Reckitt Benckiser Group plc (RKT) Earnings Call Transcript & Summary

Ladies and gentlemen, we're about to make a start. I want to welcome you to RB's Full Year 2019 Results Presentation and Strategic Update. With us today are our CEO, Laxman; and our CFO, Adrian Hennah. Just before we start -- I need to get the clicker, I just want to draw your attention to the usual disclaimers on forward-looking statements. And as this is a strategic update, there will be a number of those. So anyway, assume you've read all that. Without further ado, I call on Laxman, our CEO.

Good morning, everyone, and thank you all for joining us for the full year results and our strategic review. We will start today by providing you with our highlights of our full year 2019 results. Thereafter, we will cover the results of the business diagnostic, and we will review our strategy. We will then outline our plan to drive superior growth and outperformance and deliver long-term value for shareholders. Finally, we will address any questions you have. We are joined today by Jeff Carr, our incoming CFO, who officially takes over on April 9; and by Ranjay Radhakrishnan, our incoming Head of Human Resources, who starts today. Jeff and Ranjay are 2 new members of my revamped leadership team, and I welcome them into the company. I also wish to thank Adrian Hennah for his years of service and for helping me immensely get my arms around the business. And I thank Richard Joyce for his years of dedicated service to the company. And I noticed his last challenges with my last name, which Richard is Narasimhan. I did notice that, and I wanted to catch you on it just on your way out. Anyway, so hopefully, you'll remember that as you go. Yes, thank you. Yes, Narasimhan, Richard. John Dawson has joined the company to help us build a new IR function for the future, and I welcome him as well. Now on to a quick review of 2019. We finished the year consistent with the expectations we set in October. We delivered top line growth for the business at 0.8% on a like-for-like basis. We had a modest decline in operating margins. Our EPS came in 3% ahead, helped by several factors that, while positive this year, are headwinds for next year. Our Hygiene Home business continued to perform and closed the year with good volume growth and an improving market share trend. I'm also pleased that our Health business showed an improved market share trend in the fourth quarter, but there is no denying that Health had a difficult 2019. I am not pleased with its overall performance and, in particular, do not like health volumes. Outside of Mead Johnson, it did not perform as well as it is capable of. The issues are largely executional. For example, our Health sellout is ahead of our Health sell-in in the U.S. I will discuss these issues in greater detail in a bit. Let me talk briefly about Mead Johnson. We bought the business in 2017 for $17 billion. There has been a lot that has been positive about the acquisition. Mead Johnson increased our presence in the U.S., Latin America, ASEAN and China. The RB way has helped the business grow in the U.S. and gain share. RB's capabilities with eCommerce and consumer relationship marketing have provided a strong foundation for growth and innovation. The combination of Mead Johnson's science and RB's commercialization has led to very successful new product introductions as well, including the brand Enfinitas in China. The strong performance in the U.S., strong eCommerce performance and strong performance with some of our new products led to a business that is growing better than it did as a stand-alone company. However, Mead Johnson had a difficult year as circumstances changed. The competitive environment in China has proven more challenging than we expected. As both rates declined, the regulatory environment intensified and local competitors captured market share. While our performance in infant nutrition was better than many other multinational companies in China, we have lost share and have been slow to recover from our 2018 manufacturing disruption. Our businesses in Latin America and ASEAN also had executional challenges. Consequently, the business has performed worse than expectations we had when Mead Johnson was bought in 2017. We, therefore, revalued the business to reflect changes to RB's original assumptions, leading to a noncash impairment of our goodwill in the business. However, as I was -- as I will detail later, we believe Mead Johnson has strong prospects beyond the valuation, largely reflecting what we believe we can do with the business, building on its strong foundations in China, the U.S. and in other parts of the world. This involves us capitalizing in new ways on the businesses' strengths. The Mead Johnson brand is loved in many markets, including in China, where it is highly respected for its science and for its quality. What we've been able to create with digital, with consumer relationship marketing, with science and cross-border platforms are the foundations for growth in new spaces and with new cohorts. We can use these open, new geographies where RB is present, such as India, where initial tests have been successful, addressing the needs of new cohorts, such as toddlers and youth, and expanding to digital health, all of which are important elements of the future of this company. Mead Johnson's science is also highly relevant for the aging category. We have specific development efforts underway to broaden Mead Johnson and grow it into new spaces, all of which, when combined with better execution and performance of the core business, would make it consistent long term with being a mid-single-digit organic growth company. Turning back to the business. Adrian Hennah will now provide a quick summary of our 2019 performance and its key drivers. I will then come back and provide an overview of the diagnostic on the business, including an overview of some of the root causes. Let me be clear, our performance in 2019 was not satisfactory. It does not reflect our growth ambition or the potential from our business. It does not reflect my aspiration to rejuvenate RB and return it to a consistent, resilient top-tier growth company with superior margins. That will change, and my management team and I are committed to making that happen. Now Adrian will take you through the 2019 performance. Adrian?

Thank you, Laxman Narasimhan.

Louisiana.

