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

All right. Good morning, everyone, and thank you for attending Reckitt's Full Year 2023 Results Presentation. Presenting today, we have our CEO, Kris Licht; our CFO, Jeff Carr; and our CFO Designate, Shannon Eisenhardt. Following our presentation, we will take the usual questions from the audience. So before we start, I draw your attention to the usual disclaimers in respect of forward-looking information. So I'll now hand over to Kris to kick things off.

Good morning, everyone. Today, I will run through some key messages and a summary of 2023. Then Jeff and Shannon and I will take you through our 2023 financial performance and 2024 outlook. 2023 was a year of progress. Our full year net revenue growth exceeded our ingoing expectations, and we made significant progress from a business earnings model and cash returns perspective. However, there is more to do. We have clear priorities that we are now focused on driving throughout Reckitt. While we made some good progress in 2023, Q4 was unsatisfactory. We saw a weak OTC performance driven by the phasing and shape of the cold and flu season. We had a small voluntary product recall in our Nutrition business, and our ongoing compliance procedures have recently identified an understatement of trade spend in 2 of our Middle Eastern markets. I have zero tolerance for any behaviors which run counter to our culture of doing the right thing always. And I remain convinced that the inappropriate behavior of a few does not define our culture. Jeff will discuss these issues in further detail. Looking to 2024 and beyond, we approach the future with confidence and momentum. And I firmly believe that we have an enduring framework for leading value creation. Turning to 2023 in more detail and a brief summary of our key achievements and our ongoing priorities. 2023 was another year of broad-based growth across the majority of our portfolio. Our Health and Hygiene businesses both grew by mid-single digits, while our North America Nutrition business started to rebase as expected and held market leadership. Our innovation platforms prove that they can deliver meaningful growth beyond the core through premiumization, household penetration and category creation. We shared a number of these innovation successes at the CAGNY conference last week. We drove our gross margins back to historical levels at around 60%. That enabled an increase in investment behind our brands and our innovation launches, increasing our BEI by 130 basis points to 13.1% of net revenue. We launched our fixed cost optimization program, which we expect will deliver 200 basis points of net revenue savings over the coming several years. These savings will fuel both growth and earnings, and the onetime costs will be taken in the P&L above the line. And finally, we generated strong free cash flow, and we increased cash returns to shareholders by 24%. I will now run through some brief highlights of our three GBUs. Our Hygiene business has seen high variability due to COVID and more recent inflationary pressures. Throughout this, our market-leading brands have all played their part to deliver broad-based growth. This reflects our strong brand equities and high consumer trust. As we look to 2024, we see a more normalized environment for our categories. And we expect continued broad-based growth and consistent delivery from our high-quality Hygiene brands. The investments we're making in product superiority and innovation are driving growth in household penetration, premiumization and category creation. We continue to focus on executing with excellence. The consistent delivery for our customers is being recognized by our retail partners, but this work is never done. Turning to Health. Our excellent portfolio of market-leading Health brands operate in attractive categories. For example, our OTC portfolio features leading brands in a very attractive earnings model. This portfolio has delivered a resilient performance and has been our strongest net revenue and profit driver over the past 4 years. OTC is one of the jewels in our portfolio. Our Intimate Wellness brands have also delivered a strong performance in 2023. We are broadening the shoulders of our brands as seen by our recent entry into the $1 billion U.S. sore throat category with Mucinex where we've captured a 6% market share. In 2023, we continued to focus on executing with excellence. We invested to further strengthen our equities and see the results across most of our portfolio with double-digit growth across Nurofen, Gaviscon, Strepsils and Biofreeze and high single-digit growth in Intimate Wellness. And we continue to strengthen our supply chain to meet increased demand. Turning to Nutrition. While our North America business continues to rebase, we exited the year as market leader. And Enfamil remains the #1 brand recommended by pediatricians. We also have a circa 45% share of hospital contracts. We drive growth in this business through both premiumization, from science-led innovation and focus on the faster-growing and higher gross margin segment of specialty formula. We are operating in an evolving regulatory environment. We are working closely with regulators and other stakeholders to continually improve standards. Families and health care providers rely on our products, and we take that responsibility very seriously. We continue to invest in our manufacturing capabilities in both the U.S. and overseas. Turning now to our priorities. We are determined to win in our markets and improve our competitiveness. We target levels of 60% of core CMUs holding or gaining share. I see good progress on this, although the work is not done, and this will remain a major focus for 2024. We will do this by driving product superiority and more consistently executing with excellence. In addition, we have launched our fixed cost optimization program, which is a major focus as we look to fuel both growth and sustainably grow our EPS. Our medium-term ambitions are clear. We will continue to deliver sustainable mid-single-digit top line growth with our excellent portfolio of brands. We expect to grow adjusted operating profit ahead of revenue growth. We maintain our commitment to dividend growth, and we are now well into executing our ongoing share buyback program. As we look to 2024, we approach the future with confidence. We target another year of mid-single-digit growth in Health and Hygiene as we continue to invest in and harness the growth from our strengthened pipeline. We will advance our fixed cost program and grow adjusted operating profit ahead of net revenue growth. And we will further increase cash returns to shareholders, aiming to double what we returned in 2019. I firmly believe that we have an enduring framework for value creation. I will now hand over to Jeff and Shannon to talk about our 2023 performance and 2024 outlook in more detail. Jeff?

