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

All right. Good morning, everyone. Welcome to Reckitt's Full Year 2021 Results Presentation. Before we start, I'd like to draw your attention to the usual disclaimer in respect of forward-looking statements. Today, we have our CEO, Laxman Narasimhan; and our CFO, Jeff Carr. They will present a review of our 2021 results, our outlook for 2022 and progress on our transformation journey. Following the presentation will be the usual Q&A session. And so now without any further ado, I'd like to introduce our CEO, Laxman.

Thank you, Richard. It's great to see you all this morning, and thank you for joining us. 2 years ago, we established our strategy to return Reckitt to sustainable mid-single-digits growth and mid-20s operating margins. We're making good progress on this journey, and I look forward to sharing this update with you today. I have 3 key messages for you this morning. Firstly, we have seen strong momentum in 2021, outperforming our own expectations on revenue growth. We have a more competitive business. This positions us well to deal with a difficult operating environment, while delivering further revenue growth in 2022 and a return to operating margin expansion. Secondly, we have made good progress in actively managing our portfolio to position the business for higher growth. And finally, we have a much stronger business than we did 2 years ago. We have better execution muscle, a more resilient supply chain and a bigger and better innovation pipeline. We have a strong leadership team in place. Our performance-driven culture builds on our past and is evolving to support our future. I am, therefore, very comfortable that we are firmly on track to delivering our medium-term targets. Before we go into these messages in more detail, I will quickly run through today's agenda. I'm going to provide you some 2021 highlights. Jeff Carr, our CFO, will then come up here and take you through our 2021 results in more detail, plus our 2022 targets. And then I will finish by giving you an update on our strategic progress and why we feel comfortable with our direction of travel to deliver our medium-term goals. So with that, let's get started. We exit 2021 with strong momentum. We delivered a strong like-for-like growth rate of 3.5% on the back of an exceptional and unprecedented 2022 -- sorry, 2021 performance. This enabled us to deliver a 2-year stack growth of 17.4%. A few highlights. 62% of our core category market units by revenue are either gaining or holding share. And for the recent quarter, all 3 of our global business units won share growth territory overall. We still have work to do in certain areas, but overall, I am pleased with our progress. We have made a step change in our engagement with customers, with retailers now recognizing Reckitt as top tier in nearly half of our markets as measured by the Advantage 2021 survey of retailers. A year-on-year improvement of 20 percentage points. This also tells me that while we still have some work to do, it is encouraging to see that our efforts and focus are enabling us to build much closer relationships with our valuable business partners. And we have made strong progress on sustainability. I'm very pleased to announce that we hit our 2030 target of a 65% reduction in carbon emissions 9 years early. This is part of our wider sustainability ambitions, which we launched in March 2021 and is a key milestone in our journey towards our net-zero goal by 2040, which has been externally recognized. Our performance in 2021 was broad-based. 70% of our portfolio, which is less impacted by the dynamics of COVID, grew mid-single digits in 2021. And in fact, they grew within this mid-single-digit range each quarter in 2021. We are now a stronger business than we were 2 years ago. We have built up our capabilities across the company, and this is now translating into our top line performance across many of our brands. Given our performance over the last 2 years, I feel very good about our momentum as we enter 2022. I will now hand over to Jeff to take you through our financials for the year in more detail and our 2022 outlook and targets. Jeff?

