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

It's been a busy last year or so for RB. We've seen significant management change, a margin reset and turnaround strategy and then a sizable COVID-19-driven uplift in demand for certain products. We're delighted today to be joined by RB's CEO, Laxman, who started just over a year ago; and CFO, Jeff, who started 6 months ago.

So first question to you, Laxman, if that's okay. Back in February, you told us your strategic priorities for RB, you diagnosed the recent performance issues as executional, not structural. And set out an investment plan to return RB to outperformance. Clearly, a lot's happened since then. How do you feel about the progress that RB is making on the strategic turnaround? What are the key milestones we should be looking out for over the coming years?

Thanks, Iain, and firstly, greetings, and welcome, everyone. Jeff and I are delighted to be here. It's been a year since I first joined the business. My first 6 months were spent listening, traveling and understanding until our February earnings release. And thereafter, we've been implementing the plan by responding to the COVID crisis. I don't think anyone could have truly anticipated just how this first year was going to unfold. The last 12 months have really confirmed my initial impression that RB is a good house in a great neighborhood with the potential of being a great house again. And we have been implementing this plan while responding to the COVID crisis. And what is clear is that our combined brand portfolio, powerful brands with soul. They really reinforce why we exist. We exist to protect, to heal and to nurture in the relentless pursuit of this cleaner and healthier world. And what COVID-19 has done without doubt is really shown the value of the powerful portfolio. And as we said in February, hygiene is the foundation for health and this has become entirely more evident in recent months. So in February, we launched a multiyear journey to get to this great house. Our investment decisions are all centered around this medium-term goal of building a sustainable mid-single digits revenue growth company with mid-20s margins -- in the mid-20s. And achieving this mid-term target will establish us as one of the strongest and a total shareholder return models across the sector with the foundation of consistent, sustainable and differentiated top line growth. I think we're making meaningful progress towards that goal with a very strong start. COVID clearly has given us benefits and external tailwinds. But our performance has also benefited from the strategic actions that we have taken, which have been designed to rejuvenate the sustainable growth. But also what we're doing is we are building the business and have very clear executional milestones that reinforce a strong progress that we are making, both in our investments and in our underlying capabilities and execution. And Iain to your question, all our metrics that we are looking at, particularly with regard to milestones, are focused on the building blocks that lead to high quality top line growth. And these are building blocks that include expansion to new category market units, penetration and distribution gains, innovation leakage, productivity, supply chain execution, e-commerce growth, organization effectiveness and culture. So it's a set of metrics that we're looking at very closely in order to understand how we are performing, how we're progressing, and we feel good about the progress that we're making today.

So thanks very much for that. Are you able to give us some specific examples where you're already seeing improvements in operational execution?

