Haleon plc (HLN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the BNP Paribas Exane 25th European CEO Conference and today's presentation with Haleon. This presentation will take a format of a fireside chat. So after around 25 minutes of questions from me, we will open up the Q&A to you in the audience. [Operator Instructions]. I'm now delighted to introduce Brian McNamara, CEO of Haleon. Brian, thank you very much for joining us today.

Great to be here.

Right. I'm going to start with the topic of split from GSK. It's been almost a year since Haleon has become an independent company. In what ways do you think the organization has changed since?

Yes, this is a great question. And I'll touch on 4 areas, which I think have really helped in us focused in driving the business. First, I'd say GSK was a great owner of the business, but they were a pharma company. And we're not a pharma company, we're a consumer company. So as we look at simplifying systems, processes, decision-making and those kind of things, taking out a layer of decision-making, I think, has really helped speed up how we run the business and how we make decisions. Decisions along Centrum in India or parodontax in India and South Africa. Decisions on resource allocation and how much quicker we can do that as we're really focused on delivering growth in the consumer health business, and Haleon has made a real difference. Secondly, I'd say around focus is, one, having our own resource allocation priorities. For us, it's number one, investment in growth; number two, strength in the balance sheet; three, explore M&A, potential bolt-on M&A; and then fourth, return cash to shareholders. Again, GSK's resource allocation #1 priority was investment in pharma and R&D. So now we have that are completely in our control. Second around focus is we have a board that's 100% dedicated on the Haleon business, and it's an excellent Board. Dave Lewis, our Chairman. We have people with excellent consumer backgrounds and also governance backgrounds. And we're having quite a bit of discussion with the Board on strategy and where to take the business in the future. We just spent 2 days in our R&D facility in Richmond, Virginia with the Board. So I think that focus has been great. And then third is around performance management system. While under GSK, for instance, the long-term incentive of people in the business were linked to pharma R&D performance, shareholder returns on the GSK stock. Now it's completely lined up the performance management system to all our external commitments. Short term is about sales, sales growth, profit growth and cash flow. Our LTIs are now 3-year cash flow and net debt reduction with an ESG underpin. So I think it's created a real dynamic of crystal-clear focus on what we're trying to do as a business and now with the decision-making and resource allocation to go after that.

Very clear. And maybe to continue the same topic, what has been the biggest challenge and achievement personally for you and for the whole management team since the spinoff?

Yes, I have to say that if I think back to the -- just the spin-off, which obviously now happened just over 10 months ago, July 18 of 2022, that was an unbelievable heavy lift. You have to remember, we integrated the Pfizer deal and delivered the GBP 600 million of synergies. And then what we did is we basically cloned and copied all the systems and processes from GSK. We shut down our SAP system across the entire company over Easter weekend. 5 days later, started it up across 24 manufacturing plants and over 100 countries moving into the cloud to give us total control of the new systems and processes. That went extremely well. So I think we were able to separate the business. No business interruption. Obviously, business continuity feel great about the growth in year 1 of 9% organic sales growth, and that continued into Q1 of this year. So I just feel great about the whole process of standing up the company, continuing to deliver for our consumers and customers, continuing to deliver growth. I think the challenge is the downside of doing it that way is you cloned and copied all the systems and processes and policies from where we were at GSK. So I see it as a challenge but also a massive opportunity for us. And I talk about it as the unquantified upside in this business as we streamline and simplify the org structure and the decision-making and the policies and processes, I see that as a massive opportunity. And that's part of what we announced in our full year results that we saw about GBP 300 million of savings that we'd see over the next few years in that. And those savings are real, and that gives us tremendous flexibility on where we want to invest in the business and how much the margin, how much to growth. But bigger than that, to me, that's all about simplifying, streamlining this business, creating a more agile, consumer-centric business as we go forward.

Very clear. I would like now to focus on the consumer environment in your geographies. Are you still seeing relatively favorable elasticities on the back of your pricing actions?

