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

Hello, and welcome to Reckitt's First Quarter 2022 Results Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Richard Joyce, Investor Relations Director, to begin. Richard, please go ahead.

Thanks, Lauren. Good morning, everyone, and welcome to Reckitt's Q1 trading update. We will follow the usual protocol by starting with some prepared remarks, and then we'll follow with some Q&A. So without any further ado, I'll hand over to our CEO, Laxman Narasimhan.

Thank you, Richard, and good morning to everyone dialed in. Welcome to our Q1 trading update. I will say a few prepared remarks, and then Jeff and I will be happy to take your questions. This is a trading update only, and so I will keep the comments brief. We have started the year with strong momentum across all of our GBUs, delivering 5.6% like for (sic) [ like-for-like ] growth in the quarter. Whilst we performed better than our ingoing expectations, the drivers of our performance were as expected. The performance of our brands less impacted by COVID grew high single digits. Excluding the positive impact of the Infant Formula business in the U.S., these brands continued to grow at mid-single digits. Health delivered a very strong performance, led by our OTC business and our Intimate Wellness portfolio. Growth was price-led but with good underlying volumes. Our price/mix was plus 5.3%, and volume was plus 0.3%. Excluding the Lysol volume decline and the positive benefit from the U.S. IFCN business, volumes for the Group grew by around 7%. Our market share performance on the whole continues to show strong momentum, with 76% of our core Category Market Units gaining or holding share. I will quickly walk you through some of the highlights of each of our Global Business Units. In Hygiene, we declined 9% on a like-for-like basis due to our tough comparators where we saw 28% like-for-like growth in Q1 last year. The underlying performance was strong, however, with growth of around 4% if we exclude Lysol. Growth was broad-based across our brands, driven by a combination of innovation, such as our Finish Quantum product, and penetration building initiatives, particularly in Harpic. Lysol declined by around 30% in the quarter. This is fully in line with our expectations as we lapped a 17% growth comparator in Q1 last year, which was our peak quarter. Revenue in the quarter was 75% above pre-COVID levels, as we continue to grow share in our core disinfection spray business and broaden the shoulders of Lysol through our recently launched laundry sanitizer business, an entry into a number of newer markets. In Health, we delivered a very strong performance of just over 20% like-for-like growth in the quarter. This was led by our OTC brands, which grew by over 60%. Very pleased to say that all of our core OTC brands grew market share in the quarter. This, combined with the cold and flu season, which lapped a weak comparator, plus some benefit from Omicron meant that Mucinex, Strepsils and Nurofen all delivered outstanding growth in the quarter. Our Intimate Wellness portfolio grew high single digits. In India, we continued to drive increased distribution, and we also saw good growth in China behind our latest polyurethane innovation. Dettol continues to sell significantly above pre-pandemic levels. The result this quarter is well within our expectations, and with improving market share trends, shifts in distribution and a strong H2 innovation pipeline, we are on track to deliver low single-digit growth for the year as initially targeted. And I am pleased to see some strong mid-teens growth in our VMS portfolio, as we made further progress in China with both Move Free and our Neuriva cognitive health brand. Our brands are doing extremely well digitally, as we see strong sellout through e-commerce. In Nutrition, we have an outstanding quarter with broad-based growth across all geographies. Latin America and ASEAN both grew mid-single digits as our focus on improving execution and further growing our specialty and adult segments gain traction. In the U.S., we delivered growth of over 30%. The team in the U.S. has done an exceptional job in some very unfortunate circumstances. We will continue to work with our suppliers and customers to manufacture and provide as much product as possible until these temporary competitive supplier issues are resolved in the coming months. Our expectations are that market conditions will normalize in the coming months. Our performance in e-commerce was strong with double-digit growth in the quarter. E-commerce now represents 12% of group net revenue. On to the full year. As we look towards the rest of the year and following a strong start, we now expect like-for-like net revenue growth towards the upper end of our guidance to 1% to 4%. This is driven by stronger-than-expected performances in our OTC business and Nutrition, which will likely normalize in the coming months. Our disinfectants are performing in line with expectations. And the rest of the business is on track to grow mid-single digits as originally targeted. While this is a trading update, the significantly worsening inflationary environment we have seen over the last couple of months since we announced our initial targets warrants an update. We told you on the 17th of February that we expect COGS inflation to be in the region of low teens. Since then, due to the war in Ukraine, there have been further increases in a number of key commodities we use in our manufacturing process such as oil derivatives, surfactants, soap noodles, tinplate and dairy. We're now facing inflation of close to high teens, which is around GBP 1 billion of cost inflation versus last year. We enter the year as a stronger business. We have a strong portfolio of brands that have been invested in. This has enabled us to take pricing responsibly whilst growing volume. We have taken pricing in the quarter and will take further pricing actions as required. We will benefit from favorable product mix this year. Our productivity initiatives are delivering ahead of plan, and we will see a reduction in finite-life transformation costs. The benefits from favorable mix, productivity initiatives ahead of plan and pricing give us the confidence to expect adjusted operating margins in line with both the prior year and current market expectations, while continuing to invest in the long-term growth of our brands. The inflationary environment may well change as we further progress through the year, as well as our mitigation measures, and we will keep you updated accordingly. Finally, in respect to Russia and Ukraine, you will have seen our announcement that we have begun a process aimed at transferring ownership of our Russian business, which may include a transfer to a third party or to our local employees or both. This action builds on the previously announced decision to freeze capital investments, advertising, sponsorships and promotions in Russia. We will update you on progress as soon as we have more information to share. For now, our guidance includes Russia. To summarize, we have strong momentum across all our global business units and geographies, delivering plus 5.6% like-for-like growth in the quarter. We continue to grow market share, with 76% of our core CMUs gaining or holding share. Our brands less impacted by COVID grew at high single digits. Excluding the positive impact of U.S. IFCN, these brands continue to grow at mid-single digits. Health delivered a very strong performance, led by OTC business and our Intimate Wellness portfolio. Our disinfection brands, including Dettol and Lysol, performed in line with our expectations, and we have significantly broadened the shoulders of these brands over the last 2 years. Nutrition performed exceptionally well, especially in the U.S., but I feel heartened by the broad-based performance of the business across geographies. Our strong start to the year gives us confidence that we will deliver LFL net revenue growth towards the upper end of our guidance and maintain our adjusted operating margins for the year. This quarter further illustrates the progress we are making on our transformation journey, the return on our investments and the strength of our underlying business. We remain well on track to deliver our medium-term targets of returning the business to mid-single-digit LFL net revenue growth and mid-20s margins. And with that, Jeff and I will be happy to take your questions.