That's where you come from, Laxman. The -- so turning to the first financial slide. The -- these are the reported numbers for the group as a whole for half 2 and for the full year. We'll cover the trading and impairment in a moment, focusing firstly on the other items on this first slide. The net finance expense is very low at a cost of just GBP 9 million in half 2 and GBP 153 million in the full year. There were several significant factors, which went in the group's favor in the year. Firstly, it's noted that half 1, the RB 2.0 restructuring and preparation for the repayment of the former RB MJN bond led to higher than usual cash deposits with group treasury, on which the hedge return was made. Second, the favorable settlement of some old litigation in Latin America, which we reported in Q3, included an award of interest over a significant number of years. And third, a downward revaluation of a put option held by our partners in a joint venture, which is required to be included in the interest expense. Adjusting for these factors is an underlying net interest cost approaching our ongoing expectation of the cost of debt, excluding the tax-related component of around 3%. In addition, the tax-related component of interest expense was favorable in the year. The tax charge on adjusted income was 22% in the year, slightly beneath our guidance and ongoing expectation of 23%. This was the result of some settlements at slightly lower levels than we expected. And within this, there is a release of provision for interest expense. Discontinued net income reflects the $1.4 billion cost of the Indivior settlement. The GBP 31 million charge in half 2 is the result of the appreciation of the value of the dollar against sterling. $1.4 billion had been paid at the year-end. Total adjusted EPS growth at actual rates was 1.8% in the half year and 2.8% for the full year. If the exchange rates in December were to continue to end 2020, the net translational impact of currency movements would be a 3% to 4% headwind for the full year and a 4% headwind in quarter 1. Turning then to the next slide and the substantial adverse adjusting items in the year. The principal item is an impairment of the value of the investment in Mead Johnson. We'll cover here the arithmetic of the impairment Laxman has already referred to, and we'll cover further in a few moments the outlook for the group's Nutrition business that underpins the arithmetic. The book value of the IFCN net assets prior to the impairment was just under GBP 15 billion. Both the financial model constructed to assess the acquisition in 2017 and the relevant IFRS impairment test focused only on the current geographies and current product types of the business. Future white space is not included. At the time of the acquisition, we expected medium-term market growth of 3% to 5%, and we expected to move the growth of the business from an inherited decline to the 5% level over a few years. We expected to be able to increase the inherited margin by an incremental 6% to 7% with around GBP 200 million per annum of synergies, largely from removing duplicated corporate costs and greater procurement efficiencies. We expected this to deliver a return on capital equal to our weighted average cost of capital in year 5, and the model implied a 3% terminal growth rate. The most significant changes evident over the last year have been in the China market. The prospects for market growth have lowered as a sustained materially lower birth rate has become likely, and the competitive dynamics have changed with evolving regulation and the progress of a number of local companies. We have also revised our view on the optimum long-term design of the supply network for the business as a whole. This will be more capital-intensive than we had expected. More short term in nature, we have also progressed less fast than we expected in integrating Mead Johnson and the RB Health business, especially in LATAM and ASEAN, which has led to weaker performance. Taking these factors together, and again, just for the existing geographies and product types has led to a reduction in expected top line growth to around 3% at constant rates over the next 5 years and only moderate net margin improvement from the current position. The geographies we serve have, on average, general inflation of about 1% higher than sterling. In this context, we now see a 2.5% terminal growth rates to be more appropriate. Valuing these cash flows at a 9% pretax discount rate is a GBP 9.9 million valuation, an impairment of GBP 5 billion. Laxman covered a few minutes ago how the group sees the opportunities in Nutrition more broadly beyond the confines of this impairment model and the important role they are expected to play in the group going forward. Also included in adjusting items are an impairment of a small China -- traditional Chinese medicine business, Oriental Pharma, which we acquired in 2012. And also included are the costs of integrating the Mead Johnson acquisition and associated RB 2.0 costs and the amortization of MJN intangibles. These latter items are in line with guidance, and we have, as usual, included an analysis in the appendices to this presentation. And also, in the light of the revised strategic direction that Laxman will describe in more detail in a few minutes, we will not be incurring some of the expenditure previously envisaged under the RB 2.0 program. We expect a reduction of around GBP 30 million to GBP 35 million on the originally planned GBP 450 million. So turning to the next slide. The half 2 1.7% and the full year 2.7% adjusted earnings growth comprised the components set out on this slide. For the full year, 1% from net revenue growth; a 3% decrease from the 15 basis points margin decline; a 4% increase due to the temporary lower interest costs, which I noted a couple of minutes ago; a 1% headwind from the tax rate, which was 21% in 2018; and then a 2% foreign exchange tailwind. Turning to the next slide. This slide shows the revenue, gross margin and adjusted operating profit numbers for half 1, half 2 and for the full year for the group as a whole. Like-for-like net revenue grew 0.9% in half 2 and 0.8% for the full year. Gross margin increased 10 basis points in half 2, a decrease of 10 basis points for the full year. And adjusted operating margin declined 110 basis points in half 2, a 50 basis points decline for the full year. BEI spend for the group increased in half 2, as we signaled, by 130 basis points and 60 basis points increase for the full year. And total SG&A spend, which increased by 20 basis points, benefited from a reduction in variable pay expense due to the weak performance this year. The lower variable pay improved the operating margin by about 100 basis points compared to a normal ongoing level for a well-performing group. A headwind, we hope it certainly, of course, is for 2020. We will return to the business unit operating margins and a closer look at the drivers of margin change in a moment. So turning to the next slide and now looking just at the Health business unit. In headline terms, you can see that the Health business unit had a poor quarter in reported revenue, declining by 2.2%. Many of you would have seen market research data, which shows a stronger performance. Market growth was helped by reasonably strong incidence of cold and flu, and RB's share performance improved. Still in decline in Q4, but at a much lower level. The market data we access indicates consumption growth of RB products of around 2% in Q4. So what accounts for the 4% or so difference? There are 2 elements. About 1/2 with a lower seasonal increase in channel inventory, principally in the U.S.A. This was largely due to difficulties in the group's supply chain, which meant that not all orders could be filled. Laxman will cover this in a few minutes. Improving the group's supply resilience will be a significant focus over the next couple of years. The other half was principally an increase in trade spend. You will also hear more about this from Laxman in a few minutes. While the price points for most of the group's health products have been appropriate, there is scope for targeted reductions to enhance competitiveness and contribute to the restoration of balanced price and volume growth. Some adjustments were made in Q4. The 1% Q4 reduction in IFCN comprised further strong growth in the United States; a slight decline in China with growth at the super premium end, but a weaker performance at other levels as focus switches to our new grass-fed product; and further declines in LATAM and ASEAN, a combination of weaker market growth and some execution issues. The 2% reduction in OTC revenue was in contrast to slight market share gain in the latest market data available and reflected the supply and trade spend issues I've just mentioned. Mucinex revenue declined year-on-year, but consumption data reflected good market growth and the expected improvement to near stable market share. Nurofen and Gaviscon showed good revenue and share growth. The smaller local OTC brands showed mixed performance. Minus 3% Q4 decline in other health reflected pricing pressure on Dettol and the signal competitive pressure on Durex from the stage in the innovation cycle. VMS revenue increased with strong growth in China, more than offsetting a continued weaker performance in the United States. Turning to the next slide, the price/mix and volume data for Health. Across the business unit in Q4, the 2% revenue decline comprised a 5% volume reduction and a 3% price/mix increase ease. This is a 4% volume decline in the full year, a bad number that Laxman has already called out and will return to in the rest of his presentation. Turning to the next slide and analysis of the margin movement in Health. Adjusted operating margin decreased by 120 basis points in half 1 to 30 basis points in half 2, giving 180 basis points in the full year. We've set out here a quantification on each of the principal components of the full year margin reduction. Firstly, a 70 basis points gain as the rest of the Mead Johnson cost synergies were delivered, slightly offset by the remaining RB 2.0 cost increases. This was mainly in half 1. Secondly, the impact of a lower variable pay, which had a larger impact in health, reflecting the weaker performance of this business. And thirdly, the increase in BEI, which was oriented to half 2. And then fourthly, the other trading margin change, a net 300 basis points reduction. And there were a number of factors behind this reduction. There was a benefit from lapping the IFCN supply disruption of around 70 basis points. Importantly, there were investments, including increased production capacity, R&D, systems infrastructure, SQRC and channel capabilities in China, in total around 70 basis points. There was negative leverage from lower volumes going through the factories and the lower revenue. This was a big item around 120 basis points. And there was an increase in input costs, some specific to ingredients and products in our portfolio; some of which we called out in the first half of the year; and other supply costs, exceeding the benefits of price increases; and some negative mix, which is about 150 basis points. And then there was a small net increase in SG&A. Okay. So turning then to the next slide and focusing now on the Hygiene Home business unit. HyHo reported another 4% growth in Q4, giving 4% for the year. The business continued to perform well, benefiting from the focus on its brands and distinct from some of the pressures, which have disrupted progress in the Health business. Reported growth was slightly higher than the underlying consumer offtake growth, which we see as close to 3%. The reported numbers have been boosted slightly by the legal settlement in Latin America covered in Q3 and which increased reported Q3 growth and by some changes in the go-to-market model, which will be annualized in early 2020. Growth was again broad-based across the brand portfolio. The 5 largest brands, Finish, Air wick, Lysol, Vanish and Harpic, all grew in Q4 and in the full year. Turning to the next slide and the price/mix and volume data for Hygiene Home. The Q4 growth rate comprised a 3% volume increase and a 1% price/mix increase. This move to greater volume growth was in line with the direction we signaled at half 1. It reflects the pattern of the prior year comparatives, an increase in BEI and the pattern of innovations. The 2-year picture shown on this slide, therefore, shows the balanced volume and price/mix position that we targeted. Turning to the next slide. The Hygiene Home adjusted operating margin grew by 190 basis points in half 1, by 110 basis points in half 2 and by 150 basis points in the full year. We set out here the principal components of the increase for the full year. Firstly, there was a small reduction from the rest of the additional RB 2.0 costs, again, almost all in half 1. Secondly, there was an increase of 50 basis points in BEI spend. Following a 40 basis points reduction in half 1 we signaled at half year, the intend to increase this materially in half 2. And thirdly, the other trading margin. The net 220 basis points improvement comprises an increasing gross margin, where the progress in half 1 was maintained despite lower year-on-year price/mix increase in half 2. This reflects continuing good cost control, which was importantly accompanied by continuing improvement in quality and HSC measures, investment in innovation and the full delivery of a program to optimize cross-region costs, especially in Europe. Turning to the next slide. We show here the usual slide on net working capital. We've continued to run the business with negative working capital slightly better than our target of 9%. There continues to be pressure on receivables, especially in developed markets for modern trade retailers, but also increasingly from larger players within the e-channel landscape. Inventory levels have been quite stable. However, the group is planning some modest increase to improve service levels in Health, where longer-term work is undertaken to enhance systems and processes. And turning to the next slide on free cash flow. Free cash flow remains strong, but free cash flow conversion at 87% fell below the 100% we target. This was principally due to exceptional spend on the integration and RB 2.0, which reduced conversion by 10% and also due to the slight increase in net working capital, CapEx being slightly above depreciation and the non-tax credits within the lower net finance costs, which I referred to earlier. Capital expenditure at GBP 396 million was 3.1% of revenue, in line with guidance. Turning to the next slide in this -- on net debt, net debt at the year-end was close to the level at the start of the year and its composition is shown on this slide. Broadly, the GBP 2.1 billion free cash flow generated was deployed just over 1/2 on dividends and the rest on paying the settlement with the Department of Justice. The latter has clearly delayed our intended progress in paying down the debt taken on to acquire Mead Johnson. We have set out an analysis of the movement in the net debt in the appendices. And then finally, in this section, Laxman will cover 2020 and medium-term guidance in a moment. We're on the next slide. If we could turn to the next slide. The -- so I say, Laxman will cover 2020 and the medium-term guidance in a moment. However, as context for this, it is worth emphasizing the year-on-year effect of a couple of items in the 2019 numbers. Firstly, as I've already mentioned, operating margin benefited by about 100 basis points from variable pay being materially lower than we would expect in a normal year, implying a go-forward adjusted operating profit margin dynamic of around 25% rather than the 26% we've reported. Also, earnings clearly benefited from several unusual factors, reducing the net finance costs and a tax rate below the 23% we expected over the medium term -- we expect over the medium term. Taken together, these margin and other items increased 2019 adjusted earnings per share by about 7% from about 325p to the reported 349p. And with that, I will hand over to Laxman Narasimhan to talk about the future.