Yes. And again, just take a step back, if you look at our -- how pricing evolved in 2022 and then what happened through Q1 of '23 last year, we were at 4.3% price, 4.7% volume/mix. Now that pricing evolved through the year, 2.5% pricing in Q1, 4% in Q2, 5.5% and 5% plus in Q3 and Q4. Now versus some other consumer staple companies, that pricing is actually less than you might have seen elsewhere. Part of that is we are less exposed to those commodity and commodity related costs, and we take pricing to make sure we're covering those incremental costs, and we did that. Additionally, we're very focused on trying to find that balance between price and volume, and we think that's very important. In Q1, 7% price, 2.9% volume/mix growth. So we continue to see elasticities hold up really well and continue to see the consumer hold up pretty well. I would say broadly across the business, we haven't seen any down trading that would have an impact on our overall growth of the business. Now that doesn't mean everywhere in every category, country combination, there isn't ups and downs in there. And we said, for instance, an example in our U.S. PPI business, which would be Nexium, we took pricing and we didn't see private label follow on many competitors, and we were under share pressure. And now we're kind of clawing that back. But across -- broadly across the categories, we've seen very little down trading and really good elasticities.

And to follow up on the point you made about private label with Nexium, how would you characterize broader competitive environment? Are you seeing any players actually going for volume share by sacrificing near-term profitability?

So again, it varies market by market. So maybe to take a step back. If you look at our market in the U.S., we tend to be a lower promoted business than in -- generally, in some of the categories we're in and then specifically, in our strategy or we compete in categories. So for example, in oral health, we're a much more lower promoted business than many of our competitors. And that's because we fundamentally believe, given we're in therapeutic oral health in the premium segment, solving real therapeutic issues, that the investment in that dental detailing, in that sampling and the advertising and then really engaging the consumer and expert is where we want to put our money and the promotion game is not one that is advantageous to the equity of the brand and what we do. So when we see more promotion happening, let's say, in oral health, we continue to do well and kind of stay above that because this is just not our business model. And then on the OTC side of the business, again, tends to be less promoted, obviously. In cold and flu seasons, you'll see more in-dial displays and things like that. So it will be top of mind for consumers to buy a product. So overall, I think it's a very good competitive environment and said that it's -- we compete in competitive categories to be clear, and we don't take any of those competitors lightly, but we feel like we're really well positioned to compete. And then maybe just one comment geographically. So in Europe, where it's a pharmacy-driven market on the OTC sides, the same thing applies to oral health, where we're less promoted than we're in the premium segment. But in OTCs and pharmacies, you just, again, see much less promotion as these products tend to be behind the counter, tend to be related to pharmacist recommendation, which is another key focus for us.

And my last question focused on more near-term dynamics would be around your full year guidance of upper end of plus 4% to 6%. Assuming a normal cold and flu season, would you describe this guidance as somewhat conservative? And what categories do you think may surprise positively or negatively?

Yes. So listen, we felt really good about our Q1 results and 9.9% organic sales growth. And it's worth -- let me touch on cold and flu a little bit and the impact that had on last year and this year. So obviously, we've seen tremendous growth in the cold and flu side of the portfolio. Now part of that is -- and remember, at Capital Markets Day before we came public, we talked about '20 and '21 and how the cold and flu business was actually quite negative and down because of COVID, because of social distancing and mask wearing and those kind of things. So a bit of that is a bounce back. And a bit of that is also COVID and Omicron becoming more endemic and acting a lot more like cold and flu. So overall, cold and flu category versus 2019 is up about 19% in 2023 in Q1. Now that's not hugely surprising because it's 4 years later and you would expect to see some growth, but maybe a little bit higher. So if you look at our 9% growth last year, if you were to exclude cold and flu, we grew 6%. You look at our 9.9% growth in Q1, if you exclude cold and flu, take it out of our portfolio, we grew 7%. So we feel good about the overall portfolio and where it's growing. Coming out of Q1 with 9.9% growth, we got into the upper end of the guidance. It's still early in the year. We do want to see what happens with cold and flu as the year goes on because that is a bit of a seasonal business. We did assume an average cold and flu season, but I'm going to be honest with you, I don't know if anyone can really define what an average cold and flu season is anymore because of what's happened on the marketplace. So we'll have to see where that plays out. We also know that we're going to see some volatility in the cold -- in the VMS category. And if you really pare that down to what that is, it's really about emergency, which are our immunity brand in the U.S. So that's the one that had tremendous spikes in demand behind COVID, and we saw that negative in Q1. We want to see how that plays out in the year. The balance of our VMS portfolio was up mid-single digits in Q1. So we feel, overall, we're going to be in a good place in the medium term. And then I have to say I feel really good about our oral health business this year, and specifically the innovation that's gone out on Sensodyne, which is performing really well. So overall, I'm quite positive and quite bullish on the year. But at the end of Q1, I think that was the right guidance given there's so much of the year to come.

