Haleon plc (HLN) Earnings Call Transcript & Summary

Good morning, everyone. Great to have you all on the line. I'm really pleased to introduce to Tobias Hestler, CFO of Haleon, who's with us today to run through our questions, as well as those submitted in advance by some of you on the line. So we've got about 50 minutes, so I suggest we just dive right in. Thank you for joining us. If we can start with the outlook for top line at group level before delving down into some of the categories, your midterm sales growth target of 4% to 6% implies outperformance versus your expectations for growth of the consumer health care market of around 3% to 4%. And the midpoint of that range suggests market share is expected to grow by around 50 basis points or so over the next few years. Can you sort of help us understand whether this outperformance is expected to come more from share gains in existing market? Or is new market entry a bigger element of that?

Yes, sure. Thanks, Victoria, and good morning, everyone. So thanks for joining. And also thanks for the questions you presubmitted. So I look forward to the dialogue, and thanks for your interest in us and in Haleon. So on your first question, so the midterm sales growth target. I think it's -- first of all, both, right? I mean it is gaining share from others, but it's also penetration opportunities and new market entries where that means we grow the category. And I think we've done that consistently over a very long period of time, especially in oral health where we have been the driver of category growth with our rollout of Sensodyne and our denture care business. So -- but there's also things still huge penetration opportunities and penetration opportunities means you gain share from others, which means you bring people into our subcategories that we play in. And oral health is probably a good example. So when you look at Sensodyne, and with the latest data we've done last year, we think about 45% of the world's population are either aware to have sensitivity or they suffer from sort of frequent what they would call wings. So 6 or more months when you eat something so there's something happening in your tea. So what we call them as a sensitivity receptive audience, right? I think sort of people that have a bodily need that something ages hurt when you say something isn't right as it should be. And by the way, that figure is pretty uniform around the globe. There is no difference in population or lifestyle or anything, right? So it's a global topic. And then -- so about 45% of people have that -- when you look at Sensodyne penetration, it sits around 15% in the U.S., slightly higher than in the U.K. and lower that another market. So there's a huge penetration opportunity of people saying I use the sensitivity tooth pace. And the good news in this is this isn't the new product you need to add to your shopping basket. All you need to do in big quotation is you need to change your toothpaste brand and keep using a different toothpaste. So it's not something where you have to do educate and say there's a new product on a different shelf that you have to pick up. So that is one example. Another big example, I think, is gum health. So about 1 in 2 adults experience bleeding government gum disease as part of the -- as part of the life. Again, that incidence is pretty much there globally. And with paradontex, we have a brand that we haven't really launched elsewhere. So there's huge penetration opportunities in that brand. Centrum, another example is only 1/3 of our EMEA LATAM region market. So there is geographic expansion opportunities by bringing that brand into new markets. And then you probably also have maybe 2 other angles why I think -- why we have what we're really confident about the 4% to 6% growth, which is one, further growth in e-commerce. It's down 9% of our business. 4 years ago, it was 4%. And -- so there is a channel mix, and we tend to have higher shares in e-comm than online. So I think that helps. So that's the growth driver. And then I think the emerging market mix, 1/3 of our business, 33% last year is emerging markets. That emerging market footprint is pretty broad, and the emerging markets have grown high single digit, double-digit historically. Last year, they did 16%. So we're doing well in them. And that also helps sort of in the growth mix. So when you bring all of that together, I think there is the portfolio from a category point of view, from a geography point of view and also where the penetration opportunities are, provide these opportunities for growth.

Yes. And I guess if we focus in on the emerging market opportunities, could the potential growth contribution outweigh that you think of developed markets? And I guess also, specifically, do you see some of the potential hurdles to taking share in emerging markets breaking down as international science seems to be carrying increasing any more credibility in some of those markets.

So look, a mini clearly from a percent growth perspective, it's been outweighing the developed market growth, right, last year and in the prior year. So absolutely. But then you have, of course, the relative size of the 2, these developed markets are much bigger. So I don't need to grow them at that rate of growth to add GBP 1 million of growth that we need, right? But I think we absolutely I would say, clearly, emerging markets growing ahead of the developed market also just given the portfolio they have and so on, as I said before, right? Not all the brands are in all the emerging markets, so you should get you should get more growth from them. And I think it's -- look, I think it's less to do, in my view, with acceptance of international signs. I think it's just -- it's a matter of one have we taken these products to the market because, I mean, clearly, as I explained, this was our oral care, these are global incidences, right? Of course, how you enter the market is different. When you go to a market first with Sensodyne, you have to first educate that when it hurts and itches, then this is sensitivity. And here's what you can do about sensitivity. That is a very different activation to talk to consumers than the one we do in the U.S., where the product and people know what sensitivity is a lot of people know. So there's less of sort of the basic education. Did you explain much more about the science and what's in it? And then I think there is also in the emerging markets, I think a growing size and share of people, I mean, we call it the growing middle class or whatever, but there is a population that can absolutely afford and wants the best possible treatment for their health. An example, we launched Centrum in India, we just didn't on Amazon last year as a test. We got a 10 share on Amazon and really strong demand, right? So I think there is -- I think there's markets that are sort of ripe and ready for different type of treatments that might have not been available so far. And I think given the portfolio we have, we believe strongly in those expansion opportunities.

