Haleon plc (HLN) Earnings Call Transcript & Summary

Good morning. Thank you for attending today's Haleon Half Year 2026 results. My name is Sarah, and I'll be your moderator today. [Operator Instructions] I'd like to pass the conference over to our host, Joe Russell, Head of Investor Relations. Please go ahead.

Thank you very much. Good morning, everyone. Welcome to Haleon's conference call for our half year results. I'm Joe Russell, Head of Investor Relations, and I'm joined this morning by Brian McNamara, our Chief Executive Officer; and Dawn Allen, our Chief Financial Officer. Just to remind listeners on the call that in the discussions today, the company may make certain forward-looking statements, including those that refer to our estimates, plans and expectations. Please refer to this morning's announcement and the company's U.K. and SEC filings for more details, including factors that could lead to actual results to differ materially from those expressed in or implied by such forward-looking statements. We have posted today's presentation on the website this morning, along with a video running through the results in detail. So hopefully, you've all had the chance to see that ahead of this call. And with that, I'll hand back to the operator, and we can open for Q&A.

[Operator Instructions] Our first question is from Cedric Besnard with Citi.

Just a couple of questions, please. One on top line and one on margin. The one on top line will be about North America. Could you just shed some light on the progress you've made there, especially maybe quantify the shelf reset benefits and also how we should think about the organic growth sequence for the rest of the year with the various building blocks? And then on margin, I mean, I guess, another profit beat. But how would you assess whether the business actually remains invested enough? And what are the KPIs you would have internally to make sure no category and no market starts over earning?

Great. Thanks, Cedric. Listen, I'll take the first question, and I'll probably kick off the second and then pass to Dawn. So first of all, I feel good about the progress in North America. Maybe I'd just start with a bigger step back, Cedric. So as you all saw, 3.1% organic sales growth in the quarter. So that's a sequential improvement from Q1, which was 2.2%. And we definitely saw a better balance of price and volume mix with volume mix at 1.4%. So a few other maybe highlights. Emerging markets, obviously, another sequential improvement at 6.3%. And we do look to see that strengthen in the back half. One of the drags to the emerging markets was Middle East, where we have a disproportionately kind of large market share versus the balance of our business there. And we've just seen significant market declines in places like Dubai and Pakistan. Now we believe that will get better in the back half based on our plans, not counting on the market to do anything different or the war to end. So I would say those are 2 key building blocks. And then Europe. Europe has been more challenging. What I'd say is we ended the quarter where we expected in line, but probably a bit stronger in North America, a bit weaker in Europe. So we've definitely seen a Europe market, which is declining, and we were relatively flat, up, I think, 0.4% or so, so in the corner. So now getting to North America, 3.1% growth with 2% volume. I maybe put it in 3 buckets of what we're seeing. One is the stronger execution, and we've talked about that. That's the shelf resets, the self placements across key categories and key customers. The second, I'd say innovation is delivering. We've launched the third pillar of our clinical range and clinical repair in the U.S., and that's doing extremely well. But it's beyond that. We've launched things like Centrum Age Defy, et cetera Rapid Relief and innovation is performing well. Maybe the third pillar is around e-commerce. So we're seeing good momentum in e-commerce, strong double-digit growth and twice the market rate. So for me, listen, good progress in the U.S. I feel good about that. Still more work to do, very encouraged by the progress. And certainly, we're going to have a stronger second half than first half, and we're confident in that. And that's obviously embedded in our guidance of -- holding our guidance of 3% to 5%. Now maybe moving to your margin question. I'm going to pass it to Dawn to maybe talk a bit of the margin and the building blocks, but maybe I'd start with a bit of your question on investment, just my perspective. So I think we are investing in the business. I mean A&P in the first half grew 3.2%, broadly in line with sales, slightly ahead, but broadly in line with sales. And our A&P is roughly just below about 21% as an A&P -- percentage of A&P. So I think it's strong investment in growth. And there are specific areas where we've increased investment, and we're constantly doing resource allocation to ensure that we're investing behind the key growth areas that we believe we have won ring room and key innovations. So I feel like we're invested well in the business. Now that said, our priority is growth. We don't want to invest in the business just for the sake of investing. We want to invest where we see growth opportunities. Listen, in the second half, we expect a step-up in investment in growth, and that will show up in A&P. It will also show up in different areas like we're investing in China and on Douyin because we have a good business on Douyin. Our portfolio is a bit less exposed to that channel, but we're growing 100%, and we see more opportunities there. So we're going to invest more there. And we're going to invest some more in activations in the U.S. where we see opportunity, we're going to drive things. So let me leave it there. The only other thing I'd say before I pass it to Dawn is what the gross margin and productivity has enabled us to do is have the P&L flexibility to invest where we need to but also drive strong EPS growth if it makes sense. But to be clear, we're not holding back on investing in the business. We feel like we're investing where we need to be, and we see opportunities, we'll invest more. Dawn, maybe a bit on the margin.