Thank you, Kris, and good morning, everyone. I'm going to cover, as Kris said, our performance, and then Shannon will take a look at the outlook for 2024. But before I go into further detail, I just want to be clear and talk about the issues we identified in the 2 Middle East markets in the RNS this morning. Late in our year-end process, we identified through our own internal compliance procedures an understatement of trade spend in 2 Middle East markets related to the current quarter, quarter 4, and prior quarters in 2023. As a result, our full year net revenue performance is GBP 55 million lower than we previously expected for 2023. Some of the impact was related as I mentioned to earlier quarters, but the correction has been fully reflected in our Q4 results. So basically, they've been -- it has been totally corrected in our Q4 results. And just to be clear, it has no impact looking forward to 2024. As a result, adjusted operating profit was also impacted by GBP 35 million. Following the investigation that we've conducted, we concluded a small group of employees have acted inappropriately and we've now -- and they've now exited the business. We're confident that this was an isolated incident specific to these 2 markets and as I mentioned, does not affect our outlook for 2024. So we see this as a one-off effect in 2023. As Kris mentioned, we have zero tolerance for any behaviors which [ run ] counter to our culture of doing the right thing always. And as I've mentioned, we've already taken appropriate disciplined reaction. So let me now move on to the numbers. We grew net revenue 3.5% on a like-for-like basis led by pricing actions in the year, positive mix benefits, innovation and premiumization. Volumes in the full year were negative 4.3%, and I'm going to look at that in a bit more detail on the next 2 charts. In quarter 4, net revenue declined 1.2%. Now we saw a continued strong growth in our Hygiene business, while our Health business was impacted, as Kris has mentioned, by high seasonal comparatives in our cough, cold and flu brands. Further, our North American Nutrition business continued to rebase from the highs in 2022. And of course, the quarter was impacted by the lower net revenue we reported in the Middle East. That said, I'm pleased to see gross margins back to historic levels at 60% of net revenue. Adjusted operating profit at GBP 3.373 billion was ahead of last year at constant exchange rates, only slightly, and adjusted operating margin at 23.1% was down 70 basis points versus last year's reported AOP margin. But if you recall, that included 80 basis points of benefit from the disruption in the IFCN North American market. Adjusted diluted earnings per share was down 5.4% with the growth, albeit slight growth in operating profit at constant exchange rates, offset by negative foreign exchange rates and an increase in the effective tax rate. We delivered strong free cash flows at GBP 2.258 billion, up 11% versus last year. Now before I move on, you'll see from the RNS this morning that we've taken an impairment on IFCN business of GBP 810 million. This is primarily reflective of an increase in the pretax discount rates, which increased from 9% in 2022 to 11% in 2023. Hence, IFRS operating profit is reduced to GBP 2.531 billion. So turning to volumes. I'd like to go into a bit more detail on our performance and the trends that we're seeing. Hygiene business has been delivering improving volume trends through each quarter, in line with what we've communicated at this time last year. Q1 was particularly soft as we were still lapping COVID comparatives in Lysol, but that's now in the past. We've been through that cycle. And we've seen volume trends improve in the subsequent quarters. In Q4, we saw further sequential improvement in Hygiene volumes, in line with what we communicated in Q3. As we look to 2024, we expect to see continued volume improvement. Our Health volumes remain robust. Volumes were broadly flat in 2023. Q4 saw strong volume growth in Intimate Wellness, but this was offset by the expected weakness I mentioned in OTC volumes as we lap the tough seasonal comparatives. That was particularly true for Mucinex, for example, and Strepsils. Looking forward, we expect to see our Health volumes to remain robust as they have over the last few years. In Nutrition, we see a combination of the rebasing in U.S. and North American volumes following the competitor supply issue in 2022 and some market volume weakness in developing markets. And I'm going to go into that in a little bit more detail in a few more charts. So let's move on to the P&L. As I mentioned, gross margins expanded by 220 basis points to 60.0% with pricing actions and productivity initiatives more than offsetting mid-single-digit cost of goods inflation. 2023 was a year of some important innovation launches, and these were well supported with brand equity investments, which increased by 130 basis points to represent 13% of net revenue. Our fixed cost base grew by 160 basis points due to general inflation, and increase in performance-related incentives and a step-up in our investments in digital and AI technology. And let me also remind you, we had a one-off benefit in the previous periods from the sale of land in the Philippines. Our cost base has opportunities for optimization, as Kris has highlighted, with a number of areas in the strategy update last October. We delivered adjusted operating profit margins, as I've said, of 23.1%, 70 basis points below last year for the reasons I've mentioned. Now let's move on to our GBU starting with Hygiene performance. As you recall, we started the year with low like-for-like net revenue growth, just 2% in quarter 1 due to the final effects of Lysol lapping COVID. Therefore, to deliver the mid-single-digit growth of 5.1% in the full year, I think, is truly commendable. The performance was underpinned by some important initiatives resulting from investments we've made in R&D and technology over the past years, which are now really starting to deliver returns. In particular, Finish delivered a year of double-digit growth with a strong performance from our latest thermoforming tablets Finish Ultimate Plus All-in-One. Thermoforming products now represent around 2/3 of all Finish portfolio, whereas they only represented 10% of our portfolio 4 years ago. Additionally, Lysol returned to growth in the full year 2023 despite the high teens decline in Q1. Laundry sanitizer, for example, continued to