[Operator Instructions] I will now hand you over to Richard Joyce for the Q&A session.

Thanks, Lauren. Right, first question we have is from Iain Simpson at Barclays. So go ahead, Iain.

A couple of questions from me, if I could. Firstly, can you talk a little bit about the innovation phasing of this year? You've talked quite a lot about how this year was the year that you really expected a big step-up in the pipeline. Have we seen some of that in the first quarter? Should we expect the phasing of innovation launches to continue to build as the year progresses? And secondly, your comments around U.S. Infant Formula and how you expect the competitor supply situation to resolve itself in the coming months. Would I be correct, therefore, in assuming that your guidance is basically based on the assumption that there is a normalization and a return to the pre-disruption situation in U.S. Infant Formula in the next few months and that you don't really have anything in your guidance for continued strength in your U.S. Infant Formula business in the second half?

Thank you, Iain. On your first question, we -- on innovation, we expect further innovation over the course of this year. I think we will see some new products being launched in the second quarter, but there's a lot of innovation that is actually scheduled for the back half of this year. So it is building as we go through the year. We have given examples. For example, on Dettol, as well as on some of our Intimate Wellness portfolio as 2 examples of new innovation that we will see, and it's very similar in Hygiene as well. On your question on the U.S. Infant Formula business, we do expect that the supply situation will normalize in the next couple of months. The U.S. Infant Formula business has grown at mid-single digits for several years, and we feel good about the overall performance of this business, and we expect it to continue to perform so as it normalizes.

Thanks, Iain. The next question is from Guillaume Delmas of UBS. Go ahead, Guillaume.

