Haleon plc (HLN) Earnings Call Transcript & Summary

Thanks very much for joining for what I think is going to be the last sort of fireside chat today. So delighted to be joined by Tobias Hestler, CFO. And just, I guess, the history here, Haleon, out of GSK a year ago, sort of consumer health business, the first big one of those to come to market or obviously we since have followed.

So just to start with topline growth, how we should think about that, the extra medium term? So last year, when you set out that 4% to 6% organic sales growth target, I think it's fair to say there's a degree of skepticism. You came in well off the top end of that last year. You're guiding to come in off the top end of it this year. How much visibility do you have on growth for next year? And what would have to happen to your structural growth medium term to be in the top half of that 4% to 6%?

Thanks, Iain. So I mean, first of all, I would say I'm really pleased with the progress, and I think you mentioned the strong results we've shown and I think through, I think, if you call macroeconomic environment overall. And when I think back about 1.5 years ago when we had the Capital Markets Day and then we went on roadshow after that, there was a lot of debate and people challenging us, where does the 4% to 6% come from? Can you even do 4% sales growth? We don't believe you can even do the low end of that range. And I think that -- I think we've delivered -- we've shown with our performance, strong results. And I think that debate now, I think back about the conversations we had with many of you over the last 6 months, it's really moved in, what does it take to do 5% or 6%, to be in the upper end of that range rather than the lower. So I see really strong progress on that, and I'm very -- I'm very pleased with that. Of course, when we look at a little bit the components of it had a little bit of helpful price. I mean, it's an environment that is higher it historically has been. But I think what I could point mostly to is, I think, one, restoring volume growth. We've driven consistent volume growth in that business growth last year. And also in half one of this year. And I think that's founded in our belief that's the best thing you can do to brands that we have. You maintain the trust and the consumer and you stick with the consumer. And we've priced enough to keep the volume going, and we didn't want to go into a double-digit price increase and the single-digit volume either. And I think we've executed well on that, which is fantastic. Then of course, we got a bit of a tailwind from Respiratory, and then there was early in the year, China for COVID, 180-degree turn-in policy that our team on the ground did a fantastic job capitalizing on that opportunity. It was a prolonged cold and flu season in the U.S. But other markets weren't that strong. So I think that probably added 2 points of growth in the first half year. And now in the second half of the year, we've guided to 7% to 8% for the year. Second half of the year means -- that means 4% to 6%. So I think, very well in that long-term algorithm for the remainder of the year. And I think longer term, 4% to 6%, I feel very confident that 4% to 6% is the right range. Why is it 4% to 6%? Because as a part of our portfolio is Respiratory, which is allergy and cold and flu, which is a bit more seasonal. So having a lower point in the range protects a bit against the downside from a lower season. But overall, I think the strength of the portfolio is coming through. That -- we've done well on oral care, we've done well in the pain relief business. And I think that's what you've seen in the results. And from a geography point of view, 1/3 of our business is in the emerging markets. Those have been growing high-single-digit, double-digit at times. And I think that also helps us for us land in the 4% to 6% overall growth algorithm as well.

And just a bit more granular in terms of the drivers of that growth, we will go through your main categories, OTC, VMS, oral care. Where is the growth coming from? Is it penetration or geographic rollout? Or is it premiumization? How does that differ? And how should we think about just the balance between volume and price mix?

