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

Okay. I think we're going to get cracking. I think I've had a signal, so we're going to get cracking. Hopefully, the lunch was great. And we've got Reckitt here today, Kris and Shannon. Thank you for attending and supporting the conference every year. We appreciate that. So the format today, as has been the case already, is going to be a fireside chat. We are going to do a breakout, by the way, next door afterwards for 15 minutes for those who want to join. So I've got a lot of questions for you guys. So we're going to try and get through as many as possible.

But maybe to kick off, Kris. Can you talk a little bit about the new organization? You're talking about a more accountable organization. Why and how is that an unlock? And how would it help you deliver and execute more consistently because, obviously, consistency is the name of the game.

It is. So thank you for having us. It's a pleasure to be here. So I felt strongly that we needed to simplify our organization. And I would say the main driver of the changes that we've made was really about simplicity, effectiveness, accountability and hopefully speed. There's a byproduct, which is it's less costly. We have fewer senior executives. But I think the overwhelming focus is for us to create a simple and fast organization. And we heard that from the rank-and-file in the company for a while that they felt that was an opportunity to get to faster decision-making, and I felt clarity around accountabilities was important. So what we did is we took out a couple of layers of management. It's quite a significant change. And then we simplified the geographic reporting. So we now have 3 presidents that are accountable for all execution. And that makes it much easier for me to work with them and drive good execution, but also, of course, to make sure we have clarity of accountability. And by the way, that is also the case below. We simplified our regional structures quite a bit, too. So we made this change 6 months ago. So we've been living in this new organization for -- well, the year has gone fast. It's 8 months now. But I think it's going well. We're capturing benefits from it. But I would also say any big organizational change like this, it takes a year or 2 before you get all the benefits. So there's more to come.

Maybe moving to innovation. Innovation is the lifeblood of consumer staples. Can you explain the one Reckitt way of brand building, building categories? You've done it with Lysol Air. You've done it with Lysol laundry sanitizer, which have made new markets. And it's allowed you to get a price premium given the level of differentiation. So the question is can you replicate that market-making model to other Powerbrands? And is your R&D set up enough so that you can do it more quickly and more agile? Or are these big breakthroughs quite infrequent events? So which technologies are you most excited about in terms of innovation that can really move the top line needle. So it's a question around innovation.

Warren, that feels like 5 questions, but...

One big question.

Let's take them -- one big one. Let's take the elements of the big question in turn. So innovation is our lifeblood, and we have been investing in our pipeline and in our R&D capabilities quite a bit. And it takes years. So we did have a period historically where we didn't invest enough. And then it's a catch-up process. The good news is we're done with the catch-up. So we're now in a position where we have really meaningful innovation. To your point, you don't want actually too many of them. You want sort of a cadence of big platforms, 1 or 2 that land in the market every year because the job isn't just to launch them and land them. The job is actually to use 3 or 4 years to scale them because we want them to be permanent new additions to the portfolio. Category creation is the most valuable kind of innovation that we can do. And the way that you do that is, obviously, your fundamentals have to be good. You have to be consumer obsessed. You have to see a need in the market. You have to have the technology solution that is really going to deliver on the promise. But I think what is helpful for us is you really have to have a #1 equity to -- your brands have to have the right to create categories. And one of the things that we're spending a lot of time on is understanding which of our brands have that right and where can we do it, to your question. But You look at a brand like Dettol where we've dramatically expanded the number of categories that Dettol operates in, in a market like China, that's a big part of our growth. And so much of it comes back to do we have the right brands. And the good news is in our Core Reckitt portfolio, we only have very strong Powerbrands. It's really the whole idea behind the plan.

I'm bringing you in, Shannon. I'll try to make it a bit shorter this one. On the fixed cost reduction, it looks like you're tracking well ahead of your targets. I think you were already at 20% at the first half against your 19% target. You talked about 2 big areas of scaling shared services as an opportunity and also working with generative AI to reduce overhead. So just interested if you can maybe elaborate a bit more on those 2 points. And I guess, given where you're tracking, is there any reason why you don't hit that target a little bit earlier than you said given you're already well ahead.

Yes. We're super pleased with the progress we've made to date. As you said, savings are coming in quite quickly from overheads. I think that as far as resetting any targets, not really looking to do that. I think 19% is the right target for us. We're committed to getting there as we exit 2027. I would say, of course, there's no finish line. So once we get there, we can talk about going further. To your point, I think what's important to remember is while we've had strong delivery early on in the program, if you think about 2026 and 2027, first of all, in '26, we'll be needing to mitigate stranded costs from Essential Home. So if you think of that trajectory of savings delivery, I think that could moderate a bit in 2026. And then if you think of those 2 buckets you called out, so shared service and Gen AI, we absolutely think there are large opportunities. We think they're very structural, sustainable opportunities. So once we have that capability up and running, we think it's something that for the long haul will continue to drive savings. But it's also 2 opportunities that take a lot of work to really get them going. And so those are the 2 pockets of savings that I would see coming into play as we get into '26 and then in a really significant way in 2027.