Okay. Great. If we sort of look back at this outperformance versus the consumer health care market historically, this really steps up COVID with the Haleon business as is today reporting a CAGR of 4.4% from 2019 to 2021 versus the market, which we think was around 2% to 3% over the same period. And one thing we've seen from some of our other coverage companies is that there was an element of benefiting from having more flex supply chain versus some of the smaller players throughout maybe this more difficult operational period. So I just wondered, is that something that you think Henan benefited from? And if so, have some of these smaller players started to come back on stream now that supply constraint seems to be easing.

Let me just pick your statement into 2 parts, right? There is -- the first part, you sort of said we stepped up and benefited to COVID, right? And I think I see that a little bit different, right? Because I think what happened at the same time as COVID is -- you saw the benefits coming through from creating Haleon and bringing that Helion portfolio together and doing the divestments. So I think the step-up in growth comes from in my view, the creation of the Helion and the Helion portfolio both from a geography and from a category point of view. We now participated in we were now #1 in the U.S. We were 5 plus there. We are now #2 in China, #1 multinational. So I think that -- and then we divested 50 gross dilutive brands, which had about a drag of a percentage point on growth in the past when you look at prior GSK reported data. I also think we've consistently outgrown the market, the best example where you can really track it is oral care. We've outgrown the market in oral care 2 to 3x. So I think we've done that historically. It's not something new. What happened in COVID is -- actually, COVID for us was negative from a growth rate point of view because we took the big hit on respiratory because there was no respiratory business for about a year, I mean, it halved, right? And then we got a little bit of a tailwind because there was more VMS sales. But the net of that was negative. So we said about 50% -- 50 bps drag throughout these 3 years, right? So I think that's just how I see this, right? So I think I believe we've been well in the 4 to even through COVID, and it comes again, in my view, the strength of the portfolio where things even each other out. Your second part of the question on supply chain. So I think -- what we've seen to happen in COVID is 2 things. One, we've seen to COVID and a lot of people went shopping online, we saw actually a preference on brands, on brands that people knew and trusted and you had so much stuff suddenly to do, you probably didn't have the time and look for other stuff. So I think there was a benefit of -- I think, big brands that people trusted and I think we saw a bit of that. The other piece, I think, is supply chain. I think -- we've done well in it, right? Now have we got it right everywhere? No, we didn't, right? I think this is just -- there was such huge spikes in demand happening that are unplannable and that you can't deal with. But I think the team has done a brilliant job in being as agile as we can. I mean on Panadol we slimmed our -- we slimmed down to the range of SKUs, prioritize the important SKUs, so we can be there on the shelf for the consumer. And look, at least ensure that there is the 1 instead of 10 SKUs at least 2 are there on shelves. So I think there's a bit of that agility that was there. But I think overall, I think we've done well with certain exceptions here or there.

Okay. Cool. I guess maybe if we set at the group level, but I think more about the near term. So it seems like absolute price levels were pretty stable sequentially in Q4 versus Q3, which we estimate at around 9% to 10% ahead of 2019 levels. I guess during the results presentation, you called out the need to carefully manage pricing versus volume growth. So how much pricing is still to go to recover cost increases? And should we see that statement suggesting prices still need to step up substantially again in 2023? Or does it suggest that you may not actually fully price through? And I guess, if the former interpretation is closer to reality. Should we see this as providing confidence in the 4% to 6% targeted sales growth for this year despite cycling some difficult comparisons.

