Haleon plc (HLN) Earnings Call Transcript & Summary

Let's kickoff with the second session today. So welcome, everybody. I'm delighted to welcome Brian McNamara of Haleon. Good to be here on the stage. Thank you for supporting us every year, Brian. We appreciate making the effort with us. Same format as before, 35-, 40-minute questions.

And I want to kick off, Brian, just with guidance. I mean, you lowered your full year guide from 4% to 3.5%. Can you explain the moving pieces that led you to that decision, as the guide was already second half weighted? And even with the lowered guide, you still assume a step-up in the second half. So just what underpins your confidence to the 3.5% is the absolute minimum, you'll deliver? And could it still actually get closer to 4%, if you have a good cough/cold season, because there was no season virtually last year. So just on that 3.5% number, your conviction that, that is the floor.

Well, first of all, I think if you step back and look at what we said at half year, we did do two things. We took down sales to around 3.5%, and we took up our profit guidance to high single digits on an organic basis. And I'm sure we'll talk about that later, but that's really underpinned by this productivity program really coming through very strongly and giving us a lot of confidence. 3.5% -- To be very clear, it wasn't 3.5% per se. Listen, halfway through the year, we're at 3.2% growth. And certainly, in the U.S., we were down slightly. And if you look at the U.S. consumption in Q3, we were up roughly 0.5 point in consumption. The market was roughly down 0.5 point. Now market was up much more in Q1, and so were we, and that was the seasonality effect. So as we looked at the U.S. environment, two things are happening. We're seeing a bit of a muted overall market growth environment. And we're also seeing continued pressure on the inventory levels. So given all that, we decided to change our guidance to around 3.5%, not expecting, honestly, the U.S. for the balance of the year to change that much from a net sales perspective. We think there's continued inventory pressure in the U.S. We want to get much more proactive in managing that with our retailers, because, frankly, you can get to the point also where you can start seeing out of stocks and some challenges on shelf. So we want to get more proactively managing it. And if you also remember last year, in Q4, cold and flu in December was down 10% from a consumption basis, which ended -- which meant that inventories were kind of high at year-end also. So we want to make sure that we end the year in a healthy place in the U.S. On the balance, if you look at the balance of our portfolio, we grew mid-single digits, both in EMEA, LatAm and in Asia Pac. And we do expect to see some acceleration in growth and consistent growth in those two regions. And the combination of those two give us the confidence in the around 3.5%, but certainly not counting on a big change in the U.S. trajectory to get there.

And can I maybe touch on volume, because one of the big features from results season is investors are super focused on volume. Do you -- is there enough focus, Haleon, on the volume mix? You talk a lot about the 4% to 6% organic growth. And some of your peers are targeting 3% volume growth. But if I look at your volume mix since spin, and I track it since then, it's been tracking at around 1, mid-1s. And it's been quite driven by Asia with volume mix quite low in the U.S. and Europe. So within the 4% to 6% guide presumably, the vol mix would need to be at least 2% or even higher. And so my question is, is the top team incentivized enough on the vol mix? Or do you need to make a bit of a pivot between organic growth and vol mix or are you happy with the balance?

Yes. So just as a team, we're very focused on volume. Volume has such a big impact overall on a lot of things, cost structure, manufacturing sites, all that kind of stuff. If we think about our guidance of organic growth. We always said we expect to see a relative balance between volume mix and price. So if you think 4% to 6%, 2% to 3% volume mix, 2% to 3% price now. I've always said what's balanced 60-40, 40-60. I mean, and it's not a super exact science in any given year. It can fluctuate a little bit. So I honestly don't really have a desire to get into very specific guidance on volume mix versus price and all that, but absolutely focused on it. We track it. we look at it. Also, if we take a step back and see what we laid out for our Capital Markets Day, reaching 1 billion more consumers. A lot of that is the opportunities we have with the low-income consumer in emerging markets, and we're starting to see some, some of that launches are happening. It's a bit of a slower burn, but that's a volume play also. So it's very much a big focus for the team and I, and we track both price and volume mix and are very rigorous about that.