Well, good morning, ladies and gentlemen, and thank you, Laxman. As Laxman mentioned, we finished 2021 with strong momentum. The fourth quarter like-for-like revenues were up 3.3%, giving us a good start as we look towards 2022. For the full year in '21, like-for-like revenue grew 3.5%, an excellent performance, as Laxman mentioned, on top of the almost 14% growth in 2020. Volumes grew in the year 0.6%, and for the full year, the price mix was up just under 3%. Our Hygiene business unit grew 7.5% on a like-for-like basis and is now up 27% versus 2019. And our Health business unit was flat in the year, but this is an excellent performance recovering from a 10% decline in the first half due to the lack of a cold and flu season in 2020. Nutrition grew 0.6% in the year, with IFCN growing 3% like-for-like and VMS declining high single digits. I'm now going to focus on the group performance, excluding IFCN China, and I'm sure you will all know that we sold that business, and it completed in September 2021. Net revenue grew at constant exchange rates by 3.3%, and at actual rates, they were down 2.1% due to a foreign exchange headwind of over 5%. Gross margin at 58.5% was 200 basis points lower than 2020, and I'll go into more detail on the next page. But gross margins were stronger in the second half at 58.9% compared to the 58.1% in the first half of the year, and this is despite the strengthening of cost of goods inflation as we went through the year. Brand equity investments were favorable in the year by 60 basis points. Now this is largely due to the fact we had 90 basis points of productivity delivery in the year. This included buying synergies as we bought back together our 3 -- the media buying of our 3 business units. We also invested in technology to more rigorously measure the returns on media activities. And additionally, we've now in-sourced services such as digital and media production as we build in-house capabilities, and this has resulted in costs being reclassified from BEI into other costs. Adjusted operating profit at GBP 2.9 billion is down 2.6% versus last year at constant rates, and operating margins were 22.9%, down 160 basis points from 2020. Now the second half margin at 23.1% was up 40 basis points from the first half, which was 22.7%. On this next page, I'm going to focus a little bit on the 200-basis point decrease in gross margin. During the year, our cost of goods inflation accelerated and finished at 11% versus 2020. This is ahead of the 8% to 9% that we guided at the half year. This is inflation net of any hedges or fixed-term contracts that we had in place. At this level, inflation impacted margins by over 400 basis points. In addition, sales mix was negative for the full year, a lot less so than at the half year due to the recovery in cold and flu sales. And of course, offsetting these headwinds, we continue to deliver strong productivity initiatives and took appropriate pricing actions throughout the year. As mentioned, we've seen full year average cost of goods inflation at 11%. Now looking at the breakdown of the key elements, material costs grew at a rate of low double digits, while factory conversion costs were impacted by inflation at mid-single-digit rates. Logistic costs, which include ocean freight, grew at strong double-digit rates. As things stand, we'll continue to see strong inflationary headwinds in 2022 with additional cost of goods inflation expected to be in the low teens. Obviously, this remains quite volatile and unprecedented in recent times. So this implies around 500 basis points of impact without mitigations, but clearly, we do have a strong series of mitigating actions. These include pricing and revenue growth management, ongoing productivity, the phasing out to transformation costs, improved sales mix and the elimination of IFCN stranded costs, all of which gives us confidence in being able to deliver margin growth in 2022. So moving on. Our Hygiene business unit grew 7.5% on a like-for-like basis. You can see on this chart that there was considerable volatility quarter-by-quarter. This largely was a result from changes in Lysol. Lysol grew strongly in the first half and declined, as expected, in the second half of the year as we reached tougher comparators. In total, Lysol revenues are up around 90% since 2019, and inherent in our guidance, we expect Lysol to decline in 2022 as we comp the extremely strong performance in the first half of '21. The growth profile of the business unit is much more consistent, excluding Lysol, with strong growth throughout the year from Finish, Air Wick, Vanish and many of our other key brands. Adjusted operating profit was GBP 1.4 billion, down 6.9% versus 2021 at actual exchange rates and 1.3% at constant rates. Adjusted operating profit margin of 23.7% remains very strong in absolute terms but down versus the first half, with higher commodity costs in the second half, not fully offset by productivity and pricing actions. For Health, for the full year, revenues were GBP 4.6 billion, and like-for-like revenues were basically flat, down 0.1%. And as I said earlier, this was a strong second half of the year. The fourth quarter, in fact, Health grew 17.5%, and OTC grew over 40%, following strong market share gains and a positive start to the 2021-'22 cold and flu season. Dettol, like-for-like revenues declined low double digits in the full year, but as stated in our recent Capital Markets Day, Dettol sales have stabilized at around 40% above 2019 levels, and we now expect Dettol to grow low single digits in 2022. Intimate Wellness grew mid-teens in 2021, mid-teens. I mean that's quite a performance, led by our flagship brands, Durex and KY. Adjusting -- adjusted operating profit margins recovered strongly, if you recall, 21.8% in the first half of the year to 25.5% for the full year. Nutrition like-for-like net revenue grew 0.6% to GBP 2.3 billion with IFCN growing 3% within that mix. The U.S. infant nutrition business actually was particularly strong, growing over 5% in the year. As I've previously mentioned, VMS declined high single digits, but this is primarily a result of the reduced demand for Airborne, following exceptionally strong growth in 2020. Excluding Airborne, the remainder of our business grew strongly in double-digit growth. Neuriva, for example, continues to develop as a leader in the brain category, and sales revenues doubled in 2021. Adjusted -- adjusting operating margins for the Nutrition business were 15.5% in the year, unchanged on 2020, and that's both years excluding IFCN China. We expect Nutrition margins to benefit in 2022 from the elimination of stranded costs related to that disposal. In addition to our reported operating profit numbers, the IFCN China business lost GBP 67 million in the year, including GBP 40 million of exit costs incurred immediately prior to the sale of the business. If we move on to the next chart. Now turning to earnings per share. Adjusted EPS was 288.5p in 2021. That's down from 327p in 2020. Now the majority of the movement in EPS was due to foreign exchange and IFCN trading in 2021 versus 2020 and the IFCN exit costs I previously mentioned. Excluding these 3 items, EPS was down just 1.7%. Net finance expenses were 3.9p lower than 2020 due to lower average debt and the elimination of a prior year expense related to the interest element of a tax provision. Additionally, the effective tax rate was lower than 2020, benefiting from favorable updates to estimates in relation to certain historical matters. Now I'm very pleased with our free cash flow of GBP 1.3 billion and cash conversion at 61%. Included in this reported free cash flow is over GBP 200 million of onetime costs and tax charges related to the sale of IFCN China. Excluding these items, free cash flow would have been at GBP 1.5 billion. And in addition, in 2021, it was obviously impacted by the exceptionally strong 2020 with free cash flow in that year at GBP 3.1 billion. And as we said at the time, this was driven by strong working capital inflows of GBP 0.9 billion in 2020. And we stated last February that we expect an element of that working capital inflow to correct in 2021, and we did, in fact, see a working capital outflow of GBP 356 million in the year. Our balance sheet continues to strengthen with net debt moving from GBP 9 billion to GBP 8.4 billion. And this has largely resulted, as you can see on this chart, from the net cash inflows from M&A activities. Now let's turn to our outlook for net revenue in 2022. As we've mentioned, we're expecting like-for-like growth of between 1% and 4% while exiting the year with mid-single-digit growth. Quarterly revenues over the last 2 years have been impacted and been more volatile because of COVID. But these impacts will normalize during 2022. And this chart explains why we're confident that our investments, nearly GBP 1 billion in total, are paying off and driving the delivery of our midterm targets. First, the majority of our brands, and this is the 70% of our portfolio that we've talked about, are already traveling at mid-single-digit growth rates. And we expect this to continue in 2022. Next, we have Lysol and Dettol, our world-leading disinfection brands. These are at different stages in the cycle, as Laxman will show later, with Dettol stabilized now at around 40% growth versus 2019 base and poised to grow low single digits in 2022. Now Lysol will be still annualizing peak sales in the first quarter of 2022. Therefore, we expect Lysol to decline in the current year before stabilizing and heading back on to a growth path. And finally, our cold and flu brands were negatively impacted in the first half of this 2021, and they will grow significantly in the first half of this year before normalizing in the second half. It's very early in the year, but our first quarter has started well, with strong demand for infant formula in North America and a strong start to the cold and flu season. So in summary, for '22, we see like-for-like growth -- like-for-like net revenue growth of between 1% and 4%, a mid-single-digit growth of 70% of our portfolio, offset by uncertainty related due to COVID, primarily in Lysol. We're targeting growth in adjusted operating profit margins from a base of 22.9%, and this is despite the significant inflationary pressures. We'll be applying appropriate pricing and net revenue growth management actions in '22 to offset these pressures. And we will continue to deliver in our best-in-class productivity program. As I mentioned, finite life transformation costs will phase out in 2022. And additionally, the margin of our Health business unit is expected to benefit from an improved mix due to the stronger cold and flu seasons. So thank you, and now let me hand back to Laxman.