Yes. So look, I think in short, it's the latter of what you described, Victoria, right? And I think let me give you just a bit more color on it. So I think, first of all, I mean, Q3 and Q4, you saw a similar level of price increase in percent versus prior year. That doesn't mean pricing was stable. It meant because in Q4 in the prior year, we took -- we increased prices on half the U.S. portfolio. So in order to still do 5% on top of the spike from last year, from the prior year, it meant prices actually went up, right? So the price is on shelf. So there is continued pricing. And we're also taking continued pricing this year. And the reason for that is twofold. One, Yes, inflationary material headwinds have started to peak and on certain materials. We're starting it come down. But it's going to be a -- that are 6, 9 months or 12 until I see that rolling through my P&L because we had fixed-price contracts that roll off. So I'm rolling over to a new price level. So that's one. Of course, that isn't as big as it was from '21 to '22, where I think we said it was well in the mid-teens, that inflation. I think that comes down now to mid to high. But means we still have to take price to offset that. And I think the team last year has done a really good job in offsetting these price increases. Was always a little bit more difficult to us is to offset it at the 1% gross margin level, right? Because I think in a business in OTC, where you have margins that are 65%, 70% plus, if you have a pound in material cost increases in order to maintain the margin, you need to increase the price 3x to 4x to which is massive, right? So I think that's -- but I think we've offset it off nicely. And then the other thing is we've been very, very mindful in pricing because when you look back last year, we grew volume and we grew price. So we didn't have this double-digit price increase, high single-digit volume decline because what we feel is -- the best thing we can do for the business long term is keeping people on our products. It's products, you trust, you stick with them and you keep using them. So I think what we tried is to find this price point that we're not losing the consumers along the way. And I think the team has done in aggregate a really, really good job in doing that. And then maybe my last point on pricing is I think what we're talking here is a difficulty and is hard to manage and find the right pricing level is the Western European, U.S. topic predominantly. Asia, very much lower inflation rates, so much less of an issue there. Across all of our emerging markets, I would call it business as usual. We always had an environment where the market needed to price up, be it for inflation rates or because of exchange rate hit they took or the local economy. So I think that is for me business as usual. So when you take that together, you're well in the 40-ish 40s range of the business, where it's, I think, either not new or not different than it was in the past. So we're down to Western Europe and the U.S. where this needs to be managed.

Okay. Very clear. If we turn maybe to sort of down trading or private label risks, you called out some signs of down trading with the results last month, albeit still pretty limited. Are the areas that you've seen so far where you would have expected the consumer perhaps crack first? And what are the categories or geographies within the portfolio that you would see as most at risk if the macro were to materially worsen from here?

So look, I must actually say the data we saw and we shared at full year result is even better than I thought, right? Because private label share in the U.S. is the exactly same number as opposed to prior year. So we've not seen people move to private label, yes. Now what we said is there's one of the other subcategories where that happened. Let me give you an example. -- anti-acid so problem pump inhibitors in the U.S., biggest brand for us there Nexium. What we've done there is that's one example where we didn't get the pricing right. So we're a leader in the category. We led with price. Nobody else followed and private label didn't follow. So actually, people move into private label and sometimes the competition. So that's one that the team is correcting now. We're actually -- we've taken this sort of price volume finding the right line between them a little step too far. Tim did the right job, but that's one where you correct back. And then you have smokers health where people took a bit more. This is anyway a category that goes that goes up and down. So I'm not -- we're not seeing actually any signs of the consumer cracking. And look, in the U.S. Yes. fantastic data. You can ask -- you can get data cut by income level, which we've done. And also there, we don't even -- we don't see that. And so I'm not worried about private label because I think when you look at what our products are. So our products are in health care, they're not in your daily and weekly shopping basket and rarely in your monthly shopping basket. So your purchasing occasions are less frequent. When you're sick, you tend to go back to what you trust. And look, I mean, for me, I mean, if I get a cold and flu, I use what my mom gave me, right? And -- or if your partner sends you to the pharmacy because your child is sake, you're probably not going to bring a private label home unless you have used it before because you've been told, that's the brand and the child is sick, so you better bring this home. And probably also when you think about the last time you bought the cold and flu product or an allergy product, you don't remember what you bought it because you buy it once a year. Kids and kindergarten respiratory maybe a bit more often, right? Or if you have a heavy allergy suffer. So I think the brands we have and what they do and you're treating your health, I think, in our view, much less exposed to private label. That's by also the reason why private label shares have been pretty much flat. Over the past, probably in the U.S., we have data for the last 2 decades, and it's been that, right?

Okay. Cool. If we sort of look through maybe a category lens now, starting with oral care, which is about 30% of sales. At sign is obviously already a mega brand with sales of around 1.5 billion. And obviously, parodontax, which we spoke about earlier, still has a large expansion and opportunity. So can you give us an update on the relative size of parodontax and it sort of launches today? And maybe how ambitious that launch plan looks in the near to medium term? Is that sort of something that's been able to be accelerated post the separation from GSK?