Thank you, Adrian. Much appreciated. So that was the review of the 2019 performance. The last time we collectively met, I mentioned that I joined the company because of its amazing brands, the company's record of performance and its reputation as an innovator with strong commercial capabilities focused on our performance. Our focus early on -- my focus early on was to listen and to learn. The team and I spent time in markets and met several customers all around the world. We visited our field operations. I sold with our sales teams, visited our factories, our research and development centers and immersed ourselves with consumers. To that end, I spoke to many employees, a large portion of whom are shareholders in this company, to alumni and to investors. We analyzed our performance in great detail and assessed our capabilities versus competitors. This detailed diagnostic led to our go-forward strategy, designed to return the company to mid-single-digit growth and deliver superior value. I thank everyone for their input. I have no historical baggage here. The Board has been extremely thoughtful and pragmatic, and we've all approached this exercise with a laser-like focus on shareholder value. And to that end, all options were on the table. I spoke to you all briefly during our Q3 trading update in October to give you my initial impressions based on my work to date. I said that I believe the company is a good house in a great neighborhood. Now the company had run hot in a few places, and we are trying to do too much in too little time. Execution improvements were many, and we immediately paused any activities that distracted us from execution. Nothing I have found since then has changed that impression. We have not been waiting to address our challenges. We are already moving with pace on multiple fronts to make the required changes. There are 5 key messages I'd like you to take away about RB. First, it's a good house in a great neighborhood with the potential to be a great house again. We have a clear strategy anchored in purpose to rejuvenate mid-single-digit growth in the medium term. We have a detailed 3 phased plan we are investing in funded by productivity. This will create long-term shareholder value while engaging society with purpose. And finally, an organization and team that is inspired by this mission, by this purpose to carry this through. The outcome of this is simple. It's about restoring growth and driving strong earnings. To achieve this, we'll invest around GBP 2 billion in the business over the next 3 years, funded in 4 ways: through an investment in costs of around GBP 200 million that will hit the P&L; through an enhanced productivity program that will create the scope to invest GBP 1.3 billion over 3 years back into the business; through a one-off transformation investment spread over 2 years of GBP 250 million; and a higher level of Capex, around 4% of net revenue for the next 2 years. As a result, alongside mid-term single-digit revenue growth, we expect to deliver earnings growth of 7% to 9%, restore strong free cash flows and delever the balance sheet. Let me take you through our plans in more detail, and let me start with why I think RB is a good house. First and foremost, this is a company with an amazing heritage of 200 years. The trust in our brands has taken decades to develop. Our company has shaped communities with deep involvement. Our presence in Hull in the north of England is a great example of this company's pedigree, and what a privilege it is to lead it. After all, it is from the port in Humberside that Dettol made its way across the Commonwealth, including to India where I grew up. We have many strengths. RB's category-leading brands are loved by consumers. Our brand strength, premium new products and strong brand equity investments underpin a strong gross margin with good price premiums. Secondly, we have great people grounded in a can-do attitude and an entrepreneurial spirit. Our people talk about RB with me as owners, with a real sense of passion and achievement. We have one of the most stringent ownership requirements for executive management for a FTSE 50. And indeed, throughout the company, more than 50% of our employees participate in some form of share ownership plan. We have a strong execution gene when activated. At its best and when focused, RB is an execution machine, moving with pace and with ambition. Our people have a commercial feel for business opportunities like the best entrepreneurs. And they rise to the occasion like no other I've seen, particularly when there is a higher purpose. The recent incidents with COVID-19 bring that home. A company-wide team, including teams from Dettol and Lysol, came together to overcome many hurdles to ensure our consumers have access to information and access to products. Our people are working round the clock with consumers in mind. We are committed to China. It is a great country with long-term potential, and we have a very strong business there. And we're doing everything we can to be supportive to that great country. I can't stress enough how important digital and eCommerce will be to our future and how it already is a strength to RB. It's already big in China, but not just there. Mead Johnson, with its high order volumes and value, is a real positive for eCommerce. We've got eCommerce operations in over 40 countries today, and it is now over 10% of our overall business by revenue. It is growing 30% a year, doubling over the last 3 years, and we expect the strong growth to continue. For example, digital and eCommerce are large enablers for Durex, which now has direct-to-consumer sites in 32 countries. In 15 countries, we can now deliver Durex in under an hour and provide access and information and purpose, all by recognizing the consumer need for convenience and privacy. We have a strong global network with real strengths in China, the U.S. and developing markets, amplified by the Mead Johnson acquisition. With the right in-market scale, our footprint positions us well with a large number of consumers coming into consumption, particularly in developing markets. We have one of the largest bases of talent trained in multiple developed and developing markets. And finally, innovation has been the lifeblood of RB and will continue to be so. With strong signs across multiple areas, the Mead Johnson acquisition furthered that strength in science. For instance, we're a leading player in microbiology, foundational across our businesses. We also have a great skill in introducing new products and taking them to multiple markets, but it's not uniformly great. Our approach to science is strong. We encourage open-source innovation and in-licensing, critical to the way tomorrow's science is developing, coupled with very strong lift and scale. We have no ego about noninvented here, which our partners like. So our brands, our people, our culture, our eCommerce, our global network and our science are what drives our growth. However, there are some opportunities as well for self-help and improvement. The creation of the business units over the last 2 years through RB 2.0 brought a real focus to the Hygiene Home business. The leadership team invested in competitiveness strengthened the product pipeline and put in place a strong operating rhythm. The business began growing again and has been a steady performer, with further potential to increase market share and to outperform. Mead Johnson grew as well, less than expectations, but grew significantly more than it did as a stand-alone company. On the other hand, RB 2.0 did not go far enough. Health faltered with the pace of change. It became large, unwieldy and unfocused. While synergies were delivered, Mead Johnson had more challenges than expected when we bought it as well as issues post acquisition require high investment and attention. Consequently, the leadership's focus on the rest of Health beyond Mead Johnson went down substantially, reflected in its performance as we show here. We missed important product trends, particularly in Durex, and experienced a lot of new product pipeline leakage. In addition, some pricing decisions backfired. We've invested well behind our brands and deliver healthy gross margins as a result, which reflect our premiumization priority. As a result, I feel largely comfortable with the level of brand equity investment that we are making it benchmarks well. When I joined, I heard a lot about RB as being a lean company. This is true. Yet, we are not as efficient as we should be, as highlighted in our conversion from gross margin to operating margin. It points to opportunities to find savings here, to invest back in growth, such as innovation and sales. Our analysis showed that we have opportunities to be significantly more efficient and effective in our brand equity investment, our direct and indirect procurement as well as our end-to-end supply chain costs. We are third quartile on brand equity investment efficiency with a higher nonworking spend and the need for better allocation of spend. We used to be best-in-class in procurement with very strong practices, but we have opportunities here today, given the leanness of our team in both direct and significantly more in indirect procurement. Our end-to-end supply chain is not as efficient in certain areas or effective. It delivers lower manufacturing costs and quality, a muscle we have built, but it comes at the expense of customer service. We need to improve supply planning, including leapfrogging into new machine learning and AI tools. We can increase the use of process automation. We have a wealth of opportunities to capture these efficiencies and reinvest them in capabilities and the expertise to drive growth. These form the backbone of our enhanced productivity program, which I will talk about later. Over the last few years, execution, a real