Yes. So I think if you look at price volume, I mean if I look back to the pre-COVID days or over what's happened in that business over the past, I don't know, 10 years. And also when I look forward, and I think we're going to get back to that, what we think it's been a balance between price and volume. So let's assume, we shoot for a 5% growth overall, 2-ish percent from price, 2-ish percent from volume. I think that's a healthy sign of the business, because I think we're able that products to take price either through innovation, but also I think some of our products are less price-sensitive. So we should have the ability to take price versus strength of the brand. And also the health care nature of the product and the healthy business should also grow volume because we're driving penetration, we're driving geographic expansion. And when you look a little bit where that is, I mean, I think when you -- in the oral care space, there's a lot of penetration opportunities. I mean, our biggest products are Sensodyne Sensitive Teeth, 45% of the world's population has sensitive teeth. Only 30% of those use a sensitivity toothpaste. But there's a huge penetration opportunity just about trading awareness of the condition. And actually, there is a very simple solution, all you need to do is change the brand of your toothpaste to Sensodyne. It's not a lifestyle change that you need to drive, right, which is much harder to do, change the brand of your toothpaste and you solve your sensitive teeth issue. And I think that is, by the way, it's also visible. You start using Sensodyne, it works within a few days. So if you could Rapid, it works immediately. And it solves, right? Until you create trial, people use it and they see it works. And then I think that penetration opportunity is there globally. And then the second biggest brand we have in oral care is Parodontax, bleeding gums, gingivitis. That is a global phenomenon as well, but it's a brand that we properly activated maybe in the dust market in the world. So there's a huge geographic expansion opportunity by investing in that brand and taking it into a few markets. So that's a true example. So when you look at Centrum. We've taken Centrum in a test launch to India last year in Amazon, is doing very, very well. We think some of the emerging markets are ready for -- are ready for some of these brands. So I think that's again geographic. And in Europe, it's more activation, using our strength. And pharmacies is one of the world's largest field forces going to pharmacies, educating about the brand. The brand has been there, but it's probably not been fully supported from a sales force and from an A&P point of view. So it's a mix of that. So you get a bit of price, you get volume, geographic expansion, and I think penetration opportunities that I think drive the overall ability to grow 4% to 6% in the longer term.

And can we talk a bit about cold and flu, which you sort of touched on. It's clearly been a big driver of your growth this year, that you've got some tougher comps coming up in the second half. How should we think about last year's flu season versus a normal season? Or do we even know what a normal season is these days? How is this year looking and when will we know a bit more?

Yes. Look, I think there has been -- first of all, there's been an enormous focus and probably way too much focus on respiration, cold and flu. Because through COVID, we had this massive minus 50% and then all the business coming back. So of course, everybody focused on it. And I think we're finally probably getting back to a place where I hope we can talk much less about cold and flu because now it is in the mid- to high-teens percent of our business. I mean, it's not that big. And it shouldn't and it will not fluctuate that much. So I think it's going to come back to the normal plus/minus 0.5 point to point. It's not this fundamental shift. So what we've done is, I think, in the guidance for this year, sort of 4% to 6% in the -- for the second half, that gets us to 7%, 8%, we said in the second half, we expect cold and flu to be broadly flat. We expect volumes to be down, offset by -- broadly offset by price. Why are we saying that? Because last year, late in December, we had a very early spike of a cold and flu season in the U.S. That's unusual. That happens every few years, but not every year. That's the -- season picks off that early, plus, we had the China COVID policy chain. So there was this explosive growth very, very in the year. And our assumption is not -- is that -- this doesn't repeat. Now that's the financial planning assumption. From a supply chain point of view, I'll make sure there's enough inventory. So if it happens, there is enough inventory for restocking at that point. And I think it's much better to tell you guys what we see the financial planning assumption is because I don't know what the season is going to be. I have no idea. All I can do is I can plan from a supply chain point of view, as the team around having enough goods that when it's a good season that we can supply them to the market. Now what's still in the base that we have to work through is out-of-season use for our cold and flu products. So last year through the summer, it was Omicron having a lot of cold and flu-like symptoms. There was higher use of cold and flu products that you would normally have in the summer season. That has gone back now to pre-COVID levels. So after Q3. This is out of the base as well for next year. Then we have to see where the China business lands because there was explosive demand ended in contact and all these products. We have -- it's probably taking a few months to see where the inventory levels land on that we have to work through. And then I would say for the next season, of course, we won't have a repeat of the China fund and COVID demand. But I think things are, I think, very much settling down that we're back to the normal variability of the cold and flu business going forward.

Perhaps moving away from couple a little bit, just think in more general macro visibility, the moment is great. How discretionary are your categories? Are you seeing any signs of down trading as consumer wallets get squeezed. When might we see consumer behavior change first, I guess the perception is the VMS is perhaps amongst more vulnerable but [indiscernible].

