Haleon plc (HLN) Earnings Call Transcript & Summary

Thanks very much, everyone, for joining us. Great to be here at the Boston conference. It's also great to have with us Brian McNamara, Haleon's, CEO. So thanks very much for making the time to join us this year, Brian, it's brilliant to have you here.

So I'm just going to get straight into it. So when we look at Haleon, that 4% to 6% organic sales growth target. I think it's fair to say there was a bit of skepticism when it was announced back in early '22, but you beat it that year, you beat it last year. What are the building blocks to that 4% to 6% top line growth algorithm?

Yes. First of all, you're right. I think the biggest questions we got in the beginning, when we did our Capital Markets Day in February of 2022 was how do you deliver that 4% to 6% growth. And I understand the skepticism because the business that we took as Haleon wasn't really created until the deal with Pfizer was done in 2019. So we only had 2 years of track record, and they were COVID years, which had certain headwinds and tailwinds. So it was very hard to unpick that. So I feel great about the way the company performed in 2022 and in 2023. And as part of that, in both years, the first year was roughly 4.5% pricing, 4.5% volume growth and the second year, 7% pricing, 1% volume growth. So we've been able to keep volume growth in the -- as part of our growth algorithm. And when I think about the building blocks, they really haven't changed since 2022, where we said we believe these are categories that will grow 3% to 4% with Oral Health growing 3% to 4%, but we compete in therapeutic Oral Health as a higher growth kind of subsegment of Oral Health and that we would grow mid- to high single digits. That VMS was a 4% to 5% growth category, and we would grow ahead of that. And I think there's been quite a bit of ups and downs in those categories. And then OTC, we felt like it was a good category where we could drive growth. I think one of the things that became obvious over the last couple of years is a bit of the resilience of the portfolio and almost the natural hedging we have in the portfolio. So if you look at what happened in the last couple of years, you saw really strong growth in VMS and you saw cold and flu were quite down. Then you saw VMS kind of retracting to the mean and you saw cold and flu really driving and pain relief driving. Now we're back to VMS with really healthy growth and with and with Oral Health during that entire time, just maintaining a really high level of growth. So we believe that 4% to 6% growth, very confident in that over the medium term. We've obviously reaffirmed guidance for this year at 4% to 6% growth. And one of the things that does give me confidence is the performance of the business from a market share perspective because we're growing market share, maintaining or gaining share on 69% of the business, really a healthy number. I don't necessarily think we'd maintain that number forever. But I've always said above 60% is a really good place to be and where we want to be. So I feel good about the future and the categories we have. I think the other big learning for me is the resilience of those categories, health really matters to consumers and in health, brands really matter. And I think that's played out throughout the year.

And just digging into Oral care a little bit more. So Sensodyne has been a key growth engine for years. Is it fair to say that's now maturing a little bit? How should we think about Sensodyne growth going forward? And how much runway does Paradontax have and how much of the slack might it pick up?

Yes. To step back and you look at our entire Oral Health portfolio, you're right, we have Sensodyne. It's our biggest brand in the company and in Oral Health, Paradontax and then the Denture Care business. And then we have this Aquafresh business, which I would say is less strategic in the sense it's not therapeutic Oral Health, but also has a great kids franchise that we see really good growth opportunities on. So I believe there continues to be runway room for Sensodyne and even more runway room for Paradontax. And I think it has to do with our model and the focus on therapeutic Oral Health. And the model I've talked about, it's very simple. We identify unmet needs. We develop a product that delivers on that unmet need. We then do the clinicals and do the studies to get the scientific support, then we go to the dentist. We get the dentist recommendation. And then over 70% of the trial in this business is driven by that dental recommendation, and we're roughly 80% of the markets we compete in, we're #1 recommended. That has really worked. And the way the model works is every year, we do a big launch. This year was Clinical White, and I want to touch on that in a second. Before that, it was Pronamel Active Enamel Repair. Before that, it was Sensodyne Sensitivity & Gum, before that rapid Repair and Protect. So that model really works, and we roll that out. On -- Clinical White is doing very well in the market. And whitening was a very strong kind of subsegment of toothpaste, but we weren't a big player in whitening. One of the reasons is whitening products don't tend to be very good for enamel health, gum health or sensitive teeth. So we did the work to create a product that's clinically proven to go 2 shades whiter and still deliver the sensitivity. I was in Chicago a couple of months ago, and I was in ride-alongs with my sales team. By the way, they introduced me as Brian from headquarters, not the CEO. So we didn't get any bias from the dentist. To a dentist, they said they don't recommend whitening products because of the harshness of them. We took them through the data on Clinical White, they said we absolutely recommend this. So we're seeing that play out, really great growth. It's in 10 markets now. We're going to continue to expand that out. And as I look at the pipeline, for Sensodyne over the next 3 years, it's probably as strong as it's ever been. So I still really see that runway room. And then gum health is actually a much bigger category than sensitivity. And we just haven't really had the capacity under previous ownership to really invest and drive that and now we do. So we're seeing -- this year, you're seeing really strong consumption globally and share growth on Sensodyne of high single digits. You're seeing teens consumption growth on Paradontax and the net sales coming through corresponding to that.