Thank you, Jeff. I want to now give you a quick update on the progress we have made over the last couple of years and how we have been building a stronger business. As a quick recap, our strategy is centered around addressing 4 of the world's largest problems, and these problems address: How can hygiene be the foundation for health? How do we enable consumers to self-care at a time when health systems are under pressure? How do we support intimate wellness and eradicate the menace of sexually transmitted diseases? And how do we provide enhanced nutrition for infants and for the increasing number of seniors in society? We also capitalized on 2 major shifts: the broad and rising impact of digital on consumers and on their journeys and sustainability as we realize new opportunities while making the world cleaner and better. Addressing these 4 problems and capitalizing on these 2 major shifts puts us in a very large total addressable market. We play in very strong and attractive categories, and we do so with trusted market-leading brands that consumers love. These categories of long-term structural growth characteristics, which enable us with strong brand building, innovation and execution to grow sustainability -- sorry, to grow sustainably at mid-single digits over the medium to long term. As we have talked about before, we see 4 organic growth drivers which will enable us to achieve our mid-single-digit growth target. These are penetration, market share, new places and channels as well as new spaces and adjacencies. So let's move to each of our growth drivers, where I'll provide just a few examples of what we've achieved. Starting with penetration. Turkey has one of the highest dishwasher penetrations, and it continues to grow. In 2021, our penetration grew by over 300 basis points. Our Finish brand is the market leader in Turkey, and it now reaches around 11 million households as we continue to build penetration through our targeted media campaigns and strategic alliances with dishwasher manufacturers. In India, we have continued to build penetration of our liquid hand wash and antiseptic liquids. As we all seek to keep our families safe in these unusual times, good hygienic practices are the foundation for health, and these have never been more important. And Neuriva, our brain supplement brand continues to build penetration and grow the category by reaching more new consumers. We doubled our sales in Neuriva in 2021. On market share, as we stated in our RNS earlier today, 62% of our top category market units, or CMUs, gained or held share in 2021. I want to share a few specific CMU successes with you now. In the U.S., Lysol grew share significantly in 2021. This success was driven in part by a back-to-school campaign in August and September. Our U.S. Nutrition business grew share in both our core formula and the specialty formula segment. And in India, our focus on increasing our points of distribution over the past couple of years has helped us gain over 200 basis points in market share in 2021 for Durex. I have covered penetration and market share. A great measure that points to both is our share of distribution globally, which increased in 2021 by 110 basis points in the markets in which we measure. On new places, our Finish business in emerging markets has grown around 80% since 2019. We established Finish in a number of very nascent markets, which whilst individually small at the moment, have significant long-term growth potential. India, for example, has seen a fourfold increase in dishwashers since COVID, a country where we have the market-leading brand in auto dish. Our nascent but fast-growing VMS business in China has made strong progress in 2021. Move Free has now become meaningful brand there and is a market leader in joint health. And we continue to make progress with our unique product, Nuromol, our combination of ibuprofen and paracetamol into one tablet, which we've rolled out in Brazil during the course of this year. We continue the strong progress we are making with the expansion of our OTC brands in select geographies based on our regulatory work and by connecting our local heroes like [ Pico ] and Luftal in Latin America to global platforms. In new spaces, we have successfully launched Dettol Tru Clean, our first plant-based disinfectant, which has quickly established itself as one of the larger eco brands in the U.K. In the U.S., we have been very successful in capitalizing on the strong equity of Lysol by moving into the adjacent category of laundry sanitizers. We see a significant growth platform in this space, and I've been very pleased by its initial success. Our Global Business Solutions, GBS business, has further developed its channel and geographic footprint through partnerships. We have achieved strong share growth in the subsectors that we are focused on. However, we do not play in many of the large subsectors beyond travel and hospitality, which have significant headroom. And as a consequence, we are partnering with operators such as Diversey, a leader in the development and delivery of hygiene, infection prevention and cleaning solutions. This will enable us to expand the distribution of our trusted hygiene brands into more end markets for the protection of staff, clients and customers. We've just spoken about our 4 growth drivers, which are foundational to our organic growth expectations. I would like to specifically address our 2 big disinfectant brands, Dettol and Lysol. We immersed ourselves with consumers asking 2 important questions. Will improved hygiene behavior habits stick? And second, what will happen to Lysol and Dettol as we learn to live with COVID for a more sustained period of time? The first point to be clear about is that Dettol and Lysol, as Jeff said, are in different places across markets. Dettol is further ahead in its normalization while Lysol is anchored in a highly germ-sensitive U.S. market with very high levels of household penetration. Our global research shows that 80% of consumers say that they will maintain their new habits post COVID. This has barely changed from the 83% of people who claimed this 2 years ago at the peak of the crisis. In addition, globally, half of consumers are still disinfecting their homes more versus pre-COVID times. And rather than become complacent, once vaccinated, we actually find that vaccinated people are more likely to be more germ-sensitive and maintain this habit. I will expand on this later with particular focus in the U.S. These consumer observations are consistent with what we have seen in Dettol and Lysol. In both cases, we have focused on drivers of consumption in the core as well as sought to broaden the shoulders of these 2 trusted brands, which have driven significant growth over the last 2 years. Given the markets that they're in and consumer attitudes and behaviors in those markets, they have achieved this growth in different ways. On Dettol, if you look at the left hand side of the slide, you will see that we have broadened the base of Dettol over the course of the last 2 years through expansion into new places and spaces. Specifically, disinfectant spray and laundry sanitizer were nascent part of the Dettol portfolio in 2019, but we have seen strong growth over the past couple of years. Disinfectant spray is now 3.5x bigger than it was in 2019. This, combined with our entry into 38 new markets, has contributed over GBP 100 million to revenue growth. But the real difference in Dettol is that in our key developing markets such as India and China, we have seen a step change in penetration, with many consumers using the brand for the first time. We continue to see significant headroom opportunities in core Dettol markets, and as a result, we are focused on driving distribution and then educating consumers in new habits. On the right-hand side of this slide, you can see that after a sharp rise in 2020, our revenue has stabilized over the last couple of years at a level of around 40% above 2019. In fact, as Jeff said, Dettol was back in growth in Q4 2021. We feel confident that we will be able to sustain a significantly higher level of absolute revenue versus 2019, primarily due to the significant penetration opportunities we see in Dettol markets, along with our work in broadening the shoulders of the Dettol franchise. And as Jeff said earlier, we are now targeting growth for Dettol in 2022. Let's now turn to Lysol. Our primary focus in Lysol is in driving the core, both with investments in strengthening the already strong equity of Lysol but also in driving consumer awareness and behavior, like the back-to-school campaign I mentioned earlier. We have gained 700 basis points of share versus 2019. Our U.S. consumer research also shows that the heavy Lysol users are the heart of the franchise. These heavy users tend to be both vaccinated and germ-sensitive across demand spaces. These heavy users drove a majority of our core consumption growth in the U.S. They also increased their purchases of additional units in Lysol's adjacencies. Like Dettol, we have been active in broadening the shoulders of Lysol over the past couple of years, and this continues to remain a big opportunity for us. Lysol has seen over GBP 250 million of additional contribution from new spaces and places, including the uplift in laundry sanitizer and the Global Business Solutions business, which did not exist in any meaningful manner before the pandemic. Contribution from new market entries is solid. We see real strong traction in markets like Mexico, the Philippines and Spain, which created a new tranche of growth markets for us and confidence in our expansion success models, which we are also using to refine our approach in some other markets. We do expect some normalization of Lysol in 2022 as the world adjusts to living with COVID, but the work we have done to broaden the shoulders of this iconic brand, our strong share gains, the anchor we have with heavy users who trust in Lysol all give me confidence that when we do see some stabilization, Lysol, like Dettol, will be at significantly higher levels over 2019. I've walked you through our organic growth drivers. I have commented on our views on Lysol and Dettol. I would now like to talk to you briefly about the fundamental changes that we have made over the past 2 years across 6 areas to build a stronger, better business. Core to our success is the strength of our brands. We invest heavily behind them, both in terms of insights, innovation, understanding, preference, driving distribution and driving behavior change. We have adopted a category-led approach to our brands and identified new demand spaces for future growth. We have invested in and seeing strong growth in the equity of our brands in 2021. I'm very proud that a number of our brands won Effie Awards in 2021, the Effies being the pinnacle of brand and marketing recognition anchored in performance. Just a few examples from the Middle East and North Africa region. Dettol won a gold Effie Award. During the height of the pandemic, the Dettol team focused on not just advertising but also educating, acting and empowering our consumers to our campaign to fight and protect the little things we love so that we can keep enjoying them. Durex won an award through its Everyday Celebrations campaign, celebrating the big and small events that happen in our lives. And finally, I would like to play you to our Finish video, a gold award Effie winner in our Middle East, North Africa as well as in our European regions that ran across many markets and highlights that we still waste millions of tons of water prerinsing dishes, but we all agree that water is too precious to waste. [Presentation]