And just digging into the destocking, I think it was a minus 2% in both Q1 and Q2. What's your assumption on destocking in the U.S. in the second half? Because I've seen some of your peers talking about the difference between sell-in and sell-out of minus 4%, minus 5%. What -- you talked about visibility. What visibility do you have on retail inventory? And is there a risk that it becomes a bigger headwind as the drug stores lose share to retailers that have better inventory management, such as Walmart or Amazon. So within your guide, are you assuming the minus 2% continues? Does it get a bit worse, a bit better? Where are we on your -- how much visibility on that particular point?

Well, first of all, from a visibility perspective, we have very good visibility on inventory. Certainly, with our top 10 customers, extreme visibility. And that's the vast majority of our business. And we have visibility below that, too, but we partner with our retailers. I think you're right that there, if you look at our business and our portfolio, we have more business in a Walgreens and maybe CVS type of retailer than someone who's in different consumer staple categories, by the nature of the categories we're in. That's a reality. They tend to hold higher inventory levels. We do believe that the inventory reduction we saw in the first half and that gap will continue. We are not seeing those numbers swing higher. So -- and that's what we're assuming. And what we need to do is we need to get -- and we are getting much more proactive to partner to do that, because one of the challenges is Walmart, Amazon, Dollar, Club are very good at inventory management. The drug channel just had a different bit of an operating model. The risk is, inventories get lower, and then it results in out of stocks in the store, because the systems don't quite support the inventory levels they have. So we're very conscious of that. We have teams on the ground and that partner with all our big retailers and certainly those. So in the balance of the year, we want to proactively manage that better than maybe, and everyone has been a little bit surprised by it at this point. We see that there's going to be more pressure there and more opportunity. We want to proactively management. And that's in our guide for the year.

And in terms of consumption in the U.S., you were 3% in Q1, you were at 0.5% in Q2, the market was a minus 0.5%. Can you break down why did the market slow from 3% to 0.5%. Is it smokers health? Is it allergy? Is there any reason to think it doesn't naturally come back to the usual 2% to 3%? I guess you think it's mostly cyclical. Are there any elements that potentially could be structural?

Yes. I think it is more cyclical. I think if you just break down what happened in Q1 versus Q2. In Q1, what you saw consumption-wise, was a high cold and flu season at the end of the quarter. And we are a seasonal business, and we are impacted by that. So that really drove that kind of higher growth in Q1. So you come to Q2 and allergy season was lower. So you lose the tailwind of the cold and flu, because when you get into April and May, that kind of goes away. And then allergy season was a bit lower. And I think that's the natural dynamic on the business. Smokers health, we've talked about. That is a category that certainly is under more pressure in a $30 to $40 price point kind of range for consumers that are really under a lot of pressure and feeling it, it's a much bigger choice than, let's say, an Advil at $5 or $6.99 or Sensodyne kind of thing. The one thing that's been consistent throughout, I have to say, has been our oral health performance, which has continued to go from strength to strength. We continue to grow share. We continue to see good consumption growth. And that is a category that we're seeing in the 3% kind of growth range, but being in therapeutic oral health, where we're much higher than that, and we're growing share in a healthy way.

Just want to touch on smokers health, I think it was down 20% in the quarter and the minus 1.7% you had in the U.S. would have been almost flat. So for the second half, should we assume that the down 20% continues at that run rate? Or I think you've got new innovation coming, might help a little bit. What should we think about in terms of the drag?

Yes. I would expect that it's going to continue to be a drag, but not that level of drag. So there were some unique things that happened, some things in the base. But in the end, we believe we have plans that can help stabilize that a bit. We also do have a new innovation. It's a lozenge. FDA approved. So there won't be private label on that. It's a flavored lozenge, stops cravings within 3 minutes. We're launching on e-com in the back half, and we'll do a full launch next year. So we have reason to believe we can get that business more stable. It's never been a big growth driver business for us, but it is a good business. It meets a real unmet health need. And we are -- we believe we can get it to a place where it can play the role it needs to in the portfolio.