Thank you, Richard. Morning, Laxman and Jeff. Two questions for me, please. The first one is on your inflation guidance. So you've increased it this morning from low teens to high teens. I was wondering, what is, today, the proportion of your key commodities that are now fully hedged for 2022? In other words, is there a significant risk of you having to further revise up your inflation outlook in 3 months from now? Or with all the hedges in place like high teens is conservative enough? And then my second question is on portfolio management. In the highly hypothetical scenario whereby you would be selling a relatively large asset, what would be the most likely use of the proceeds? I mean, would you be looking in priority at returning the cash to shareholders via a share buyback or a special dividend? Or would you be looking at making some acquisitions? And if so, in which areas, geographies, categories would be of greatest interest to Reckitt?

Thank you, Guillaume. I'm going to turn to Jeff for the first question. I'll take the second.

Well, look, Guillaume, for the year 2022, we had, in total, about 2/3 of our cost of goods hedged one way or the other either through fixed contracts or through hedging or inventory on hand. So -- and as we said in our outlook, there is some sensitivity to future commodity price changes, but we are in a reasonably good position in terms of the hedging that we have in place.

On your second hypothetical question, as you know, we don't comment on speculation or in hypothetical situations. We are very shareholder-value focused as a management team and as a Board. And I intend very much to ensure that we maximize our shareholder returns. We have laid out our capital allocation thoughts on several previous calls, and if you'd like, we can readdress them, but as you can probably see, our intention is to be incredibly shareholder-value focused, and that's how we will be going forward. On your question on M&A, and as you know, we sold our Infant Formula business in -- last year in July. We also sold our Scholl brand and reunited it with the owners of the Scholl brand globally. You also know that towards the end of the year, we announced a transaction to sell our E45 business, which we closed in this quarter. And we also sold our Dermicool brand, which is a talc brand in India, for obvious reasons there. I think -- so those are the ones that we have done. We bought Biofreeze last year, and we integrated the business, and it continues to perform well. What we are -- we clearly have a pipeline of things that we would look at, but it's too premature for us to speculate on M&A. And as I said, we continue to remain completely focused on shareholder returns.

Next on the line is Celine Pannuti from JPMorgan. So go ahead, Celine.

My first question is on pricing versus mix. You did have quite a strong performance, but I would presume it was more mix driven. So can you talk about how much pricing have you seen so far in the first quarter? And whether we should rightly expect to see that stepping up throughout the rest of the year? My second question is on the puts and takes since February on the cost inflation side. So you guided from low teen to high teens. Can you talk as well about the benefits that you are getting in terms of better mix from the IFCN business as well as OTC performing a bit better, I believe? And you also mentioned finite life. So yeah, Jeff, maybe if you can go into those building blocks. And as a result of what's the tailwind in H1, would there be a difference in terms of performance in margin H1 versus H2?

Jeff?

Should I address the cost inflation first?

Yes.