Very clear. And then moving to your medium-term growth algorithm of plus 4% to 6%. Has your thinking behind the building blocks of this algorithm changed at all in the past year?

Great question. We laid those out, obviously, in our Capital Markets Day a little over a year ago. And some of those building blocks were seeing VMS as mid- to high single-digit growth, seeing oral health is mid- to high single-digit growth, emerging market growth, e-commerce. I think all those building blocks still hold. I think maybe the difference for me is I'm more optimistic about the OTC side of the portfolio. We saw quite a bit of volatility, especially obviously in cold and flu during COVID. And prior to that, the OTC business had done well. But there were some challenges in certain emerging markets, so we said 2% to 3% growth is a category we expect to grow above the category. I think we're seeing more potential growth going forward in those areas. Pain relief, we've seen really good growth. Some of that is linked to seasonality, but not nearly as much as cold and flu to be clear. And we have a really great portfolio with systemic analgesics, pills, which are Advil and Panadol and then topical analgesics, which is Voltaren. And what we see is when cold and flu impacts that category, people tend to take more systemics and they use less of the topicals. So we have a little bit of a hedge in our portfolio depending on what happens going forward. And then fundamentally, underpinning all of that is just innovation, and the innovation we have and the innovation that we feel really good about as we look forward. So...

Very clear. And maybe to zoom in on oral care, in particular, do you think that Sensodyne will continue being the major driver of growth within this business, or parodontax and other brands will become more important?

So first of all, Sensodyne, being the biggest brand in that category, will continue to be a key absolute growth driver. With Sensodyne, as we've talked about, had grown double digits over a 10-year period. And frankly, you could go back further 15 years, it's just been a tremendous growth-driven business. We don't need Sensodyne to continue to grow double digits in the future to deliver on our aspirations for this category. But I still expect it to be a really good growth business in that mid- to high single digit range. But you're right to point out that oral health is just not about Sensodyne. We tend to talk about that a lot. And the things that have made Sensodyne extremely successful really applied to parodontax, which is our gum health business. Because what we talk about on Sensodyne is 40% of people now, in our latest data, suffer from sensitive teeth, just over 1/3 have a sensitivity toothpaste. We are 100% focused on sensitivity plus additional benefits, but we always start with sensitivity. So we come out with products that deliver needs that haven't been -- unmet needs on the market. An example would be Sensodyne Sensitivity and Gum, where we see 50% of people that suffer from sensitivity also suffer from bleeding gums. We developed a product that delivers on that benefit. We do the clinicals. We secure the claims. We have the science. We go to dentists. We secure the recommendation. 70% of the trial comes from dental recommendation. And we've done that on Sensodyne Rapid or now Pronamel, active enamel protection. So that model holds. That model really applies to parodontax, too, where gum health is actually quite a big unmet need out there. And we have the same model. The... [Technical Difficulty] Hello? Okay. Good. So on parodontax, the differences that we haven't had really the capacity, investment capacity, to go after parodontax as big as we think it could be. So I see that as a real growth opportunity as we go forward, and we're seeing double-digit growth on parodontax. And then the third pillar is denture care. And denture care is a great business, we're the #1 player on a global basis. We see innovation really having an impact there. Last year, we launched an innovation that was, frankly, about a stronger hold, but also the way you apply Polygrip to the denture, which helps it -- so a packaging innovation, that helps it apply in a more correct way, which a big issue for consumers on dentures is what you would call food occlusion. When food gets caught in between the denture and the gum, it's extremely painful. And what this product is, really helped and improve that benefit of food occlusion. So we see opportunities across the portfolio, and I feel really good about the categories, the innovation that's coming and what I'm currently seeing in the market.

Very interesting. And maybe to return to the point that you made about VMS, where we are clearly seeing some normalization, at least for emergency. When do you expect to return to your mid- to high single-digit growth trajectory?