strength for RB, became an issue, particularly in Health. The MJN acquisition created a margin pressure, which meant we cut back in other areas, including our sales teams, which cost us distribution, particularly in developing markets. Growth faltered and service levels decreased, illustrated perfectly by poor product availability, in this case, in the U.S. in peak season. Our ability to fulfill customer commitments also suffered after several years of underinvestment in our supply chain infrastructure, something that explains our Q3 and Q4 performance where sell-out in Q4 in North American Health was significantly better than our sell-in, frustrating several customers I had the opportunity to meet on my tours. Our SAP investments, while correct, amplified this weak underlying capability. We need to be lean in the right way, not lean by cutting muscle. I'm pleased to say that we're already tackling this with vigor, with much stronger performance already in the first few months. But the long-term fixes, none of which are rocket science, are a focus in parallel and do take time. So some clear strengths and some opportunities. What is another benefit is, of course, that we are blessed to be living in a great neighborhood. RB is present in large categories with strong sustainable structural growth. Cutting across these are 4 major megatrends, which provide us tailwinds as well as the fifth, which is fundamentally disrupting the whole world and where we are strong. These provide tailwinds and shape where we play. To start, the global pressures of urbanization and global warming make the need for hygiene ever higher. Hygiene is the foundation of health, creating a strong symbiotic relationship for our business. It is entirely visible in the difficult events around us today, which are challenging public health systems. Pressures in governmental health spending is reinforcing self-care, avoiding one visit to the health care system with available self-care products. And digital information access saves money in developing markets and in developed markets. Demographics are also a tailwind. We benefit both from the increase of youth coming of age as well as aging consumers. Sexual health and well-being is a big societal issue. There are over 1 million transmitted infections daily, 5,000 new HIV infections every day, particularly in sub-Saharan Africa. At the same time, aging creates opportunities for our science platforms. When combined with digital, which is completely transforming what people buy and how they buy it, we can expect large growth in areas like personalized nutrition, wellness and digital health. Finally, all these positive megatrends require solutions that are sustainable. These underlying megatrends are very compelling for some time to come and directly support our presence in hygiene, in health and in nutrition. The magnitude of these societal challenges underscores also why our portfolio must not just do well, but also be authentically engaged in doing good. Given this great neighborhood, the big question was this: How does breadth of our portfolio fit with this opportunity? Undoubtedly, the competitive bar is increasing. Consumers demand more. Customers expect more. Technology and eCommerce are raising the bar. What it takes to outperform will be loved brands, market presence, customer relationships and capabilities, all efficiently delivered at scale. Consumers want to buy trusted brands. Our brand portfolio gives us leverage in commercial activation. An example is the flu season. The common promotions we run in the U.S. using the scale of Lysol and Mucinex, coupled with sensing data and analytics, help us digitally pinpoint where we see the flu season break. We rely on similar programs in the U.K. with Lemsip, with Dettol and with Nurofen. We see collective opportunities across our portfolio as the #1 surface care company in the world. Our scale gives us market presence in the most important markets, which drives availability without excessive deleverage. In India, Dettol and Harpic have grown up together over the years in terms of market presence. And now with 2 focused businesses also in channels like pharmacy. Having spent time with customers in North America, our largest market, it's clear that scale enables access and better customer relationships at the highest levels, particularly in eCommerce. Scale enables us to access and develop stronger science networks as in the case of microbiology, which cuts across our business. It helps us access development partners, whose small brands, or what we refer to as rocket brands, digital-first brands, we can commercialize. It helps us build distinctive digital and eCommerce capabilities. For example, our digital and eCommerce learnings in China and in Health, have been very strong over the years. We are scaling these across our entire portfolio and taking advantage of our scale in eCommerce where we built the speed of activation and delivery and used scale on the underlying technology platform, data and analytics. For example, we're doing this in UpSpring, a small women's health brand from the U.S. that is now being scaled to other markets. These rocket brands, coupled with our minority investments in partners, such as Pharmapack and Your.MD, and partnerships with incubators, like Launchpad and Founders Factory, are pivotal to our future growth. Our portfolio, therefore, plays in great neighborhood spaces in hygiene, health and nutrition. Given the megatrends, what is required to win in this future requires scale, trusted purposeful brands, market presence and customer relationships and capabilities. Therefore, keeping the portfolio together and focused entirely on performance was the most value-creating choice. Yet, focus does matter. RB's historical success has been driven by each business having a clean focused playbook on how we run our business to create and compound success. In their simplest form, our playbook is about having the right brands that consumers prefer at every point of choice, about developing the right premium products that underpin our gross margin, that fuels high brand equity investments which, in turn, is supported by flawless execution, coupled with a highly efficient business that are creating the resources to reinvest and delivering compounded growth, cash returns and long-term shareholder value. But all that requires accountable leadership. Across our business, there are large elements of commonality in this playbook. When in place, as in Hygiene Home, it leads to performance and compounding returns. When not in place, it does not work. We, therefore, need real focus. After assessing all options, our review concluded with the following observations. We are better and stronger together. We are leaving growth and profit opportunities on the table. We took on a lot of change but did not bring sufficient stability or focus. We need more and new muscle and need to do it at scale. And greater efficiencies can help us invest where it matters. We also concluded that the previous approach of transform to perform would create less value than an approach to stabilize and rejuvenate the company to first perform and, through that, to transform. I've touched on our business, our markets and why I think RB has the potential to be a great house. Let me now set out how we're going to rejuvenate growth. What makes RB distinctive is that the functionality of many of our brands authentically serve a large social cause, be it in hygiene, be it in sexual well-being or be it in nutrition. Harpic's campaigns around access to toilets have been very powerful. Durex in South Africa or Dettol in India drive availability of high-quality products and provide access to information and education for our consumers and for the communities in which they live. Today, our brands like Dettol, Lysol, Harpic, Finish Durex, Mucinex, Enfamil and Move Free, amongst others, fight at the front lines to give our consumers a better life. Why we exist? Our purpose, our soul is clear. We exist to protect, heal and nurture in our relentless pursuit of a cleaner and healthier world. Each word matters. They speak to our portfolio and the categories in which we play. Relentless pursuit captures RB's entrepreneurial and can-do spirit, all in the service of creating a cleaner, healthier world. Our company is inspired by the fight of making access to the highest quality hygiene, wellness and nourishment, a right not a privilege. Access has multiple platforms. Quality products that are available with attractive price points, along with awareness and advocacy, all part of how we make high quality accessible. Our brands will over-index on social with intentionality. But while doing so, we will redouble our focus through our brands on reducing, recycling or reusing plastics, reducing our water footprint and meeting our science-based carbon reduction targets. The 3 spaces that RB plays in, hygiene, health and nutrition, fit well together with a very attractive mix of market dynamics, consumer pull, customer relationships and market-based presence and new products that support an attractive earnings model. How we drive performance from the portfolio will obviously be key to returning RB to attractive growth. There are 4 main levers. Our primary focus is and will always be on penetration. When we get this right, we grow significantly. Yet as is evident in the multiple markets I visited, we also see the opportunity to extend where we play. We have opportunities to grow faster in markets we're already in that are not part of our focused category market units. We're also not present in many growing channels in the existing markets that we're in to the levels that we should be. Our power brands also have a license to play in adjacent spaces. We, however, do have market share opportunities in several markets and need to win at the