Since February, we've seen about GBP 250 million extra cost in relation to inflation, obviously as a consequence of the war in Ukraine. And we are addressing that through various aspects. You didn't mention productivity, but our productivity program has really stepped up in 2022. Since we gave guidance, we think that we will beat our expectations in terms of productivity and possibly even getting close to last year's number in terms of the absolute delivery of that program. And if you recall last year, we're at something like GBP 700 million in terms of productivity. And these are real pounds saved, not just cost of volumes, they're measured and they're checked. And so we're very pleased with the productivity program. Mix is going to give us some favorability in the year, not least because of OTC and the fact that we have a stronger-than-average cold and flu season. And as you know, that is generally a stronger higher-margin performance. On the transformation costs, there's no real change from the update that we gave in February. There will be a few. It's really -- but it's relative to GBP 1 billion of cost inflation, which we're now faced with, it's just really just a few tens of millions, which in a normal inflation year could be important, but it's pretty much dwarfed by the inflationary environment that we said. And the GBP 1 billion, just so you know, where I get that from, that's basically the high teens based on our total cost base gets you to close to GBP 1 billion. So I think holding margins flat faced with GBP 1 billion of cost inflation is a really credible performance. On pricing and mix, I guess, first of all, I think that what you see coming through by each of the GBUs is just under 4% price/mix on Hygiene and that's mostly price, to be honest, limited mix of that. We do think that will increase as we go through the year, and we will continue to look to take further pricing actions in the second half of the year. On Health, we're at 5.1%. Again, it's mostly a price movement. And the one thing I'd point out on Health, most of the OTC pricing has gone through quite late in the year post the flu season. So there will be a slight increase in that as we go through the balance of the year as well. Then on Nutrition, you see quite a high price/mix, 11.5%. I must say that a significant part of that is mix in relation to the mix of WIC versus fully funded revenues. And therefore, the pricing is probably more around 7% to 8%, and mix around 4% on that breakdown in terms of Nutrition. So all in all, we think we'll be responsible on pricing. And we do see some potential for pricing in the second half of the year. Just finally, on margins, we're not giving specific guidance on margin. I do think margins will be slightly lower in the first half, which is what we guided to in February. So I still think margins will be slightly lower in the first half due to the fact that certain aspects of pricing won't kick in until during the first half of the year. For example, European pricing generally kicked in, in March, April, by the time that new agreements were all put in place. So margins will be slightly lower in the first half, I think, and a bit higher in the second half.

Thanks, Celine. Right. Next on the line, we've got Pinar from Morgan Stanley. Go ahead, Pinar.

When we look through the short-term noise, the top line performance seems to be very strong with volumes up 7%, excluding the U.S. IFCN boost and the Lysol declines. Why are you not raising the '22 top line guidance then? And then the second question is you highlight some supply chain challenges in the press release. Can you please elaborate on those?

Well, thank you, Pinar. I think that -- at this point in time, at the start of the year, we feel good about the guidance and what we have provided. We of course, come back to it over the course of the rest of the year in our conversations with you. On your second question on supply chain, as you could well imagine, there are dislocations still underway, be it in logistics, be it in availability of certain raw materials, be it in the pricing of some of these raw materials. I think that what the supply chain team has done admirably is rise to the occasion because they're dealing with both cost increases, availability challenges, logistics, all of the above, as well as in some markets, you continue to see labor as a challenge, particularly for example, North America. So given all of that, I think that we continue to work incredibly hard. The supply chain has been strengthened over the course of the last few years. But the external environment is highly volatile, and we just want to be cognizant of that as we respond to it.

Okay. Thanks, Pinar. So now, we've got Bruno Monteyne from Bernstein. Go ahead, Bruno.

Just a bit of a follow-up on the kind of Abbott recall benefit you have in the U.S. Given this WIC sort of mechanics in the U.S., the extra trade you get, is it better for your margins or worse for your margin or actually, overall, neutral? I'm just a bit confused with those rebate claims. And also, what size would be the impact on your organic growth for like-for-like for the first quarter? Could you quantify it? And my second question is around the measures that you quote for percentage of CMUs gaining or holding shares. Would you be able to give us the data without the holding share? So if you look at gaining share, do you have a rough estimate of what percentage of CMUs you're gaining without holding?

I didn't get the second part of your WIC -- CMUs question. No, the second part being on the Abbott question. First of all, yes, the extra sales we get is basically, fully -- full revenue because clearly, our WIC sales in the WIC markets we operate in are pretty -- running at normal levels. What's happening is, obviously, we're supplying WIC sales in non-Reckitt WIC markets, i.e., in Abbott markets, and we get fully compensated for that. So therefore, the incremental sales that we have, that plus 30% in the U.S. or whatever, is at full revenue. So the -- our overall proportion of WENR versus WIC has gone up, which is why we see a significant price mix improvement in Nutrition. I didn't get the second point about organic...

What's built into the organic growth rates for the first half like for like.

Well, we've been -- as we've mentioned before, like-for-like, we've been running at mid-single digits in North America. We've been improving in LatAm and ASEAN. So I think it's fair to say that we expected -- excluding Abbott, we expected to be in the mid-single-digit range for 2022.

Just to finish on the WIC point. So given that you have this benefit rebate, is it fair to say that the incremental WIC-related sales is actually margin enhancing for you? Would that be correct?