Okay. And maybe just touching on advertising spend because that was up significantly in the first half, I think, 130 basis points from 13.3% of sales to 14.6%. That's a big jump. Can you maybe outline where that money is going? What are the top priorities for that spend? Maybe how much of that spend is digital today, if you have that number? And should we assume it kind of levels off or does it -- just in terms of calibrating modeling, what's the thought process about what the right level of spend should be in the business?

Sure. So in addition to innovation, I'd say one of -- the second most important thing, I think, for FMCG is to be really investing in our brand equity and making sure we're fully supporting our brands. And so our intention is that over time brand investment as a percent of net revenue should absolutely be growing. And so in '23, we had a significant step-up more than 100 bps. In '24, we increased it another 30. Year in and year out, you should be looking for that to be increasing as we take some of this fixed cost optimization and put it back in to invest behind our brands. As far as where that goes, I mean, obviously, one of our top priorities is that when we do have great innovations, we want those to be fully funded. And so that would be the first place that we're putting incremental BEI. But we're constantly looking at country-brand combinations to understand where do we think we either have clear opportunity to drive high ROI investment, where do we think we're behind some of our key competitors and we're very targeted in where we put that incremental spend over time.

And then another one on EPS growth. I know you had it a few times, but for some of us, it's quite hard to model. And there's a lot of moving pieces. You said that EPS will be up in 2026 after the Essential Home exit. And so you've got a few things going on there. You've got a minor -- you've got the 30% associate that we need to model. You've got the stranded overheads. So can you maybe help us a little bit sort of bridge that to give us confidence that actually, indeed, the 2026 EPS will be up? What would you outline what would you point to?

Sure. So absolutely, our ambition is that year in and year out, we're growing EPS. I think both Kris and I recognize that if you look back historically, it's been a bit of a missing piece if you think about consistency of EPS growth from the Reckitt story for the past few years. We had great results last year. We're confident this year that we'll be growing EPS. When you look into '26, the building blocks I would think through are, obviously, the sale of Essential Home is dilutive. It's about GBP 2 billion of net revenue. What bridges us to growing EPS and the ambition to grow EPS is, first of all, Core Reckitt top line growth and so we expect strong top line growth. We've guided 4% to 5% as our midterm outlook for Core Reckitt. Going back to the Fuel for Growth program, we expect to deliver cost savings in 2026 from Fuel for Growth, which will help drive operating profit expansion. That will all be compounded by we've had an ongoing share buyback program that we launched in October '23, which will continue to be a tailwind on EPS. As we have the special dividend with the Essential Home transaction, there will be a share consolidation with that, that will be a tailwind for growing EPS. And then to your point, we would expect to have some benefit coming into EPS from both the interest on the vendor loan note associated with the Essential Home transaction as well as the 30% stake. Obviously, FX, I can't predict that. So we'll see what the impact is, but those are the building blocks.

Okay. Thank you, Shannon. Super useful. Maybe back to you, Kris. Got to ask you about the U.S. market. You've called it as hard to call, lots of moving pieces, a lot of channel shift going on, a lot consumer shift. How exposed are you to the declining drugstore channels versus the growing channels of Amazon, Walmart and Costco? And how are you trying to improve execution with the winning retailers like Walmart? What investments are you making in supply chain, technology, people maybe to win in the U.S. almost regardless of what the macro does?

Great question. So yes, I think the U.S. is quite dynamic. It's tough, although it's stabilizing. So actually, if anything, from what was quite a concerning outlook in the middle of the spring, I would say, it feels more stable now. Our categories are pretty stable. It's a low growth environment, but it's an environment that we can work with and we can drive a reasonable performance. Our brands are quite strong in the U.S. We are leaders in most of our categories. And that means that our brands find their way to consumers' pantries irregardless of channel shifts. We're available broadly. We win with lots of different retailers. And so I'm not so concerned that the consumer won't find our brand. In fact, we have good traction and execution is improving and -- that's really good to see. So we're watching channel shifts. The drug channel is obviously having a tougher time. But we've been winning with -- winning retailers for a long time. So Walmart, it's not a new focus. Walmart has been a winning retailer for a long time and a focus of ours for a long time. We have a great partnership with Costco. We have great partnerships with many retailers, and we do well online. So I'm not so worried about these shifts. They tend to happen quite a bit, and we have to be able to navigate that and deliver performance regardless. I don't think the shifts that we're seeing in the U.S. are dramatic. There's other markets around the world where we're seeing far more dramatic channel shifts like China. And so I think we can navigate it.