Sure. Let me give you some examples from a few of the areas. The first one is supply chain and supply chain investments. About 1/3 of our business, including Dettol and Lysol, we've had to ramp up production significantly since March. And this has been a huge focus for the team. Just to give you an example, if I look at the rest, the Lysol disinfectant spray, demand has grown 350% of 2019. And we've quintupled our capacity and we will get to this over time. In a very similar way, our wipes capacity has also increased substantially, and we will keep increasing this and improving on it until the early bottom next year. Our supply chain has also been improving based on work that we were doing right from the first day started in September, all through to early March. The ramp-up has been well received by our key customers. They've appreciated what we've done. But we fully recognize there's more to be done. To ensure that demand meets supply. And clearly, what the team is doing is making very systematic improvements in this area. That's one area of supply chain. The second area is of rolling out our new management structure. We have said that by July 1, we put this in place. We've moved to 3 global business units, along with a business that's integrated in China, which also has e-commerce responsibility. We've had some terrific people joining the company, Jeff Carr who's on the team -- who has returned back to RB. As has Sami Naffakh, who also is an alum, who's returned back to the company. We've added Volker Kuhn to come in to be the Chief Transformation Officer. We've organized our 3 global business units. We have advanced internal talent as well as external. And just last week, we announced the appointment of our new Chief R&D Officer, Angela Naef. So that's sort of the management structure as a second area. The third is sales excellence that this is an area that RB was traditionally very strong in. And for a variety of reasons over the last several years, this is one that we have actually, in some ways, not been as strong in. We talked in February about the idea of expanding our focus from 75 to 100 focused category market units. And if you look at the world of hygiene, we've already expanded from 40 to 50. And just the additional investment in some of these other markets is resulting in 10x the kind of growth they had previously. And we're rebuilding the sales muscle and I'll talk more about this over time, in over 50 markets. We've invested in e-commerce significantly over the years. It's a capability that has been built well, but it's not just the investment. It's also creating very distinct operating models on how we operate across the traditional large omni-channel retailers and marketplaces, the direct-to-consumer models we have for brands like Durex as well as small brands that we are scaling up. And what we are seeing is capability building that is happening across a variety of geographies and a variety of these channels. And again, it's resulted in very good performance in the first half of 2020. I fully expect that e-commerce will be at least 20% of our business. And the possibility of it going higher is clearly there. The fourth area is productivity. We said on productivity that we would deliver GBP 1.3 billion of productivity over the course of the next 3 years. If you look at the work that we are doing, it clearly is on track. One specific example, we've done 100 competitive teardowns of our products. And what we now have is almost 600 live projects inside the company. They're looking to not just improve cost, but also improve the sustainability of our products as one example. So productivity is strong and [indiscernible] working with Volker, who's our Chief Transformation Officer, to find ways of not only delivering this but also enhancing it even further. Lots of operational improvement in our nutrition business being in China, sales execution, e-commerce competitiveness, some of the factory upgrades that we have made. Our share in Mainland China is good. But overall, I would say, again, underlying capability improvements are clear in the business, thanks to the work that the team has done. COVID clearly has provided us additional tailwind, and we have had some challenges, no question. But our job is to use this tailwind in order to make the opportunistic investments across the many strong brands in our portfolio in order to fortify our top tier, medium-term growth targets.

Thanks very much. And a question to Jeff, perhaps. What are your priorities as CFO when you benchmark RB's performance? Where are the areas with low-hanging fruit where you see the most scope for improvement medium term?

Well, certainly, I discussed those priorities early before I joined actually with Laxman to make sure I was totally aligned with the strategy that was launched in February. And of course, since then COVID has come along, which has meant we've had to be more agile in our planning and execution, but the priorities have remained consistent. Firstly, supporting and making sure that we execute on that productivity challenge, which Laxman laid out, GBP 1.3 billion delivery in efficiency improvements, productivity improvement, over 3 years. And we started well in the first half of the year with GBP 165 million of delivery across the key areas. That's not just procurement, direct and indirect procurement. As Laxman mentioned, the design to value, supply chain optimization and basically cost efficiency across all lines of the P&L. And so we continue to look very hard in that area and look for new opportunities in that area. Secondly, I'd say in terms of -- we're investing GBP 2.2 million in this 3-year period and making sure those investments are well understood that they're measured with the right KPIs in terms of returns, and that we're getting value for money for each of those investments. And we're making a lot of investments in new areas, as Laxman mentioned, professional, for example. So making sure that we balance those investments with good returns and keep discipline around that. I'd say the third area of priority remains free cash flow. It's always been important to RB in terms of the delivery. Strong free cash flow conversion remains a very strong, very important KPI. And we're looking at those measures very importantly, especially in terms of as we expand our capital program, that we continue to look to optimize in terms of working capital. In terms of the benchmarks, we've laid it out pretty clearly in terms of the relative performance. And the key issue is to deliver against our mid-single-digit revenue target and the mid-20s margins. And that's -- those are the key benchmark targets that we're measuring against, and that will give us best-in-class overall performance. I'm not sure there's much low-hanging fruit, Iain, to respond to your question, but those are certainly the key priorities that we've got now.

