe twice. So you -- it's not something you put in your shopping basket on a daily or on a weekly or sometimes not even on a monthly basis. And when you have a health care need, something hurts, your child is sick, you -- your teeth hurt, you have bleeding gums, you tend to go to the brands that you trust and that you believe in. And we've also seen that through COVID. We've also seen it through -- I mean, the limited data points we have from the financial crisis from countries that went through a significant turmoil is, I think, importance of health care is high and our products offer therapeutic need. So I think that gives us a little bit "protection." And of course, I mean, probably the health warning all around -- this is, I think, yes -- I mean, the last time we had inflation that we're seeing right now, I mean, I was a baby then. So I think this is -- the data points are limited, so I think we have to keep that in mind a little bit as well, and we're watching it very tightly. But I think given the portfolio we have and the products, I think we feel good about the ability to compete successfully through that. And private label share hasn't gone up much. In the financial crisis, we haven't seen it go up much, although that offer is there on the shelf for part of the portfolio. So -- and then I think for some products -- we have the ability to give a trade down on Sensodyne. There is a base Sensodyne. There's a Sensodyne with additional benefits. So people could trade down. In OTC, that doesn't really exist. And then the -- we also -- in OTC, it's mostly done by a pharmacist -- a pharmacy recommendation as well.

Okay. Thank you. So looking maybe a bit more deeper into the P&L. Now that you disclosed -- at the time of the Capital Markets Day, you disclosed a gross margin of 63% in 2021. Commodities also only accounting for around 10% of sales, which obviously implies that your conversion and logistics costs inbound -- are around about 27% of sales, which feels quite high. So is there further potential to rationalize the manufacturing footprint further? And how much of a headwind are raw material and freight/logistics costs? Are they...

Yes. Yes. So let me maybe just specify. So what we said is commodity and commodity-related costs are less than 10% of our revenue. It's other materials we buy that we think have nothing to do with commodity and commodity-related costs. And we make about 60% to 70% of the products ourselves. The rest is purchased. So there's a bigger purchasing component in that, and it's not just labor and conversion costs in the cost of goods. Now the other element to look at is that 55% of our products are over-the-counter products. They are made and produced under pharmaceutical standards, so you have a much, much higher regulatory environment. And also, the production processes are very, very different. You have a very high level of quality controls and checks that are required for that. And also, the production processes happen in batches that need to be tightly quality controlled. You tend to have a whole -- higher amount of materials. So I think it's a different -- it's a little bit of different environment for 55% of the portfolio. The VMS and OTC -- or health portfolio, that's probably more typical for a wider CPG peer. So that's maybe just a bit of background. What we've done on the manufacturing side is we've had, in total, 41 manufacturing sites from Novartis, GSK and Pfizer. We've reduced that to 24. We're looking at further potential, but I think the majority of the heavy lifting is done on those. But we've only completed this integration late last year. So -- and then also through COVID, that was not a time to run optimizations. We were really focused on being able to supply to our consumers and customers. So I think there is further optimization that can be done. Especially, also takes, in a regulated environment, sometimes 2 to 3 years until you can move a product from 1 factory to the other. So there is still some optimization to come from that, and there's optimizations that can happen. And plus, of course, the ongoing improvement we run through our supply chain.

Okay. Perfect. And so if we look a little further down the P&L, you've made comments, again, at the time of the Capital Markets Day that A&P- and R&D-to-sales will likely increase.

Yes.

How big a move higher in A&P and R&D may we see? And when was -- you see the benefits of that spend and innovation coming through. And maybe what are the savings you can make elsewhere lower down to perhaps offset some of that at the margin level?

Yes. So I think the -- what we had -- the model we have laid out is moderate -- so sustainable and then moderate annual margin expansion in constant currency. And that model is underpinned by -- there's a flywheel we had in the Capital Markets Day that we presented. So we have a high gross margin, 63%. We see positive -- we see mix improvement possibility from the higher growth of the power brands, plus the other improvement -- optimizations that I just talked about. And so that should allow gross margin to increase. Then we have other SG&A costs that should come as we optimize the footprint, as we optimize -- become a self-standing consumer company. And with those positive drivers of margins, there is money to invest in A&P and R&D ahead of the rate of sales growth and still deliver a moderate margin expansion on the bottom line. And I think -- but I think ultimately, it's every pack you sell more, there's a 63% margin-plus and price increases, gives room to invest. I don't think there's a major reset in the level of A&P and R&D. R&D is around 3% of sales. That should give us the innovation. But I think it's important we keep investing in R&D because that's what keeps the brands healthy and fresh. These are decade-old brands, and they need to flow. So it'd be wrong just to focus on A&P. You also want to invest in R&D. And A&P is around 20% of sales. I think with that, I think we are competitive. That, by the way, includes the investment we make in experts. So our expert field force is seeing dentists as well as part of that. And I don't think it's a major reset, but I think we've said grow ahead of the rate of A&P. And if those -- ahead of the rate of sales growth. And if we have the sources of growth identified and as long as those deliver results, that should feed and give confidence on the 4% to 6% sales growth. And just to step back, when you look at what we did in the last few years, we grew sales 4.4% in a market that grew about 2% from '19 to '21. And at that time, we grew A&P about 6%. So we started driving that model and started fueling it. And we think there's more room in that, and there's more sources of growth that we can unlock by investing. And as long as these investments deliver sales, we keep doing that with our ambition to deliver 4% to 6% sales growth on an annual basis.