Yes. Look, I mean I think -- I mean parodontax is a significantly smaller brand than Sensodyne, right? And I think I would say we probably activated it properly in maybe a dozen markets in the world. But I mean, as I said earlier, come disease is a global phenomenon. So I think that's where the opportunity is. The second piece is that the way we launch our products, this isn't usually 1 where you enter a market and you do 1.5 years or 2 years of big consumer advertising? You do consumer advertising along the way. But how we're building our brands is building support by the experts. And for us, the experts are dentists and dental practitioners, educating them about the product. So when you're in the dentist chair because you get your hygiene or in front of the dentist, that they recommend you and say, "Hey, look, with your gums. I recommend you using hydro sensitivity or a gum toothpaste. And I would recommend you use parodontax, if you stay with the example. They usually hand you a sample and then you start using it. And then when you start using the product, you've got to see improvements over quite fast period of time. And then when you're ready to buy, that's when I think then we're there and you can buy it in all the channels. And that tends to be a slower build, right? I think it's very rare that you go into a market and it's taking off like a rocket. These are slow builds, but I think the benefit when you do it that way is that your -- and you asked Sensodyne users today. I mean, over 70% of will tell you, I've started using it because my dentist or my dental hygienist or so recommended me doing that. And a similar thing we have is the pharmacies where we sell stuff to pharmacists. It's a pharmacist, again, a health care professional that recommended you to use the product. And I think that's where there is potential. And look, I think, yes, absolutely, parodontax is one of those investment opportunities where we invest and we double down on the investment.

It is -- I guess, sort of touching on what you just said, but is parodontax by its nature, more of a referred product because you kind of have to be told you've got gum disease relative to sensitivity, which is something that's perhaps more self-diagnosed. And I guess does that mean it can command a higher price tag because of that recommendation element. And I guess from what we've been able to see online, it tends to retail at a higher average price than Sensodyne.

Look, I think it probably depends where you go. But I mean it's a therapeutic product, right? And for us, also Sensodyne is a therapeutic product. And we've always where we've launched it, we've launched at a very, very high price point for that reason because it is treatment, right? And it solves a health care need. I think on DCs, I mean, mostly, it's associated with bleeding gums and I mean you see when you brush and it bleed. So I think it's the -- I think the work we have to do is we have to educate, right? And our consumer education is anything here is the signs that you can self diagnose. I mean the blood is, I think, very obvious -- but then there's also other signs. I mean, usually, if you have it, it tends to come along with bad breath, it comes to have a long bit. You see your gum lines receding. So I think there's education to be done. We do in our direct consumer communication to talk and educate about the issue on the topic. And then you buy that up and couple it with the recommendation from the health care professionals. So I think that's been the -- that's how we go about that.

And I guess also just thinking about the learnings from Sensodyne and sort of that education process did it suddenly get to a point where that critical mass or education or awareness suddenly is over launched? And is that something that actually you could over a couple of years, happen with parodontax as well?

Look, what I have seen, I think this has been more of a steady build, right? I don't think there's a -- you reach a point when it's taking off. I think this is a steady build of getting people to try the product, see that it works, and then they continue using it. And then what we've done on Sensodyne is that once you're on Sensodyne, you start sort of with the base sensor in that, just treat sensitivity, which for some people might be enough. But then next time you come and repurchase it or whenever in your life, you need to change, right, that you say your -- I don't know, you drink a lot of day, then whitening might be a combination. Then you do Sensodyne plus whitening so that your additional need is covered or it's speed of action that you say, look, I I'm a heavy suffer. I really want to be sure it works. So I brush my teeth before I go and need an ice cream. So then that's when we brought out rapid then there's enamel repair. So there's these additional needs that you pick up along the way that to keep the product relevant and fresh for you as a consumer. So in addition to making sure the base product is and continues to be the best sensitivity treatment in the world. It is then keeping you on the journey that we provide incremental this incremental need, but it's also sensitivity first, plus your other need that you have?

If we move on to VMS, 16% of sales. There's a lot of debate going on with investors about volatility on the fundamentals of the category. So first, if you COVID, could you just help us understand what proportion of the portfolio was exposed to COVID triggered adoption that's now normalizing versus the less impacted parts?

Yes. So let me maybe describe what happened with the overall category. And then I talk about our products. So in the overall VMS category, we saw a bump with the category growing in the low teens in the COVID year. And then it's grown steadily from that base. So there's not -- so what we haven't seen and in the subcategories that we play in, we've not seen people come running into the category and then dropping off, right? I mean it was a big step up. And then we thought maybe the following year, it's going to drop. It didn't. And also, we're not seeing it this year, right? So I think it's -- and I think in our view, it has to do with, I think, COVID reminded all of us it's how important it is to take care of our health and I think that carries along, right? And I think it's sort of one of those basic needs that's moved up in the latter of how we take care of ourselves, our families and how we lead our lives. Now when you look at our portfolio, there's parts of the portfolio that aren't impacted from COVID like, a cut trade in China. Tweets calcium deficiency, a basic health care need that is independent of COVID. And I think the team is our largest brand in China. The team has done a brilliant job. It's supported by the Chinese government as part of their health 2030 agenda. That helping people to treat deficiencies, which is pretty much a Chinese phenomenon or across some of the markets in Asia. So I think that part of the portfolio isn't impacted by COVID. And then I think the overall multivitamins were pretty stable. There are some people that came into it. And that's also -- and then we had 1 brand that really went through the COVID roller coaster, which is emergency in the U.S., which is a high-dose vitamin C in an IFRS and powder with some cool flavors in it, has an immunity claim on it. So I think that did the -- each time the papers and newspapers were full of COVID. And then I think you've got these crazy spikes, and we're still going through them. And when you look at my presentation, I did at full year, we sort of showed that a little bit where you see the -- where you see those little spikes and we're still working through those.