So I think, I mean, more broadly, I mean, I think our categories are very, very sticky. And why are they? I mean, you deal with health care and you deal with a health care problem that you or someone in your family has. So something hurts, something ache, you have a runny nose, so there's a problem you're dealing with, yes? So you want that problem solved. And secondly, our products are not in your daily, not in our weekly, not in your monthly shopping basket. You hopefully buy an allergy product once a year, maybe twice a year. a respiratory product once a year, if you have kids in school, in Kindergarten, maybe several times a year, but it's not in your daily shopping basket. And what you tend to do when you have a health care problem, you go to what you know and what you trust, yes. And look, if I'm sick, I have a cold and flu, I go back to what my mom gave me and I don't know what happens when your wife calls you and say the kids are sick, you're probably going to bring exactly home what your wife is going to tell you and not what you find on the pharmacy shelf and you bring [ $0.50 ] cheaper that's my assumption, yes. So you go back to what works because you're dealing with health care and you're dealing with the health of your last ones, and you want to be sure that it's the things you know that work. And then also when you look at how these products are sold in Europe, we're not standing in front of the shelf. If you go into a pharmacy and the pharmacist recommend something to you. So you're much more likely to take what the pharmacist recommends you. And you're very unlikely to ask the pharmacist, do you have something that's as good, but it costs a euro less, I think, you have a decision that you might make in front of a shelf, but in front of somebody in a white coat, also less likely. So in the categories we're in, less discretionary overall from my point of view. And that's what we've seen with the data, right? And the U.S. actually would be the perfect place in OTC, there's private table everywhere on shelf. We've not seen private label shares change in the U.S. throughout the last 12 months. On the contrary, actually, private label shares have decreased and branded products shares have increased. So there is no -- although there is an option that is significantly cheaper, consumers have not taken that. And I think the reasons are what I just explained earlier that you want to deal how is the problem there that you have. And I think, look, I mean, you're also not seeing this on, I think, products like Centrum which is a multivitamin or Calsid, which is a calcium deficiency product that we have at China because ultimately we're dealing with basic health care needs as the population has on vitamin C with emergency, which has come down. That is probably more related to COVID-related demand and less -- has less to do with discretionary. Now having said all that, we watch that very tightly. I mean we know consumers are under pressure. They have less available income. But I think so far, we've not seen big changes. I think it's really more working through the base of some of the VMS and the respiratory topics that we just talked about.

Well, perhaps moving on from top line then, talk about margins a bit. So gross margins of 60% plus you should get a pretty decent amount of operational leverage from the sales growth you're doing, and that's sort of targeted 4% to 6% medium term -- how do we think about the balance between reinvestment and letting that drop through midterm, medium-term margin expansion? And then specifically on this year, how come you seem to be guiding for sort of flattish margins this year despite very strong sales growth?

Yes. Let me start with the second question first. I mean what we've guided to for this year is 7% to 8% topline growth -- organic topline growth, and 9% to 11% adjusted operating profit growth at constant currency. So that gives you margin expansion for the year at constant currency. You might have noticed we changed the way we guide. We made that change at half a year. I think in hindsight, probably something we should have done much earlier because we try to guide to absolute margins. And then I think you have the roller coaster of currencies, especially with the progress of sterling, strengthening that just created more noise than it had to. So I think, yes, we're delivering margin expansion at constant currencies this year. And that, I think, is exactly what we have guided to in our medium-term model, yes. Now then, of course, this year it's still a little bit unusual because we had earlier in the year, so the tail end of higher inflation coming through, we have higher labor cost inflation, given the labor cost environment and the salary increases we gave to our teams. There was quite some swings in demand. Like when the China situation happened, I mean, we've been around the factory 24/7, brought in additional people, had air freighted in active ingredients and stuff in order to move the demand or -- then there was for a while, no children's product in Canada on respiratory and on pain relief product. We got approval from Health Canada to use European products, so we charter airplane and flew that stuff over. So doing all the right things to meet unprecedented demand, using more contract manufacturers and all that, which also was a little bit of a drag to March and that -- but ultimately, we do the right thing because we help our consumers solve their health care need, and I think that's a role I think we play as a company, and that's very much on our purpose. And then I think your question about reinvesting in the business. So I mean, ultimately, if you want to reinvest -- you want in the business to drive growth, because I think there's growth opportunities. I mean, I mentioned Parodontax earlier. Can we activate that product in more markets? Can we take more -- can we do more geographic expansion of some of our products? And that's where we want to -- that's where we want to invest. And I think there is enough ideas and areas in the business where that investment can go.