increase household penetration. Lysol Wipes grew distribution, and we created a new category with Lysol Air Sanitizer, which was launched in the U.S. in June 2023. As I mentioned earlier, volume trends improved sequentially through the year, and we expect to see continued strengthening of volumes in 2024. Operating profit was GBP 1.236 billion, and this grew 4.7% at constant exchange rates although operating margins are still below historic levels and 30 basis points below last year due to the increased investments in BEI. So turning to Health. We also delivered a strong year in Health with like-for-like growth of 5%. And remember, this followed a year of double-digit growth in 2022. For the full year, we saw strong double-digit growth for Nurofen, Strepsils, Gaviscon and high single-digit growth for Durex. Dettol declined, however, by mid-single digits, but we do expect to see Dettol return to growth in 2024. Operating profit at GBP 1.690 billion grew 6.3% at constant exchange rates with a margin of 27.9%. That's up 40 basis points versus last year. So turning to the fourth quarter. Like-for-like revenue was down 2% in the quarter, which is slightly disappointing, but this is primarily due to 2 issues. First, a high single-digit decline in our cough, cold and flu-related OTC brands, specifically Mucinex and Strepsils. As you're aware, the quarter lapped a very strong and early cough, cold and flu season in 2022. Now to give some market context, our net revenue performance was totally in line with what we've seen in terms of U.S. category data. Our noncough, cold and flu-related OTC brands continued to grow in the quarter, particularly a strong performance from Gaviscon. Now the second key issue is Dettol declined by low double digits in the quarter primarily due to the performance I've mentioned in the Middle East, which is a significant Dettol market. Encouragingly, we see share gains in Dettol in China and India, and our ASEAN Dettol business has stabilized in the second half of the year. It's important to note the Q4 result is not an indicator of momentum for this business, and we are confident of a strong performance in our health GBU in 2024. So turning to Nutrition GBU. For the full year, like-for-like net revenue was down 4% with volumes down 10% and price/mix up 6%. Operating profit margin at 18.5% was down 460 basis points. But again, that's from a very high and unsustainable level in 2022. As expected, we continue to see a rebasing of net revenue in the North American market during the fourth quarter. The total result for the quarter was net revenue of minus 14.8%, which included a 200 basis points impact from a returns provision in respect to the voluntary Nutramigen recall that happened right at the end of December. We saw net revenue growth in Latin America, but this was more than offset by category weakness that continued in ASEAN, resulting in high single-digit declines in our total developing markets. Now given the circumstances that have taken place in the last couple of years, I'm going to provide some additional insights to our Nutrition business on the next couple of charts. Now the purpose of this next chart is to give clarity on the status of our U.S. IFCN business. As you look at the chart, the left-hand side, the bars show volume market shares for 2021, '22 and '23 and the right-hand side show value market shares. Now above them in the bubbles, we've shown the starting shares in January 2021 and the exit shares in December 2023. The 2 key takeouts. First, we exited December 2023 in terms of volume market shares and value market shares as market leader and with higher shares than the precrisis 2021 levels. Second, second key takeaway, the average 2023 value share, as you can see, was 47%. But in the first half of 2023, we had a share of nearly 50%. Therefore, there is further rebasing in the first half of 2024. Remember, we exited 2023 with a 42% share. So there's further rebasing in the first half of 2024 as we comp these higher shares before we stabilize our position and restart growth late in 2024. Now let me also now show some further detail on volume and price/mix across our different geographies. Now overall, our net revenue -- our Nutrition net revenue is 18% larger than in 2021 while volumes are down 4.2% but with volume growth in North America, which was more than offset by some quite significant volume declines in our developing markets. Just to be clear, our North American volumes remained stronger than 2021, and the volume declines in the other markets are broadly in line with market volume trends where we're seeing an impact from a combination of declining birth rates, increased breastfeeding rates and some Stage 3 mother switching from infant nutrition to cheaper alternatives. The decline in DMV -- DvM volumes was also impacted by the exit from our Brazilian IFCN business and the cessation of a third-party supply agreement between Reckitt and Primavera. The drivers of growth in our future developing markets business remain science-led premiumization and a focus on the faster-growing specialty segments. Now moving on to earnings per share. Adjusted earnings per share decreased in the year, as I mentioned, by 5.4% to GBP [ 3.234 ] per share. However, do recall, 2022 included that higher operating margin from the Nutrition business in 2022. The decline year-on-year in adjusted EPS was therefore driven by the higher effective tax rate, just over 25% and the negative translational foreign exchange impact due to the relative strength of the British pound during the year. While adjusted EPS does decline year-on-year, we are recovering well from the low point at GBP [ 2.885 ] per share in 2021 following the strategic investments that were made in 2020 and '21. And the priority, as Kris mentioned, is for sustainable EPS growth driven by our earnings model and supplemented by an ongoing share buyback program. Now moving on to cash flow. We had a very strong year of free cash flow generation with free cash flow at GBP 2.258 billion, up 11% versus the prior year, representing a 97% cash conversion rate. The improvement in free cash flow is primarily due to improving net working capital performance versus prior years, somewhat offset by increases in interest costs and tax. Net working capital in absolute terms was broadly flat year-on-year led by a strong focus on improved inventory control and inventory management. Thank you. I'll now hand over to our CFO Designate, Shannon Eisenhardt.