Okay. And maybe a specific one on the U.S. I think it was down to 2.7%, I think it was, and you said that a lot of that was due to the reformulation of Mucinex?

Yes. So we were reformulating the sinus range, the Mucinex and that product is then going back -- the reformulated product went back into the market at the beginning of Q3. So it's a bad guy in Q2, a good guy in Q3.

Was it most of that minus 2.7%? Just want to understand. And does it mechanically completely come back in Q3?

Yes. I mean, we obviously have to execute that well and we've been micromanaging that execution. But yes, I would expect it to come back fully.

And in terms of sell-in/sell-out dynamics, are you seeing -- where are inventory levels today? Is that also improving or normalizing? Maybe are you able to say how much stock is in the system to give us an idea of where it goes?

There was a bit of destocking in the spring. I think a lot of that had to do with the confluence of what inventory levels were after a relatively weak start to the season and then a very sharp decline in March after a robust season in January, February. That gave retailers, I think, the opportunity to just work through the inventory they already had. And I think -- so I think my interpretation, a bit more of a short-term situation that was very reflective of how the season was moving and also what was happening in the macro at that time. We're not seeing destocking as a significant impact for our business now. We don't anticipate it being a significant impact. In fact, we're quite happy with the sell-in and the shipments for the season that's upcoming.

So net-net, would we expect the U.S. to therefore be up in the second half given Mucinex is coming back?

Yes. We expect the U.S. to grow. Yes.

And maybe turning to Emerging Markets, that was obviously a star performer in the second quarter. It was up from 10% to 15%. I think you've got mini-CMD on EM coming up in December, which would be super interesting. But when you think about the sustainability of that growth in Emerging Markets, Reckitt has been a bit up and down, I would say, in EM in the past. How can we get comfortable that this time it will be more sustainable? That you can actually grow EM, I don't know, high single digit? And are you confident you can comp the comp? Because Q3 is fine. In Q4, Q1, Q2, you start to get into much tougher comps. When that happens, would we still expect to see maybe not 15%, but still high single-digit growth?

Yes. What we've said about this, and I believe that to still be true is we shouldn't get used to growing at double digit just because it's unlikely to sustain itself quarter in/quarter out, year in/year out. But high single digit, I feel very comfortable we can do consistently. And as we can see, the business can definitely do more than that, too, as it has been doing now for 3 or 4 quarters. We have been successful in China and India for a long time, and that's really the markets that are driving most of that growth, not all of it because it's broad based, but most of it. And we have the ingredients to be successful in those markets for a long time. We have very strong brands. Much of our growth is volume-driven growth because we're competing very effectively in the online channels in China, and we're expanding our off-line footprint in India. Much of the growth is in Health and in Intimate Wellness, where we are leaders and have a big runway for continued household penetration. So I'm very happy with the teams we have in place. They really know what they're doing. I think we have some advantaged capabilities. So for China and India, I feel quite confident that we're going to see continued strong growth. Then the most exciting part about this footprint to me is the remainder of Emerging Markets, where we have a cluster of 6 to 7 markets that taken together will be and is of the size of India or China and has the same growth potential. And so actually accelerating those markets is a big priority of ours for the coming years, which will also support the...

So which countries would you call out? Colombia? Is it Colombia, is it Malaysia, is it Indonesia? What would be the most exciting?

It's -- yes, so there are some good names in there. So we have, for us, Malaysia, Vietnam, Sub-Saharan Africa, Colombia and Mexico and Brazil, where we have nice businesses today. Now there's more markets than that, but those are the ones that are on my radar in terms of really big growth potential.

And how do you seed those markets? How do you -- how are you actually going about trying to grow them? How do you prioritize? Is it Sub-Saharan Africa versus Indonesia? What's the kind of priority?

Well, we have a lot of conversation about this. I mean, I don't want to prioritize too much because there's so much growth. So I would like most of it if we can find a way. But obviously, that's already a subset of markets that we've picked. The good news is we're not starting from scratch. So we have pretty good businesses in these markets. They just haven't been, let's say, the biggest priority for the organization. And so that's what we're changing. And what that looks like is investments in the brands, in supply chain. In some places, we can have more capable R&D that's a little closer to the market to get the innovation really firing. So every market is a bit different. But what's exciting about it is our people know how to do this. And so our new structure where we have Emerging Markets under one roof with some very capable, experienced leaders, they can start to really spread these capabilities and playbooks in a more effective way. That's probably the thing that I'm most excited about our new organization.

Okay. Maybe back to you, Shannon. As we're staying on the geographical talk, maybe we can turn back to Europe. I think you said that the Q1 sales Europe would be kind of up low single digits. It ended up being flat. So that was one of the few areas that was a little bit behind what you had thought. Can you maybe outline why that was? And where do you see kind of category growth in Europe share? Do you expect Europe to be back into positive territory in the back half as Kris does for North America in Europe?