And I guess you talked about your purpose earlier. I mean, more generally, we've seen a number of companies sort of step up investment in ESG areas in recent years. It's increasing focus for investors, especially in Europe. How do you feel about your own sort of positioning on ESG metrics? So those areas you'd like to be doing more in? Or how do you think about that at the group level?

So I think, I mean, first of a all, I think we're in health care, right? I mean everything we sell serves a very clear purpose, which is taking care of all of our health, right? It's all a healthcare need, right? I mean that's -- I mean, very much a role we play in society. And then providing that as a self -- as a self-care product. You don't need to go a doctor. You can go into a pharmacy, you can go into the store and buy that. So you can take your -- you can better take care -- better take care of your own health and of your loved one's health. So I think that's very much on purpose. Then I think we want to -- I think we're investing is one, I think there is -- we want to provide better access to health care to about 50 million people, so health inclusivity. And a lot of health inclusivity, the barriers are education, educating about these products. And I think we believe there's a lot we can do in that space that we explain to people disease or condition awareness. What can you do and what benefits that has to you as a -- when you take better care of your health? So that is a clear focus for us. And of course, we have the environmental targets, I mean we have a very good starting base. I mean, in terms of, of course, the products we make, I mean, we don't sell half liter bottle of shampoos, right? I mean, all the products we sell, you don't start a rushing cycle with them, right? So I think we -- I mean, the amount of -- of carbon that our product's rate is already relatively low, also the amount of plastic. But we said, I think, very strong reduction targets both on carbon, on plastic reduction, on recyclable -- on recyclable toothpaste. And I think we're making good progress on those. And then I think also on governance, I think we put the right governance in place as an independent company. Now there's more work to do with all the ratings, with all the indices because we're a new company, so we need to start publishing all our results, then external companies can rate us, grade us. That work is still underway. And I think that every one of those rating agencies or groups or associations or whatever they are, they're different mechanics. And I think we still need to work through that, and that will take a bit of time until we understand on what they want until we put the right data out there that needs to be published. So that is underway as we speak. And then by the way, just I think from a, I think, very focused on that as a team, so our long-term incentive structure have an underpin on the ESG criteria. So we don't get paid for delivering ESG. But if we don't meet our ESG criteria, long-term incentives get significantly reduced. And that is something investors have played back to us, that they thought this is a, I think, a new and unique structure that we put in place because we think delivering on the ESG targets is table stakes. And we as management have committed to doing that. And if we don't deliver on it -- then if we wouldn't, then the long-term incentives would be reduced, but there isn't sort of a positive figure or getting extra paid if we do that.

And perhaps turning to the balance sheet. So you spun out of GSK with a reasonable degree of leverage, to put it mildly. Can you sort of remind us on the progress you've made on bringing debt levels down? How quickly should we expect you want to delever from here? And how much of a focus is it for you and the rest of the management team?

Yes. I think European investors told me it wasn't reasonable, around 4. So I think -- but so we spun out at around -- around 4x leverage. Now I mean, we take a step back and say every company has gone through major M&A activity, which ultimately that was, has had such levels of leverage, and we deleveraged very quickly from that. We deleveraged 3.4 in less than 12 months. Or if you look at it in absolute terms, we took GBP 1.2 billion of debt out of the company between the 18th of July last year and the 30th of June in this year. So absolute strong progress made on the delevering, and I think this is a very cash-generative business. We said we're going to be below 3 originally by the end of '24, we've upgraded that earlier in the year during '24, and we're very much on that track. So you should expect us to be below 3 during 2024. Also, we announced recently the divestment of a tail brand. Also, we'll use that to pay down -- to pay down debt. So very much on track to delever and remove the 3 before the come on the leverage, which is a concern, I think probably, mostly from European investors, much less than here in the U.S. So it's not a topic here and a much bigger topic in Europe.