Thanks, Jeff, and I just want to take this opportunity to quickly thank you for all of the guidance and support you've given me as I've been onboarding for the past few months. Good morning, everyone. I'm excited to be here today, and I'm very much looking forward to taking over as Reckitt's CFO. Since October, I've had the opportunity to spend time both at our headquarters and out in a number of our larger markets. I've also spent time with our executive leadership team as well as the Board. And this onboarding time has been invaluable as I've not only learned about where Reckitt is headed, but I've also learned about the history that has shaped where we are today. Reckitt has been on a journey in many areas from both an execution and governance perspective. And I look forward to building on what's been achieved over recent years while recognizing that we still have work to do. I'd like to start today with our outlook for 2024 and specific guidance. We are confident in the year ahead. We expect our group like-for-like net revenue growth to be between 2% to 4% with mid-single-digit growth for our Health and Hygiene portfolios. Specific to Nutrition, we expect a high to mid-single-digit decline as this business continues to rebase in the first half of the year and will return to growth late in fiscal '24. Overall, it's important to note that we're not expecting our group net revenue growth consensus to change on the back of this outlook today. And for profit, we expect a leveraged P&L for the group. Some additional perspective, our adjusted net finance expense will be in the range of GBP 300 million to GBP 320 million. This is reflecting the higher interest rate environment. CapEx is expected to be in the range of 3% to 3.5% as we invest in the long-term growth of our business. And our effective tax rate is expected to be in the range of 25% to 26%, which is largely consistent with our '23 results. I thought it would be helpful to provide some additional context on what the shape of the year will look like. Our revenue and profit growth will be second half-weighted. Specific to Health, we'll be lapping some European retailer inventory rebuild on our OTC products from Q1 of last year. Specific to Nutrition, there are a few factors that are impacting our North America Nutrition business. In Q1, we're lapping retailer inventory shelf refilling from last year. Additionally, until February 28 last year, we received a temporary benefit in states where our competitor held the WIC contract. And we have a continued rebasing of our U.S. non-WIC market shares. As you saw from Jeff's chart, our exit market share was in the low 40s compared to an average share in the first half of last year of 49%. Clearly, this delta will have a high teens negative impact on our U.S. business in the first half of the year. Given this, we expect our total Nutrition business to deliver a low teens decline in the first half, and that business will return to growth late in the year. The phasing of this revenue delivery will also impact the phasing of our profit delivery, and we expect that to be more weighted to the back half. Moving on to leverage. As Jeff mentioned, we delivered strong free cash flow in fiscal '23. This has enabled us to reduce our leverage to just below 2x EBITDA. It also enabled us to fund a 5% increase in our dividend and the execution of our ongoing share buyback program. This program started in late October, and we've purchased around GBP 200 million of shares by the end of December. I'd like to take a moment to just review our capital allocation priorities. We will invest in organic growth, and this remains our top priority and will be funded through our organic earnings model. We'll prioritize strong free cash conversion. We're committed to continuing to grow our dividend, and we target a single A credit rating. In October, Kris shared the 3 principles for capital allocation that we will use to manage our portfolio. Finally, we're committed to returning surplus cash to our shareholders. We're proud of the increased cash returns to shareholders we delivered in '23, and we're committed to continuing this in 2024. We generated GBP 2.3 billion of free cash flow in 2023. This was used -- GBP 700 million to reduce our net debt, and GBP 1.5 billion were returned to shareholders via dividends and share buybacks. Our balance sheet and debt levels are in a good place, and I expect the majority of our free cash flow to be returned to our shareholders. Kris walked us through our framework for value creation. In 2024, we are committed to delivering 2% to 4% top line growth, and we will grow AOP above net revenue growth. Finally, we're committed to further increasing our cash returns to shareholders. I'll now hand it back to Kris.