Cool. And turning to VMS. I think half of Centrum in the U.S. is now Centrum Silver with those specific claims around delaying cognitive decline in older consumers. It seems pretty extraordinary considering you only really got going with those claims pretty recently. So what are the learnings from that in terms of how clinical claims can just help drive VMS growth?

Are you using Centrum Silver?

Not yet. But I live in hope.

Okay. That didn't really land so well, but I thought it was quite funny personally. But -- okay. So listen, Centrum Silver, by the way, has been on the market in the U.S. for 15-some-odd years. And the claim is new as of a couple of years ago. And again, it was a clinical study of 2,000 consumers over a 2-year period of age 60 and older. And the output of that was using Centrum Silver daily increases cognitive function by 60%. Then another -- we have 2 more studies that came out since then, the latest a few months ago in partnership with Harvard Medical School. So real credibility behind those claims. So what we're seeing is that in a category that isn't as science based, it's not a problem solution category in the sense that if you have pain, you take Advil and your pain goes away, you feel the immediate benefit. You don't necessarily feel the immediate benefit of taking vitamins. So we think it's really important to, one, have the credibility in the claims we make and have the clinical studies behind it. Centrum is a unique asset. It is the most clinical-studied vitamin in the world. It's also really the only global franchise within the VMS category globally of any competitor. So we believe that this opportunity to bring more clinical claims on real consumer insights and unmet needs is a big idea. So we have other things in the works. Of course, they take time to do. And frankly, with clinical, sometimes they work, sometimes they don't work. But when they work, you can see the impact of that. So we're seeing it in the U.S. where we're seeing really healthy growth on -- and share growth on Centrum. We see it in China. We're rolling it out around the world. We think that will have legs for a time, and then we're working on other things and other claims that we can bring to bear across the franchise. Because, again, in a category where there's also a lot of small players who kind of fly below the radar screen of the FDA, there's lots of claims and stuff that out there that aren't as legitimate. So we think really legitimizing the category, something that we can uniquely do and uniquely invest in.

That's good. We can go a bit more short term then, I guess. You did 3.5% in the first half. So we need a bit of an acceleration in the second half to get you in that 4% to 6% organic range for the year. What are the moving parts of that? Is Q3 on track? And you had negative volumes in the first half. Is it fair to expect positive volumes in the second half?

Yes. So a couple of things. I mean just to put the first half in context, there was quite a bit that happened a year ago in the base and just seeing everyone grounded. So I'd say a couple of really big things. First, in China, the COVID -- Zero COVID policy ended at the end of 2022, and that had 2 impacts on our business. We have Fenbid, which is the #1 Western pain reliever, ibuprofen in China and then Contac, which is a cold and flu product. They treat symptoms of COVID. So during Zero COVID, those products were on sales restrictions, which meant -- if you were to buy that product in a pharmacy, you needed to register, someone would show up to your house and test you for COVID. Oddly enough, that was discouraging for people to buy the product. So when Zero COVID went away, sales restrictions went off and then COVID went through the population. So Contac and Fenbid at the first half of 2023, both doubled, all right? Demand was tremendous. Team did a great job, by the way, reacting from a supply chain perspective to meet the demand. So that was one thing that was in the base. The other thing that was in the base was just generally a high cold and flu season. And then in Canada, it was a drug shortage on children's pain relief and cold and flu products. We worked with the Canadian government to help fill the gap on that drug shortage, even shipping product -- getting approval to ship some of our U.S. products into Canada, and it was quite a high base there. So we have those couple of things that, let's say, muted the first half growth. The last was we did see inventory reduction at retailers and broadly in our U.S. business. We saw about a 1-week reduction in retailer inventories, whereas such we would classify as normal levels and even pre-COVID levels. We don't think, by the way, that's going to come back. We think that's there to stay. The inventory is out. We feel like that's stabilized though and very manageable as we go forward. So those things are no longer in the base and to just give you a sense in the U.S. business, while we didn't see growth in the first half, we did see consumption growth in about the mid-single-digit range. So we're confident as we get in the back half, you'll start seeing that growth come through. Absolutely expect to see volume growth in the back half. And we were 3% growth in Q1 with minus 2% volume, 4% growth in Q2 with plus 0.7% volume. I'd expect to continue to see that trend go in a positive direction. And as we sit here now, nothing has changed since we gave our guidance in just about a month ago.