Thanks very much. Well, perhaps slightly nearer term, Jeff, we're in a low visibility environment here, to put it mildly. What are the key assumptions around your guidance for this year and especially next year as well?

Well, again, the guidance was laid out in February and with the strategy at that time. Obviously, COVID's had an impact on that. And what we laid out in July, there's no change to the strategy, but how that impacted the guidance. And it's clear that some of the things -- some of the phasing had changed. So we talked about -- we were committed, continue to be committed, to investing the full 350 basis points of margin investment that was laid out in February. That's 100 basis points in terms of operating headwinds, 100 basis points of the one-off transformation costs and 150 basis points in capability and consumer value investments. Now -- so we continue to make those investments, but it'll be spread over in 2020 and 2021, the first half of 2021. It's not surprising really that we've been focused in the first half of this year on just meeting the demand. I mean, it's been a great challenge that our supply chain have stepped up to be able to deliver in this environment. And that's been the key focus in the first half. So clearly, some of those investments are spread over not just '20, but also '21. So that was the key change to the guidance. We also said we would reinvest any leverage upside back into our brands. We would reinvest for medium-term growth. So we talked about an extra GBP 100 million of investment that we'd be making from the upside from leverage, which would be used to expand the plan and accelerate the plan, make sure we really capture the opportunities, not just wholly behind Lysol and Dettol, but largely behind Lysol and Dettol, in terms of new spaces, new CMUs and new adjacencies. And with that, what we said is it gives us more confidence in achieving our mid-single-digit growth targets in terms of net revenue growth and in terms of mid-20s margin. So it increased our confidence and our ability to achieve those targets, and that's really how we have updated the guidance and talked about it in July.

Thanks. So a question for Laxman. I was hoping we could dig a bit into COVID-19, the impact it's having on Dettol, Lysol, parts of your VMS portfolio. How enduring do you think the uplift here will be? How are you investing and innovating to make the most of this opportunity? Are you able to give us an update on the rollout of Dettol and Lysol into the professional channel?

Well, thank you for that. I just want to start by reminding you of the heritage of Dettol and Lysol, Dettol is almost 80 years old. It's a brand that was created to address the issue of internal sepsis in the U.K. and then scaled up around the world. Lysol was created in Germany in 1879 and has played a role in a variety of things that we've seen, including the cholera epidemic, the Spanish flu and sold over time. So these are brands with a great deal of heritage and a great deal of respect and admiration and love from consumers. . And we're clearly seeing that in the choice that people are making. We've heard from some of our customers, particularly in the professional space that when they've tested these brands relative to others', consumers have overwhelmingly said, these brands are the ones they really -- that really stand out for them in terms of the level of comfort, anxiety, performance that they bring to bear. As you know, we've seen major growth acceleration of these brands. I think we talked about in the first half of the year, the Dettol grew over 60% worldwide and Lysol grew over 70%. But what is interesting is when I get back to the growth model that we talked about in February, the growth model of saying, we worry about penetration, we worry about market share, we worry about new places and new spaces. It really does apply very much to what's happening with Dettol and Lysol. We're seeing big penetration increases. If you look at the multi-purpose cleaner for Lysol in the U.S., I think if I'm not mistaken, it's close to -- it's over 600 basis points of a penetration increase. A very similar thing with Dettol in many of the markets that it is in, in terms of the kind of penetration increases we're seeing. We're also seeing, in the case of the VMS portfolio, as you just talked about in our brand Airborne, which is our immunity supplement, it grew over 200% in the first half of the year and the penetration increase was good as well for Airborne, but also frequency was a very big driver of the growth in the case of Airborne. Without a doubt, what is happening is that the consumer behavior is changing. And one of the things we've talked about is the fact that when consumers behave in a certain way, beyond 60 days, you do see some of these behaviors stick. The longer, the more intense, you will see more of it stick. And over time, you will see a drop from the peak in terms of what you have, but the levels will be higher than what we've seen before. And we saw that in the case of SARS, and we saw that in the case of MERS, and it's something that we're absolutely focused on. Back to the point about sort of new places, one of the things that we have seen is the demand in a whole bunch of other markets. And so we're accelerating the growth of brands like Lysol and Dettol into a whole range of markets. We brought Lysol into Brazil. We've launched the Dettol hand sanitizer in several new markets this year. And what we are doing is, from a research and insight standpoint, is putting money into understanding both the evidence, but also how do we drive behavior change and make it sustainable over time. So that in a nutshell of sort of new places. If I go to new spaces, global business solutions, what Jeff referred to as our professional business, is a completely new area for us. Consumers always want brands that they trust. We've already developed business. And as our team calls it across planes, trains and automobiles, but also with hotel destinations at the end of the journey, all very sensitive consumer-facing areas and we expect even more to come. The opportunity is too early to quantify, but we're building this business in a very disciplined manner. We have a team that we have formed. We are building the capabilities for this business. We're, frankly, turning away some business. But at the end of it, what we have said very clearly is we are a front-of-house business that is out here to give consumers the confidence in our brands and ensure that they have the performance at those points where they feel the most vulnerable. So that's where the focus really is. We believe COVID will have a lasting impact on the consumer trends. People are more aware of their hygiene practices than ever before. And the headroom is real. Only -- and as I've said before, only 20% of people around the world wash their hands after going to the bathroom. The headroom you have to spread grade hygiene is quite large.