And just maybe following up on channel mix. You mentioned you're maybe slightly overweight the drugstores. But how are you executing with the growing retailers like Amazon, like Costco, like Walmart? Do you need to do anything around strengthening those relationships in terms of execution, in terms of category management, in terms of supply chain, data merchandise? I don't know what it is. Are you happy with how you're executing with the growing retailers?

Yes. Listen, we have very good partnerships with all of them. And Walmart, Amazon are our top 2 customers in the U.S. We have teams on the ground like every other CPG company or consumer staples company in those locations. Very good business at Club, very good business at Dollar. So it's not an issue of -- the channel shift isn't going on for years. It's a bit exasperated, because of the challenges that, that drug channel is having and then trying to meet their financial commitments and things like that. But I think we're very focused on winning with the winners. Also while ensuring we have a lot of consumers and our consumers that go through that drug retailer. So, we want to make sure we're right on that business. But no, I don't have a concern that we're moving to channels where maybe we're less -- have less strength. And then actually, if you look at Amazon specifically, our top 18 brands are over 90% of the business in the Amazon, 18 brands are over 90% of the business. 16 of those brands actually have higher share on Amazon than they do bricks and mortars. So for instance, Sensodyne, which is roughly a 21% share or so in bricks and mortar is close to a 28% share on Amazon. So even when that channel shift happens, there is some benefit to us as you're moving from a channel with higher share.

And maybe final question on the U.S. But in terms of competitiveness, when you look -- obviously, a lot of stuff going on with the channel or the consumer, but where are we in terms of U.S. market share competitiveness? Are there spots where you're still not happy from a share point of view. I mean, Advil is an obvious one where it's been a share issue. Where are we on that? And are there any other spaces within the U.S. where you'd like to improve the share?

Yes. So if you take, again, a big step back and overall share, we're growing share in the U.S. And again, 0.5 point up in the market, 0.5 point down from a consumption per basis, means we're growing ahead of the market, we're growing share. Within that, clear strength in oral health continues, and we expect it to continue. And then across any portfolio, you have areas that are doing better and not doing better. Advil grew share full year 2024 in the first half, though, it was under share pressure again. We've now in the latest period, we've stabilized that. We think we have strong plans in the back half. So again, I think across any business in any portfolio at any given time, you'll have things that are doing better, not better. We're very focused on the overall consumption. Am I happy? I'm never happy. So I mean, yes, we should be -- I want to see us grow more share. I want to see us grow a bigger percentage of the business growing share. I want to see us drive more volume. I mean, it's very much a focus of the business of how do we maximize the portfolio. But it's not that we're losing across the board, and we have major significant issues on share.

And maybe just turning to one of the key categories of VMS. I mean, the question we're getting from investors is the category structurally challenged, especially in developed markets. Obviously, it's a different story in emerging markets, but in developed markets. And Centrum has been doing well. You've been putting science in it, with Centrum Silver, et cetera. You've got new stuff coming in Q3. But some of your competitors like Nestle are now looking to sell big chunks of VMS, Church & Dwight. And so there's a bit of a question mark about, actually does the consumer really believe in this science? And why are other players actually exiting where you're doubling down? It's obviously been challenged in the first quarter. It was a bit better in the second quarter, but still negative in the U.S. How do you think about it kind of structurally? And should we expect to see VMS in the back half in the U.S. to turn positive?