I hope you found that as inspiring as we do as we recognize the importance of shaping sustainable consumer behavior through our long-term brand building. Our category-led demand space models and our investment in science platforms come together in our innovation pipeline. Our innovation pipeline is stronger than ever and 50% larger than last year. In January of this year, we launched our latest Finish Quantum All in 1 innovation in sustainable packaging, which provides deep clean and sparkling shine without the need for a prerinse. We are leveraging the strong equity of Mucinex in the U.S. to launch Mucinex InstaSoothe for our sore throat relief, clinically proven to numb pain fast. And in infant nutrition, we are launching Enfamil Enspire Optimum, our closest ever formula to breast milk, which contains up to 5x the amount of key ingredients found in other formulas. A key focus for us over the past 2 years has been improving our relationships, our reliability and our overall service delivery to our customers. Our commercial execution is significantly stronger, and this has helped us increase our share of total distribution points, which increased by 110 basis points in 2021. Earlier, I mentioned our Advantage 2021 retailer survey results. We still have work to do, but I'm pleased that our efforts and focus are enabling us to build much closer relationships with our valuable business partners. And it goes beyond statistics. Our customers are recognizing our efforts with their own awards and we've listed just a few here. Moving to our investment in capabilities and starting with supply. We'll be making fundamental improvements across our supply chain. One of the tangible improvements is in quality, with a strong improvement in the quality of our supply chain and our products. We are seeing good reduction in both the costs associated with nonquality and our time taken to test and release our finished goods from our factories. We are building a very strong muscle in e-commerce. We now have e-commerce capabilities in every market in which we operate. Excluding our business in IFCN China, e-commerce is now 12% of our group net revenue, and we have bold ambitions to get to 25% by the mid-2020s, and we will do this through partnership with our key stakeholders such as Amazon, where we are collaborating and share best practice, expanding into new spaces and innovating to keep our brands on Amazon relevant to our consumers. Our brands are rated, on average, 4.2 stars on Amazon, and we have grown share in our categories on Amazon. Additionally, we have 4 different operating models in e-commerce. We're investing to continue to make our technology platforms and supply for e-commerce even more robust. One additional highlight is the digital native brands or capabilities that we have invested in that are scaling up as well. Our world-class productivity program is a key element of our earnings model. It enables us to fund our growth drivers, build our capabilities and invest in innovation while delivering the margin expansion we are targeting in 2022 and beyond. As you can imagine, there are no silver bullets here. Over GBP 1.1 billion of productivity savings over the past 2 years have been delivered, and they made up over 14,000 individual initiatives that we monitor, track and assess progress in, ranging from direct procurement on raw and packed materials right to the end of the value chain with revenue growth management. We're increasingly embedding these behaviors and practices into our organization to become business as usual. We are ahead of our plan on the targets we established, and we've increased our ambition to hit GBP 2 billion in 4 years. As a performance-driven company, we embed sustainability into everything that we do. We have developed a sustainability calculator to determine our environmental footprint on each product we make and measure ourselves on the level of revenue we make for more sustainable products. We also hold ourselves to account on our level of greenhouse gas emissions at absolute carbon in our operations as well as contributing to building a fairer society through our Fight for Access Fund. We have recently released our social impact report, and we are significantly ahead of target on the commitment we made to donate the equivalent of 1% of our operating profit to causes and communities. I'm pleased to tell you that we've been recognized as the sustainability leader after being listed in S&P Global's 2022 Sustainability Yearbook gold-class distinction. The gold class is only awarded to companies in the top 1% of the industry, and it's based on the company's Dow Jones Sustainability Indices, DJSI, score. Only 2 companies in our industry, household products, managed to achieve gold class in 2022, one of them being Reckitt. We have been active managers of the portfolio as we repositioned the company towards higher growth. In 2021, we divested our low-growth brands of IFCN China and Argentina as well as Scholl, along with the proposed sale of E45. And we made a strategically important move into the world's largest pain management market, with the acquisition of a great topical analgesic brand called Biofreeze. So this has been a busy year for us as we have turned over 9% of our portfolio while remaining fully focused on the organic growth drivers of our business. The Biofreeze team have done a great job in building an outstanding brand and expanding distribution in the past few years, as evidenced by strong double-digit growth over 3 years, but there is huge potential for further expansion. Consumer penetration for Biofreeze is low at around 5% and well below the segment penetration of 31%, and a segment penetration is well below the pain category penetration of 82%. The Biofreeze brand has a unique franchise with major sports teams as well as with physical therapists. I call it the Gatorade of pain, and it provides a strong growth model for expansion. We are very focused in driving awareness and building further penetration. And whilst early days, we have made a strong start in line with our acquisition case. I feel very positive about its prospects. Before I wrap up, I want to give you an update on our culture. All of these strategic imperatives are underpinned by the work we are doing to inspire our talent and evolve our culture. We have a terrific senior team, energized by the transformation enabled by a more systematic approach to talent management. The unique culture of Reckitt is one of the most important building blocks of our future. We are a company which has always been run by owners, and this remains firmly embedded within the DNA of the business. Over half our employees own shares in the company. Culture is shaped by behaviors. I have talked to you at length about our leadership behaviors on previous occasions. We own, we create, we deliver, and we care. We have engaged the organization extensively on these behaviors. They build on the success of the past while enabling the future. Some examples. Over 30,000 colleagues are now actively engaged in inclusion activities. We have made great progress in creating a more inclusive workplace, and our LGBTQ+ community were far more supported in bringing their true selves to work. Over 75% of our employees are already feeling the positive impact of our leadership behaviors rolled out through the course of this pandemic. And I'm delighted that we recently been recognized in Fortune's most admired company list in 2022. I want to finish by reiterating the key messages I opened with today. Firstly, we have seen strong momentum in 2021, outperforming our own expectations on revenue growth. This sets us up well for further revenue growth in 2022 and operating margin expansion. Secondly, we have made strong progress in actively managing our portfolio to position our business for higher growth. And finally, we have a much stronger business than we were 2 years ago. I'm, therefore, very comfortable that we are firmly on track to delivering our medium-term targets. Thank you. And with that, Jeff and I will be glad to take your questions.

