Haleon plc (HLN) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining the Haleon Q3 2026 Q&A. My name is Claire, and I'll be coordinating your call today. I would now like to hand over to Joe Russell, Head of Investor Relations, to begin. Please go ahead.

Good morning, everyone. Welcome to Haleon's conference call for our Q3 trading statement. 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. Hopefully, you've all had the chance to see that ahead of this call. And with that, I hand back to the operator, and we can open for Q&A.

[Operator Instructions] Our first question comes from Don Delmas from UBS.

I've got 2 questions, please. The first one is on Q3. So Brian, you talked about a quarter that was below your expectations. So maybe can you walk us through the key areas of softness that you are unhappy with versus what is more like temporary adverse effects that should correct relatively quickly? And I guess, Brian, if you could shed some light on how you are addressing these pockets of weakness and how quickly you think you can fix them? And then my second question is on your outlook for the year because it does seem to imply a fourth quarter organic sales growth quite similar to what you just reported in Q3. Now I appreciate Brazil, Centrum in China will be headwinds. But I thought a favorable comparator. We have a good start to the cold and flu season in the U.S. and some continued operational progress, I mean, particularly in North America, all that should also come through in the fourth quarter numbers? Or maybe is it just like you being purposely cautious only 1 month into the quarter. So any color on the Q4 building blocks would be great.

All right. Listen, thanks, Guillaume. Listen, I'm going to start with the full year outlook, and then I'll come back to Q3. I may ask Don to also make some comments. So first of all, let me say I get it and understand that the full year guidance is a disappointment. So let me first talk through the moving pieces in Q4. And then I want to give a little of a bigger picture perspective on the business and where I think things are at. And then I can come back to through Q3, Guillaume. So listen, on Q4, I mean, fundamentally, we believe the interventions we're making in North America are having an impact. We see that in oral health. We see that in Centrum. We see it in places across the business. But there's a couple of areas. Well, there's one area that's taken longer than expected, and that's in pain relief. So we have competitive launches in Q4. We do expect we're going to have an impact in Q4. We want to be transparent about that. We have our own innovation launching at the end of the quarter that we believe is going to set us up for much stronger performance in 2027, but it's going to be a drag in Q4. Also, if you look at North America, in Q3, we had double-digit growth on Oral Health on Sensodyne. Listen, the business is doing incredibly well in North America. We don't expect continued double-digit growth on Sensodyne. -- wouldn't expect it, don't need it going forward. And we also are lapping a price increase in Q4 last year. Then if I look across the businesses, we -- India continues to drive mid- to high teens growth. That will continue. Middle East, Africa, mid-single-digit growth. Europe continued to be challenging. Now we mentioned the 2 factors, the classification change for Centrum OTC in China, that will have an impact on Q4 and the change to the go-to-market model in Brazil, in Latin America in Q4. Now I want to be clear, this is something we had planned in doing in 2027. Given the tax change that's happening towards the end of the year. We decided to pull that forward. It's going to have an impact on the full year. it will set us up for high single-digit, double-digit growth in Latin America in 2027 in a sustainable way. Now test based on cold and flu. So clearly, Cold include the past 4 weeks are up in the high teens from a category perspective, we're slightly ahead of that. So we fully expect that the category will grow in but we're 4 weeks in. I've been associated with this category in a long time, and it's very hard to predict what's going to happen. So we don't know what's going to happen going forward, but we do know that we will grow versus a year ago in North America. Now perspective, it's 30% of our business in the U.S. So 70% of our cold and flu business is outside the U.S. And frankly, to date, we haven't seen the season start. It's been slightly down. It varies market to market, to be honest with you, but it's been slightly down. So we are expecting at least flat versus a year ago. And potentially some growth, but we haven't seen anything to indicate the season is here yet as we look at the guidance. So we're calling it kind of as we see it, where we're standing today on the full year. Now maybe just taking a step back for a second. If I think about all the changes that we're making on the business, I fundamentally believe we're doing the right thing and they're the rep changes. Now they need to translate to growth. and I'm very clear of that. The operating model changes we're making are right and I'm seeing proof points and benefits -- we started in North America, and we've seen the changes in North America helped really strengthen our performance there, not the clearing Victory still have work to do. But of a modest, it's probably taken a little longer and it's been a bit more disruptive than I would have where expected. And for perspective, I mean, we are rewiring the company. We're changing innovation, the way we're doing innovation. I believe that's going to have a positive impact on 2027. How we're doing commercial execution and our marketing model, we significantly improve how we're engaging with consumers, how we're driving commercial exits with the latest tools and technology we put in place, how we're doing resource allocation. So I believe all of those things as we go into 2027 is going to help us change the trajectory of the business and strengthen the growth of the business. But they haven't yet played out yet in full force. But everything we're doing is in train and will get embedded as we go forward, and we're acting with extreme urgency and pace to make sure we get those things in place.