I think if we could just focus specifically on [ Caltrate ] quickly, the supplement brand for calcium we've seen a proposal from the government in China considering mandating mass nutritional fortification of various staple foods in order to sort of combat those nutrient deficiencies which could include calcium. So how much could that be a risk for the brand? And what can Haleon do to retain consumers if the prevalence of calcium deficiency receipts?

So look, I mean, I think it's a phenomena. It's there, and it's been there a long time. And what the government has done in the past is they've given out calcium treatments for on sort of in the hospital, right? So you could get it sort of under a prescription and then be paid for. And the government has massively pulled back on that to get people to do self care. And so I think there is enormous growth potential in there because the amount of people that take calcium supplement is still is still quite low. And that's, I think, a reason why the government is looking what other tools we have available. So I think there is enough growth potential. Secondly, I think what we're doing is we've built Calcium plus, so that we move from a calcium treatment to a calcium plus other needs to have a calcium plus probiotic, a calcium plus... And then the third piece is -- we're also moving with Centrum into -- sorry, it was Caltrate into different forms. So we did a culture plus milk in a company form that is much more suitable to give to younger to younger people and to kids. So you can start treating that earlier, and there's -- we believe a high enough population base that is interested in that.

If we just quickly cover off respiratory. 22 saw a big increase in confluincidente, it's in a prolonged season driven in part by COVID, which resulted in sales 30% of 2019 levels. In the near term, there's quite a lot of debate with investors as to whether the 4% to 6% organic sales growth guide for '23 assumes a decline versus last year to more normalized levels. Is that something that you can shed more light on for us at all, please? And then can we sort of clarify what we think you said at the full year results, which is that you don't see any excess retail inventories in the category currently.

Yes. So -- let me maybe unpack what happened last year a bit, right? Because I think there is a first half last year and then maybe Q4. So the first half last year was come back from what we all hope was a once in a century event with COVID and all of us being locked home and the kids and not going to be able to go to kindergarten. So that flow. And what happened in the first half last year is it came back. So the around 50% growth we had in that category last year is from a comeback, right? It is not because it was a super strong season, right? So -- and then what happened in the second half of the year is, yes, there was more use of cold and flu products because the covid variants that have been going around that are still going around also have cold and flu like symptoms, so people use those products. That has continued to date. And then thirdly, we had last year, a bit of an earlier spike, especially in the U.S., where the season just started a bit earlier, which is sort of the normal stuff around 1 year, it starts in November. The next year it starts in January, you don't know. What kind of season you get. And if you get 1 spike or no spike or you get sort of the bumper season, which is triple crown where it happens 3 times. so as -- so I think -- and that part is, yes, it might make the results a little bit more up and down year-to-year, but we always said that. And that's also why we report this respiratory category separately. Now on inventory management, this is something the team is doing very, very diligently because we have it every year. What we do is we sell into the market and we fill up pharmacists and retailers inventories in usually Q3, by the end of Q3. The reason we do this is when you have those spikes and you saw it on the charts we have, you get a whatever. Quadrupled the weekly sellout. Quintuple within days, there is no time to repipe the market in that time. So you need to have the products as close as possible to consumers for these spikes happening. Which then means is we're tracking the season, we're tracking these inventory levels and make sure by the end of the season, March, April and sort of the spring flu thing is over. That were down to normal inventory levels before you go into sort of the off-season months, because what you don't want to happen is that there's too high inventories by then. And that's what the team is doing. And look, I think we had earlier spikes in the U.S., which means the U.S. ended the year with very, very healthy probably too low levels. So I think -- and that's also why as a result, I mean, in aggregate, we have said we saw continued growth in respiratory going into Q1, right? And by the way, the chart I have shown, were U.S. the dynamic in EMEA LATAM is slightly different. They didn't have this massive spike, and I think it continued out of it. And look, it's -- we're going to take another month or 2 until we can sort of draw a line and then can make a conclusion on how good of a season it was. And then let's see what happens this summer. That's the unknown. Will we still have endemic? Will we still have put strains going around and those COVID strains also having cold and flu like symptoms, or not, that's the unknown, right? But that's the sort of the out-of-season delta that you've also seen on the chart I put out.

If we spend just a minute now to look at additional potential sources of growth further out at the time of the demerger, you highlighted 2 potential Rx to OTC switches in '25 and '26, which could each have the potential to add a percentage point of revenue growth on top of the 4% to 6%. Are these switches still on track? We know you can't tell us precisely they are, but can you share any more details on the cost to those? And are there perhaps other alternatives that could be on the horizon if either of those are not successful? Or would that still be too far away from potential authorization and commercialization.