Let me just, Maxwell -- we're going to start with questions in the room. So if you put up your hand, we'll pick you out, and please state your name. And please limit your questions to 2 parts. I know we sometimes get multiple parts. And then we'll go to questions from -- via the telephone in due course. So please put up your name. We will start with Martin.

Martin Deboo from Jefferies. I've got 2 straightforward questions, one to the brand strategy and one to [indiscernible] growth. The brand strategy question is -- see, wanted to just get your attention as there's a lot of corporate action in the OTC space [ GSK spend ], J&J [ spend ], et cetera. How are you thinking about that? And do you want to be a player in consolidation or a bit? That's the first question. Second question, easy one, Jeff, for you is -- sorry, he's very good at it. You said the finite life transformation costs were phasing out. I did -- there's been some debate whether they're partially phasing out this year or fully phasing out. So just a very...

Why don't I start with the easy one? No, they'll be fully phased out this year. So the transformation program we said would go over a kind of 2-year theory, but it's -- with COVID, it's basically going into 2022. But this will be the last year where we talk about finite life transformation costs.

I thought the first question was easier. We're very pleased with our portfolio. We have plans in our business that will get us to mid-single-digits growth and mid-20s margin. So we feel very good about the progress we're making. Clearly, what's happening in the world outside is there's a lot of corporate action, as you have rightfully said. I think some of these things in that -- in the consumer health space, I think it'll just take a lot of time to fully play itself out. So my team and I are fully focused on delivering our plan and are focused on ensuring that we do everything we can to hit our medium-term goals of mid-single-digits growth in the mid-20s margin.

Go ahead.

Sir, can we just ask if you can use the microphone [indiscernible]?

Sorry, I should have given better instructions. Sorry, we have to an education course on the use of the microphones in the room.

It's Guillaume Delmas from UBS. Two questions, if I may. The first one for you, Jeff, on the 2022 margin outlook. Could you provide some granularity on the margin bridge for this year? So I get that you have a 500 basis points input cost headwind. You're going to mitigate part of that, but I would still assume gross margin down, compensated by a decline in other and BEI. So any granularity on this would be helpful. You also mentioned in the press release that it's going to be back-end loaded. So should we assume some margin decline in the first half of the year? And then my second question, it's on the tension between like-for-like sales growth and your medium-term margin target, mid-20s, by 2025 because you showed in your presentation, Laxman, all the opportunities for Reckitt in terms of penetration gains, in terms of white space opportunities. So why facing almost a risk of curtailing your investments and your organic sales growth by pursuing this medium-term margin target? Wouldn't you be better off dropping the margin altogether and trying to accelerate your organic sales growth further?

Let me start with 2022. I'm not going to get into too much detail, but I would start by saying what we're projecting is margins will grow. And I went through in the presentation, the kind of levers that we have in place in '22. A lot of those levers are levers which affect gross margin, not just pricing, revenue management but also a considerable part of the productivity program. In 2021, pretty much 50% of the gross of the COGS inflation was offset by productivity. And I think that's a good rule of thumb to work forward to going forward. So within our guidance, we're not necessarily projecting a gross margin decline. We also have the benefit of a full year of cold and flu sales coming through, which will give our Health GBU significant mix favorability, both in terms of operating profit but also in terms of gross margin. And we are certainly not -- we're not going to get into detailed forecast of individual lines, but we're not talking about cutting investments in 2022. And we will continue to invest in our brands. We'll continue to invest in our businesses. You did see BEI go down in '21, but I explained what the reasons were behind that in 2021. So I think in terms -- and then in terms of the first half, second half, I'm not going to get into specifics, always said is the growth will be more weighted towards the second half, both in terms of like-for-like revenues but also in terms of margin growth. And for like-for-like revenues, that's not least because the first half in Q1, we have a huge comp in terms of hygiene but also in terms of margin. Our pricing actions in 2022 will be being implemented as we go through the first quarter, and there'll be pricing actions into the second quarter.