Maybe we step back to your question on Q3. listen, you've seen a couple of one-offs. Obviously, we don't like the one-off Centro TC classification issue and the cold and flu category down versus a year ago. I think the comment you asked me, and I'll ask Dan to talk more about Q3. But as you ask me what are the other things that maybe below my expectations. I think I made that comment in my last question, which is the operating model change, right thing to do. I think we're heading in the right direction. -- taken a bit longer to do. But maybe, Dan, I give you the Q3 perspective.

Thanks, Brian -- so in terms of Q3, let's just be clear, was below our expectations. What were we expecting? We're expecting North America to strengthen emerging markets to accelerate and Europe to remain challenging. What have we seen? North America didn't strengthen as much as we expected. That was due to low cost cold-and-flu consumption, down high single digits in Q3, which reduced in lower shipments. That had around 40 to 50 basis points impact on the group -- in terms of emerging markets, we did see an acceleration, double-digit growth in India, -- we saw me back to high single-digit growth. And in China, a strong underlying growth, high single digit, but that was impacted by the Centrum OTC rotary classification issue, which was around 50 basis points on the group. And in terms of Europe, Europe did remain challenging. Our portfolio remains resilient in that backdrop. The units are down mid-single digits from a category perspective in Q3. So overall, as I said, below our expectations, and Brian talked about the actions that we are accelerating and moving at pace to drive stronger growth moving forward.

The next question comes from Loren Ackman from Barclays.

Brian Donitaren here at Barclays. So can we go back to this China thing. Just unclear on this. When did you know about this change in the classification between OTC and food-grade ingredients? And -- it sounds like it's going to continue into Q4. It's not like -- it sounds like you thought you could have a fix to it, but then there was no fix. So what changed in your discussions with the Chinese authorities? And then how long is it going to take to actually get a proper solution for this? Because I guess this is the new news today? And then secondly, just on the longer-term guidance, Brian. I mean, given the print this year. I know it's been a perennial question, but was there any sort of thinking at the Board level just to get that guide down in the medium term because clearly bridging from 2.5% to 4% to 6% looks even tougher.

Thanks, Lauren. Listen, let me start with China. -- and give you a sense of what happened and what we knew and what we see going forward. first of all, let me say we do have a strong business in China. It will continue to be a key growth driver for us. But this is going to have an impact. So Sintrom is roughly 30% of our Chinese VMS business. The way it works in China on BMS is some things are classified as over the car and some things are classified as food grade. So OTC center is about half of our Centrum business in China. -- and it's distributed through pharmacies. So OTC classified products can't be sold on DCOM, things like Don and regular decom. So -- if you look at the 2 businesses, our China OTC business and our Centrum OTC business and our sensor Health business, health food business is roughly 90% on DCOM, growing pretty healthy double digits. -- the Centrum OTC business has been more of a flat kind of growth business. Now we've, over time, have been shifting our portfolio from OTC to Health Foods. So this business looked very different 5 years ago where it was a vast majority in OTC. We continue to drive that. We were in discussions with the Chinese health authorities over the summer through mid-September kind of timing. As you can imagine, as we're having conversations with health authorities, they're quite sensitive. And actually, we're quite sensitive to share any discussion -- specific discussions we've had with the health authorities in China. But what became clear towards the end of the quarter is that there is not going to be a short-term solution for this. And frankly, we don't see as we sit here now, necessarily the solution in 2027. So we are working to mitigate the issue. It's not a safety issue. It's not a quality issue. There's no issue like that, which is why we felt like we could come up with a resolution. We are working to mitigate it really by driving the portfolio we have in China and making some portfolio changes. We're launching BenaFiber in China in Q4. We've accelerated that launch because that is another e-commerce opportunity for us. So we're doing everything to mitigate. But the reality is we don't have a path to get back to market on market at this point in time. So our assumption is this will also go through 2027. Yes. Sorry, guys. So on the long-term guidance, thanks for the question, Warren. Listen, I fundamentally believe this is a business that should be able to grow in that 4% to 6% range. Now we haven't done it for a couple of years. So I understand that, that raises a very big question. And we need to improve. I mean, fundamentally, we have been dealt with categories that have been slower than expected. We are taking very clear actions, by the way, that should not only drive our accelerate our growth, but also accelerate category growth. So we are taking those actions to do it. I talked about some of that. We revamped our innovation program. We're revamping our marketing model. how we do commercial execution. All this is part of the new operating model that we're that we're putting in place. So at this point in time, I still believe this is a business and do it. We have great brands in great categories. We need to demonstrate that improve that and prove that to everybody. Now as we look at going into next year, I fully expect the changes we're making will give us stronger growth and improved performance in 2027.

The next question comes from David Hayes from Jefferies.