Yes. Good. So I mean, let me -- absolutely. So first of all, I think, I mean, we had said we're working on 2 Rx-OTC switches. We continue to work on them. We're in discussions with the FDA. Based on these discussions, we think that there might be a delay at least to one of them I think -- and that pretty much normal. And that's also -- because all the switches that we're working on and also what our competitors are working on at least the ones we're aware of, they all have complications and they aren't easy to do. So I think this is pretty much the normal nature of Rx OTC switches these days. I think the easy ones and a lot of quotation marks, I think they're behind us, what is there on the horizon and to be had all has its complexities for very different reasons. Product by product. That is also the reason why we said switches are outside our 4% to 6% guidance. That's the icing on the cake when you get them, right? And I think if I look at my 5-year financial plan, do I expect a switch to happen in a 5-year plan? Yes, I do, but I couldn't tell you in which year it's going to happen. So you keep it as an opportunity outside of the plan. What we put in our plan is the full funding so that the Switch team, the R&D efforts, the studies you need to do are fully funded. In addition to that, of course, our team is very, very active in scouting the market to add to that portfolio. So that. So I think this -- what we would want is we always want to have several switches that we work on. And then we'll talk more about it as we either see they're not progressing or secondly, once we're getting to a point when they would become public anyway, which is usually around the time when you do a bigger when you need to do a bigger trial, and it becomes public because there is trial activity going on. Yes, sometimes, actually, you might only hear it much closer to launch, and that's, of course, what we prefer because you don't want to put any of your competitors on to what kind of categories or products you're working on.

If we move on to the margin outlook and specifically A&P spend, which was flat at constant exchange rates in 2022 versus 9% organic sales growth and that was impacted by stopping spend in Russia in the second half as well as efficiencies from moving production in-house. Just sort of excluding Russia, which we think was around a GBP 30 million saving on a full year basis. Was this spend in line with expectations? Or was there an element of spend held back due to timing of innovation and also still related to that, will those production efficiencies continue in the first half? Or put another way, how should we think about the phasing of A&P spend through '23?

Yes. So look, I mean, I think for me, the most important metric was last year and also not last year, it's still the most important metric is how are we doing in our consumer and customer-facing A&P. So are we putting more advertising mainly and the promotion, we're much less promoted driven business, but mainly a in front of the consumer. So I think that's where the measure is. And I think when you exclude Russia, that was up 6% last year. So I think we're very well invested into the brands and into making sure our products are presented in the right way in front of the consumers. And then under that, of course, you switch and you shift stuff around, you take money out, took money out of China in Q2 because the country was in locked down. And then you also -- of course, you wouldn't then grow your A&P if you have a very strong cold and flu season because the stuff is flying off the shelf anyway. So you wouldn't increase as much. We had a really good year with efficiencies last year. I think there was opportunities through sort of the inflation environment as well because people pulled back on other companies that really suffered what happened had to pull back. So we were able to get more media also -- I think the team did a really good job bringing production in-house. So I think -- and those things have a bit more of a stepwise function. They don't -- you can't plan them to run continuously. What I would expect for '23 is that we're growing A&P ahead of the rate of sales growth. And then my what Brian and I are reaching hear doing is we just continuously watch. I mean we wouldn't throw money out of the window. We need to have the execution plans behind that. That is clearly, I think, the model that we see going forward, right? And I think when you look at consumer facing A&P, that's what happened last year with which I think is around the market. And also last year, I mean, when you look at there was incremental price increases that you also then probably wouldn't put the same amount of A&P behind those around.

And then, I guess, if we look at efficiencies, a productivity program has announced the full year results, which aims to deliver annualized gross cost saves of around 300 million a year over the next 3 years. Can you give a bit more color on where these savings or assets will be focused? And sort of the conversion cost for helium relative to a number of our other coverage companies is closer to 20%, 25% of sales. So could we assume that there's more scope in manufacturing?