Thank you, Shannon. To recap, 2023 was a year of progress and laid the foundation for future value creation. We are confident in our business and plans for 2024 and in delivering 2% to 4% top line growth and a leveraged P&L. We will continue to generate strong free cash flow, and we will increase returns to shareholders. Thank you. Jeff, Shannon and I will now be happy to take your questions.

Okay. [ Guillaume ] why don't you go ahead?

So two questions for me, please. Firstly, on your 2% to 4% like-for-like sales growth guidance, within this, you're guiding for mid- to high single-digit decline in Nutrition, which effectively implies a like-for-like sales growth, I mean, close to the midpoint of the mid-single-digit range for Health and Hygiene combined. So that would be above consensus. That would be pretty much in line with what you reported in 2023. So my question on this is what underpins your confidence in another strong year in Health and Hygiene at a time when pricing is normalizing and from the market share development, you're holding or gaining shares in less than half of your Health and Hygiene business. And also related to that, do you expect a consistent mid-single-digit delivery every quarter for Health and Hygiene? And then my second question is on the trade spend understatement in the 2 Middle Eastern countries. I mean, maybe if you can provide a bit more details on that on exactly what happened. And I guess more importantly, what gives you confidence it was an isolated incident, whether you don't to have to strengthen your supervision or processes that you've got in place? And fundamentally, is it down to -- is it the limitations of having this unique culture of being a company of owners.

Good questions. I think I'll start with the outlook for the year, and then Jeff will speak more to the Middle East issue. So the outlook for the year, the reason why we feel confident is if you look at the year we just had, we have significant momentum in our Hygiene business and our Health business. We have invested in innovation. That innovation is working, and we see lots of signs of improvement. I recognize you can't see all that we can see in terms of market shares, but our outlook on market shares is positive, and we have positive momentum. So what I will tell you is we feel confident that these businesses can deliver mid-single digit, and it's not just down to a price volume equation. It's very much because we're investing in innovation. We're investing in increased capacity. We're investing in expanded distribution, and we're stretching our brands. And so we are not just sort of behold into the market dynamic that you're describing. These investments that we have been making over the years to strengthen these businesses are genuinely working. So that's probably what I'll say about the outlook for Health and Hygiene. We're feeling good about it. Notwithstanding that it's a complex market environment, like you said, but we can see that and we can navigate that. And as you see, our volumes are now coming back to a much more normalized place, and we'll have a balanced -- a more balanced algorithm in '24. Jeff, maybe you want to talk to the Middle East?

No, absolutely. Look, I see this very much as a one-off factor in 2023. We have done extensive work around it. We've isolated the issue. The people involved who have been -- have exited the business did not have accountability over other markets. We've done significant additional extensive checks into other markets. And we feel very confident that this was isolated into these 2 markets in the Middle East. As a consequence of the investigation, several people have left the business. As Kris said, we have 0 tolerance for any behavior which runs counter to the culture of doing the right thing always. I don't see this having an impact on 2024 at all. The -- and the investigation initiated in Q4 really in relation to some commercial practices and not really anything in terms of trade accruals, things like sales into the gray market and stuff like that. It was only late in the investigation that this came to light. We've acted very quickly. It's really come to light as a consequence of our own internal control. So I'm very pleased that we found this within our own internal procedures, and the adjustment has been fully booked in these numbers. So we're not correcting any prior misstatement. The adjustment's fully represented in these numbers. The only reason that we feel we need to be transparent. We're disclosing it really because it means that our Q4 performance, it's a variance on our Q4 performance, which is lower than we had previously expected. I think that's all I'd say on the subject at this stage. As I said, I treat it as a one-off item. We have a culture, a strong culture in the group of doing the right things always. Now ownership strengthens that culture, in my mind. As owners, we have a duty to do the right thing for all stakeholders. And I see that every day. This happened to be -- in Reckitt. This happened to be a small group of people who were not doing the right thing, and we've dealt with it.

I'd just build on that and say I'm in my fifth year at Reckitt, and I've been all around the business, and I know that this is not who we are. I know this is not our culture. We can't exclude that there will be 1 or 2 or 3 individuals that do something inappropriate, and we will deal with it. And as Jeff said, our control framework did prove that it was working, albeit late in the process.

Could you elaborate a little bit on mix through the year specifically in Health and maybe a bit more details around fourth quarter? We have very different dynamics within subcategories. Did you have a negative mix as a result? And my second question, when I look at your Hygiene, the volumes are below 2020 levels. Why don't we see the impact of broadening the shoulders of brands, innovation? Why it is not reflected in the volumes? And should we expect it maybe to recover or rebase in 2024?

Maybe I'll start on the Hygiene question. So sometimes when we premiumize and you have to appreciate in Finish, for instance, we're moving from hard-pressed taps to thermoforming, the premiumization impact of that is very significant. So a lot of the value of innovation is also in premiumization. And sometimes, to your point, it is actually volume-driven because we're creating new categories like Lysol Air. But at the same time, as you saw in Jeff's chart that he walked through, Hygiene was the one of our businesses that was most impacted by inflation and the pricing that we had to pass through. And so we did take a sizable step backwards in volumes, right, which we're now climbing our way out of and we expect to enter into a more normal environment. So those things are offsetting, and that's why you're seeing what you're seeing. But it's certainly not because we're not getting great volume growth out of our innovation. We really are. I think on Health, we do have a lot of mix effects in Q4, as you say, because some segments went up quite a bit, and some segments went down. The net picture is actually not a dramatic shift in mix. But when OTC declines a bit, that has a mix effect. Conversely, though, Intimate Wellness grew strongly. And so that is also a high-margin business. So net-net, the impact is not as big as you may expect with those moving parts because some of them are offsetting.