point of choice. Additionally, we expect to scale digital-first rocket brands that we or our partners create or incubate as well as our brands with eCommerce, enabling customer engagement, consumer engagement everywhere we want to play. All of this requires resources, but the headroom for growth is clearly there. We've created a clear roadmap of growth for each space that leads up to a company that grows mid-single digits. Let me describe it. The first is hygiene. Our brands have significant penetration potential. For example, in cleaning toilets in urbanizing India and developing India as well as in Mexico, where we've built out Harpic as a leading brand. Over the last 5 years in India, penetration rates in urban environments for Harpic have gone up by 20% in urban areas and in rural communities by over 10%. But both still have lots of headroom. And there are other developing markets we're already in where we expect to see similar dynamics. Even a brand like Finish has good growth opportunities as dishwasher penetration in both developed markets, like the U.K. or Germany and in markets like China, are significantly below where they could be. In China, less than 2%. Looking at new spaces, our purposeful brands are expanding. For example, Air Wick Essential Mist Aroma taps into a well-being trend that stretches the brand into a consumer need for nurture. Over the last year, in Europe, we're seeing strong growth and market share increases. When it comes to new places to be, it's all about putting investment behind our leading brands and their category market units. The Hygiene business today focuses on 40 category market units that drive a significant portion of its growth, growing materially over the 3% or so category. By investing in breadth and capability and adding 10 CMUs to the 40 CMUS, we can add a further 100 basis points to our top line growth. That's just a few of the many opportunities we see that give us confidence we can grow ahead of a roughly 3% growth market and deliver 3% to 5% growth per annum. There are also great examples in Health. Health is made up of 2 distinct parts: self-care, which includes OTC, Dettol and wellness supplements, VMS wellness supplements, growing around 3% to 4% per annum; and sexual well-being growing at 6% to 8%. We continue to see solid growth opportunities for OTC through penetration, multiyear product development and brand-building and with brands and their derivatives anchored in spaces, not just specific molecules or technologies, particularly in emerging markets. The opportunities for Dettol in this area are large, particularly with the BIOM lens that we are bringing to the category. Our wellness supplements business has also shown strong growth opportunities, particularly in the digital channels. In sexual well-being, we've had great success developing our brand in lubricants through a normal normalization campaign, which breaks down barriers and makes the consumer experience better. The impact has been dramatic. In one of our developed Europe markets, since the start of 2019, revenues were up 35% with our market share for the product over 175 basis points, and 80% of shoppers are new. And there's been a halo benefit to our base lubes business as well. In terms of playing in new places, Nurofen launched 24-hour medicated plasters in Italy and Germany. Previously, this is only a Nurofen for children position for us. But now we're starting to play in the bigger growing spaces. When it comes to playing in new spaces, a local product here in the U.K. is a great example. Guardium, an acid reflux control tablet, leverages the Gaviscon reputation in the broader GI space to offer the same control of heartburn. This proton pump inhibitor-based product has been very successful, reaching a 20% market share within 6 months of launch and helping develop the PPI category by nearly 30% since launch as well. Overall, we bring a strong consumer lens to our Health business from Dettol to Durex to Nurofen. With that lens, we've got an opportunity to grow above the average of the sector in the 4% to 6% per annum range. Turning to Nutrition. As I've outlined before, we currently only really play in infant nutrition. The fundamentals of the category are highly attractive with steady growth and very attractive margins. Key drivers of category growth include increasing birth rates in most developing markets, premiumization as well as shifting regulation. Yet, it is a competitive category, dictating the need for meaningful marketing and higher-than-average capital investment, reflecting the most sophisticated manufacturing processes involved. In the long term, birth rates will decline and seniors will increase in number. Our brand is perceived as a science-driven leader in the U.S. and in China with strong endorsement from the medical community. Our continuous relationship marketing program is one of the strongest in the world. I've laid out earlier why I believe that the expansion beyond infant, taking advantage of our science and market presence. We have market share improvements evident here, and we've got examples in the U.S. and Mexico where we've reversed the trend as well as further execution opportunities in Latin America and ASEAN. We have further opportunities with the Daigou, our Chinese cross-border influences, particularly with our wellness products. These new spaces and new places, taken together with better science-led innovation and the opportunity presented by youth and adult nutrition, give us confidence that we can grow this business in the 3% to 5% range. All our spaces benefit from the scale and experience we already have in eCommerce. Our ambition is to double our eCommerce business again over the next 3 to 4 years. We have created and refined 2 tailored business models for eCommerce: be big, focused on B2C and marketplaces with an emphasis on driving scale and efficiency; and be fast, focused on direct-to-consumer, cross-border online to off-line as well as digitally native brands with an emphasis on fast cycle, test, learn, correct scale loops. Both these models are in play with a very clear operating model that is being scaled across the entire company. As a result, we see many reasons to believe in the growth opportunity. Our power brands will move from a focus on 75 category market units over time to 100, with a primary focus on penetration and category creation, and therefore, on market share improvement and broadening where they play in new places and in adjacent spaces. With the right focus and investment, we can rejuvenate the best of RB to drive sustainable mid-single-digit top line growth in the mid to long term, ahead of underlying markets with a healthier mix of volume as well as price/mix than we've done in the past. I've covered our portfolio review. I've covered our purpose and our growth opportunity. I will now lay out in more detail our plan to get the company to outperformance. We've developed a phased plan to sequence the change. The first phase is to stabilize and perform -- next page, please, which is the focus of the first 18 months. We expect the second phase to be to perform and build momentum. And thereafter, we expect to be on the path to sustain our performance. Let me put some more detail on that. Our first phase is about addressing competitive gaps, fixing the foundations and launching the productivity program with targeted capability investments. The focus is to sustain the growth rate of Hygiene as well as reignite volume growth in Health and Nutrition. Our competitive investments include specific pricing actions and brand-building spend in markets with heightened competitive activity. We have continued to invest in foundational end-to-end supply chain planning, debottleneck seasonal capacity shortfalls as well as in safety and quality. We've already launched our enhanced productivity program. Savings generated this year will support some of the capability investments in Hygiene to expand category market units as well as targeted investments in eCommerce, digital, technology, insights, research and development, particularly base health product development. We are launching channel-specific sales excellence program. I was with the team yesterday. And tomorrow, we are launching this to 60 countries, bringing back to life what was already entrenched inside the DNA of RB. Our investments in brand-building include resources for design, demand space insights, digital and more advanced revenue management and spend optimization tools. We also expect to reinvest some of the direct material savings that we get into an ongoing program to environmentally future-proof our product portfolio. To gauge our progress, we will also broaden our internal scorecard to more effectively monitor metrics such as customer service, distribution point growth, brand investment returns, innovation pipeline, vitality and leakage, total productivity, eCommerce growth, price/mix, volume and value market share. The second phase beginning in the second half of '21 is about sustaining and building on the momentum from the first phase. In this phase, we expect the productivity program savings to further kick in across Hygiene, Health and Nutrition. Additionally, we expect volume growth to start providing fixed cost leverage across the company. We intend to use the fuel from productivity and the cost leverage to drive growth, as an example, from additional CMUs and additional challenges -- channels, redeploy savings to invest in brand-building, innovation and execution and continue to invest in design, research and development, eCommerce and digital. We expect the capabilities built to prepare the business to further accelerate growth as well as start delivering margin improvement in Health. We expect to continue to make maintenance level investments in our foundational capabilities while beginning to make