Yes. My expectation is that we were negative in Q1. It was primarily driven by emergency and the spikes in demand that happened the previous year. I'd expect to see that business strengthen as the year goes on. And then I am still very confident in that medium-term outlook. I think these are categories that really matter to consumers. They were -- VMS was an area that grew 4% to 5% pretty much pre-COVID as an overall category, I expect we'd get back to that. And then we feel good about our ability to deliver ahead of that based on the portfolio we have, the geographic footprint, the expansion opportunities.

And you also target to grow high single digits in emerging markets, right? Keeping in mind that India and China together account for about half of your EM exposure, can you please talk a bit about your strategy for these markets? And maybe elaborate a bit on establishing your own distribution in India?

Yes. So a couple of things. So China is 9% of our business. India, we've never really disclosed what it was. So it's a bit less than half. I wouldn't say it's quite half of our emerging market footprints. We feel good about China. We're seeing strong -- coming out of COVID lockdown, we're seeing strong tailwinds in China, basically linked to our OTC portfolio, where we had 2 brands, Fenbid and Contac, that were [indiscernible] and ibuprofen brand like Advil, but local Chinese, and then Contac cold and flu business. Those were under sales restrictions during COVID -- zero COVID policy because they were linked to treating the symptoms of COVID. And in a zero COVID world, people didn't want -- the government didn't want people buying products to mask symptoms. So those restrictions were let up, and then COVID actually ran through the country, which created the symptoms which we could treat. So we see really good growth in China where we are now. Very optimistic about India in the short and medium and long term. We have announced that we are ending our distribution agreement with Hindustan Unilever in India. That was part of the deal when we did the divestment of Horlicks there. And what that was is that was an agreement with them that they would be a distribution partner, and we played a flat percentage of sales to get that service. That percentage was higher than we believe we could do it. But we have a business that's growing double digits, and the percentage of sales continue to track with that, which then didn't give us leverage in the P&L. We needed the time, by the way, and Unilever has been a great partner in that. So absolutely no issues there. But it's absolutely time that we build that capability ourselves. The team that was running that full capability before the Horlicks divestment is still in place in India and the GM is still the person that ran the business there. So I believe we have the capability to build that out. And the other piece is, frankly, with Hindustan Unilever, we are competing with them in a number of areas on sensitivity in toothpaste, potentially on VMS. Now we've launched in India, they may have plans to do that. So I think it was the right time to separate and build our own capability. And maybe the last thing I'd say in emerging markets, while I'd say China and India are very important to us in those markets, great business in Southeast Asia, Middle East, Africa, excluding Russia, Central Eastern Europe is a good business. Good business in Latin America. So I feel good about our broad footprint. And specifically, we've seen some real strong growth in Middle East, Africa, when we really had the opportunity now to activate for instance, Centrum, which was in many of those markets. But under Pfizer ownership, they didn't really have the resources and commercial organization to drive it.

And if I'm not mistaken, you are aiming to grow e-commerce double digits as well. Can you please update us on your digital journey?

Yes. So first of all, I think digital commerce from any company perspective is very related to the portfolio you have. So if you look at our digital commerce in 2019 pre-COVID, it was only 4% of our business. And then it's -- as of 2022, it was 9% of our business. So depending if you look at other companies, that would feel like a low percentage of the business. But that's really related to the categories we compete in, because OTC products are quite low penetrated overall on e-commerce. But the difference also exists by market. So the U.S. is 12% of our sales in e-commerce. Germany and the U.K. are in the mid-teens. And in China, were up over 20%. Those 4 markets represent over 80% of the e-commerce sales in the categories that we compete in. I think what's most important in a U.S. review earlier this week, and this was a big discussion is, if you look at our top 20 brands in the U.S., which make up more than 80% of our sales on e-commerce, 18 of those 20 brands have higher shares online than offline. And to me, that's the bigger way that we look at it, which is less about the percentages there. The question is, are we doing better online and offline. As we see it as a faster-growing channel, that's critical. Because as the channel shift happens, it means we're moving into the channel where we have higher shares. So just as an example, Sensodyne is about a 20 share in bricks and mortars in the U.S. It's about a 28 share on Amazon. So as that channel shift happens, we're moving the places with more disproportionate share. So feel good about where we're at. And we'll see. We saw an acceleration of digital commerce within COVID. And when COVID happened, it looks like it has, for the most part, has stuck and going forward. And at some point, I believe that e-commerce will open up more for OTC products. But it's going to be slow in places like Europe, where there's a pharmacy within a couple of blocks of wherever you are. The pharmacist still plays a key role in the relationship with the consumer on choices and that discussion. So it's been less quick to move in certain geographies.