Chris Pitcher from Redburn Atlantic. Kris, you put up that target of going from 44% of CMUs holding or gaining share to 60, which looks quite a heroic leap. But if my math is right, half of that is getting U.S. infant nutrition back to stability or growth, which clearly isn't going to happen in the next 12 months. In terms of -- can you give a target for this year? Would you be hoping to get to 50 without the Nutrition side of it? And then on Nutrition, we have had a period where you've had cost savings, excess profits, investing in the business but there's still -- you've got a product recall. We have the FDA letter. Is that a business that needs more capital investment and more marketing investment to deliver on that ambition because Jeff mentioned that 2022 was an unsustainable level of profitability. I mean really should we just be thinking 18% is the level now for Nutrition despite where your peers are? Sorry, long question.

All right. Let's start on share. Look, we're not going to be happy until we're at 60%. I'm not going to be happy until we're at 60%. And we're going to continue to report and share with you the progress that we're making. What I'm telling you is I am feeling confident in what I'm seeing in the business, right? Much of this has to do with things we're either lapping. I'll give you an example. Even though OTC has traded well this year, many of our competitors' supply chains have come back. Last year, our supply chain actually did better than our peers' supply chains and OTC. So that creates sort of a natural share drag, but we know when that ends. So we have a bit of a forward look. So I feel very good about the fact that we're going to see gains in market share and in that 44 number, that's going to improve. You're also right that the Nutrition business and the normalization in the U.S. creates a headwind in that number, that's clear. But we're not going to use that as a reason, okay? We want to get to 60%. That's what we're focused on. And hopefully, we can show it to you that we're going to get there quick.

Can I just say a little bit about Nutrition margins?

Yes, sure.

I mean, look, Kris, you're right to identify that there will be some step-up in capital and operating expenses as a consequence of the new -- or the more intense regulatory environment following the Abbott recall. So we refer to that in the notes to the accounts that we will see some step-up in CapEx and some step-up, albeit relatively small, in operating expenses. We did say the margins were unsustainable from a short-term perspective. But what I've said consistently is we do see a low 20s margin as a longer-term ambition for this business, and that's something we still target is a longer-term ambition.

By the way, capital investment can enable part of that, right? So we do invest -- we are investing in our supply chain in infant nutrition, and I expect us to continue to do so. We have to. It's a good idea. But it also comes with some returns. So hopefully, that helps.

I just want to do quick follow-up. In the chart you put up on Nutrition volume and value share, you had a 7-point gap value over volume in 2023, but that closed to a 4-point gap in December 2023. Can you give us a quick color on the pricing environment with your [ making ] competitor now back in full supply, et cetera?

Yes. Look, I'd say that gap closing has more to do with the rebate environment around the WIC rebates that we were previously getting, which are no longer in the market. So it's more related to that than any gross pricing movements or retail pricing movements. So we haven't really seen trade pricing change since the early part of 2023 when we implemented that low double-digit price increase in the U.S., which is catching up from '22.

Can I come back to this accounting anomaly, please? Can you tell us exactly what happened? It's obviously more than just a misallocation in that it had an EBIT, not just sales impacts. And related to that, Shannon, what's your initial view of Reckitt's internal controls? Can you see any weaknesses?

Well, let me start by saying this was a consequence of a group of individuals suppressing the quantity of trade liabilities through 2023. This was uncovered through the internal control processes at Reckitt, and we've corrected it, and it's fully reflected in these numbers in 2020 -- at the end of 2023. So there's no misstatement from prior periods or no material misstatement from prior periods. The correction is booked in our full year accounts. What it -- the reason -- one of the reasons we're reporting it, it's one of the reasons that we have missed effectively our Q4 expectations with going -- before this was identified, we'd expected Q4 to be the GBP 55 million higher than has actually been reported. So I take some comfort from the fact that we identified this through an internal control process. We've corrected it, and the individuals that have been -- that were involved in this have exited the business.

What was the cash -- I'm trying to understand how? who is paying for this, were [indiscernible].

No, no, no. This was effectively an understatement of trade liabilities. So there's no cash impact. It was just basically a balance sheet accrual issue.

So just making [indiscernible].

Suppressing information, which meant that it wasn't immediately identified. But again, during our year-end processes, we did identify this, and we have now corrected it. And Shannon?

Sure. I mean, obviously, I'm disappointed, and I think we're all disappointed to have to share this news today from a control standpoint. As far as my impressions of Reckitt's control environment, I've worked at 2 other large multinationals with similar complex footprints and certainly understand that controls are important at all companies of this magnitude, and there's no finish line. There's always -- it always needs to be invested behind in a focus area. I'm really pleased to have seen and learned about the focus this has been at Reckitt for the past few years, which, I think to Jeff's point, is evident in the fact that we were able to detect this in a timely manner and make the necessary corrections before we shared our results. And I think it's clear this will continue to be a focus area that we'll invest behind going forward, not just for the finance function, but for everyone at Reckitt.

Celine Pannuti, JPMorgan. So my first question is on cost inflation. I think you said mid-single digit in '23. What should we expect for '24? And what does that mean for pricing? I mean I think that some -- all derivative prices have come down. I think [indiscernible] as well. Could you talk about the pricing dynamic in both the Hygiene and the infant formula category or specialized nutrition category? My second question is on -- yes, yes, second question is related potentially. Gross margin, you said that reached historical level. What's the path going forward? And can we talk about as you look at implementing your cost savings, how you plan to redeploy those savings between the reinvestment in BEI and the bottom line?