On your second question about the medium-term targets, as you know, we've been very disciplined about what we are trying to do. We are fortunate that we are in very attractive categories that have attractive margins. And the mix of business is going to play to our strengths over time, just given what we are -- where we see the growth and the kind of investments that we are making. Our intention is to invest in order to drive growth. So when we see opportunities to grow, we will clearly make the investments. But we want to do this in a very disciplined manner. So we don't see any need to get away from our medium-term targets because we see opportunities in productivity. We see opportunities in continuously driving further efficiencies. So growth is obviously a very big and important element, but we're going to be very disciplined about how we get there. And I think the category mix -- the category presence and the mix we have really plays to our strengths.

Next question, and please use the microphone and introduce yourself. Please go ahead. Come back.

Jeremy Fialko, HSBC. A couple of questions from me. First one is, can you talk a bit about the visibility that you've got on costs at the moment? So just how much you're hedged through the year, how much you're covered and kind of that mid-teens number and kind of what the variables relating to that are. And then secondly, can you talk a bit more about the Nutrition margins? So 15.5% is obviously a very long way below where they were when you bought Mead. I think you went on record saying that the U.S. margins were in the 20s, which, obviously, we can do the maths on what that means for the rest of the division. So could you talk a little bit about what you think are kind of sustainable margin for that business is? And sort of -- do you think there's quite a lot to go for on that side?

Should I handle the visibility? We have either through hedging or through kind of contracts in place. Probably around about 50% of our cost of goods is covered for 2022. Now what we're saying is including that -- I'm not going to break out the difference between hedged versus non-hedged, but including that, those contracts and those hedges in place, we see cost of goods inflation going to the sort of low teens in 2022. Now it's highly volatile, lots happening both geopolitically, fuel price, oil prices and such forth. But that's where we currently stand. I think on Nutrition margin, let me just say, we -- it's important that we address the stranded costs that were left from the IFCN China. So this Nutrition business obviously includes VMS, which had some specific onetime costs that were incurred in 2021. And so we are confident we'll see margins improve as we go. I'm not going to give you a target for Nutrition, but we will see margins improve and move over time closer back to the group average margins.

Tom Sykes from Deutsche Bank. Just firstly on the top line guidance. Is Lysol the biggest swing factor in the 1% to 4%? And when do you envisage Lysol actually getting back into growth or stabilizing, please? And then there's been some commentary that it's a short cold and flu season. And I just wondered whether you could make some comments on that and maybe where you think inventory levels are, whether the -- where we are with the sell-in versus the sellout and perhaps where your innovation is benefiting you in cold and flu, please?

I think in the first question, yes, Lysol is the biggest swing factor. And we expect that over the course of this year, Lysol will normalize. We can't give you a precise in a month, quarter, whatever. Over the course of this year, we will see that, and we will see, by the way, changes over quarter by quarter as we go. But really, the expectation is this year, it will normalize. What I feel good about is all the things we have, particularly on broadening the shoulders of the brand and the activity we are seeing in market in order for that to happen and feel good about the expansion into additional categories with the Lysol brand, the countries and so on. So I think to me, that's the swing factor over the course of this year. In terms of the cold and flu season, I think just a couple of things I just want to correct. One is, I think -- I know we look at a lot of data that exists out there around things like ILI and so on. And the challenge with some of these statistics, particularly over the course of the pandemic, is that they're a bit decoupled from actual events because there are a lot of people not going to doctors and not going into clinics in order to report themselves. So one has to take some of that data with a pinch of salt, particularly with what we see but on the transactional side. If I look at the inventory levels, there's -- I mean they are normal. There's no excess. And clearly, if you had -- as you look at some of the availability challenges you've seen pictures all over, obviously, you get more, you could even sell more. But the fact of the matter is that it is a business that is also a good start for this year.

Okay. We'll take 1 or 2 more questions from the room. Please go ahead before we go to the telephone.

John Ennis from Goldman. My first is actually a follow-up on Lysol. I wondered if you could give us a bit of a flavor for the exit rate so far for the start of 1Q in terms of how sales are trending. And in answer to your previous question, you said that's the big swing factor. If we use that as the swing factor, I guess you could assume Lysol sales down in a range of 10% to 30%. Is that a reasonable set of parameters for this year? And then my second question is on portfolio review. I think you said that you've changed 9% of the portfolio roughly in 2 years. Is that the right sort of level of change for a business like yours on a 2-year basis? Or should we expect that magnitude to slow going forward?

Let me -- shall I take the Lysol question, Laxman? I think that's a reasonable range in terms of the 10% -- did you say 10% to 30%? 30% is probably at the -- but we will see double-digit decline in Lysol during 2022. And obviously, as we talk about exit rate of this year of mid-single-digit growth, we're looking at all the brands contributing to growth. And we're not giving a specific forecast of when Lysol will start growing again. But inherent in that guidance is you'd expect the contributions from our, one of our -- if not our biggest brand. So -- but that range of numbers that you talked about, I think, 30% is at the high end but, certainly, within that range. And I think in total, Lysol did grow last year, but obviously, it was declining, and we've said double-digit declines for this year. So I wouldn't get into the current run rate any more than that.

I think your second question about is the 9% the number that one should think about over the next couple of years. We don't have such numbers, to be frank. I think we are active managers of the portfolio, but I think we've taken a lot of actions, and we feel good about those actions because they do position our business in high-growth spaces. We're always on the lookout for -- if there's another Biofreeze or asset like that, we would obviously consider it. But we don't really have any targets to tell you that it's a 9% number.

Maybe go ahead, yes. And we'll come back to the last question in the room in a second.

It's Fulvio Cazzol from Berenberg. I just wanted to throw it out there. Obviously, the elephant in the room, which is the IFCN business. There's been a report on the press that you may be considering whether you are the right holders for that asset. So wondering if you can either rule out or comment on whether more disposals could be possible. And then the other one is on Finish, Air Wick, some of these other brands that may have benefited from people spending more time at home. We're now all back into offices. Do you see some potential headwinds for some of those hygiene brands in 2022? Have you factored any of that in the guidance?