Yes. Good morning, everyone. So look, I think what's important to say on the margin is we have delivered the margin through efficiency. We are driving long-term sustainable improvements in our supply chain. So to Brian's point, the margin has not come from cutting investment. It's not come from taking too much price. When you look at our pricing, we -- our pricing is in line with inflation. And this is a really important point that it is coming from efficiency. So the 120 basis points improvement in margin -- in operating margin at constant currency is coming from gross margin, up 140 basis points. And we also have a 40 basis points benefit coming through FX, which if you think about, it's quite nice to have a tailwind from FX for a change. And to Brian's point, that is pulling through and driving strong EPS in the business, and it is giving us flexibility and agility. And why that's important is when you look at the second half, from -- we will start to see costs come through from the Middle East impact as we roll off fixed price contracts and our hedging positions. And it means that given that we've got the strength in the supply chain productivity program, it means we won't have to take exceptional pricing to cover it. We will be able to absorb that cost, which means from a margin perspective, we also expect in half 2 that we will deliver high single-digit operating margin growth as we have operating profit growth as we have in half 1. So let me take your second part of the question, which was about A&P and the KPIs and how we think about A&P. So people buy our brands because they are superior, meaningful, differentiated and salient, which means that people are aware of them. And therefore, continued strong investment in A&P at 20.9% as it is today, is really important for our brands. And the way that we think about that, there's probably 3 main areas in how we think about it. So the first question is, are we buying efficiently? And if you look at the first half, we have mitigated the majority of our inflation in terms of how we are buying that media. The second piece is, are we spending effectively. We have quite a sophisticated market mix modeling tool where we look at the incremental retail sales growth and ROI around that spend, and both of those are up in the first half. And the third question is, are we driving growth through reach and relevance. And when we think about this, we're trying to match our spend with where consumers are consuming that media or where they're getting their media from. 60% of our spend is allocated to digital, and we continue to increase that spend behind social and expert, which are both up in the first half. So when we think about A&P, we keep it quite dynamic. So in areas where we're performing really well, like oral health, China, India, we increased our investment. And in areas where it needs less investment. So for example, when cough, cold and flu season was weak in Q1, obviously, that's an area where we would shift investment to other areas. So all the time, it's very dynamic so that we're ensuring that we're making our money work harder. And we continue to look for opportunities to invest.

Our next question is from Guillaume Delmas with UBS.

A couple of questions for me. The first one on Respiratory Health. We had another weak quarter in Q2. I think it shaved off 150 basis points of your organic sales growth. So my question is, of the 3 buckets of cough and cold, allergy, smokers health, which are the ones where you would expect an improvement materializing relatively quickly? And is your confidence in OSG, Organic Sales Growth accelerating in the back half largely underpinned by an expected sequential pickup in Respi? Or do you think the acceleration should be more broad-based than that in the back half? And then second question, just China, high single-digit growth in the second quarter despite low incidence of cough and cold and some negative pricing. So maybe can you touch on what is driving what seems to be, I guess, double-digit volume growth in China? And how should we think about this pricing pressures? Is it more of a one-off? Is it the cost of competing in that hospital channel? And does this have any negative implications for your margins in the region?