Question for me just on the margin on the reinvestment plan. So the profit guide held today, even though obviously, sales growth has been below your expectation to your point. So where is that coming from in terms of the gross margin holding up? Is it quicker and the cost saves that are more than compensating -- or I guess the question would be, is there an A&P spend change in the plan? That means profit is still coming through? And looking into next year, in terms of the profit outlook, if we're kind of assuming at 3%, 3.5% top line growth with some of those adjustments that you've called out, just now in terms of the impact going into the year. Where do you think the margin can end up next year, does it still go up? Or do you plan to pick up on your last point, Brian, about the category acceleration and your acceleration here, will you be spending more in pricing and brand investments to try and get that volume growth to step up? And does that mean the margin guide midterm might be a little bit more lumpy over the next few years.

All right. Thank you, David. Listen, I'll pass that to Don on.

Yes. So thanks for the question, David. First of all, let me talk about this year. And I'll just start off by saying we continue to invest to drive growth in this business. We invest at A&P at a healthy level, and we're also investing A&P ahead of revenue growth. The second thing to say is we continue to see strong progress from our supply chain productivity program, -- we saw that in the first half of this year. We expect that to continue through the second half. That will cover the on costs that we're seeing for Middle East this year. And in addition, we also have the start of the operating model change savings as well. So when you look this year, full year, as I said, we continue to invest. And in terms of consensus, adjusting for flat this year, then I am comfortable with consensus in terms of margin this year. If we look to next year, Obviously, lots of moving parts. In terms of inflation, in terms of COGS, the situation is volatile, it's uncertain. So that's about scenarios and ranges rather than definitive numbers. Our objective is to mitigate that on cost primarily through productivity savings, both supply chain and operating model savings, and we will also look to optimize price pack architecture as well. But as I said, that's a moving part. There are lots of moving parts, but that would be our objective. The other thing I would say, when we look to next year, -- we are focused on driving progress in terms of top line performance. And so we will continue to invest at healthy levels in the business. And obviously, when we get to full year results, we'll provide specific guidance on the year.

The next question comes from Jeremy Fialko from HSBC.

A couple of questions from me. In the kind of prepared remarks, you referenced some of the changes in U.K. execution and so U.S. revenue growth management, which you are rolling out for other geographies. Is there any way you can perhaps quantify or spell out the sort of benefits you've seen from those and then the second question is on innovation. Again, if there's any way you can perhaps give some sort of color as to how much greater or how bigger the innovation pipeline is 27% relative to '26.

Good. Well, listen, let me start with the innovation question. So listen, Karl, our new Head of R&D joined just a bit over a year ago. We've taken a step back on our innovation program, priorities, investment, how we do things. I think we've made tremendous progress in the last year that makes me much more optimistic going the force. First of all, on oral health. Listen, this is a business that continues to perform well. Our innovation program in Oral Health for 2027 is -- continues to be incredibly strong, and we now have a much clearer view of how that will go beyond the next 2 to 3 years also. If we look across the other business, like I said, we have a very big FDA approved launch that will happen on Advil at the end of the year. We have really strong innovation across a number of areas in digestive health and frankly, a very big program on Centrum and Wellness next year, which is also a global program. In the end, I feel very good about it. Obviously, we never share too many specifics for competitive reasons, but there are a step change in our innovation program as we go forward. If I step back and your question on commercial execution, listen, we're not going to give very specific kind of impacts of each of those initiatives. But what I would say is we started in the U.S. Again, it's not like we haven't done revenue growth management in the past, but we've created more better tools, much more sophisticated tools, obviously, leveraging the current AI technology. We rolled that out in the U.S. in the first half of the year, absolutely seeing benefits from that. And that is the program we're now taking, and we've begun this. But through Q4 and Q1, we're going to roll out broadly, and it should be embedded in our top 20 markets time we get to Q1. The other programs we put in place around perfect Store and commercial execution, we've had them in the past to be clear. We have enhanced them again, leveraging the latest technology and the data that we have. So we've seen improvement in I mean, in the U.K., as we said. But again, that's going to get rolled out in the majority of our top 20 markets, it's happening now over Q4 and Q1. And then maybe I turn it to Don to Sias anything else to add if I left anything else to I'm not sure.

So maybe just let me give you a couple of examples because on the AI tools that we're leveraging in terms of pricing, promo mechanics. Our objective -- our objective is to broaden our market reach, ensuring that we've got the right price pack architecture at different price levels and across different channels. So an example would be our launch of Duo fab in Sensodyne in the U.K., which is now a top 5 selling would be an example of broadening that coverage. We've also lifted our promo strategy in terms of the effectiveness of multi-buys versus high low and being really lazy targeted for specific brands in specific markets. So as Brian said, leveraging AI, that we've embedded in the U.S. and rolling that out globally to our top 20 markets, which should enable us to get even more effective at driving for market coverage to unlock growth.