Yes. That is -- that absolutely is correct, yes. So our margins on Nutrition are running positive in the year relative to where we expected them to be.

On your question on Category Market...

Sorry to interrupt. Now offsetting that, like all of our business, we've seen incredible inflation, including dairy and tin, which affects the IFCN business. But net-net organically, yes, we see a net benefit in terms of margin because of that. Sorry, I'll...

And we've been very responsible on pricing in this business as well given the situation. So on the question on Category Market Units, the vast majority of them, vast majority of them are gaining. And so the number on hold, which by the way is a plus or minus 20 basis points, is actually very small. This is all largely gaining.

Yes, it's just mathematical. It's -- because it's just plus or minus 20, there's not a lot to fall in that count, and it's usually a pretty small proportion of single-digit percentages. I don't know the exact percentage this quarter, but it's usually pretty small.

Thanks, Bruno. Right. Next, we've got Fulvio on the line from Berenberg. So go ahead.

I've got 2 of them, please. So in terms of your latest margin guidance for this year and the fact that you've maintained your mid-20s EBIT margin by 2025, I guess, very simplistically, it implies an average of 70 basis points of annual EBIT margin improvements from next year. I was just wondering how you feel about this target, obviously, because you've obviously reiterated it, but is it a realistic target in the absence of a downturn in commodity prices? And then my second question is in relation to the China lockdowns. Could you maybe just give some comments on the risk that you see to Durex and VMS in Q2 from the recent lockdowns there, please?

Let me start on the margin. Yes, we do feel confident in the mid-20s by 2025. And as you said, rightly so, that implies something in the region of 70 basis points annual development. Now, if you look at where that comes from, just the leverage we get from the growth that we will be delivering in terms of mid-single-digit growth gives us a significant chunk of that. Margin will come through just from that leverage. As you know, we've got many other opportunities in terms of mix, in terms of revenue management processes that we're running through, which I'm very excited about the opportunity to optimize how we manage our mix on shelf, how we manage our trade activities and such forth to also generate our margin improvements. And our productivity program continues to run. So yes -- I mean, it's difficult, obviously, at this point to project what's going to happen with commodities over the next 2 or 3 years. The economists all have their views. But generally, we feel comfortable in the target of mid-20s by 2025.

If I could add to this with a little bit more detail on a couple of areas. One is our productivity program. As Jeff mentioned, we feel very good about the progress we are making. It is significantly ahead of plan. We feel there's even further upside to what we can do there. And I think our teams are working very hard. The muscle has been built inside the organization, and I think what we see both bottom-up as well as top-down are ideas that can help us further enhance productivity. So I know we've given a target of GBP 2 million over -- we added a year and added GBP 2 billion. But the reality is, if we just look at where we are this year, we're going to significantly perform better than the numbers that we have set out for, as we said, GBP 1.6 billion. We're going to be significantly ahead of that. So I feel good about how that's going to play itself out going forward. Jeff talked about the volume and the leverage, that we get the growth. Furthermore, on revenue management, we're 18 months through a process of strengthening our capabilities and revenue management. We feel very good about the investments we've made over the last 18 months in that capability. And in a lot of ways, it has helped us as we entered this period of very difficult operating conditions. In my view, we are less than half of our way in terms of the level of sophistication that I think we can get to over time. And the investments we are making in capabilities, in what we do with digital and analytics, the work we're doing in execution, particularly the area of revenue management, both in offline channels as its online channels, continues to give us the confidence that we can, in fact, deal with some of the commodity pressures, but also deal with some of the productivity opportunities we have. And that gives us confidence, as Jeff said, to continue to grow margins in the medium term in order to get to our medium-term goals. So we feel good about the medium-term guidance, and that's the reason we have actually reiterated it.

China lockdown.