Now Brian, I know you love to talk about innovation. So could you please elaborate a bit on some innovations that you're particularly proud of?

Yes, great. Let me maybe talk about a couple. One is -- I see what we have laid out here on the table. One of the things in vitamins, minerals, supplements is delivery forms are really important. And as you may have seen over the years, this gummy form has become a real growth driver for the VMS category. We have a brand emergency in the U.S., emergencies in immunity brand. And the way emergency works is it's a powder that you would put, let's say, in a bottle of water, shake it up and drink it. It's got a unique flavor profile and a unique, let's say, experience because it's just a lightly carbonated drink. We've launched now in the U.S. just in the last few weeks, a new product called Emergen-C Crystal. What this is, is a waterless form of Emergen-C. So you just open this up and you pop it in, and it has a very unique sensation of low carbonation that you might experience when you use Emergen-C. So it's early days, but we see this as a -- it's doing well in early days, but we see this as a key growth driver and potentially a platform for new -- as a new form of innovation across other VMS categories. If I stick with VMS, we announced in October that we finished a clinical study, and it was among consumers over the age of 65 with Centrum Silver, which is our brand, which is focused on an older consumer. It was 2,000 consumers, men and women. And the output of that 2-year study was that taking Centrum Silver daily helps improve cognitive function by 60% among that population. Cognitive function is a very top-of-mind thing for consumers as they age. We executed that claim in the U.S. market. Centrum Silver is growing healthy double digits off of that, and it's more than 50% of our Centrum franchise. So we also see the opportunity in innovation to think about how we bring what we brought to oral health, which is bringing science to a category where maybe it was less focused on the science to a category like VMS, where we can bring claims that we've done that study on Centrum, so that's ours and we own that claim going forward. The other is on a couple of other innovations, a brand I see here, too, which is PanaNatra. We launched this in Australia recently. Naturals is a huge trend among consumers. And we see it as a faster-growing area than, let's say, medicated OTC in some places. The challenge is how do you create naturals that delivers the real benefits. And as we are a company which is focused on ensuring we're delivering on the consumer promise and the benefits. So we have 3 versions of PanaNatra, which are natural ingredients, the differences are clinically studied and we have claims of -- and the real benefits that go behind it. So this is something we're launching first in Australia. And as we see how it does, we see the opportunity to roll that out in additional markets. And then on Sensodyne, we continue to see great innovation. I probably feel as positive I ever had if I look out the next 3 years and what we're doing on Sensodyne. We launched a new enamel product in the U.S. under the Pronamel subbrand of Sensodyne called Active Enamel Shield, which has active enamel protection and some very strong claims. But we're seeing very -- again, early days, launched in January, but doing really well. A lot of positive customer support behind it, but most importantly, consumer take up. So innovation across the portfolio is going to be a key driver across all of these categories.

Very interesting. And before we move to the questions from the audience, Brian, imagine we are sitting in this hall 1 year from now, and I very much hope it will be the case. What would be the question that you would love to start our fireside chat with?

That's a really great question. So Brian, you look amazing. How do you keep yourself in such great shape? Second question would be on the business. I think it would be just around the continued momentum in the business, the continued strength in the business and how we see the outlook. The update on our productivity program and what we're seeing coming out of that, because I'm quite optimistic. And the ability for us to not only drive the savings that we've committed. But for me, more importantly, how we can streamline and simplify the way we operate, which should, in my view, help unlock even more growth going forward.

So now I would like to open to the questions from the audience. If anyone in the audience has a question, please raise your hand.

Just first, I'd like to know whether you think the balance sheet situation is any sort of a constraint in any way at this point? And secondly, you've talked a lot of -- or earlier about some of the things that have changed in the post-Glaxo world, but you haven't talked a lot about, if you like, your strategy around brand building or your marketing, your advertising profile. And I'd be really interested to know whether you feel that -- it seems to be that Glaxo good at that, but I might be wrong. And they seem to do a lot of, if you like, category building. Certainly in the U.K., they talk a lot about some of the diseases and they try and build awareness and so forth, not just around products but around the need to address things. So it feels -- so I'd be really interested to know whether you feel that there is scope to do a better job around brand building, not least of what you say now around there being claims and real benefits, you highlight more of the scientific aspects of some of your product categories. Does that bring within a different type of education or marketing challenge? So I see it's a [indiscernible] question.

