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

Good morning, ladies and gentlemen, and welcome to the Reckitt Half 1 2021 question-and-answer session. On the call this morning are the CEO of Reckitt, Laxman Narasimhan; and CFO Jeff Carr. We will be going straight into the question-and-answer session today. [Operator Instructions] I would now like to hand over to the CEO to start the conference call. Thank you.

Good morning, everybody, and thank you all for joining. We're looking forward to taking your questions, and I will hand this back to the operator. So she can call on the first question.

Our first question today comes from Celine Pannuti from JPMorgan.

Yes. So my first question is clearly on pricing and the margin guide for this year. So thank you for all the details you provided in the presentation on the bridges, by the way. But so question is, you have higher raw material inflation and it doesn't seem that you were able to pass on this to pricing maybe yet. So can you talk about the pricing environment? And we -- do you think you have what it takes and the setup and the visibility so that pricing implementation is a reality for -- as we start 2022? So that's my first question. And the second question, probably related, thank you as well for providing an update on the top line exit rate for 2022. Can you also talk about -- next year, we should have the benefit from having less restructuring cost into the margin. I know you're not providing a guidance here, but if you could give us some help on understanding the building block of margin realization as we progress towards mid-'20 -- by mid-'20.

Celine, it's Jeff here. First of all, in terms of the guidance for 2021, it's fair to say that when we see this type of commodity price inflation, there's a lag in terms of the offsetting measures, and that's what we'll see in the second half of this year. We're seeing inflation in the region of 8% to 9% in terms of our total cost of goods, which will be a bit higher in the second half than it was in the first half. And as we laid out in the margin bridge in the presentation, this is about 120 basis points of commodity inflation relative to where we were looking at the situation in February. We are able to offset elements of that in this year, around 50 basis points through incremental pricing and productivity, and we'll continue to work on that in terms of pricing and productivity opportunities across all of our GBUs as we get into 2022. So just very briefly, if you look at Nutrition, for example, we have priced a significant part of the inflation coming through in this year. Both in the U.S. and in Latin America and ASEAN, we've been able to take pricing in terms of IFCN, for example. Hygiene also, we're seeing pricing come through this year. And we'll continue to work on, as you know, in some regions, the pricing comes through in different windows. So in Europe, for example, we'll be looking to take pricing at the next opportunities. And obviously, as we take pricing, we look at the competitive position to make sure that we remain competitive and maintain our strong performance in terms of market share delivery. So it's a mixture -- for pricing, it's a mixture of -- sorry, offsetting the commodity inflation will be a mixture of productivity, pricing and we see a big opportunity in overall revenue management as well. In terms of the building blocks for 2022, clearly, we've said all along, and we said this in February, that 2021 will be the low point in margins in terms of our margin reset program. As you know, going back to 2020, we deferred some of the investments out of 2020 into 2021. And therefore, we said this year there'll be another 40 to 90 basis points of margin investment. As we look to next year, clearly, we have onetime costs, which will fall away. We've invested the onetime costs in 2020 and 2021 for the transformation. And to some degree, they will fall away in 2022, which will help in terms of the margin recovery in 2022. So we do expect to see margins improve in 2022. Of course, there's areas like COVID costs, which are difficult to predict how much of those at this point will still be in place in 2022, depending on how we operate in our factories, for example, in our offices. But clearly, we're quite clear that we'll see margins improve in 2022.

Our next question comes from Pinar Ergun from Morgan Stanley.

A quick follow-up on the guidance. You're now excluding the China IFCN business from your '21 guidance, which indicates a softer outlook for the ex-China IFCN business. Is this purely because of the rising input costs? Or have you seen any changes in the competitive landscape? And can you please talk about the drivers behind the mid-single-digit like-for-like exit rate in '22? How do you think about category growth, share gains and so on? And then my second question is on your investments. You have remarkably invested GBP 1 billion into your business since 2020. That's about 8% of your pre-COVID sales and 30% of EBIT invested in just a matter of 18 months. So how did you go about identifying the areas where this investment was most needed in light of the changes brought about by COVID? And how do you make sure you generate good returns on this investment? Has all of it gone as you expected so far?