And then just in terms of GSK and Pfizer, they're still pretty substantial shareholders in Haleon. Can you perhaps remind us how much they own? What is lockup period and what they've said about their intentions? Whether you have any flex to assist with any participation if that [indiscernible] the stuff? Yes.

So Pfizer owns 32% of the company. That's unchanged. So that's the same stake there as before as a joint venture partner and as we listed. GSK was holding close to 13%. They sold 2.6% of that and updating they did, I think, back in May. So they're now 10.3%. So they did the first -- the first step of -- of selling some of the stake. There's no lockup. So they can sell. Of course, they don't have to ask us, it's their choice. They can help us, they can ask us to help with many marketing activity. They committed to do this in an orderly fashion. They do it jointly, so they need to inform each other. And then the other part, you can say, participate or not. So that's what happened in May, that GSK said they want to do it, Pfizer said, we don't want to. So GSK did it by themselves. They both said that the stake isn't strategic. They want to monetize that stake over time. And they both said they're going to do it in a, I think, very organized fashion and maximizing value. And I think that's exactly what GSK did. They did that placing at a very low discount. I think 2.4% was the discount. And I think sort of -- they've done exactly what they said they would do. And by the way, also how I experience both of these companies and then working with them. So I would expect them to calculate exactly where that is, maximizing value and do that over time and their decision when they would do this. And they think I would expect them to do that over time because it's clearly not strategic for either of them.

And then just moving on, I suppose, this time last year, we probably would have been discussed more Zantac at length. We haven't mentioned it at all. Do we -- do we need to talk about it? Or is that kind of all in the rearview mirror?

So look, I think for me, it's in rearview mirror, right? I think it caught us just 2 weeks out of the gate as an independent company. I think at a time when we didn't have the time to do, I think, a, educate the market about where the legal topics are. I mean we're in health care, so that there could be a little case here or there. It's not unusual, especially in the U.S. litigation environment. But I think we're very clear on Zantac. We don't think there's any risk exposure with -- there's no liability to Haleon. And I think the primary cases and those we can't be pulled into anyway, those are also progressing, and you've seen some big cases that have been thrown out like the multi litigation in Florida. But you've also seen as earlier in the year we settled another legal matter, the proton pump inhibitors for a de minimis amount. So I think that's usually what I'm used to that. You might have a case here or there, and at some point, you decide to settle it. It's actually better settling than just making law firms rich than trying to fight it. So I think, look, overall, I think the legal -- the risk exposure in the business we're in is relatively low because, I mean, what are we selling? We're selling products that have been on the market at the prescription product for, on average, 15 years before the patent expires. Then you go into a very, very intense dialogue with regulatory agencies, the FDA in the U.S., that you need to convince that it's safe to put the products on the free shelf for a consumer to pick that is safe for U.S. consumer to use that. And then the regulatory hurdle is very, very high. So there is one, the data points for 50 years of use as a prescription product. And then another very, very strict regulatory procedure. As a result, the risk exposure comes down massively. And so I think I'm not concerned about the -- the risk exposure and the legal cases. And I think [indiscernible].

And just thinking about that category, that sort of -- I mean, I guess, consumer health is highly fragmented relative to other consumer type of categories. You are seeing consumer health companies come out of their sort of pharma parents, I guess. Does the space still need consolidation, in your view? Or is consolidation likely longer term? And does Haleon have any ambition to play a role in that? I get all -- Haleon done it's consolidation with the [indiscernible].