Thanks very much. And thinking about innovation more generally. In recent years, you've had some successes, Enfinitas in China, say -- but also some disappointments, not being first to market with PU condoms in China. How do you think about your innovation capabilities? And quickly, what are the main lessons from what's worked and what hasn't?

There are 4 things we're focused on. First is the creation of the GBUs. And what we're doing with that is bringing real focus to health innovation, in particular. I think Hygiene has a lot in the pipeline and is doing well. Nutrition has a lot in the pipeline, but Health clearly needs that. Second, as you know, we've added to the R&D leadership and also expanding the number of partners that we actually work with. Third, we're investing in consumer capability and bringing that to bear, particularly, on how our brands are expressed in the various demand spaces that exist out there. And finally, we're focused on execution and leakage. In some parts of our business, we have had innovation leakage, ideas in the pipeline that have not played their way through. Specifically to your point of Durex PU, and I'm very pleased to say to you today that in October, we will be indeed introducing our long-awaited ultra-thin polyurethane condom for Durex in China, it's Durex 0.01. And this is one that we will have in the market by the end of October and we're looking forward to its success in that market.

That's great to hear. So changing topic a little bit. Can we talk about IFCN? So it was acquired 3 years ago under previous management. February this year, you wrote down GBP 5 billion of the GBP 13 billion purchase price. Where are you happiest with performance there? What needs some work? What levers can you pull to improve performance medium term?

In February, we outlined a plan. It's a multiyear journey. We felt that with a focused management team and a science-centered product and market development that the business will fit in the portfolio that would grow between 3% to 5% and that sort of growth dynamic. And it's this multiyear journey that we are really embarked on. The focus this year has largely been execution. How do we ensure operations, supply chain, people, the innovation that's in the market, realizing the most of it is, in fact, what we need to do, including price competitiveness and e-commerce performance. And what we've seen in the first 6 months of the year, and I'm going to separate Hong Kong, which is clearly an exception and has not gone well. In effect, what we have found is that the performance has largely gone broadly to plan, and we are improving from an execution perspective. If you look at North America, the business is holding to gaining share. The TRIA transition in Mexico has gone well. ASEAN is mixed. Some markets have done well and some have not. So not that [indiscernible] about some of the markets there. Mainland China is very fierce in terms of competition. It's a highly fragmented market. Execution is a lot better. But market conditions clearly are challenging. And Hong Kong is a problem area.