investments in get-ahead capabilities. We expect to fund any acceleration resources we need to deliver these capabilities from internally generated productivity. Many of the scorecard metrics are the same. But in the second phase, we've put even more emphasis on improved customer service, net revenue realization, innovation pipeline quality, our eCommerce growth rate and further enhancements to productivity. Meaningful margin progress, particularly in Health and Nutrition will be very important. By the time we get to the third phase, 2023 onwards, we expect that the business will be operating with all 3 business units in a virtuous cycle of volume growth and productivity, funding revenue growth, capability investments and margin improvement. At this stage, we expect to see growth at or over the category growth rates we've outlined earlier. Before I move on, let me give you a little more detail on our enhanced productivity program. The GBP 1.3 billion 3-year program will be a key role in how we will create room to invest in growth. As I outlined earlier, there are many areas in RB where we have taken our eye off the ball in execution and core capabilities. These all represent opportunities for productivity. In particular, we'll focus on direct and indirect procurement, supply chain efficiencies, commercial levers as well as fixed costs. We will look at the entire cost structure of the company to ensure they are focused on driving sustainable growth and competitiveness. Taken together, these should provide the scope to enhance our typical productivity initiatives to around 3% of revenue per annum compared to a typical 1% to 2%. Looking at our journey in -- to the medium term in more detail, it's clear that 2020 is a transitional year in terms of revenue. We've started the year strong and, in some cases, much stronger than last year. And we've got some weak quarters to lap, particularly in the second half. Looking at our plans, this would typically be a 1% to 3% growth here. However, we've also got some uncertainties. China is over 10% of the business, and the full impact of COVID-19 in 2020 is evolving. Additionally, we've got issues to fix, particularly around our supply chain, and this will take time. With all this, I expect us to grow faster than 2019, consistent with the progress towards becoming a mid-single-digit growth company, and we will update you as the year unfolds as to the trajectory that we are on. From an operating margin perspective, we expect a significant decline in 2020. This decline consists of several components. Firstly, we enter 2020 with 100 basis points of operating margin headwinds, previously outlined by Adrian, and mainly related to variable pay. Secondly, we plan to invest an incremental GBP 200 million into the business to rejuvenate our commercial muscle and address issues where needed with consumer value. This will have an additional 150 or so basis points impact on operating margins. With these 2 components, we are at a decline of 250 basis points of margin. Lastly, we expect to incur some finite life on nonrecurring transformational costs of roughly GBP 125 million or about 100 basis points in each of the next 2 years related to the cost to achieve the restructuring, which we will take against our operating profit. I know these are often referred to as restructuring or exceptional items, where these are costs to reposition our business for better future growth. I am, therefore, putting them into our adjusted operating profit. These will roll off after 2 years and provide short-term margin acceleration. Taking all the 3 components into account is how we build to the expected margin decline of around 350 basis points in 2020. This will obviously have an impact on earnings as well. As Adrian previously mentioned, we will also face headwinds from interest and tax benefits seen in 2019. As a result, adjusted earnings per share will be around 20% lower as we set out in our preliminary results statement. 2020 represents a base on which to sustainably grow. As we stand now, I would expect top line to further improve versus 2020 and for incremental investment to be fully funded by productivity initiatives. As we then look towards the medium term, we transition towards our long-term target earnings model. Looking longer term, I expect RB to have a sustainable growth algorithm and earnings model. Specifically on top line, I expect us to grow mid-single digits from execution competitiveness, penetration focus as well as widening our aperture to new places and adjacent spaces. On operating margins, I expect some good margin expansion as we lap our finite life transformation costs and a modest expansion driven by operating leverage. We will remain a highly cash-generative business with continued focus on net working capital, cash conversion and deleveraging our balance sheet. This will enable us to sustainably deliver 7% to 9% EPS growth, which, combined with a stable and sustainable dividend policy of around 50% of adjusted earnings, should provide an attractive and sustainable TSR proposition to our shareholders. Finally, efficient capital allocation will be a key priority for Jeff and for me. In 2020, we are going to see a lower level of free cash conversion as we step up capital investments and invest selectively in working capital to ensure customer service while fixing our inventory management systems. Our long-term ambition is unchanged, to be a strong generator of free cash flow year-on-year. We intend to be very disciplined about capital allocation across our portfolio. The first priority of cash generation is the investments into our continued operations of the business with a focus on maximizing our return on investment. We intend to sustain our dividend payout at current levels until we rebuild cover to around 2x. And importantly, we intend to rigorously manage our brand portfolio to maximize shareholder value. We will continue to evaluate them for strategic fit and actively migrate the portfolio to higher growth and returns. You will hear from me periodically about our progress in this area. So we've covered our plans and growth strategy. Before we finish, I'd like to share a few thoughts on how we're going to set a fresh direction of the business, focused on addressing the needs of tomorrow's society and the changes we are making to the organization and leadership to deliver our plans. Earlier, I talked about how our clear purpose and fight shape our strategy. This new purpose agenda builds on progress, but its widespread push is a change. Underpinning the shift will be a new set of values for the business set out in our compass, which will guide us. At its heart is the goal of always doing the right thing, but with clear principles around putting consumers and people first, seeking out new opportunities, striving for excellence the basis for outperformance and building a culture of shared service -- of shared success. Our new culture will celebrate what has made RB successful, yet we'll contemporize it for what is required for sustainable growth and success in the future. For instance, diversity. Over the course of the coming year, we will also relook at reinforcement measures, including compensation, to reinforce rewards, but also incentivize for the long-term success of the business. We are critically dependent on the commitment of our people. Our clear purpose, fight and compass, will inspire their commitment and bring success through their inspiration. As I said earlier, we need to have clear playbooks in our focused Hygiene, Health and Nutrition businesses. We also need to get the balance right between focus and accountability as well as scale. As a result, we are setting up our organization to address this. We are moving to 3 global category focused business units: Hygiene, effectively our hold Hygiene Home business; as well as Health and Nutrition, aligned with the spaces with full P&L accountability. Given these -- within these, we have developed capability centers of excellence that can be leveraged across the company. Given the importance of China, we will operate China as an integrated business across the 3 category business units. Building leapfrog capabilities in digital data and analytics can further the speed, the rapid growth that we're seeing as digital, eCommerce and analytics are at a major turning point for the consumer. Our eCommerce capability will support all 3 category business units as well as our global functions. Our priority was a focus on performance and minimize unnecessary organizational change. It is intended to sustain the momentum of hygiene. It elevates the focus and oversight for the Health category innovation and enables senior oversight of Nutrition category innovation and development with minimal impact on the front line. Finally, key to this turnaround will be the company's leadership. Today, I'm announcing further appointments in the organization. We will be building our new team from the best of RB's existing talent, supplemented by some targeted outstanding new hires, who can bring fresh perspectives and the capabilities we will need to strengthening the business. Jeff, Chris, Ranjay, Adi, Zephanie and Harold are great examples. You will hear about the moves of both internal people and select external hires over the coming years. I therefore hope you will walk away with 5 key messages about RB: Good house in a great neighborhood, the potential to be a great house again; clear strategy anchored in purpose to rejuvenate mid-single-digit growth in the medium term; detailed 3-phased plan that we're investing in, funded by productivity will create long-term shareholder value while engaging with society with purpose; and organization and team inspired by this mission to carry this through. I look forward to sharing our progress with you periodically. We will now take your questions.