I think on the first one, we don't comment on speculation. We're pleased with the overall portfolio that we have. If I look at our Nutrition business and you look at the performance of the business, separating from VMS, by the way, which, as you know, was lapping a very high sales increase in Airborne, so you take Airborne out, the VMS business did very well, strong double-digits growth other than for Airborne, which is lapping a big number. So if you look at the Nutrition business, and as Jeff has pointed out, it grew 3% last year. We're off to a strong start this year as well. So I think we feel good about it. We feel, look, the U.S. has grown at mid-single digits growth for the last many years. The margins are very attractive. Our business in Latin America has stabilized. We know that we have a margin improvement opportunity there. We also know it's the same thing in the case of ASEAN. So I think looking across the board, our Nutrition business is performing well, and I don't make any comment on any speculation that you might have.

And yes, I mean we -- on the other brands, we continue to see those brands growing, the Air Wicks and Finishes. And certainly, of course, we take into account any factors. Now the million-dollar question is to what degree people return to the office, and I think we all agree, probably, it's not a 9-till-5, 7 -- 5 days a week. It's going to be some sort of hybrid going forward in the future. So we take that into account, of course, in our planning.

Just one thing I'd say, the penetration opportunities for those brands is very high, still. And we see both what's happening online, what's happening in homes. And so I think we see a play there for that as well.

So we'll take the last question in the room, and then we'll go to the telephones.

It's Alicia Forry with Investec. Two questions. The first one, I wonder if you could talk about the pricing environment that you're seeing thus far in 2022. What percent of the pricing that you hope or plan to take for the year have you got in the bag already? And then secondly, I think you said you're moving the VMS business into Health and out of the Nutrition area or division. I wonder if you could talk about what you hope that move will achieve for both VMS and for Nutrition.

Sure. Well, the first one, our pricing plans are proceeding much as we have planned. I think we have pricing in North America that is going through, pricing in Latin America that has gone through. We're obviously very conscious of competitiveness and how we ensure our brands are competitive. But the pricing plans for North America, the first wave have certainly gone through. There will be more to come in subsequent waves over the course of this year. And then we see that in the developing markets, largely, we've seen the pricing has gone through. In Europe, we're still working through the pricing environment in France and Germany. But the rest of it, I think we feel good about. So that's the nature of what we have on pricing. To get to your second question on VMS, that business has traditionally been focused on North America and China. And in a lot of ways, it was a representative of the way it was organized and how it was run. We see a major opportunity for that business in various other parts of the world. And we needed a growth chassis that would actually drive it. The Health chassis provides us the ability to, frankly, scale it and scale it faster. The regulatory environment for VMS is different from that for OTC, and we see lots of growth spaces and lots of growth potential for that business, which is why we have, in fact, made that move.

Okay. Operator, I hope this works. I'm going to try and take questions from the telephone. So could we have the first question in line on the telephone, please?

[Operator Instructions] And our first question today comes from Celine Pannuti of JPMorgan.

My first one is coming back on the 1% to 4% guidance. And should we expect that there would be a volume growth within that? Obviously, there is the impact of Lysol, but I'm referring whether you would expect some pressure on volume from raising prices, some elasticity that some of your competitors are talking about. And then my second question is on consumer health. There has been -- well, clearly, some of your competitors are looking at selling businesses. You have been adding Biofreeze, at the same time, the exit of IFCN China probably. As we can some higher capabilities in China, how do you see consumer health going forward? Is it really about concentrating in few geographies and capabilities? Or do you think that scale will be important?

Okay. Did you hear the second question?

I think -- yes. No, I think the second question was more about how do you -- strategically, how do you see the growth from consumer health geographically and such forth? I think the first question was about volume growth. Celine, I would say -- and it's quite difficult on the telephone. I'm just indicating to the guys in the back. It's really difficult at this point to talk about precisely pricing and volume because obviously, we're in this really dynamic period. And so of course, we target volume growth but as a target. But I think it would be unwise at this point to break down the guidance into specific numbers in terms of volume versus price.

On your second question on consumer health, the consumer health business is 3 parts. It has Dettol, it has OTC, and it has Intimate Wellness. The Intimate Wellness business is a global business, and we're strong in a few geographies, but the growth potential we have across the world is very large. In addition, our ability to expand what we do in Intimate Wellness is very high, too, which really underpins the high single-digits growth that we have in Intimate Wellness. Our expectations at OTC, as you know, have been a 2% to 4% growth avenue for us. What we are seeing is a combination of expanding what our brands do in OTC, the ability for us to take our local jewels and link it back to our global platforms. We're bringing science platforms as well as consumer insights to drive new innovation. And we're also seeing global opportunities in terms of growing these brands through either in-licensing but also just through expansion. The Nuromol expansion in Brazil is a very good example of that. That part of it, the global expansion of some of the OTC is obviously slower than what it might be in some of the other categories that you might see. The third on Dettol, it is really about driving penetration in many of our markets, particularly in the emerging markets, where, as you know, it goes through the pharmacy channel, in some cases. And so that business is one where it's about penetration increase and how we drive it. So for us, China is very important. It's a business where we have a very good Intimate Wellness business, a very good business with Dettol. And as you know, the Chinese regulations are changing as well with regard to what happens in OTC. So future growth potential there is clear.

Okay. Let's take the next question. Hopefully, if we're struggling to hear you, it's not a great line. But let's take the next question from the telephone, please.

Your next question comes from Iain Simpson of Barclays.

Firstly, I wondered if you could talk at all about your Philippines IFCN business. It's a pretty fast-growing market. It's basically a duopoly with you and Nestlé. Can you give us any color on your performance there? Is it -- feels that we haven't heard much on that for a while. And then secondly, look, I appreciate you don't want to get dragged down the rabbit hole of decomposing your guidance. But just when I think about price mix this year, now you're guiding incremental COGS pressures this year to be modestly higher than they were last year. Given that you took 2.9% price/mix in '21, would it be reasonable to expect price/mix in '22 to be kind of comparable with or slightly above '21 price/mix given the worsening input cost headwinds? Or are there other sort of specific factors we could be -- should be keeping in mind?

You want the second one? I'll take the first.

Let me hit the second one very quickly. I think the answer is yes. Yes, we would expect the price/mix to be higher than the level in 2021. Again, not going to get dragged into how much higher, but you've seen everything in terms of the consumer price indexes in various countries. So we would expect it to be higher.