I think, Pinar, you managed to get more than 2 questions in there, but anyway, we'll try and answer as best we can. In terms of guidance for 2021, let me just be clear, and I think the presentation laid this out very, very clearly. We have excluded IFCN China from the margin guidance because we expect that to complete in the second half of the year. And I think it's just clearer to take that out of 2021 rather than have the uncertainty of when does it complete, what's the contribution in 2021. So we were clear last year, the impact of IFCN China was 90 basis points dilutive to the group. So we've been clear in the presentation. If you take out that 90 basis points, we should have an accretion of the base business by 90 basis points. And then we've laid out the reason that we're then holding this year's guidance to 22.7% to 23.2%. So it's clear in that that we are not recovering all of the commodity inflation this year, and that has effectively a 70 basis points impact on this year. So I just want to be clear. We're not trying to cloud the situation with IFCN China. We decided to take it out the guidance to be trying to be clearer about where we're coming out this year and take out the timing of the completion and how that impacts things. So the 90 basis points is a good guide to what we expect the dilution for IFCN China to be this year. Taking that out, and then what we have is the offsetting factors of the commodity inflation offset by 50 basis points by additional pricing and productivity actions that we're able to take this year. So that's in terms of the guidance. I think maybe in terms of the 2022 mid-single digits was the next question?

Yes. So Pinar, just back to your question on what's driving the sense of the exit rate for next year being mid-single digits. I think in the presentation, what we tried to lay out was why we believe in the revenue growth algorithm for the overall business across Hygiene, Health and Nutrition being in the mid-single digit range, and there was a buildup. And I'm happy to talk more about it as needed. But there's a buildup as to why we would get to that in the medium term. If I think specifically about the exit to 2022, what we are clearly seeing is the fact that there are dynamics happening in the near term with COVID. And with the cold and flu season that are playing themselves through, both this year as well as the early part of next year on the cold side with the lap that we would have for Hygiene overall. What we have shown in the presentation is that 70% of our portfolio at this time is already operating in the mid-single digits range. And we try to isolate and focus on the fact that if you look at Dettol, Lysol, Strepsils, Lemsip and Mucinex, together, that's 30% of the portfolio. And in the first half of the year that modestly declined. Now our belief is that the back half of next year, we'll see a more normalized environment. We believe, as we've seen from the buildup to the mid-single digits that we play in a neighborhood that is great. It's dynamic in many parts, but it's great. We can touch on the investments, I think it's a question you've also had. But if you look at the investments and what we've been doing, we've been making investments, they're both catch-up investments as well as get-ahead investments that we have been making in our underlying brands, the investments in commercial capability. And we've seen the results of that just in terms of customer feedback, in terms of market share evolution. We're making investments in our supply chain. And again, you see that with the improvements in service levels as well as the better realization of demand in a brand, for example, like Gaviscon that we showed in the presentation. We're also investing in e-commerce and digital. And as you see there, just the e-commerce stack growth rate over the last 3 years is over 100%. And furthermore, we're investing in our productivity muscle, which, as you know, has realized over GBP 1 billion of productivity in the business, which, of course, is funneling or being funneled into the investments that we are making. So the underlying platform or the underlying business that we have is much stronger. You see that translate as well into R&D, as we have talked about 450 new heads in R&D. The pipeline, as we see it today, is 50% higher going into next year as it was in 2019. And so again, from a pipeline of innovation and what we're seeing, we're seeing strength in that. And furthermore, if you look at the underlying company, the culture change we're bringing about, the level of engagement in the business, we feel very good about that. And we feel that it's going to be more embedded a year from now. So if you look at a more normalized environment in the back half of next year, look at what we're already doing at 70% of the portfolio and the fact that the underlying capabilities of translating into a much stronger competitive position as demonstrated as well in our market share numbers, what we see coming out of the back end is confidence that we will exit 2022 with a run rate that should get us to deliver mid-single-digit growth in 2023. And as Jeff has also said, the mix of our portfolio, the increasing strength of the execution, where we play in terms of the categories and the elimination of the unwinding of some of these above-the-line transformation and onetime costs will lead us to delivering upon our margin objectives, as we have said, in the mid-20s. So that overall is why we have confidence in the exit rate coming out of next year.

Our next question comes from Bruno Monteyne from Bernstein.

Just to clarify on the revenue recognition, am I right to understand that without that revenue recognition adjustment, the organic growth was actually minus 3.8% in quarter 2 rather than minus 1%? Just to make sure that I don't misunderstand it. And the second one is around the global business solutions. I think previously you said that expected to contribute 100 basis points to organic growth. Is that still the case? Is that the kind of contribution you've seen in the second quarter? Or have expectations changed for that?