Look, I think oral care is already highly consolidated, right? With the third largest player, I think the top 5 in the industry have a 65-plus share. So I think no. And then where you have the fragmentation is on OTC and on this, of course, very vast vitamin, mineral, and supplement space. Now, I mean we've been in the consolidator industry with Pfizer and GSK [indiscernible] transaction retail. But the reason we did that is because all these 3 businesses had strategic gaps. They have strategic issues. We had both from a geography side and from a category side. And I think the combination we did was a little bit like the dream combination because these businesses fit together like a glove. They -- the geographic strength and weaknesses were totally matching, and it gave us the #1 position in the U.S. It gave us the #2 position in China from #30 and #56 position. It gives us an entry into VMS, where Pfizer had a good base. One of the higher growth categories, made us the #1 in the biggest configuring in OTC. So I think it solves sort of the strategic issues and gaps. So where we are now, we don't need big M&A to be successful. Now if there's an opportunity coming up, would we look at that? Of course, you would have add us as a market leader to look at it, or definitely get their synergies. But it doesn't necessarily mean that the business can grow more and is a better business at the other end. So from my person of view, we don't need it. If the opportunity is there and without limiting the expense, we would look at that. But don't forget, there's been very, very little consolidation in this business because the synergies where they are 15 and 20 years ago, it didn't happen, right? So synergies alone aren't a reason to do a bigger transaction. And then there's a little bit of bolt-on here and there, but I don't think that -- I think that is icing on the cake when you got a brand. But even there, the bolt-on deals in our industry is rather small. It's not -- this is not an industry with a very huge amount of M&A activity. So I think we have lots of internal growth opportunities, how we can grow that business. We feel good about that, and then the rest to be seen.

Perhaps lastly from my end. Haleon is a relatively new company. It's just over a year, you spun out. How are things different now you're an independent business? What does that mean I guess, operationally, but also culturally in terms of the company?

Yes. Look, I mean, I think it's -- first of all, I think spinning out the company, I think hopefully creating a new subsegment in the market, right? You mentioned earlier, Iain, we were the first one out. [indiscernible] is out now, Sanofi internally separated. They might go up. Let's see what they do. There's the whole rumors about what buyer might do. And I think it's positive that there's more companies going out and doing that because I think there is hopefully, a new subsegment that is being created in the market with consumer healthcare companies, even if the portfolios aren't the same, but it just helps, if there's a second or third or fourth company that talks about over-the-counter medicines or about pain relief and educates because we have a big education work to do. And look, I mean, we started probably 3 years ago, and I think we're far from being done about educating about the space that we play in because [indiscernible] on the pharmaceutical companies. And for the valuation of the pharma company, it didn't really -- you didn't have to have that granular understanding of what consumer health care businesses are. And I think we're still on the journey of doing that. I think we made a major step forward, but there is more work to be done. And I think more people in the industry doing that will help on that. And then in terms of spinning out, I think, look, there is -- in the first year, from my perspective, has gone well. I mean, we focused really on stability, on being able to -- learning how to walk, putting up what the report out during our first annual report, all of these things are very, very important to do them for your first time to start with a white sheet of paper. We've done that. But we've also -- we copied down a lot of systems, a lot of tools from GSK. So I mean it's created many copies. And I think -- and but that is not what we want to be as a company. So there's an evolution now to build on the strength of what we have and making that more agile, a more quicker company. And they think that's the next phase of life that we enter, and we're in the middle of doing that, becoming more agile, becoming quicker, becoming faster. And of course, sales have been good. So that was very, very pleasing. So the business results are good. There's learnings, like I mentioned before, and how we guided on profit or margin. There is -- there are skills we didn't have. We didn't have hedging skills, because that -- it didn't come across from GSK. We had to build those. So there's stuff we have to do, and that's the new company that we have -- we had to do, and we made really good progress in that. And we have a board that is entirely dedicated and is very diverse. On the consumer business, I think very different discussions that the Board have compared to what I was used to before, because you have a group of consumer experts sitting around the board table, which I think are deeply engaging, challenging us, bringing different points of views from the other areas, and we think that is fundamentally different than before. So look, lots to be done still. But I think -- look, I think we're really pleased about the first year-plus now that we've been independent.

Right. Thanks very much. Well, I think further 30 seconds left, probably not the time for a question in the room, but I think we'll get it break out and continue talking later. So [indiscernible] you want to do join and break out -- thank you very much.

Thank you.