Great. Thanks, Guillaume. Listen, I'll take the first question on respiratory, and I'll pass the China question to Dan. So listen, on Respiratory Health, you're right, 3 buckets in Respiratory Health, cough and cold, allergy and the smallest piece being smokers health. So first of all, on cold and flu, cold and flu is about half the size of -- in Q2 than it is in Q1. It's off-season, so it tends not to be as volatile. You are right that Contac, which is a very big cold and flu brand in China, just saw very little, if any, pickup in the quarter. We believe that's just an extension of what was a very difficult cold and flu season. And I'll get back to cold and flu in the back half in a second. Then you have allergy, which did well in Q1. It was down a little bit in Q2, just the phasing of the season piece, and you just expect that, that's normal. You tend to see some seasonal swings in allergy, but it's never to the degree of cold and flu and the impact. And then third is Smoker's Health. Listen, Smokers' Health still declined in the quarter, but it's declined at a lower rate than it did in Q1. So we're starting to see a stabilization of that business as we go forward. And we have plans in place where we're -- like most things, like in the U.S. in general, we're seeing better execution, and we're seeing improvement as they go. Now on cold and flu, as we look at the back half in cold and flu, we know that we've had 2 years of decline in cold and flu. And I think I've said in the past, been associated with the category for over 20 years. It's not necessarily common that, that happens, but it's not unheard of. We've obviously done all the work to understand, is that a cyclical or a structural thing. We believe it's cyclical. What we're assuming in the back half is we see growth off of this 2 years of decline. We still don't expect it to be at the level it was from 2 years ago. And obviously, in cold and flu, that's more Q4 weighted because that's when the cold and flu season is. So that's a bit of the frame around respiratory and what we're seeing. Dawn, do you want to talk a bit about China?

Yes. So let me take the question. Let me take the question in 3 parts. So let me talk about Asia Pac, then I'll talk about China, and then I'll come on to your specific question around hospital channel and price. So -- when we look at Asia Pac, when you look at the growth profile of Asia Pac, over the last few years, more than 80% of that growth is coming from volume. And that's a really good growth profile for that region. I think, obviously, and you see that also coming through in the year-to-date and actually even stronger, even stronger growth in Q2. China is a really important driver of that. So China was up high single digit in Q2, main drivers. So we increased investment in Douyin. Douyin grew more than 100% in the quarter and key brands that underpin that were in Centrum, Caltrate really strong in terms of driving growth in Douyin. And we have actually doubled the amount of content creation in that channel. So that's a really strong driver of performance. The other strong driver of performance was actually on Voltaren, where we increased our presence, Voltaren 2%. Innovation continues to do really well. And we have actually put that now through the hospital channel. Hospital channel is a channel that we have always been in, in China. That's not new. What's new is now Voltaren is in that channel, which is a real positive. If I put all of that together and then talk about pricing, so you're right, pricing was negative in Asia Pac in Q2. I'm not worried about that. It was driven by going into hospital channel where we have a volume-based procurement pricing model as well as investment in Douyin. But when you look at the gross profit growth in Asia Pac, that's strong. And when you look at the margin improvement in Asia Pac at constant currency, that's also strong. So for me, this is -- it's a real positive. It shows that the investment that we're putting in to drive growth in China and in Asia Pac is actually coming through. And as I said, we're still seeing margin improvement overall in that region.

Our next question is from Nicolas Ceron with Bank of America.

Just 2 questions from me, please. The first one is on your VMS business. Do you think there's any consumer need that your current portfolio is not really able to address? And do you think that you need to do M&A to do that? It's a bit of a thorny question. And the second one is going back to the pain relief, big acceleration in Q2 versus Q1. Maybe if you could just explain to us the key drivers behind the acceleration and whether you think mid-single digit is the growth for that business going forward?

Great. Thanks, Nicolas. First, on the VMS business, Listen, I think, first of all, we like our portfolio. And we have seen, by the way, if we look at Centrum in the U.S. specifically, we've seen improvement in the first half of the year, so mid-single-digit growth. And actually, if I look at latest consumption data, so now we're into July, you're starting to see double-digit consumption behind the activations and the shelving resets and everything we're doing on that business. So we do like the portfolio we have. Listen, there are higher growth spaces within VMS we don't participate in, and we're looking at that also organically, how can we introduce new products under Centrum, how can we drive that? One example I would give you is our GLP-1 variant on Centrum, which we launched in the U.S. as part of our broader GLP-1 effort to support consumers on that journey and activate in retail. So I've always said every portfolio can benefit potentially from a bit of bolt-on M&A, a bit of divestment as we go. But I feel good about the portfolio we have. And I'm confident that while the VMS has been a bit of an up and down business for us over the last few years to acknowledge that we have plans in place where we feel like we're going to get that to a place where it can deliver the growth that we would like. On Pain Relief, it was a stronger quarter in pain relief. And I think that links to a few things. First, I'd say we saw strength in Voltaren, and that linked to a launch in China, by the way, of a Voltaren 12-hour variant that's doing very well. Also in the U.S., we're seeing some strength in Voltaren behind some of those changes we've talked about across shelving because we also saw benefits from shelving across Voltaren. Panadol has grown healthy growth and ahead of our global number, and that's behind good activations, but also the rollout of Panadol Dual Action, which is the combination of acetaminophen and ibuprofen. We market that under Advil Dual Action in the U.S., but outside the U.S., we market that, and we've launched that under Panadol. And overall, I'd say a stabilization and slight growth of share in Advil. So we're starting to see some -- we're starting to see share growth in Advil, which we'd expect, although the category is still a bit muted, but we're ahead of the category. So overall, I feel there's some fundamental things that are happening in pain relief that helped drive those numbers.