Cool. Well, just digging into the U.S. consumer. We're getting some pretty mixed messages around how that's holding up at the moment and some other consumer companies are coming under some pressure. So I'd just be fascinated to hear how resistant you think your categories are in the event of a consumer slowdown? And also what you're seeing at the U.S. consumer at the moment?

Yes. We see the categories that we're in as pretty resilient. And I think there's a couple of factors that drive that. So one, if you think about our Oral care business, and we do play in a premium segment of Oral care, what we see is because a lot of people join the Sensodyne franchise or the Paradontax franchise through a dental recommendation, it makes it quite sticky, and it works, and people aren't willing to walk away from something that works. And then as we see, as we drive innovation like Clinical White, we're continuing to bring more people into the franchise. So we're not seeing any dynamic of down trade or movement in that category. And in that category, there is no private label to speak of in the U.S., but even globally, it's like 1% of the business or something like that. In OTC, it's different dynamic geographically in Mainland Europe, 70% plus of our overall business and most of our OTC business goes through independent pharmacies. So in independent pharmacies, there's really no private label, it's generics in the draw and pharmacists would have to decide, I'm going to going to offer you a generic instead of a branded product, which doesn't tend to happen too often. So the percentage of the business, which is in generics is relatively low versus private label in the U.S., which I'll touch the base on in a second, and we haven't seen much movement in that. So then you get to the U.S. and U.K. kind of environment, which are much big private label markets. And what we've seen overall is, across our portfolio, we have overall gained share on private label. So we haven't seen a shift to down trading and no impact on the business overall. Now, it doesn't mean that every category dynamic is the same. And there's a couple of categories we are seeing. Private label gain -- makes some share gains. One of them is smoking cessation. This is a category where the price point can be $20, $30, $40. There's a bigger decision for the consumer to make when they walk into the store. You think about many of our other categories, you're in the $5, $6, $7, $8 range, private label maybe can say be $1 or a bit more. And what we see is consumers aren't making that choice. If you go in and Advil is your brand and you have pain relief or Excedrin is your brand and you have a migraine headache, people are pretty brand loyal and there's private label people that are fairly loyal to being private label users, and there's brand folks. And that dynamic has been there for -- I've been in the industry for 20 years. It was the same 20 years ago. And if you look at the relationship between the 2, what happens is when you launch innovation, brands kind of get a leg up until private label catches up and launches a similar kind of product. But you can grow a business with that relationship between private label and branded products. And we -- that dynamic really hasn't changed.

Cool. And just kind of moving off the top line. If we look at margin, we haven't seen a lot happen here since separation, but then we had 50 bps expansion in the first half. So is that the right run rate going forward? And how do we think about the drivers of that? I guess there's operational leverage, there's mix. You've got a pretty chunky cost-saving program that we don't -- if you could tell us more about that.

Well, I think there's a couple of things. If you look at our operating margin in the first half reported, it was up 50 basis points. On an organic basis, so excluding the divestments and excluding currency, it was up 160 basis points. I just bring that up because 40 basis points were driven by dilution from divestments, 70 basis points were driven by FX and currency. I don't think the FX and currency, eventually we're hitting the base on that, and we shouldn't see that level of drag. Of course, I can't predict that. We don't want to manage the business on the short term for a translational FX because it can go either way at any moment in time. So certainly, the dilution from the divestments we plan on, we're doing the productivity program, and we're bringing savings this year and last year. And our plan always was to offset those margin dilution, but it doesn't always work on perfect timing, right? We sold these businesses because we got the right value creation for them. So listen, I feel good about our ability to drive margin improvement on the business. And I think there's a few things. There is the operating leverage of having a business that's over 60% margin, growing 4% to 6%. There's opportunities in gross margin to continue to improve gross margin, and we have programs that are every year, productivity programs and other big things that we're looking at, one we've already announced, which is the shutdown of our Maidenhead plant in the U.K., which manufactures Sensodyne. We're going to move that production over the next 18 months to Levice, Slovakia, a fantastic plant for us, significantly lower cost structure in Slovakia. So as we look at the number of contract manufacturers and our opportunity to rationalize the number of even internal plants we have and the opportunities, about 10 months ago, I brought in a new Head of Supply Chain, Namrata Patel, who was running the beauty supply chain for P&G, having someone with that consumer kind of supply chain background has really helped to unlock, I think, those opportunities. And as I look out over the next 6 years to the end of the decade, I see opportunities for us to really make some improvements in supply chain and drive productivity in that area.