Bruno, it's Jeff. Let me take the first question. Yes, we've been absolutely clear. Revenue recognition gave a tailwind in the second quarter of 2.8%. So if you take -- if you choose to take that off, then the minus 1% becomes minus 3.8%. Obviously, a big effect of the minus 1% was China IFCN, which we're dealing with. If you exclude China IFCN, we're 2.2% for the quarter and 3.7% for the half. But your math is correct, minus 1%, minus 2.8%, does equal minus 3.8%. Correct. On to your second question on global business solutions, we've been at this for a year. We feel very good about the progress that we have made. A lot of marquee accounts have been identified and deals have been signed with them. They were in the travel sector. They're in the hospitality sector. They're also in the commercial offices set up both large as well as medium and small scale companies. The share of what business we are gaining is strong. The volumes from this business will depend greatly on the activity levels that we will see from those sectors. As you know, the consumer is still going through a transition. I feel good about our long-term ambitions in the business, and we're making steady progress. At this point in time, I would say that we are awaiting more of the volumes in some of the sectors to go up in order for us to meet the objectives for this particular year. Having said that, the progress is strong and shares are good.

Our next question comes from David Hayes from Societe Generale.

Two for me. So firstly, one on OTC and then one on the Hygiene business. So just in OTC, can you give us more of a sense of -- when you talk about a normalized flu season second half, where that kind of sits? Are you thinking lower end of what you would normally have seen? And I guess can you relay that into the range that you've given on the sales growth and the margin for the full year? Is it basically a good flu season, perhaps a bit better than you're hoping. Is it top end? And then worst, worst case OTC wise, if it really doesn't take off at all in the U.S. and Europe through the second half, you're at the bottom end of that range. Is that how we should think about it? And then the second question on Hygiene, you were quite bullish through last year that everyone was going to be sanitizing themselves in one way or the other sort of for a prolonged period of time with the mindset shift. And you put a lot of commitment, I guess, behind that in terms of supply. So the question is, are you now meeting the demand with the supply? I think that was for the shortfall last quarter. Is that now in equilibrium? And is there a risk that you may be overly bullish, would you concede that and that habits are changing? Maybe just tying into your comments just now on professional services, are you seeing that hygiene volume drop off that's quicker than you felt?

Let me take the first 2 questions, and I'll just translate on to Jeff for any comments on margin. But just on the OTC question, we have assumed in our guidance an average OTC season, an average over the course of the last 3 years. In terms of what we are seeing, let me just go to Australia. I think there's been a lot written about Australia and a lot written about the publicly available information about the incidences of flu in Australia. What we saw in our POS data, our point-of-sales data for Australia, was that the traction on our cold and flu brands in Australia most closely tracks 2019. What we saw though was that when Melbourne and Victoria went into a lockdown and later on New South Wales, it did have an impact on it. So clearly, government guidelines will have an impact on the cold season. What we're seeing in the U.S. is we are coming off a historically record low cold and flu season. So the lapse, particularly from last year, are incredibly favorable in that sense. What we are seeing so far is, in the recent months, weeks even, particularly with the scale up of the RSV virus as well as the recognition of other viruses, we're seeing growth. And in June, Mucinex tracked higher than 2019 levels, and that number is even higher in the early weeks in July. Then naturally all this depends on how this plays itself out. It's too early in the flu season to call it because many of the dynamics that are at play with cold and flu this year are very different from what you would normally have given shifts taking place in mobility across countries and the like. So we can only really call it early October. What we are saying, though, and what we are seeing in the market is it feels from the data that it's consistent with what we would define as an average cold and of flu season, which is really what is driving our guidance. On your question on Hygiene, we've said all along that Hygiene will come off its peaks from 2020. Some of the peaks that you saw there were quite significant just in terms of the overall partake. To give you a sense of markets, there is no one number that you can look at across all markets because it is very specific to what happens in the market. You have some of the markets that are more advanced in terms of their rebasing, a lot of the Dettol markets are in that place. But also if you have a sudden variant that emerges, what you see is growth in consumption. India, for example, being a great example of that, where there is rebasing, but once with the new variant and people understand what it is, they certainly behave that way. If you look at the U.S., what we saw in the second quarter is we saw an earlier tail off than what we had originally expected, given the expansion of vaccinations in the country as well as guidelines from the government certainly had an impact. And so I think what you saw in Q2 was a tail off that was quicker than we thought. We clearly do see a tail off. In terms of data on it, if you look at the U.S., at the end of February, it probably reached its peak in terms of the category of U.S. disinfectants. The category was significantly higher, maybe 85% higher in February '21 than where it had peaked in COVID February '19. Lysol, of course, was higher than that because of share gains that Lysol has consistently seen and see so even today. What has happened in Q2 is you've seen a tail off where the category in the U.S. has declined by about 35% from its numbers early March. Lysol has declined less, again because of share gains. And what you see where Lysol is at this point in time is Lysol is probably at this stage over 70% to 75% above its pre-COVID levels while the category is about 35% above pre-COVID levels. Our intention and what we are doing very much is ensuring that we encourage behaviors. And what we're seeing as well in places with high vaccination levels in the U.S. as well as in places with low vaccination levels, we assume uniformly strong consumption. In states with higher vaccination levels, we're seeing people rely on protection because that is also explaining the vaccination levels that you have. Our core consumers, for example, heavy users of our brand. And certainly, from a behavioral standpoint, both penetration and frequency remains strong. We're also seeing the same thing in states with lower vaccination. Just to give you a sense from a consumer perspective what's going on. On the global business solutions, what we see is germ sensitivity outside the home is higher than germ sensitivity inside the home. Now this has been something that's been consistent over history. But what has happened is the level of awareness of what happens with germs is actually stronger today because of the pandemic than what it was before. We are seeing that with the innovation we've put in place on the retail business with regard to on-the-go solutions. So we fully expect that that will manifest itself as people look to go to work as well as people are on the go. From a consumer data standpoint, at the pandemic worldwide, what we saw was 76% or 80%, close to that, essentially changed their behaviors and their routines, they changed their routines. That number is about 50%. But if you look at hygiene behavior, it's down only about 10% in terms of ensuring your homes are clean, ensuring that your hands are clean, you're washing your hands, it's about 10% down from the peak. So we continue to see germ sensitivity, concern about COVID, majority of consumers still are concerned about COVID. And we are seeing shifts in behavior. But what we did see in Q2, in the U.S. in particular, was a tail off that was higher than we thought, which is precisely why you saw Q2 forming the way it was. That's the Hygiene story. Let me go back to Jeff, and maybe he can touch a bit on your question on margins.