Okay. So your guidance on cash flow is for a high and stable cash flow. You list a 4x, roughly, net debt-to-EBITDA, but there's obviously a considerable consolidation in the sector at the moment. To what extent can you actually play a part in the consolidation given that particularly large peers are allocating considerable capital to areas like CMS, for example?

Yes. So first of all, I think we were the consolidator in the industry, right? I think we've done two major consolidations. And we've done -- and we've done at least one of them without taking cash into our hand, right? So I think there are different ways if there would be more major consolidation. Now let me maybe just go back to what I said before. I think we don't need M&A to be successful. So, I mean, a, we've -- all of our targets we've given are organic, so they exclude any M&A activities. Secondly, we fixed the strategic problem that the business had. So there isn't a geography issue because we have leading positions everywhere in the world. We have leading positions in all the subcategories that we play in. So there is no -- so we -- and we've done the portfolio rationalization. We've gotten out of the thing. So we've done the heavy lifting on that. So we don't need M&A to be successful in the model that we've laid out. Now if opportunities arise, of course we're the market leader. You would expect us to look at that and we would. And how would we finance that? First of all, in the deleverage commitments we've made, we kept room for bolt-on M&A. So first of all, there's room to buy a brand each year so we can participate in that and meet our deleveraging commitment. So that's one. Secondly, there are some brands in the portfolio that have low growth. I mean they're growing, I mean, low single digit, but they're stable deliverer of profit. It makes absolute sense to keep them in the portfolio. But if a high-growth brand comes to the market that is on strategy for the right price and makes strategically sense, we could divest one of those lower-growth brands for a higher-growth brand, for example, to build out the VMS space. So that optionality is there as well if we chose to do that and if those opportunities arise. And then last but not least, the deal activity in the sector isn't that big. I mean this is -- I think there's very -- relatively low amount of assets coming to market. So overall, I don't think we're restricted in doing activity. But as I said, I don't think we need it in order to deliver what we have set out at the Capital Markets Day and in the prospectus for Haleon.

Okay. So given the nature of the products you sell, your business should be presumably considered a purposeful investment proposition for many people. What are the main ESG priorities and targets for yourselves and -- or for the group? And how are these actually built into management remuneration going forward?

Yes. So overall -- so let me start with the E, so on the environmental side. So we have a structural advantage starting place. And I think that comes from two reasons. One, we know what's in our product down to the roots because we have to demonstrate that to the regulators because it's pharmaceutical production. We know what's in our product and where it comes from, all the way back with every ingredient that's in it. So secondly, I think all of our brands fulfill a purpose. They solve a health care need. And then thirdly, our -- when you look at our carbon footprint and our plastic footprint, it is significantly lower than the wider consumer peer set. Of course, some of our products help. Our products tend to be smaller and -- smaller in size. They have a lower amount of raw material in them. But also, I think given the benefit we come from a pharmaceutical background, I think, helps in that. Now the good -- to have a good starting -- a lower starting base, and then we made significant commitments to improve from there. Now we put some data into the prospectus. But, I mean, we're still -- we're building out our reporting capabilities in that. So we're able to report on the ESG side, as is expected from us as a listed company, and you'll see more of that as we report externally and then building towards our first annual report by the end of this year. We've made strong commitments to reduce the carbon footprint, to reduce plastic use. We're working on our Scope 3 targets. And then also, we're looking for ESG ratings. We can only get them once we're an independent company. So that is all well underway. And all that work is led by our Head of Sustainability, Teri Lyng. She sits on the Executive Committee. She has built that team, so I think we're well underway with all those activities. On the social side, we believe our focus is going to be on health inclusivity, and that is about providing -- explaining more about what our products do. And I think a big barrier to using health is that people don't understand what you can do. And I think we have a big role to play and we can help people take better care of themselves, which is understanding what products are there, what they can do. And that is going to be a focus as we build the S part of ESG. And then on the government, you've probably seen the Board that has been nominated. The Board is coming together. The Board is onboarding now. I think it's a highly diverse Board, spanning, I think, consumer industries, luxury goods. So I think it's a really strong group of people that I think will -- we will benefit from having as a Board. And around the Board, we're building all the things we need to do as a publicly listed company in terms of external reporting, all the policies and procedures. So that work also, again, is well underway. So I think overall, I feel we're well on track, but quite some work to do for us given a lot of these activities were happening under the cover of a larger group so far.

Okay. Well, look, thank you very much indeed. We've come to the end of the time now today. If there are any closing remarks you'd like to say to everybody ahead of your listing on -- in July, then please to do them. Thanks.

Thank you, Tom, and thanks, everyone, for your interest. So as Tom said, we're listing in the middle of July, on the 18th of July. So really exciting times. I have a full team around me, so my Head of IR, Sonya and her team. So if there's questions, please reach out. We look forward to engaging with you. And of course, hoping to see many of your names on our shareholder list as we become an independent company. And I hope, yes, you enjoyed the session, and I look forward to future engagements with all of you. So thank you very much.

Tobias, thank you very much indeed. Thank you.