Cool. That's very helpful. Just kind of changing tack a little bit. When I think about use of cash, many of your large cap staples peers put a payout ratio of circa 50% on the dividend. Yours is a fair bit less than that, and you've got a sub 2% yield. Now, I totally get why the payout ratio has been low historically because you spun out with a huge debt pile that need getting rid of. But now the balance sheet sorted, could we see you move to a sort of more industry-normal payout ratio over time?

So listen, obviously, that's a discussion we would -- we will have with the Board. Let me just take it through last year. So we were at a 30% payout ratio. We decided to move to 35% payout ratio, but we also evaluated the best use of cash and returning cash to shareholders. And clearly, the best return for shareholders was to do a stock buyback. At the same time, well, one, we felt like the stock was undervalued, so you want to buy your own stock when it's undervalued. Secondly, we didn't know for a fact, but we expected that Pfizer was going to do a placement, and we want to do everything possible also to accelerate their placement. So they were able to do a placement of $3.5 billion. We bought $400 million of that. And the agreement with Pfizer was do the placement and maximize everything you have, and we'd like to come on top and add to it. So instead of $3.1 billion, it was $3.5 billion. So it helped. And we got the stock at a 4% discount on what we thought was already undervalued. So that was the best use of capital at the time. By the way, in our capital allocation priorities, which is investing cash, bolt-on M&A, return cash to shareholders if we felt like there was a better use of cash in the bolt-on M&A or a way to create more value for shareholders, we would make that decision based on our capital allocation priorities. So I think we still have 22% ownership of Pfizer. Again, I can't speak for them. I can't say what they're going to do or not do. But certainly, we would evaluate the opportunity for us to participate again. We haven't used all of the GBP 500 million stock buyback that we announced. We used GBP 350 million of it in the Pfizer placing, and we are starting to now buy on the open market, just because we hadn't done that before, and we wanted to get the experience of doing it. But I expect that if they do another placement before the end of the year, we'd still have cash to participate.

Well, just thinking about uses of cash more generally, I suppose. I mean, can you just remind us where your leverage is now versus target versus where the leverage was when you did the spin out? And then in terms of kind of how would you think about that trade-off between buyback versus bolt-on deals and I guess, maybe buying out your partners in the China JV as well?

Yes. So first of all, when we started as a listed company, we were 4x levered. And by the way, that was really important for us to get down on that below 3. It was less of an issue, honestly, for many U.S. investors, it was a major issue for a lot of European and U.K. investors where they really didn't want to invest in the company unless it was below 3, just strategic flexibility and just that really was a big turn off. So we felt like we really needed it. It was one of the overhangs in the stock. We needed to get the leverage below 3. At the end of 2023, we were at 3 -- 3.0, and that's when we're quite confident in the cash flow this year and the fact that we'd be able to get below 3, obviously, in the year, and still do a stock buyback of GBP 0.5 billion. And that's why we moved ahead with that -- that stock buyback. So we used GBP 350 million in the first half to buy back the Pfizer shares, $400 million. Leverage at the end of the half year was at 2.9. So now we're below 3. We said that our midterm target is around 2.5. We -- around 2.5 could be 2.3 to 2.7, I mean in that kind of range. We feel like with the cash flows on the business, we can absolutely do that, and it gives us strategic flexibility to do more stock buybacks, if it's the case, to do bolt-on M&A if the right opportunity arises, discussion with the Board, always will be on dividend and dividend cover, again, we went from 30% to 35%. But we want to make sure that we're evaluating what the best use of the cash is and the best return for shareholders.

And just I guess looking further out with that potential uses of cash, the global consumer health category is still extremely fragmented by the standards of other consumer staple subindustries. So do you think we see consolidation over the next 3 to 5 years? And might we expect to see Haleon play a role in that?