Well, the question was, I think, on top line guidance. Yes, I think it's reasonable, David. You asked about the range of top line guidance relative to a strong or a weaker flu season. So clearly, that would have an impact. A stronger flu season will get us -- will obviously benefit our performance in the range and a weaker flu season will be a negative. Just to cover up one other question was about demand and supply. Very much around Q1, the end of Q1, we very much had got our supply back in line with demand, and that allowed us to do quite some restocking as well in the U.S., particularly on Lysol around the first quarter. So there's absolutely -- we're in good shape relative to demand and supply for disinfections. Thanks very much, David.

[Operator Instructions] Our next question comes from Guillaume Delmas.

I mean it's 2 follow-up questions from me, really. The first one, going back to cold and flu, because you mentioned this morning, both in the press release and in the presentation, some encouraging signs from a consumer offtake standpoint in cold and flu. But clearly, this is yet to be reflected in your like-for-like sales growth. So wondering where this discrepancy between sell-in and sell-out is coming from? And if it's potentially down to retailers' inventory levels, I mean, could we still see an adverse impact from this in the second half of this year, at least? And then my second question is also going back to Hygiene. I mean Dettol slowed from flat like-for-like in Q1 to down circa 20% in Q2. Just wondering if you see Q2 as the trough for Dettol? I mean simplistically, the base of comparison gets easier for Dettol from Q3. And related to this, to what extent Dettol is or is not a good lead indicator for Lysol, which I understand was still expanding in double-digit territory in Q2?

Just on your cold and flu question, retailer inventories are fine. They have had very little impact on that statement around sellout. So we are not at a stage where we have to worry about that because clearly, there's been consumption over the course of the last several months as well. So we feel good about that. On your question on Hygiene, this is a very market-specific question, Guillaume. Dettol clearly is in markets where the pandemic have seen greater, I would say, sort of more leading edge, if you look at a market like China or even a market like Australia and so on. What we've seen in many of these markets is the consumption of disinfectants is a rebase and it's structurally higher. Dettol is at about 44% above where it was at the time of the pandemic. But the reason why we can't really extrapolate is that you do see very different levels of germ sensitivity in various markets. If you look at penetration levels in the U.S. and Canada versus, let's say, penetration levels in Germany, in Germany, the penetration levels are low. They went up in the course of the pandemic, they have sustained, but they're significantly lower than the U.S. and Canada, which tends to be a lot more germ sensitive, and the consumer is quite concerned about it and actually does take action, and brands like Lysol are very strong in their psyche. And so it's hard to really extrapolate from Dettol to Lysol and therefore, say this is where it is because the markets are quite different in that sense.

Our next question comes from Fulvio Cazzol from Berenberg.