On the Philippines business, thank you for asking the question. It's obviously a growth market for our infant nutrition business overall. We've had a few challenges in that market, but the team has done a great job in fixing those. And what we're seeing now is growth is back, and we're seeing new innovation going across the portfolio of brands we have. In particular, we've really focused on execution in the medical channels in the Philippines, and that has been helpful to us in terms of building brand and brand preference.

I think it's worth saying I think with China and the U.S., the Asian markets didn't perhaps get the management focus. And we've also seen market share growth in, for example, Thailand, which -- so it's really encouraging what we're seeing in Asia.

Our next question comes from David Hayes of Societe General.

If I can come back to costs and investments, I guess, in 2 parts. So just first part, just on the BEI down 90 bps in the second half, which you talked about [ further ] efficiencies and change of in-house. I guess there's 2 parts to the question. But what is it that the kind of level we should we be thinking about in '22 on your base case budget? I think it's more specifically on the second half, which you have seen. And what are projects that dropped out that go into '22? Because I know you're asking that is obviously input costs were higher than you thought towards the end of the year, but you still hit the margin targets? So was there some costs that you avoid? Or were you able to get very quick pricing in the last couple of months of the year, which kind of offset that input inflation level? And then the second part of the question, just in terms of cost versus investments, you gave the number, I think, about GBP 1.1 billion of delivered cost savings. I just wondered, can you give a number of investments against that equivalent number? I think it's running something like GBP 900 million, you said in the first half stage. And I guess when you look at the GBP 2 billion, how much do you [ give to the ] number of spending against the GBP 2 billion across the 3 or 4 years? Is there a number that you can give us? Or what is the investment level and, therefore, the net benefit or cost when you put the investment side that GBP 2 billion?

Okay. Really, David, really difficult actually, but I think I've picked out your question. The first question was in relation to generally BEI and what happened to BEI specifically in the second half. And how did we manage -- I think what I heard is how do we manage to hit the margin for the full year having seen COGS inflation accelerate during the course of the year. And the second question was in relation to productivity versus investments. Maybe if I start with the productivity and investments. I think we were tracking the investments and talking about a specific pound investment in the business during the transformation phase and the investment phase that we're going through. We've come through that phase, and that's -- those step-change investments really finished in the first half of this year. So I don't think it's helpful to continue to talk about what additional investments we're making in the business. The productivity program contributed GBP 700 million this year. I think what is fair to say as we look to 2022, the productivity program will be more weighted towards funding the price inflation than perhaps investments into other areas. So we will be putting more of the productivity program to offset pricing -- COGS inflation pressures than perhaps we did in the last 2 years, and that's just a necessity as we see -- look to manage our gross margins.

But at the same time, we are going into this era with a business that has been invested in. And so we feel very good about that as we enter this next phase.

Yes. And I'm not implying we're not going to be making investments, I'm just saying, and then it's more in the normal course now. So that's why quoting an investment number is a little kind of artificial. In terms of BEI, all I would repeat is what I said. We had a lot of productivity. We spent, in 2021, GBP 100 million in absolute terms more than in 2019, GBP 100 million more investment into our BEI. As a percentage, that's come down, but we've also delivered significant productivity savings. As I mentioned, just bringing back together the media buy that had been split between Health and Hygiene, has -- those types of actions have delivered significant productivity, and we saw 90 basis points of productivity in that media -- in that BEI line in 2021. So I know it's difficult to be precise, but we're not cutting the investments and the effectiveness of the investments in our business. And then in terms of the margins, we saw inflation increase from -- we guided 8% to 9% cost of goods inflation at the half year, and then we ended up at 11%. The levers we had to pull is, yes, we had pricing coming through in the second half of the year, which I think was one of your questions. And we modified that as we saw the inflation coming through. And we also stepped up our productivity goals. I mean the GBP 700 million in 2021 is a really significant and best-in-class number. I think I'm going to try and take one more question from the telephone, but if the line doesn't improve, I think we'll go back to the room. Let's try one more question from the telephone.

Our next question comes from Pinar Ergun of Morgan Stanley.

Two questions. Do you see any threats from private label this year and next? What gives you confidence that consumers will not trade down from your brands? And then the second one, Laxman, you've brought quite a few external talents to the leadership team in recent years. Any key learnings or different perspectives the company has got from these executives?

Well, thank you for that. The first one on private label, very good question. We obviously watch this very carefully. Our brands are premium. They're well invested in. Really, what we have to ensure that we're doing is bringing in real preference from a consumer perspective. And I think you have to recognize as well that the cost inflation's pressures are also hitting private label. So I think you're going to see that too play itself out. And we feel good about that. We feel good about the brands and the strength, the investments we are making end to end, so we feel good about that. And we've actually obviously looked at this very closely. The second one on the external talent coming in. We have a combination of terrific leaders in the first 3 layers of the company. They include people from the outside, and I think you've met many of them as part of our Investor Day as well as we have internal talent that we promoted as we go through this. And I think it really builds it together what we've said before, the strength of the culture of the past, but we are clearly evolving it for the future. What these people bring is they bring a respect for the past, but they also bring new ways of thinking about the business in ways that are triggering new growth ideas for us and building new capabilities for us. And so as you look at strengthening some of these capabilities, we've had people come into functions in ways to strengthen our business overall, and that's been the big contribution of [indiscernible] that they made to it.

Let's take a final question from the telephone, please? There's no more? Okay. In that case, is there any final questions in the room? In that case, Laxman, why don't you?

Well, I wanted to close with the 3 messages that I thought I'd leave you with, and I hope you'll take away from this. First, we've seen strong momentum in 2021. We've outperformed our own expectations of revenue growth. We have a more competitive business, and this positions us well to deal with a difficult operating environment while delivering further revenue growth in 2022 and a return to operating margin expansion. The second message is we have made good progress in actively managing our portfolio to position the business for higher growth. And finally, we have a much stronger business than we did 2 years ago, with better execution muscle, more resilient supply chain and a better, bigger innovation pipeline. We have a strong leadership team in place. Our performance-driven culture builds on our past and is evolving to support our future. I am, therefore, very comfortable that we are firmly on track to delivering our medium-term targets. I just want to make one scheduling comment. As you know, we've been doing investor seminars. We started doing them in September. We have another one coming up on April 6, and it's focused on ESG. And so you get a chance to interact with our team on that. Thank you, again, for your engagement. Thank you for your investment in our company. We deeply appreciate you joining us this morning.