Our next question is from Warren Ackerman with Barclays.

Warren here at Barclays. Apologies if this question has been asked before because I just jumped on late, multiple results today. So I just wanted to just dive a little bit deeper on a couple of places. Latin America, Brian, looks like it's accelerated from low singles to high singles. Can you talk a little bit about the new team that you've got in LatAm and kind of what you're doing differently in terms of price pack architecture and understanding kind of local consumers better? And do you think this kind of step-up in Latin America is sustainable? Is it a one-timer? Or do you see kind of real legs for the improvement in that region? And then the other region I just wanted to touch on was, again, Europe. Sorry, if this has been asked already, but it just seemed a little bit softer in the quarter sequentially in Q2 versus Q1. Just wondering whether you can sort of outline -- is there anything happening in the pharma channel? Is it Germany? What are you seeing in terms of kind of consumer dynamics in that region? That would be super helpful.

Yes. Thanks, Warren. I don't think either of those questions were asked. So I'll take them both. Listen, on Latin America, you're right. What we saw was kind of flattish in Q1, and we're seeing high single-digit growth in Q2. I would say, is that sustainable in the back half? I'd expect to see similar results to that high single digits, albeit maybe a bit of phasing Q3, Q4 just because of some base effects and stuff. So to take a step back on January 8, when we announced the new operating model, we also announced a new leader in Latin America, Andres, who has spent many years at a company in a Colombian-based company called Quala in Latin America and then spent some time at Unilever once that company was acquired. Clearly, deep, deep, deep understanding of the Latin American markets. and the consumer. And I think he has come in and has done a very robust assessment of what is happening and has taken actions. One of the actions we've talked, Warren, that I believe I've mentioned in the past is very quickly identified a bit of an opportunity in Brazil and a few other markets on our price gaps on Sensodyne, very quickly did a pilot test. And so that would drive double-digit volume growth. We've executed against that. So we've taken pricing down. And again, it wasn't broad-based pricing on Sensodyne. It was a particular skew on Sensodyne and the price gap versus one of our competitors that got a little out of whack. But we've made that change and we moved. And I'd say just purely on execution across the region, understanding moves we need to make and looking as we go forward a better capitalizing on the low-income consumer, where, obviously, we have a tremendous case study in India on the low-income consumer that's driven now over 20% growth on Sensodyne and also huge opportunities we're seeing in Centrum and area. So I think he's making good progress, again, on all this stuff, encouraged with the progress. You never want to declare victory. We're not complacent. But I feel like the back half, what we're seeing in Q2 is sustainable in the back half. On Europe, there's no question what I said earlier, Warren, you may not have been on, is that if I look at where we ended up in the quarter, it was broadly -- it was in line with our expectations of what we thought we would deliver in the quarter. It was a bit better in the U.S., but it was a bit tougher in Europe. So there's no question that we're seeing a tougher market in Europe, and we're seeing kind of low single-digit declines in the categories. Now that said, as you saw, we delivered roughly flat results, up 0.4% or so. We are growing market share in Europe. Sensodyne continues to perform well and broadly, we're performing. I feel like, listen, as we look at the balance of the year, we're not counting on anything changing in the Europe dynamic. Obviously, we're just very focused on driving our execution, driving our innovation, delivering the growth that we think we can get in that market. But we certainly have seen a tougher backdrop in Europe than we had seen in -- as the year has gone on.

Our next question is from Misha Omanadze with BNP Paribas.