I mean most of the topics have already been covered. So I might just ask a little bit about the innovation pipeline. I guess you'll start to lap some tougher comparables for some of the businesses that last year benefited from innovations such as the Durex business. Could you highlight what you've got coming that might be worth noting, particularly in light of higher prices to recover commodities? How is the innovation pipeline shaping up, please?

The innovation pipeline in Lysol is very strong. We feel very good about it, and it's also grounded in the strength of the brand. The brand equity has increased significantly over the course of the last 2 years. Our franchise of loyal consumers is very strong. Additionally, what we are seeing is that some of the more, I'm going to call it, repertoire consumers who have come into the category, particularly in moments of need. You saw that during the pantry loading. If you look at the equity, even with those consumers, it's actually strong. So what we are doing is we are broadening the shareholders of the brand. We are looking clearly at different opportunities to serve met and unmet needs for consumers with whom we have a strong franchise. We're also expanding, as we have said, to additional markets. That's largely on track. And GBS, the brand relevance in the Global Business Solutions is strong, too. So I think you're going to see a broad suite of innovations in Lysol. If you look at the intimate wellness, which is our rebranded, so to speak, sexual wellbeing business, I think with Durex as well as with Queen V and with KY and the suite of brands we have, we have a terrific set of innovations coming in as we fundamentally rethink that business. It's a business that we are strong in 3 major markets, where we have a global play linked with e-commerce, of which, of course, we are very pleased with the progress in e-commerce. And it gives us the ability to frankly scale that business with the investments we are making in the science platforms. The investments in the science platforms on polymer science, on microbiome being just 2, sensory being a third. There's various things that we've put money into, and that is actually giving us the ability to bring to market great innovations, particularly in the sexual wellbeing business, but just more broadly across almost all of our various businesses. The adult nutrition expansion is happening, and we've launched in ASEAN, and we see good results initially, but of course, it's too early to tell. And then just more broadly, our specialty nutrition business is back to leading share gains given some of the innovations being brought in and some of the fixes we have made in terms of go-to-market. And that gives us confidence in the scalability of that business not just in North America but also globally. So the innovation pipeline feels a lot stronger. I think what we are doing now is essentially prioritizing what we have built in order to ensure great execution next year. But we feel good about the plans that are coming into place for that to happen.

Our next question comes from Jeremy Fialko from HSBC.

Jeremy Fialko, HSBC here. So 2 questions really. First one is, could you just give us a little bit of help on the balance of the year in terms of the sort of like-for-like sales rate? So obviously, you're saying you expect a slower Q3 and also a slower H2. So perhaps you can sort of spell out what sort of declines you might expect in Q3, [indiscernible] growth you might see in Q4? And then the second -- also with a bit of divisional context there. And then second question is if you could talk about IFCN. So clearly, your volume, your organic growth, excluding China, was quite good, but your volumes are quite weak. So if you could just give us a bit more color on some of the sort of volume, price/mix trends and also any impact from the WIC Program within that?

Jeremy, it's Jeff. I'll cover off the first part of your question in terms of the balance of the year. And I'm not going to get into a quarter-by-quarter guidance, but we have indicated that we see Q3 being relatively weak, but then a strengthening of Q4 as we see a stronger performance of our Health business and also in Nutrition, specifically in terms of BMS that we expect a stronger Q4. So I would expect to see the trend for Hygiene continuing where we were up some 28% in Q1. The Hygiene GBU was up 8% in Q2, but I would expect Hygiene overall versus the tough comps that they have to be negative in the second half. I'd expect Health, which has been negative for a few quarters now, to be positive in the second half. And I would expect certainly to see a stronger performance from our Nutrition division. So all in all, we do -- as we've always anticipated, as we planned, expect to see Hygiene come down once we get into the tougher comps in the third and fourth quarter. And I guess that peaked in the first quarter of '21. And so up against those comps, Hygiene will come down, but we will see Health, as I said, strengthening through Q3 and Q4.