On the China lockdown. The China lockdown -- clearly, as you know, there are parts of China that are going through lockdowns, including the Shanghai area, Shenzhen and a few others. We have not yet seen an impact in terms of supply. Particularly, as you know, we manufacture in China for China many of the commodities there. But we fully expect that if this continues over a period of time, there might be some challenges there. But we feel very good about the resilience of the team, what we have built, the inventory we have in the system that we believe that we can navigate that well. On the demand side, just so you know, you obviously have offsetting demand pressures there, right? We've got on the one side Dettol's business benefiting from Omicron and some of the closedowns there, and we haven't seen really any negative impact on Durex here.

Thank you. Now, we've got John Ennis from Goldman Sachs on the line. So go ahead, John.

A few quick ones for me. The first is coming back to U.S. Infant Formula again. I just wondered if you could help in quantifying the margin difference between your WIC and non-WIC sales. The second is on just inventory levels across the portfolio, but particularly, in OTC following a very strong start to the year. Is there anything to be aware of in terms of phasing? Or is -- or would you describe inventory levels as relatively normal? And if I can sneakily put in a third, can you just comment a little bit on brand investment levels and where you're expecting to be for the year, that would be very much appreciated.

I think on WIC and WENR, I mean, we don't really talk about the margin differential. But obviously, the WIC margins are significantly low. I don't think that's a trade secret. So there is a significant difference in margin, but we don't get into anything specific on that.

Let me take on guidance. On inventory, our position in the Health business is normal, including in OTC, it's normal. Our inventory position with distributors, retailers across the world in Health business, there's nothing really concerning or -- I mean, it's just normal. If I look at the inventory position in Hygiene, it's also in a normal. I think the inventory position in Infant Formula, particularly in the U.S., is light. And so -- for the entire chain. And so that's where we will be in terms of inventory. On your question on brand investment levels, we are managing the business for the long term. We will continue to invest in our brands, and we're comfortable with the brand investment levels we currently have.

Which is roughly in line with...

Which is roughly in line with last year.

Now, I've got David Hayes from SocGen on the line. David, go ahead.

So 2 for me, one on the productivity offset and one on the math, if you can mark my math homework. So on the first one, it feels like what you said, 200 million -- 200 basis points of -- or GBP 20 million of extra headwinds, which is going to be offset by the uplift in productivity activity. I guess, the question around that is how comfortable are you doing the right things at the right time? So stepping up productivity when supply chain is disrupted, et cetera, is there not a risk that in the second half in particular, you start to fail on both sides of that, if you like, because there's so much going on that you're trying to do too much? And I guess, related to that medium term, it feels like this investment program that drive top line opportunity feels like it's switching much more back to a net productivity gain, like a cost saving program or model. Would you push back on that and say that's not fair? There's not a shift in that sense? And the second question, on my math homework. So 70% of sales, non-COVID, growing high single digits, which kind of suggests that 30% COVID-related is kind of flattish in the quarter to get to 5.6% for the group. Is that right? But then if Lysol's down 30%, what's offsetting that in terms of that 30% being almost flat? I'm not quite sure what I'm not quite adding up the numbers there.

Let me take that on. So firstly, on productivity in your question, we have built this muscle over the course of the last couple of years. If you look at the full year and what we had talked about that, there are 14,000 different projects that actually led into this productivity program. It's built into the teams, built into the muscle of this company, and you have people executing against that. This is not a shift from a growth investment program to a cost management program. So I think that's an unfair state of characterization, and I will push back on that strongly. In your question around the 30% and where we are, if you look at the brands in that 30%, they include, on the one hand, brands like Dettol and Lysol. But on the other hand, they also include brands like Mucinex and Strepsils, [ Delsym ]. So what you see the offset there, I think your math there is correct in terms of being relatively flat. What you see is the offset you're getting from the decline in Lysol essentially being offset by the growth you have in Mucinex and others. And that's why you see a flattish number.

Okay. Thank you, David. I've got Tom Sykes from Deutsche Bank. Go ahead, Tom.

Just on the phasing of the productivity and indeed, when you see the highest level of COGS increases this year, how -- at what point in the year, as you stand at the moment, do you see the worst of the pain? And when do you see the highest level of productivity gains? Because obviously, you've got mix benefits in the first half, which are calling the margin down, and you're, therefore, by implication, calling the margin up a little in the second half of the year. And then just -- you've obviously continued to invest where sort of excluding the businesses where there's rebound and the mix benefits where you've expanded into white spaces. Are you happy that you're getting the level of profit growth from that revenue growth at the moment? I mean, obviously, COGS increases there, but is there scale benefits to come from some of that white space expansion? And is that part of the improvement we should expect in margin, please?