Thank you, Laxman. Mr. Narasimhan and Mr. Hennah will now be happy to take your questions. So just put your hand up in the usual way, just announce who you are, and we'll go from there. So why don't we start with very eager Richard Taylor sitting there in the front row? Go ahead, Richard.

Good morning, everyone. Richard Taylor here from Morgan Stanley. I have to say that -- a very detailed diagnostic of the issues, which I think are particularly helpful. I suppose first observation I'd make is the diagnostics suggests too much organizational change and too little investment, solving that with more organizational change and more cost savings. So can I ask as my first question for a little bit more detail on where those cost savings are going to come from? I know you had a slide up about it, but I'd just like a little bit more granularity on that. And then secondly, just very specifically, that 100 basis points variable compensation number. In 2020, if I interpret your guidance correctly, which is better than 2019, so conservatively, it would seem that, that means 1% to 2% top line growth. Will that variable compensation kick in? I hope it isn't going to kick in, but I'd like to ask if it is going to kick in. And then finally, I'd like to ask about price tiering. So I think there's been a lot of discussion about pricing being too high with Reckitt brands, not something that I've personally ever believed. But there is a fair argument to say that strong brands should be -- have an umbrella or a price tiering behind them. So can you talk a little bit around that, please?

Great. Thank you. There's 3 questions in here. The first one is about organizational change, you doing more when you said that was the issue. The other one was about variable compensation. And the third is about pricing. Yes. So I'll start with the first one. I think one of the things that we have seen is that, as I showed you earlier, we were able to bring focus to Hygiene Home, and that actually led to growth and performance and Health got loaded. If you look at what we are doing, we're actually elevating the oversight of the categories with senior leadership. And that's going to give us a lot more focus in senior leadership on innovation. We are minimizing frontline change, which was part of the previous efforts that went through. So we're trying to bring focus, we're trying to ensure that we're also enabling it with scale with the capabilities that we're building, and we are minimizing frontline change. So that is different from what was done before. The second question, which is on variable compensation. We want to pay our people. And we're -- with performance, that comes back. And so we would celebrate it if it were to come back.