On the infant division business overall, let me start with China. Our performance in Q2 in China was disappointing. What you see in China clearly play itself out is the birthrate decline. 18% birthrate decline in that market. But in addition to that, I think what we saw was with some of the destocking that took place in the process of the strategic review has clearly had an impact on that business, down significantly and explains a bit the performance. But also, what you saw there was the playing out of some of the structural challenges that we have referred to at various points in time. If you look at the birthrate decline, in larger cities, it's higher than the birthrate decline in smaller cities. And that's just one example of why structurally ensuring that we get to the lower cities is very important. And I think what we've done with that business is we have found a buyer, Primavera, a partner of ours, who over time will help us ensure -- will help unlock the potential of that business. If you take the rest of the IFCN business, ex IFCN China, that business was in growth, I think it grew about 2.2% overall. Now what you see there is, well, because of the pandemic, is you see the impact of the birthrate declines in many geographies. But our strategy has been quite clear. If you look at the Enfa business, it is really about offsetting the birthrate decline with innovation and premiumization in order for us to get to the revenues that we said are possible. What we've said long term is that part of the business is a 0 to 2% growth business. What we saw in the U.S. with the work that was done, and it's taken a while to get all these different building blocks in place, particularly on the medical side, is we saw specialty business grow significantly. Overall, market shares in North America are positive, and we've seen real gains in market share in North America, and we feel good about that and the progress made in particular on the specialty side, but also on the base Enfa business. Our business in Latin America is in share gain. And we feel good about that, particularly lapping the dryer change we made in the early part of the year last year. Our business in ASEAN has turned a corner and is now in share gain. Now naturally, that market is facing birthrate declines an is offsetting that with all the actions. But if you look at shares in ASEAN for us, they are gaining. Now we do have some problem spots. Philippines is a problem spot for us in the case of IFCN and we're going into it. And our e-commerce performance is strong as well. But overall, on the IFCN business, ex infant China, a combination of innovation, the strengthening of our execution of the medical channel, the ability for us to further scale our strong specialty business, coupled with our performance in e-commerce, all give us confidence in the trajectory of the business. Clearly, we have addressed the challenge in infant China.

Our next question comes from Iain Simpson from Barclays.

Two questions from me, if I may. Firstly, just to come back to the margin. You seem to be investing significantly more in your business than you set out in February last year when you announced the margin reset. Are you able to give a little bit more granularity on where the spend is going? I guess professional build-out is one of those areas. But where else the spend is going? And sort of what benefits we should see from that in terms of top and bottom line and when? And then just a second question, if I may. It looks like many emerging markets across sort of Asia, ex China, bits of Africa, bits of Latin America are currently seeing another COVID wave. Is this having any impact on Dettol when we think about the sort of June, July run rates?

Iain, it's Jeff. Let me talk about the investments that we've been making. You're right to say, and the story hasn't really changed since February on the investments, the messaging hasn't changed, and the content haven't changed. What we said back in February is we, during 2020, took advantage of the extra leverage that we had. And as a consequence, we were investing more than we've originally talked about back in February 2020. So we have increased the level of investments. And to some degree, we've increased our productivity to fund those. The key areas that we've been making investments obviously include pricing and in this current environment, there's been more price investments that we talked about then. But we've also -- go back to the areas that we talked about back in February, we've been making significant investments in R&D. We've made significant investments in what we call our centers of excellence, which includes sales excellence, marketing excellence, but also eRB -- well, I guess it's eReckitt now, as we now call it, in terms of our e-commerce business, which we are very pleased with the overall performance delivering on a 2-year basis over 100% growth in e-commerce sales. In terms of measuring those investments, clearly, there are different -- we track on a regular basis all of the investments we make. Certain areas will pay off differently. If you look at sales excellence, for example, we can see both qualitative and quantitative results in terms of the response to those investments. So for example, if we look at customer surveys, we see Reckitt improving in terms of our performance, in terms of customer services -- customer surveys. We see our delivery stats improving in terms of the order fill rates and so forth. And we get qualitative feedback from customers that we have made significant improvements in our performance over the last 18 months to 2 years. R&D, Laxman has talked about the pipeline. Clearly, we're measuring the pipeline, and we see a significant improvement in terms of the new initiatives in the pipeline, what we've got to do is translate that now into significant net revenue improvements in terms of the new product, net revenue percentages coming through from new product initiatives. So supply chain, we talked about some of the investments we're making in capacity, the investments in capacity of Lysol, for example, a lot of that is with co-packers, which is an incremental cost in order to manage a 100% increase in the size of the brand over an 18-month window, which is not something we normally would plan for in terms of our own manufacturing capability. So there's a whole multitude of various investment. And clearly, the paybacks tend to be over different life cycles, but we're tracking all of them and measuring them all on a regular and quarterly basis.

I think it's fair, if I can just add one perspective. There's no question that we have invested in the core of this business, both catch-up investments as well as get-ahead investments. And it is more competitive now than it was. And hopefully, as you see through the presentation, various areas of examples of the investments that we have made. To get to your question on the emerging markets and the variants, the variants are having an impact on consumers and having an impact on consumer concern around germs and on disinfection. And I think that what we are seeing in India, as an example, where with the recent wave that happened there, I think you did see translation into consumption in India. Now 2 years' stack growth in India is extremely strong overall across all the businesses that we have had. I think you see this in the U.S. with what is happening with the Delta variant across the various states. And it doesn't matter whether you're vaccinated or not, you're clearly seeing that impact there, too. So the variants are unknown, like in terms of are there going to be more or not. So I think overall, variants do have an impact on consumption.