Yes. I mean, listen, I think there's bolt-on M&A opportunities, and we're going to be very active in looking at those, and we have things that we would -- we'd evaluate in that space. I don't think there's anything imminent out there from a bigger transformational perspective. Sanofi is going to do something. They're either going to spin or sell to private equity. I've said that's not really -- that's not a business that we're interested in, we don't think really strengthens us strategically, not that it's a bad business to be clear, just not right for us. I don't think there's anything else imminent out there as I look out over the next 3 years. So I think bolt-on M&A certainly in the short term. And then if a form of transformational M&A became available in the market and imminent, you would expect, of course, we would look at it and evaluate it. But we'd only do it if we felt like strategically, it really strengthened the business and it had the right kind of returns for shareholders. Now, what we do know is that the synergies are there on these deals. We delivered it in the Novartis deal, and we delivered it in the Pfizer deal. But the thing that made those deals so good for us was the strategic set of it, right? Pfizer gave us an entry in the VMS, which was a category we liked, we weren't in. It gave us -- doubled our business in the 2 largest markets in the world, U.S. and China given us significant scale, extended leadership positions in pain relief where we had a small presence with Excedrin in the U.S., now we have Advil. So I think you want to look at it strategically. We know that the synergies are there. But honestly, it's not something I'm waiting to see happen. And frankly, I don't think we need to do any M&A to deliver on all the commitments we've made.

Well, look, one final question for me, which is it's over 2 years since the spin now. So if we could conjure up a time machine, and post you through that time machine, and you could go and speak to the Brian of July '22, just as Haleon was coming out of GSK. What advice would you give him?

Listen, what I would say is being the CEO of Haleon as a listed company, being the CEO of -- versus being the CEO of the joint venture at -- that was within the structure of GSK, is a completely different job and completely different role, probably more than I would have anticipated, all in the positive sense, to be clear, I love the job and I think it's great. I would have probably told myself, don't take vacation in the first week of August because someone's going to set up a rumor about Zantac. That's one thing I would have told myself because I didn't really get that vacation. But listen, I just think it's been a great experience, to be honest with you and be able to separate the company. I'm incredibly proud of what we've been able to do. The organization has been able to do, deliver the growth and deliver the leverage and the cash flow and the commitments we made. But I don't think we're fully bright yet. So I had the question earlier today in your journey of becoming a world-class consumer company and a stand-alone company, where are you? I mean we're probably 70% there. We've made a lot of changes. We're improving, but I still think there's more for us to do, continued cultural changes, continued systems and processes work that we're all working on. So yes, I would have said it's going to be fun, but not going to be easy. That's what I would have said.

Well, look, I know I promised you a reverse fireside...

Yes, yes, yes. The reverse fireside is something I'm going to patent. These guys always get to ask me questions. So I agree to do firesides only if I can ask you 2 questions. So my first question is you were with us in the beginning of the journey, Capital Markets Day in February of '22. I'm sure you had all kinds of questions at the time. Two years now as a listed company, what surprised you in what Haleon has been able to do in the last year on the good and the bad, like how do you evaluate the last 2 years?

I'd say on the good side, the organic sales growth delivery has been consistently above where I think almost any of us thought it could be. And that's kind of the lifeblood of consumer companies. Everything flows down the P&L from that. So getting that right been really encouraging. I think the pace of deleverage and cash generation has been pretty astonishing as well to go from, oh my God, these guys are at 4x net debt-EBITDA to they've announced a buyback in 18 months was pretty swift. Downsides, I mean, I guess, EPS momentum has not been perhaps what we thought it could have been. Part of that, though, is the headwinds from the disposals that allowed you to sort the balance sheet. So there's a bit of a trade-off there. We've probably had a few below-the-line drags on EPS, finance, tax. But ultimately, those are kind of issues that come out in the wash. And I don't think anyone loses too much sleep over them.

Okay. Very good. And maybe one last question. If we're doing this again in 12 months, what do you...

Now I'm getting in the time machine.

Yes, you're getting in the time machine. Go back and talk to yourself today. If in 12 months, we're sitting down again, what are you -- what would success look like in Haleon, what are you looking for us in the next 12 months?

I think just keep delivering the top line over the next -- over the next 12 months. And I guess the components to that are a bit of an acceleration in the H2 this year. VMS and all staying strong. We've got the Eroxon launch next month. That sounds like that's going to be more of a '25 driver than a '24 driver, but it would be nice if that did well. And just being boring in the nicest possible way of just having that top line compounding up, having that EPS compounding up and being a kind of sleep-safe-at-night stock because that's what you're building.

Okay. Great. Thank you.

Thanks so much for joining us.

All right. Thanks, everybody.