Thanks a lot. On the phasing of productivity and the overall phasing of the margin, we've -- I've said earlier that margins will be slightly higher in the second half relative to the first half, and that's partly because of the phasing of pricing, but it's also related to the phasing of productivity. So clearly, we have had some benefits from leverage in Q1, not least in the IFCN, which I mentioned earlier. But when we look at the full pricing effects of our first round of pricing coming through, they won't all be through in the first half of the year. So I think the first half will be a bit -- a little bit more challenged on margin than the second half. I would like to say on productivity, coming back to the general question of cost versus growth, I think the vast majority of our productivity program really is not about cost cutting. It's about efficiency driving throughout the business. So it's about better buying, it's about driving efficiency in our manufacturing facilities and our distribution and our logistics and supply chain. And to that way, I really think, when I look at the productivity program, I'm looking at it benefiting the company by becoming a better company and more efficient operation and not cutting cost. We've actually invested significant costs in key areas like R&D, and we're not backtracking on those areas. So I look at our productivity program, and I'd call it best-in-class because it really is about driving efficiency in the organization, doing things better and getting more for less. And I think that's a key element. If it was just purely cost-cutting, cutting back to the bone in key areas, then it would not be the sort of program which matches with the transformation project that we're undertaking. So I think that's a real distinction of how I look at the productivity program.

Part of our market share gains is also driven by just the enhancements we've made in execution in sales. If you look at the investments we've made in sales excellence, the investments we've made in our customer teams, if you look at the feedback we're getting from customers, the scores we're getting in terms of our outperformance with customers, the fact that we're bringing growth ideas, the fact that our joint business plans are actually driving real results with customers, those are the sorts of areas we've invested in. And that's just one area that I'm pointing out in addition to what we've invested in, in terms of R&D and the pipeline of innovations that we see over the course of the next couple of years that actually come from that investment. So we're entirely focused on growth. We realize that's the value overall that we have to drive, but we also recognize that we're operating in a challenging condition. And we have to do everything we can to be as efficient as we can be in order for us to continue to progress margins as we have said we will over the course of the next few years.

I think [ about ] white spaces, and we went into quite some detail in February on the percentage of the growth from Dettol and Lysol that's coming from new spaces, new places, which is quite high. And so you can see from that, that overall, the investment into the new locations, as well as broadening the shoulders of our brands is driving a significant part of that growth. Of course, not every single country that we enter into with new brands makes the return you expect. Some do better, some do slightly worse. But I think, in general, we're pleased with the investments that we're making into the new spaces.

2 more questions. The next one is from Alicia Forry at Investec. Go ahead, Alicia.

2 questions for me. First one is on developing markets volumes. They started to decline slightly, 60 bps in the quarter. I was just wondering if you could dig into that a bit more. Was it price elasticity? Was it Lysol driving that? Then my second question is on market share gains, specifically in Nutrition and OTC, both areas where you say you've gained some significant market share across your portfolio. In Nutrition, typically, volumes are pretty sticky when companies gain share because parents are unwilling to switch. You don't seem to be necessarily giving us that message, however. And then in OTC, would you expect those share gains that you mentioned that are significant to be maintained, absent any major external developments into the next flu season? Or would you expect to give back of some of those share gains?