So I think, if you take a step back and just if you look at our portfolio, three brands make up about 85% or so. So that's Centrum, obviously, in 68 countries. Emergency, immunity, very focused on the U.S. Caltrate, which is in a number of countries, the biggest country being China, and we feel like China is a very strong place as osteoporosis is a major focus for the Chinese government, we partner with them, and we think we drive really good business there. Now -- and again, just to isolate it back to the U.S., if you look at our business outside the U.S., it grew mid-single digits. It was the U.S. that was the challenge. The challenge specifically in the U.S. that we saw in the first half is a year ago, consumption on Centrum was up in the high teens. And that was driven by the activation of the cognitive function claim that you mentioned. Now, it's down. We're not -- we're giving some of that back. We're not giving it all back. So I think for us, it's more of getting the rhythm right on the claims and what we do. I do believe -- and we have a new claim, as you mentioned, we're activating now in the back half around that cognitive function. We have a number of things going on to come out with new science-backed claims. We do believe that, that is a massive opportunity done in the right way with the right credibility and the cognition claims, some of them were done in partnership with Harvard Medical School. So it's like this is real credible stuff in a category where, frankly, there isn't as much credible stuff, and we believe the consumers that really resonates with consumers. We also think Centrum is a brand with a history and legacy that can really carry that. So, we believe there's an opportunity here as a consumer health company where we can do something unique and different, given our medical, regulatory and clinical capabilities that maybe some other companies that aren't in the consumer health space would necessarily have. So I'm still optimistic about it. There's no question we faced some headwinds in the last 6 months.

Have VMS maybe in emerging markets by the contrast growing?

Yes. So again, in emerging markets, it's growing really well. It's also part of our focus on low-income consumer. We believe this is an opportunity. Again, we believe those things are going to be slower burns. So we launched in India, Centrum 1.5 years ago or so. A couple of years ago, we launched in Centrum Essentials in Brazil, where we specifically designed products for that low-income consumer. That kind of stuff takes a little bit of time, but we think can really build momentum. I look at launching Sensodyne in India 11 years ago, and now it's our second largest market continuing to grow in the mid-teens. But in those first 3 or 4 years, it was a relatively small business. So I believe some of this is long-term investment and category creation. If you look at China, it's a well-established category, and we have very strong positions with both Centrum and Caltrate.

Can we spend a bit of time on the Oral Care business? Obviously, great portfolio for you. You mentioned a multiyear runway for Sensodyne and you've got a clinical platform, the Clinical Whitening platform, Clinical Repair, Pronamel as well. Are there any new areas that can be -- that are untapped? Or is it more about extending existing brands and then closing the incidents versus the treatment cap? And what innovations should investors be most excited about? Is it more just about rolling into more countries, maybe kind of size it for us?

Yes. So if you look at the performance of Oral Health first and then Sensodyne over the last number of years, it continues to be really strong. We continue to grow share in the U.S. and outside the U.S. and on a global basis. The clinical platform, we started with Clinical White and then we launched Clinical Repair. And now in the U.S., we launched Clinical Enamel. It's doing really, really well. And it's really doubling down on what I would say, makes Sensodyne in kind of special, which is this therapeutic focus, the dental recommendation. And what we've seen on all three of those innovations that it really does get that dental recommendation in a big way, because the data is real and it's there. And I've told this story a few times, but 6 months after Clinical White launch last year, I went to Chicago for business meetings, I spent a day with our dental detailing team. And to a dentist, they would say, we don't recommend whitening products, because they're not good for gums and sensitive teeth. It took them through the clinical data on Clinical White and they said, we'd recommend that. And that's the thing. So Clinical White is now in 16 markets. It'll be in 21 markets by the end of the year. Clinical Repairs in 16 markets, they'll be in 21 markets by the end of the year. Clinical Enamel has launched in the U.S., and we'll start rolling that out, although Enamel isn't as big in many other markets. And we're very clear. There are some markets where Clinical White may not launch for 3 years, because the whitening segment isn't quite as established. And then beyond that, we have additional Clinical Innovation that will come out. We haven't launched yet. We also -- again, the low-income consumer opportunity with INR 20 pack in India, we launched that. We've gone from 0.5 million outlets in India to 1 million. We'll go to 2 million to 3 million. We're also launching cavity plus sensitivity in emerging markets for low-income consumers, because for that consumer and for that mother who's buying, she's buying for the family and cavity is still very important. So we'll also launch slightly bigger sizes. So we're continuing to learn and kind of evolve. But we think in the longer term and midterm, that's going to be a real growth driver for us.