Okay. That sounded like quite a few questions, Celine, which are -- it's great. Let's start with COGS inflation. Maybe, Jeff, do you want to speak to briefly what we're seeing at the moment and Shannon, the outlook?

No. Look, I think one of the issues on -- going back to the question on Hygiene volumes, over the last 3 years, we've seen inflation that many of us haven't seen in generation. So yes, we're actually pleased if you go back to '19, you could say Hygiene volumes are flat versus '19, which is actually quite an achievement in this inflationary environment. For 2023, we saw mid-single-digit cost inflation, and we see that moderating into low single digits as we go through '24.

Do you want to add anything to that?

I mean I think you hit it. So we just see it moderating, and we'll continue to be driving our productivity program as a key lever to offset the moderating inflation that we see.

I wouldn't say anything specific on specific items in terms of pricing. But pricing will obviously be more moderate, therefore, in 2024. There is obviously carryover pricing that we will see, and there's pricing that comes through effectively through premiumization. We report mix and price together. Some companies have mix in with volume, which obscures the volume numbers, but we have it with pricing. And as a consequence, from mix premiumization, some of the carryover pricing. And of course, there will be some pricing in 2024 through inflationary countries and such forth. There'll be a little pricing. But as Kris mentioned in the discussion in the presentation, the algorithm for price mix and volume will be much more normalized in 2024 than it has been over the last 2 or 3 years.

Just on inflation, I'll just add that we do see wage inflation, much like the broader marketplace, and that also impacts our cost structure. So I think what you heard on commodities is absolutely the case. But wage inflation is running higher than normal, and that will take some time to pass through our P&L. Obviously, we aim to offset that in our fixed costs with our cost optimization program that I've talked quite a lot about. In terms of gross margins, you asked about the return to around 60% gross margins. Look, this is a hallmark of what a portfolio like ours can do. We have a premium branded portfolio. We are known to be able to generate high gross margins, and we are back at a historical level. That's quite a good level. I don't have an ambition to dramatically expand that. In fact, I think we are at a good place. Now the question is about reinvesting in growth, which is exactly what we want to do. So to your last question, where we're going to deploy those resources that we free up, we're going to make those choices as we go. But we see a lot of areas where we can invest further in our brands. We have an innovation pipeline that is stronger, then we would like to fully support. So those are big areas that we can invest in. And there's other areas of the business where we still need to expand our capacity and strengthen our supply chain, which also yields growth in this case. So all of it doesn't have to be towards growth. We're going to be judicious about that. We're going to make smart decisions based on the returns of the investments that we see. And then obviously, we are completely committed to growing our EPS going forward. That is an overwhelming focus for us. And part of this enables us to do just that.

Tom Sykes, Deutsche. Just on the BEI level first, it looks like it's just shy of GBP 1 billion in the second half of the year, so up to close to 14% of sales, I think. So is that the correct run rate? And can you maybe say something about the payback if there's a step-up in Nutrition, are you having to step up the BEI and Nutrition despite the fact that you're expecting share losses? And then just on the difference between the DM and the EM businesses perhaps mostly in Hygiene, you've sort of seen perhaps as having a high price point versus in some areas, the value proposition that you have that you're obviously making that up with innovation. Within emerging markets, do you think that is particularly accentuated or not because you haven't really seen the emerging market growth that perhaps peers have seen? And is that an issue for '24, please?

Okay. So on marketing, I would say we're pleased that we can raise the support for our brands. I believe that's absolutely the right idea. Some of the phasing in the year is also a function of when we have certain launches, big innovation, et cetera. So some of that is a function of how we plan the year and events during the year. I think as you see us go forward, we are looking to fully support our brands. And there are places in the portfolio like OTC that I talked about before, which is such an attractive business. And we still have some CMUs around the world where we think we have an opportunity to invest even further. And that's the kind of place that I would look to invest more BEI as well as supporting the innovation platforms that we're rolling out. We talked about Finish. We talked about Lysol Air. These are great innovations, and we have an opportunity to support those as well as we can in as many markets as we can. I don't think Nutrition is particularly a place where I would direct incremental BEI to answer that question. Now I think as it relates to DvM, the Hygiene business, yes, we're a premium-priced player in most markets. There are some of these segments that are doing very well. There are some segments where we are not doing well enough, okay? I mean Finish is performing very strongly in many emerging markets. We're very pleased with it. That is a premium product for sure. It's at the high end of the category, but that's where Finish belongs. And it's commensurate with the product experience and the proposition, the strength of the equity. I think there's other segments where your question is a good one, and we are looking at that because if we don't have product superiority, premium pricing is not a winning strategy. I think there's some segments, but we have work to do. I've highlighted pest as an example before. It's not a really large business for us, but it's a business that could be doing better, and that's something that we're working on at the moment.