Our next question comes from John Ennis from Goldman Sachs.

My first question is on price positioning within categories. I think last year, you repositioned some of the price points within your portfolio. I just wondered, are you comfortable with your relative pricing now or are there certain categories or brands where there's more to do? And are you pricing slightly less than inflation to further support some of those initiatives you took last year? That's the first question. And then my second question is on intimate wellness. It's clearly a big building block to get to your medium-term guidance because you're targeting 7% to 9% growth there. I guess what do you see is the market growth for that segment? And what proportion of your target is reliant on market share gains? And can you also remind us of the 3-year average sales growth for that business for you?

On price points, it's a great question. I think in February 2020, where we talked a bit about some of the investments we did, we did actually invest in competitiveness in several places. And we felt good about the price gaps versus competitors as well as the trends that we were seeing in that space. I think the best way to look at it is just take a look at certainly, market by market, how are we doing, what is our price gap, what is our competitiveness as measured by market share, and what specific actions do we need to take to offset some of the inflation we're seeing? We've a very clear view on how we do this. The first one is on productivity. It's very important to get our productivity program in place. I know that when we started in February 2020, people were a bit surprised that we would find more productivity in what they have defined as being a very lean company. But what we've realized is with the inefficiencies, the investment selectively in capability has unleashed this kind of productivity [ where ] we see. We are fully on track to getting to a GBP 1.6 billion number in productivity, as we have said, and the capability set that we have built in productivity gives us strong conviction that the run rate that we will see on an annual basis on productivity, we are consistent than what we have -- see, it's a step up, almost doubling in the step-up of run rate of what we saw pre-2019. Part of the productivity that we are seeing is also -- we haven't fully captured it yet at all, by the way, is actually in revenue growth management. We see that some of the tools, some of the processes, some of the practices we have need significant enhancement and significant improvement. And that's an area of investment as we look at what we are seeing, which actually comes in a very timely manner as we look at offsetting some of the price inflation or the cost inflation that we are seeing. So productivity plays a very important part. Pricing does, but it's not just raw pricing, it's also looking at mix and looking at a more sophisticated approach to revenue growth management, which we're scaling across various markets that gives us the confidence that we will be able to offset the inflation with pricing and with productivity. But in all matters, we are very conscious of competitiveness, and we will be competitive on the shelf as well as with our consumers.

I think just to come back on intimate wellness, we see -- so we have seen mid-single digits -- an average mid-single digits CAGR over the most recent few years. Obviously, we see that stepping up going forward. But if you look back over the last 3 or 4 years, we've averaged in the mid-single digit CAGR.

I think our role in intimate wellness as a category leader is really in category creation. It's a business that we have perhaps the best portfolio of brands. We play in a small part of the business. We have the ability to scale the brand in various spaces. You will see us talk more about how we're repositioning Durex. You will see us talk a bit more about how we're going to scale up Queen V. And I think the capabilities and the abilities we have in that business are very strong, particularly linked to e-commerce. So it isn't just a market share gain, it is actually category expansion that we believe is a big opportunity for us.

Our next question comes from Tom Sykes from Deutsche Bank.

Just sort of coming back to various different reasons, perhaps the disappointment this morning seem several fold. And so therefore, maybe COVID covered up some of the transformation issues that still needed to take place at the company. Do you feel that you're getting the responsiveness from the business quickly enough when you're getting demand or competition changes in different geographies or categories, please? And then just -- sorry, another one on the pricing and perhaps just building out what you just said. You mentioned in Hygiene, I mean you seem to be alluding to increased price competition in Hygiene. I wondered whether you could maybe pick out what the level of -- to the competition in disinfection is relative to other areas of Hygiene. And when OTC comes back, do you think now it's going to come back at the same price points that you were at before, please?