I think on your question on developing markets, I think if I look overall at the consumer and how the consumer has reacted to some of the price increases, as I said earlier, we go through a logical process of, say, productivity first, revenue management next. And then, of course, revenue management is about ensuring consumers have a range of different price points from which they can actually participate and buy our products. And then the last is, of course, price increase over time. I think in the developed markets, what you see, and I think it's particularly relevant in the U.S. where the strengthened balance sheets are still strong with consumers. And in the developing markets, we don't quite necessarily see the kind of elasticity one would have expected sort of in the past so the consumer is taking the price increase as well. In some of the emerging markets and Latin America particularly being one, we are -- we have seen a decline in volume as we have taken pricing. But it is a smaller proportion of our overall business. And so that's why you see the sort of mix difference there as well for us. But again, in those markets, what we expect over time is that it will normalize. It's very important for us to ensure that the earnings model isn't necessarily at lost. And so we do take pricing but again, take it in appropriate manner while we're looking at risk and price points. And then over time, we expect the volume to normalize over time. So I think that's the way I see the developing markets question. So we are seeing some pricing elasticity there. On your questions on the -- on market share. Traditionally, 30% of the Infant Formula business is a switch business. And it tends to be one where the baby hasn't responded to things well and then they switch. I think in this case, particularly with supply shortages, you might see a higher percentage of that switch. Normally, a parent wouldn't necessarily want to change their brands if the baby has responded to the brands well. But it's too early for us to comment on all of that, particularly as we expect the supply situation in North America to normalize in the coming months. In the case of OTC, I think what you see there is you see the market share gains. And it's not just in the core business. It's actually pretty much across the board. We have seen some of the market share gains. And I think we feel good about that. Underpinning it is innovation and execution. And I think we'll see how things play out over the course of next year. But I feel good about the way the team is executing the plan we have for OTC.

Okay. Thanks, Alicia. Final question from Iain Simpson, part 2. So go ahead, Iain.

I just want to talk a little bit about your Infant Formula, if that's okay. And I appreciate your commentary that you expect things to normalize there in the next month or 2 as your competitor sorts out its supply chain. But could you talk a little bit about your own supply chain in terms of, firstly, how you've coped with that uplift and U.S. Infant Formula up 30%? Given that the disruption took place halfway through the quarter, that presumably means that U.S. Infant Formula is running at something like up 50% for you guys, and that's what Nielsen seems to suggest. So I'm guessing you don't have enough spare capacity lying around to sustain up 50% indefinitely. But could you comment on how much spare capacity you have? And what sort of uplift you feel that you could meet in the hypothetical scenario that your competitor took a little bit longer to support the supply chain out? Or for that matter that consumers were a bit stickier and then didn't want to switch back having kind of experienced your brand? Anything you can give around that? And also, at what point, if the consumer switch became sustained, would you start to think about, perhaps, what steps you could take to increase your own capacity, bearing in mind the desire not to be left with stranded assets?

Thank you, Iain. The primary focus of manufacturing and the supply chain in our Infant Formula business is quality. We want to be sure that what we are producing is something that we feel comfortable with, that we feel good about supplying into the market. So the most important measure in anything that we think of is quality. It is possible to raise volume levels, but it has to be done incredibly carefully. It isn't like manufacturing something else, where you can just add shifts or do things differently, et cetera. You have to be very cautious and careful about how you think about raising volumes in the business that you're operating in. Clearly, there's an inventory in the system that has -- that you see in the scan data that has found its way clearly into consumers' hands. And I think that my focus with the team is that we view this as an important commitment to the U.S. consumer, and we have to do the right thing always in terms of how we operate this business. So we are not going to be driven by just mathematic equations around, "Hey, you could do this or you could do that." We have to do it the right way. And the team is -- completely understands that. They have the right level of investments in order to do it. We have capacity from the standpoint of raising it. It's all a question of how we do this in the right way.

Okay. Thanks, Iain. Laxman, do you want to wrap up with some final comments?

Sure. Well, thank you, Richard. As I mentioned at the beginning of the call, we have made a strong start to the year. We are well placed to deliver at the upper end of our revenue guidance and remain on track to deliver our medium-term targets. Clearly, what you see here is the transformation coming together in the kind of results that you see and the expectations that we're setting. Before we wrap up, a quick word on our investor seminar series. The next session will be held on the sixth of May and will focus on ESG, a topic central to everything we do here at Reckitt. This will mark the anniversary of the publication of our 2030 sustainability targets and our social impact report. And the team will give you an update on the progress we are making and provide some insights to the journey that we're on. With that, I would like to thank you all for joining this call, and I look forward to speaking to you again soon.

Thanks, everyone. Have a good weekend.