Can I just answer specifically, I wouldn't necessarily, therefore, because of the phasing of those initiatives, take the second half run rate as an expectation into 2024. But looking at the full year, we do expect that we will continue to increase our investments in BEI.

I've got a couple. The first one is on industry pricing power. I was wondering if you can give a few comments across the business units of what you're seeing there. Are you seeing rising pressure from private label, increased promotional intensity from some of your competitors? And perhaps if you can give some comments on where these are versus, say, 2019 levels? And then my second question is on portfolio management. I guess you're implying not much to spend on M&A, given that you intend to return quite a lot of cash to shareholders this year. But what about on your existing businesses. Is there potential for you to review some of the businesses that you have currently that you can't add more value to drive better growth, could we see some disposals through 2024?

So let's talk about the environment first. Look, I think maybe it's helpful to set the stage a bit in terms of as we headed into this inflationary spike, which was historic in nature, it was an open question as to whether elasticities would follow what our normal models would say or what exactly would happen. I think if you zoom out, what we have seen is that we have been able to pass through more pricing with less volume declines than we thought would be the case going into it. Now that being said, of course, there are some businesses that have been elastic, and you've seen the consequences of the pricing, and that's fully to be expected, okay? Now we're coming out of that cycle, and we're coming into a more normal cycle. What we're seeing at the moment in our categories is that the environment we're moving into is a more normal environment. That means that there is more promotional activity, but it doesn't mean that we are giving back in some significant way what we have built in terms of the protection of our earnings model. It is just that we're moving into a more normal environment where promo and different promo price points are playing a bigger role. Now there are certain segments, I would say, certain segments in Europe, where we are seeing perhaps a bit more of that happening. And those are also incidentally places where private label is more developed. It's just a matter of how the market is structured. But for instance, in the U.S., we're not seeing that. And so overall, we feel like we're in a reasonably rational pricing environment. And we certainly hope that, that will continue, and that's the approach that we want to take. At the end of the day, we're here to grow our categories, to delight consumers, to launch and scale innovation. And those are the ways in which we want to grow the business. Oh, portfolio.

Just on the portfolio, maybe look, I think we've always said at Reckitt, if there's good assets available, we'll look at them. And I think the fact that we're returning funds to shareholders through a share buyback program doesn't limit that. There's plenty of opportunity for us to raise funds for good assets. That's all I would say on that.

The other thing is at Q3, and we referenced it today, we set forth a set of principles that are very clear about how we want to manage the portfolio. And my commitment just as I said in Q3 is that we're going to hold those principles up against our whole portfolio as well as potential inorganic opportunities. And these criteria are pervasive for that. And when we conclude that there are businesses that don't meet them, we will, in a practical way, in due course, we will act on that.

A couple of questions for me if I may. So you talked about how you didn't expect full year '24 organic sales growth consensus to change. But you also guided Q4 infant formula to down mid-single to high single digit. And I think many of us, given the performance for infant formula in the last few quarters, will probably lean more towards the down high-single digit than the down mid-single digit. Consensus at the moment is down about 3. So you're broadly speaking, putting forward it's like a 5% swing on 15% of the business, say, that takes the best bit of a percent of consensus. So if group level consensus isn't moving, but infant formula is coming down, other bits have got to be going up to leave it unchanged. What should we be upgrading and why, I guess, would be my first question. And then my second question, Dettol had a pretty tough time in 2023 if I recall correctly in ASEAN. How should we think about that? Has it stabilized? Is it rolling on to easier comps? Should it have a better '24? And then very quickly, a bit of housekeeping. You said that you put mix into price, whereas many of your competitors put it into volume. Can you just remind us how big mix is for you, please?

Should we take them and do you want to take mix?

I'll take mix if you want me to get that out of the way quickly. Look, generally, mix is, I'd say, runs at less than 1%, but it could be up to 100 bps. So in that 50 to 100 bps category is the normal type of area that we see the mix running at.

And on Dettol, the ASEAN business has stabilized, and we expect that business to start growing again. The other poor performance in Dettol that you're referencing was in the Middle East driven in -- to some extent by the issue that we discussed about trade accruals. And we expect that business to have, let's say, a benign lap and to be able to return to growth. Fundamentally, Dettol is actually trading well. We're gaining share in our biggest markets with Dettol in China, in India. We're very pleased with the outlook for Dettol. We have a lot of great innovation behind Dettol, too. So I'm not going to minimize the fact that it wasn't a great year for Dettol. It was not. But it's not an indication of where we think that business is going to go, and we expect to grow it.

Then I can try and take the top line guidance. So Ian, I think you reiterated the guidance quite well. So we're not trying to change the group number. We don't see a need for that to change for fiscal '24 in total. We do expect across the portfolio of brands, growth will be back half-weighted versus front half. Specifically to Nutrition, what we'd be guiding for the first half of next year is net revenue growth that's in the -- a decline in the low teens. And again, that's a function of the rebasing as that continues in the front half of next year. We do believe Nutrition, as we exit the year, gets back to growth. And then yes, what this means is Health and Hygiene, we expect versus today's consensus, that will float up a bit, and they'll deliver in the mid-single-digit growth range for the year again, with Health being slightly back half weighted.

Well, thank you very much for attending.