Maybe let me start on the first part of the question in terms of responsiveness. I mean I think one of the reasons we showed in the presentation, the mix of the 70-30 is we weren't breaking out 70% doing well, 30% doing poorly. We were breaking out the 2 areas most impacted by COVID and showing that if you take away the disinfection, which is about 25% of the portfolio and cold and flu, which is about 5% of the portfolio, the rest of the portfolio on average is growing mid-single digits. And that's a consequence of the investments that we've been making, and that's shown the responsiveness that we've been experiencing because of those investments. The fact that disinfection is coming off its peak is not a surprise to anyone. We never expected once the infection rates in the initial pandemic period wore away, that disinfection rates and usage and frequency would stay at the peak levels. Nobody expected that. We didn't anticipate that. And we are seeing it decline, as we said many times on this call, however, Dettol is still plus 40% also from its 2019 levels, and Lysol is around 100% from the '19 levels. But the current trends on disinfection are to be expected. And on cold and flu, clearly, we had no season last year. There was no cold and flu. We are anticipating a season in 2021, '22, and that will see not just in terms of an improvement in OTC like-for-likes, it will also see a significant improvement in terms of the group profitability because that has a big contribution to the mix. So just in terms of the overall responsiveness, I thought I covered that off.

If I could add one thing to that. I think Tom, it's fair to say that I think the responsiveness of our business to the changes in China on the infant formula business was disappointing. And I think what part of it is the responsiveness there required us to have some of the structural shifts that they needed to make in the business that we didn't quite have. And I think that with us having essentially sold the business, that what's going to happen is the ability to build that structural capability in the business will be there in the future. But that's an area clearly of disappointment, no question.

Okay. And just on the pricing aspects?

On the pricing question, I think on the OTC side, we're seeing a focus on hygiene. It is more competitive. At the same time, what we are -- and by the way, it is more competitive, particularly for us in certain subcategories, wipes being one example. But I think as we look more broadly, I think it does depend a lot on the strength of the brand, the ability for the brand to carry a price premium. And Lysol has literally strengthened significantly over the last couple of years, and we are building the shoulders of the brand in terms of new places that we're going into. So on Hygiene, no question, more competitive. But the strength of the brand really matters in this case. I think if I look at your question about OTC, we expect OTC to come back, and we don't see anything at all to give us any sense that the pricing is going to be lower than what we've traditionally had and the margins will be lower than what we've had.

[Operator Instructions] And so our last question for today comes from Chris Pitcher from Redburn.

I'll keep it to one given the call. On cash flow and the impact of the China business, can you give us an idea of what sort of benefit the IFCN China business is in terms of working capital? And what percentage of sales do you expect working capital to settle at on a pro forma basis? And I'm assuming there's limited CapEx this year allocated to that business. So in terms of the absolute guidance you've given for this year, is that a steady-state figure for going into next year?

Let me -- it's Jeff. Let me cover that off very briefly. You'll notice the free cash flow for this half is down significantly versus last half. That's primarily -- so I'm not going to specifically get to the question on China. First, I'm just going to give you an explanation of the free cash flow. We saw a significant working capital inflow last year, and we're seeing a significant element of that flow out this year. I'd expect the free cash flow -- sorry, working capital at the end. And clearly, this is kind of COVID related. The 2 years combined are still going to have very strong free cash flows. I would expect our working capital to stabilize a little better than the 2019 position. And in terms of China, it's not particularly different in terms of profile, in terms of our working capital. So it's not going to have a particular impact on the overall group's percentages. So I don't think it's going to have a significant impact. China's profile is pretty similar to the rest of the group.

And can you say on CapEx whether there's any CapEx to drop away with the divestment? Or is there very little at all allocated to that, if any?

I think CapEx has been, for that particular -- there will be some CapEx, which falls away. I think as a percentage of the group, it's probably a little under the average in terms of the percentage of the group. So there will be some CapEx that drops away, but probably at less of 1%, more like 2% of sales as opposed to the group average, which will drop away. So there will be obviously some CapEx which comes out as a consequence of that. But I think our investment in CapEx is in that particular area runs a little less than the group average.

Thank you, ladies and gentlemen, for all of your questions today. I will now hand back to CEO -- CFO, excuse me, Laxman, for any closing comments.

Well, thank you for that. Appreciate it. Jeff and I are pleased to host you all and to answer all the questions that you had. So thank you for joining us. I just have 4 key messages. We've had a solid first half of the year despite a strong comparator, and we've had a slower Q2. We've had a strong 2-year revenue stack of over 13%, inclusive of IFCN China. Second, we continue to make good progress in building a better house in a great neighborhood. Third, we are addressing near-term cost pressures while actively managing our portfolio. And finally, we remain confident in meeting our medium-term targets of mid-single-digit revenue growth and mid-20s margin by the mid-20s. Thank you all for joining us, and we appreciate all your questions.

Thank you very much for joining the call, ladies and gentlemen. This now concludes today's conference, so you may now disconnect your lines.