May I add to that?

Yes.

Because I suspect in Richard's mind is the LTIPs for the executive directors. Will they pay out at the guidance? No, they won't. You can do that calculation and see very clearly. But actually, when you look at total variable pay, the greater part in our organization is the annual bonus for people in general. And the LTIP for people, in general, is also subject to adjustment by the [indiscernible]. So clearly, we have looked at -- we have looked at getting to that 100 basis points, what we would expect to pay out for what you've seen is a guided good number in 2020.

On pricing, this is an area of work. We went through, we looked at different elasticities, we looked at the proposition, the brand strength, how consumers are responding to it. And actually, we had it largely in a good place. We clearly had places where there were hot spots, and we're addressing them. Both market hotspots as well as some brand hotspots, and we are addressing them. The foundation of this is very strong brand equity investment in brand building, which consumers love. I mean, you see this, the sell-out is actually better than some of the sell-in numbers that we've had in some of the markets. So the consumer is feeling good about it in a lot of ways. What we have to do though is just ensure that we manage this very tightly, and we are building an advanced revenue management capability that will ensure that we don't have this issue occur again.

Thank you, Richard. The second question, I think, came from Martin Deboo. Martin, you want to put your hand so you can you at the microphone.

Martin Deboo, Jefferies. A couple of sort of, I guess, quite surgical questions on the shape of the medium-term guidance. You've couched the revenue target and the language of net revenue growth. Now historically, a record net revenue has included an M&A component rather than the LFL measure. And you've got positive gearing from top line to earnings growth. So the question I just want to clarify is, is anything assumed about M&A, either net acquisitions or net exits in the shape of the guidance? That's the first question. Second question is the productivity savings are significant, 10 percentage points of sales. If they phase in over 3 years, and putting all the other moving parts in place, you'd be back to mid-20% margins pretty quickly. But I'm assuming something is being assumed about ongoing reinvestments of those or not? That's the second question, just what's being assumed about net retention of the GBP 1.3 billion rather than the gross benefit.

Our -- thank you, Martin. Two questions, net revenue as well as the savings. The net revenue guidance we're giving is organic net revenue. In terms of the savings, this is the fuel that is going to get the company just to get to and sustain growth. So we're assuming all of that is invested in what we need in order to ensure that we are building existing muscles as well as new muscles in order to support the growth.

Okay. The next one. Let's go with James. James Edwardes Jones, in front row.

James Edwardes Jones from RBC. Firstly, if you do get back to mid-20s margins, it seems probable that the margins in each of your businesses, Health, Nutrition and Hygiene and Home will exceed your peer groups, everyone in your peer group, they certainly do at the moment. Is that the way you see it? And if so, why should that be the case? And secondly, staying on compensation. Can I ask you, Laxman, just probably slightly rudely, what are the determinants of your variable compensation? Are they any different from the LTIP we know about?

On the first question, we are privileged to be in very good spaces, with a portfolio of brands that consumers love. And so if I look at what we were able to do with the premium brand positions we have, with the innovation pipeline that we are bringing into the market, it does support what we're giving you in terms of guidance going forward. I will not comment on the competitors and where they currently stand. But if you look at our position, it is definitely different from many of them. On your, I guess, direct question on my compensation, I think we published everything, and whatever is in there is exactly what it is. I have a lot of skin in the game. And so I'm completely going to be compensated by the shareholder value creation that the company delivers.

One worth adding, Laxman, that it is your intent as you look over the next year to be thinking about how we should evolve or you should evolve, the direction that is [ anticipated ]. So I think that's probably also behind James' question.

And that's something we're going to be looking at in the back half of the year.

Yes. Thanks, James. I think we go to Jeremy next. Jeremy Fialko, just up there. Jeremy, keep your hand up.

Jeremy Fialko, HSBC. I've just got one question, which is on innovation. It's something which you addressed briefly in the presentation, but could you talk a little bit more about kind of how you see Reckitt's innovation capabilities at the moment? Perhaps more reasons why you don't think it has been as successful as you would have liked over the last few years. And then also to quite some more specific steps or changes in the process that you think you need to make in order for Reckitt's innovation machines to be humming perhaps as it was a few years back.

Well, thank you. I think our innovation machine in the Hygiene Home business is working well. Our innovation vitality is strong. And we have a pipeline of great things that have come into the market. I mean just this year, we're going to continue expanding laundry sanitizer products. We've got them in the U.S., and they're going to a whole bunch of other countries. And this is about really killing germs at low temperatures as the way people wash their clothes. We have Air Wick BOTANICA, which is a new creation within the Hygiene Home business. So I feel generally very good about the situation of the Hygiene Home business with regard to innovation. In the case of the Nutrition business, there's been a lot of work there, too. We'll be launching a new Enfa A+2 in Hong Kong this year. We've got Neuriva, which is a brand targeted at seniors that we launched last year. We have gummies coming out this year. So again, the pipeline looks good. I think at base Health we've actually had issues, as I showed you. We've missed some innovation cycles. And some of the ideas that we had in the hopper, haven't made themselves -- shown up in the marketplace because we've had innovation leakage. So what are we doing about it? We're essentially investing in capabilities to ensure that we get the right consumer insights, that we're then looking at the process and the level of oversight so there's no sort of deviation in focus. We ensure that the ideas that we have show up in the marketplace, so we get to see more innovations coming in. I think it's an issue of focus. It's a question of elevation of the seniority of it. It's a question of investment in the insights. There's a science base that is strong, that we need to continue to work on, obviously, and we are. And that's what we're doing on innovation.

[ Carrel, ] I think you had your hand up. Can you keep your hand up? Okay, speak loudly.

[indiscernible] I have 3 questions. The first one is on adding 25 business and market sales. How quickly do you plan to add those? And where would it be? Mostly emerging markets or across-the-board? The second one is coming back to the dividend, you say, highlighting a stable dividends payout ratio. Does that basically imply a more or less 20% cut in the dividend if EPS is 20% down? Or does it mean stable dividend? And the third point is supply chain, and that has proven to be relatively shaky whenever there was a shock and lengthy as well. Can you be a bit more specific on investments you plan to do in supply chain and how that's going to drive performance?

Well, let's start with the second question. Adrian, do you want to take that?

Yes. It's the easy one, yes. So we intended to say maintain the 2019 sterling dividend level in future years until such time as we reach again the 2x adjusted earnings per share, at which point it can then go back up.

On your question on the 25 category market units. First of all, these are market units we're in where we haven't invested in as well as we could have in order to drive growth. What is interesting about them is a few of them are actually in developed markets, including in Europe. So it is not just developing markets, but it's also developed markets that we feel there's more potential. And clearly -- and I say developed, when I say Europe, I mean not just the developed part of Europe, but just more broadly Europe. But clearly, there's developing markets as well that form the basis for this. You can expect that we will start making investments next year in order for us to expand. This year is about stability and about ensuring that we perform and deliver and restore our performance credibility. Next year, you can start seeing us begin to do that. On the supply chain, we've taken a customer back lens to this. Right? And our big issues, of course, is customer service. We have the hard infrastructure with the plants. Clearly, we're continuing to make capacity investments to ensure that we don't run out at the peak for some of these products that we have that, frankly, consumers demand and we can't fulfill. But at the same time, what we are doing is looking at the underlying supply chain processes and ensuring that we are making big improvements to that. So that is process improvements, which of course will be enabled by technology investments as well as we do that.

I think Iain had his hand up. Iain Simpson.

So just firstly, on the margin. That reset in 2020, is that spread evenly across all divisions or concentrated on Health and Nutrition? And within the margin as well, there seems to be quite of a focus on indirect costs and the cost savings. A bit surprised there's still stuff to do here after Project Supercharge, which I guess was before your time, but I recall indirect costs being a very sort of large area of focus there. It feels that Nutrition is a much more holistic category than IFCN if you're talking about targeting a range of consumers with specialized needs. How long before that's a meaningful part of your business? Could we see that go into medical nutrition as well or sticking with the sort of consumer-facing element? And then just lastly, a bit of housekeeping. You've talked about supply chain issues leading to poor on-shelf availability in Q4 '19 of certain products, especially flu. Is that likely to be an issue through first half '20 as well? It seems to be a very strong flu season right now. Is your own shelf availability good as we speak?