So let me maybe give you a bit start with the efficiency program for us. So I think the efficiency program is what I see as the evolution of our company that we always expected. When you look at what I presented at the Capital Markets Day, a bit more than a year ago now already is that I said from 2023 on, I would expect other SG&A to come down over time. And I think that was absolutely clear expectation that post separating out that we can start driving efficiencies. And because when you look at how we separated and our separation approach was one that we went for stability. So we copied and cloned and as much as we could in terms of processes, all our systems are a copy of what GSK had. They had a huge benefit because it gave us stability. It allowed us to build, do all our external reporting. And when we publish our results, our annual report came out this week in the same time lines as other [indiscernible] that have been in the market for a long time. So now the price to pay for that is that these are in systems and processes yet that probably -- that aren't fit for a consumer type company. So that's the evolution that we're getting into. And I think we had more time than after separation was done last year. to look into that. And I think we're confident to be able to deliver 300 million, and we felt then should announce it with our full year results. So I think it's an evolution and a journey becoming a more agile and faster organization and doing things in a more easier way, which comes at a natural time, separate first. It's gone well. So now I think is the next phase that we're entering now. And I think I would predominantly see this in the other SG&A area. And then I think that gives us then, I think, the confidence and the ability to invest and reinvest in the business in a still a difficult external environment. When you look at conversion cost or cost of goods, I think we've done the heavy lifting with the integrations of Pfizer GSK and Novartis. The 3 companies together had 41 manufacturing sites. We're down to 24% now. I think we've done the major improvement steps on the efficiencies we can get from that. Now I'm not saying there are no efficiencies you can always do, but there isn't another chump change happening on that.

And just quickly before we move on to strategy. Can you give us an update on Russia and whether we're right in thinking that the company is recording sales but no profits from the country? And is organic growth still declining as the reduction in the portfolio is annualized?

So look, I think what we've done in Russia is we significantly -- we're still active in Russia, but we significantly stream ran our portfolio to health care products. We've done that in Q2 last year. We stopped advertising. So I think what we're doing is we're shipping to the demand that pharmacists have. So is there's a demand for a pain product we ship to that demand. And that's what we have continued to do. And I think it's ultimately when we believe that is the right thing to do. Given the portfolio you have and the role we have to play in terms of health and health for our employees. And then I think we're not commenting on profits that we're making. What we have said publicly is that we are making donations. So humanitarian donations plus the support we give to our employees to deal with the crisis, both in Russia and the Ukraine and neighboring countries that are impacted by it. And we were making multimillion-dollar donations in addition to that for humanitarian corcass and we have done that, and we're continuing to do so.

If we sort of switch to our last topic of sort of strategy and sort of starting with channel exposure, one of the key arguments for the Unilever bid last year was based on potential supermarket effication benefits from sort of rolling out consumer health care products into Unilever's distribution footprint. So just sort of wondered whether you think that accessing new channels is something that could materially help Haleon scale up growth?

So look, I think, first of all, -- when you look at over-the-counter medicines first, which I think last year was 5% of our revenue. In the vast majority of the world, you can't sell them in supermarkets. It's just not allowed. So go to Continental Europe, you have to go through a pharmacy France, Spain, Italy. Many of the Asian markets is the same. So you need to sell it through a pharmacist to a licensed pharmacist or a different store that has the license to sell those. For those, for the 60% of our bid. So the only difference where it's in the same channels as the U.K., it's the U.S. where it goes through big retailers, it's Australia. Canada. And in those markets, I mean, these big retailers they buy shelf. So actually, there's a category buyer for the OTC shelf, and that has nothing to do with the buyer that buys the, I don't know, cornflake shelf, right? So I think -- and we have, with the scale now. I mean we have a #1 or #2 position in over 70% of the OTC VMS markets in the world, I think, and that gives us the seat at the table to be seen and to work with Walmart as a strategic customers. And I wouldn't see any benefits from another big consumer group with those customers. Now where you could say there might be some opportunities as in emerging markets. Could you get into more distribution points where don't have these regulations, yes, but I think this is probably in the rounding of the portfolio. And I don't think this could be a strategic driver for a deal because we have to critical mass. And I think for me, the question is always -- and that's why I think the -- why the 3 M&A trends -- the 2 term M&A transactions that we did. So bring it back the 3 companies, Novartis, GSK and Pfizer on the consumer health side made such a difference because it fixed those geographic these gaps we had from a channel geographic geography portfolio that now we have these leading positions and the leading positions, then allow us to build the distribution and the go-to-market network to go and see those consumers, right? As we do on the over-the-counter business, where I think we have one of the world's largest pharmacy field forces, and we're seeing those pharmacists on a regular basis.

Sort of thinking about that portfolio management aspect, we've seen press reports on a potential sale of Chapstick in recent weeks. And sort of thinking on from that, just wondered how the growth of smokers health compares to the rest of the group and whether actually has limited supply chain efficiencies relative to some of the other products that you've got? And then on the other side of that, what would be the key categories, geographies targeted for development via bolt-ons? And how would you think about adding exposure to more volatile or seasonal elements like respiratory?