No, no, no. Fantastic. First, on the balance sheet. If you look at our capital allocation priorities, investing growth strength in the balance sheet. I don't think the balance sheet is holding us back from doing anything we need to do to drive this business organically. Obviously, our objective is to get that leverage down below 3 as quick as possible. We started like 4x levered, 3.6x at the end of the year. We've announced that we see opportunities in the portfolio between some divest and some bolt-on M&A, as you expect any consumer company to proactively manage their portfolio. Expect to see divestments before you would see any bolt-on M&A. But it's not constraining us from doing anything we need to do to drive growth in the business. And remember, this is a very strong cash flow business, and that has continued along the way. Listen, we are a company of brands. So brand building is fundamental to what we do. And frankly, GSK Consumer Healthcare and the team that was running that is obviously now Haleon. So that's a continuation. I'd bring out a few examples. I think Sensodyne is an excellent example of brand building over many, many years. I think one of the pieces that I think is unique to us -- and we are very much a consumer-facing company, we're not a pharma company. But the unique thing we've been able to do with the oral health category is bring a bit of that science lens into it and more therapeutic, because we are a health business, but we're a consumer health business. So brands are critically important. But strategically, where we focus, for instance, our strategy on oral health is very care, it's therapeutic oral health. It's in those benefits of gum health and sensitivity because that's where we see the consumer need is and that's where we see we can differentiate. So we made a strategic choice many years ago, pre my time, to not fight some of our competitors on just base toothpaste every day, which is a different promotion game and require scale, and this is where we can be differentiated. And I take that across the portfolio. So in pain relief and Voltaren, which is a brand that was built through Rx-to-OTC switches in close to 100 countries over a 20-year period and launched only in the U.S. in 2020. So investment in A&P. Investment, frankly, and partnerships with agencies and great creative makes a difference. If you look at ROI on advertising investment across all mediums, 70% is driven by the creativity to content as opposed to just the spending per se. So we're very focused on ROI. We're very focused on brand building. We measure brand equities across the business. We know what we want to own from a brand equity perspective across these brands. We have global category teams that partner with the local markets to really drive that into execution.

Yes. My question is about -- with this amazing business, you see returns on capital employed and they don't look that appealing. Maybe is it because of a lack of focus when the company was maybe independent? And then there's a room for improvement, a lot of improvement. Do you have any targets or a clear path in order to achieve better returns as the business should be?

You're talking about returns on invested capital, is that what you said?

Yes. Okay.

I think part of that becomes the -- doing 2 deals over a couple of years period, which was quite heavy investment is so what you see in the balance sheet and what you see tends to be elevated because of those investments. So listen, I think return on investment, return on investment capital, all of this is a very big focus on the business. We believe that the growth algorithm we have will deliver a lot of value and that growth algorithm being that 4% to 6% growth with the gross margins we have, the ability to drive moderate margin expansion, with the ability to invest in R&A and A&P ahead of sales, we believe that over time, this will be an extremely attractive business. And we're very focused on that shift, frankly, from a business that in 2015, the year of the Novartis joint venture, had 11.5% margin. 22.8% margin at the end of '22. GBP 1 billion of synergies delivered, offsetting currency headwinds and divestments that had some negative impact. Now shifting from a business that's more focused on growth and driving that growth opportunity. And frankly, the best way to improve margin and profitability on the business's growth when you have 63% gross margins.

Okay, that's in terms of the numerator, right, in terms of the denominator, the invested capital, that's also with the deleveraging and capital allocation room for improvement?

Yes. Yes, of course. And as I said earlier, deleveraging and strengthening the balance sheet is our #2 capital allocation priority beyond the investment in growth, and that's a very big focus for us and the team. We realized that 4x leverage was quite unattractive. It held back quite a bit of investors. We know we need to get below 3 as quickly as possible, so it's a big focus for us.

Thank you. We've run out of turn for today's presentation. I'd like to thank Brian and investors in the audience for joining us today.

Thank you, Mikheil. It's great to spend time with you.