Yes. Look, I think, first of all, I mean, sort of as a matter of principle, we're not commenting or talking on any speculations there is in the market. So I think there will always be so we just can't comment on that. But you just take a bigger step back from that. I think what you would expect us to do as a consumer company with a portfolio of 100 brands that you would expect me to look at that portfolio of brands, both from a resource allocation point of view, which brands get the resource allocated. But also when you look at the more tail end of the brands, a regular check if those brands are -- we are still the right owner and is it best to keep the portfolio there? Or is there actually a better owner, right? And I think that's -- I think our I have is my team to say, actually, there is a brand that we can't contribute and put the resources to it, is it actually better to divest it. And then you only find out when you start a divest process, you asked for bids if that's actually the case. And the outcome of that might be, you might get a bit that it's actually better. And then you say, "Oh, it's actually better to divest and it's better for shareholders? Or no, it isn't because bids we got are significantly below the keep valuation, then it's better to milk it and accept that you have something in your portfolio that might be a little bit growth dilutive but the earnings and cash you make on it outweighs the potential you could have gotten. And look, we only divested 1 brand last year, a smaller one. That's not enough look at the size. So I think the healthy thing to do and now we have the capacity again given we divested is that we look actively at our portfolio and do that. And I think that's the right thing to do a company with our portfolio of brands. Now looking at where we would go for M&A and add to the portfolio. I think the 2 dominant predominant places that we're interested in this VMS. So vitamins pinasupleents products, given, as you said, 16% of our revenue, can we make that strong third -- stronger third leg in our portfolio overall. And also, this is also the space where there's brands and products available. So when you look at M&A that was done in our categories, I mean the vast majority of that is in that segment. There is very little coming to the market in OTC and other brands. So I think that's also a function of demand and supply in the market. So I think -- so clearly, VMS. And then I think it would be -- what we're also looking at are the local carrier brands. Are there local brands that have a brand recognition as an over-the-counter or maybe as a prescription medicine that we could buy and then use that brand and feed our global innovation pipeline into that so that you that you can sell the brand already using a local brand recognition rather than introducing a new brand name into market. And of course, in addition to that, you have the Rx to OTC switch, BD&L deals and, of course, any business development, licensing, we would do on the R&D side. So that's probably the sort of the priority things as you look at bolt-on M&A opportunities.

And just in terms of larger scale M&A, is that a bit less attractive now that the key gaps have been mostly plugged already. And as you said, it's -- there's more limited availability of large assets basically. And you would be looking more for sort of these more local brands to slot in.

Look, I think there has been very little consolidation in the industry, right? And I think over the last 20 years. It's not an industry that has consolidated much and the synergies have existed 20 years ago, right? So I think in synergies alone aren't the reason to do aren't the reason to do the deal. And I think -- and you mentioned it, Victoria, right? I think the beauty of the 2 consolidation steps we did is it fixed strategic issues we have, both from a category and from a geography point of view. And I think it made us a stronger company at the other end. And I think that's sort of our first and foremost, the lens to look at any potential M&A. And then you have to add if it actually comes up, right? Because I think there is another thing that these businesses or VMS businesses have stable cash flows and margins. So there is quite a hurdle for someone to actually being ready to let go of them as well and which is another reason why there wasn't that many assets coming to the market. Over the last, whatever, 10 and 20 years since I've been in this industry. So I think from that point of view, look, -- we'll see what happens. It's all highly speculative. I think our focus is on the bolt-on M&A side. And of course, if something else comes up, we're a market leader, you would expect us to look at it and assess it. But again, I would assess it the lens that I just described to you.

Cool. Well, we have run over a little bit. So I'm just going to go with the last question. Apologies that. But you brought the leverage target forward slightly of sub-3x now sector during 2024 versus by the end of 2024 previously. Once this is met, are there any theoretical hurdles which could prevent the company from purchasing some of the Pfizer GSK holding like we've seen recently with other companies in the sector, including JDP buying back some of the Mondelez over home.

Yes. Look, I mean, I think bigger step back from it. I mean, right now, I mean, we very clearly said our capital allocation priorities are invest in the business and delever. Then -- and then look at bolt-on M&A and cash return to shareholders. Right now, given the leverage and a commitment to bring down the leverage, I don't have the full menu options available, right? So I can't press all the buttons on the piano yet, right? And I think -- the nice thing is it's a highly cash-generative business. That will not change. So I think over time, we think we're very quickly getting to a point where I can start using all the buttons on the Piano and play. And I think I look forward to that, and that isn't in the to distance future given the guidance we have, right? And I think, look, I mean, when you look across all the other staples, how they drive the shareholder returns, share buybacks and dividends are part of that menu and that just these many options aren't available to me yet. You also seen maybe in the AGM notice or maybe not yet, it just came out this week, together with and the reports, we're asking for share buyback authority. Both a general one, which is pretty standard, but also from Pfizer and GSK. So if funds would be available, then we have the option to do that, which I think should give you, I think, a little bit more confidence that we're really thinking about shareholder returns in aggregate, of course, following those priorities that I just laid out.

Brilliant. Well, thank you ever so much. It's been a great discussion, and thank you to everyone that joined us as well on the line. And we look forward to catching up soon.

That's brilliant. Thanks, Victoria, and thanks, everyone, for your interest. Thank you.

Thank you. Bye-bye.