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

Good morning, and thank you for joining us online for the Reckitt's half year 2026 Results Presentation. I'm Nick Ashworth, Head of Investor Relations here at Reckitt. Before we start, can I draw your attention to the usual disclaimers in respect to forward-looking information. So presenting today, we have our CEO, Kris Licht, and our CFO, Shannon Eisenhardt. Following their presentation, will be the usual Q&A session. [Operator Instructions] If you have any follow-ups after the event, please feel free to reach out to the IR team, and we'll be happy to help. So with all that, I will now hand over to our CEO, Kris Licht, to start the presentation. Kris?

Thank you, Nick, and good morning, everybody. Welcome to the call. I will start with an overview of our first half performance and some of the key highlights particularly the significant acceleration in Q2 with the more balanced growth that we delivered. Before Shannon takes you through the financial results in more detail. I will then come back and provide an update on the progress we're making across our areas and our strategic priorities for the second half, which underpin our reiterated full year guidance. After that, we will both be happy to take your questions. . As I just said, we've delivered a significant acceleration across our business in the second quarter. In the first half, we delivered like-for-like net revenue growth of 2.7% in core record with growth in the second quarter of 4.2%. Importantly, all areas in all categories improved in the second quarter with a balanced contribution from volume and price mix. This performance not only demonstrates the strength and equity of our power brands, it reflects the continued impact of innovation across our portfolio. Alongside top line delivery, we continue to make good progress with our Fuel for Growth program. You can see this in our first half results, where we continue to reduce our fixed cost base to offset the stranded costs from the Essential Home divestment. We're driving greater efficiency across the organization, and we're increasing our ability to invest behind our power brands. Overall, we're continuing to drive benefits from being a simpler and sharper business. Executing against the priorities we've outlined consistently over the last 2 years. Our portfolio is more focused our capabilities are stronger, and our execution is improving. Turning to our financial performance. In the first half, we delivered like-for-like net revenue growth for the group of 2.6% with a much stronger Q2 of 4.7%. Our AOP margin for core record and Mead Johnson was 23.6% in the half. This was higher than our expectations, as headwinds on gross margin were not as significant as anticipated, and we made good progress in offsetting stranded costs through fuel for growth. Including the impact from the essential home divestment at the end of last year, we delivered adjusted EPS of [ 152.1p ] in the first half. We continue to return significant cash to shareholders, returning approximately GBP 3 billion during the period, through both the special and full year dividends and our ongoing share buyback. Today, we've announced another GBP 500 million share buyback and a 5% increase in our interim dividend. Since announcing our strategy 2 years ago, we have now returned GBP 6.4 billion of capital to shareholders. This is around 20% of our market capitalization at the time of announcing our plan. The organizational changes that we've put in this across record are driving improved execution making us a more resilient business able to successfully tackle challenges. This is evident in the strong acceleration in core record in the second quarter with all of our areas and categories improving performance compared to Q1. Emerging markets again delivered strong high single-digit growth led by China and India with Q2 supported by more broad-based growth from our ASEAN and Latin American regions. Europe improved sequentially as we executed better in an environment of continued category and consumer headwinds with Q2 seeing the absence of a seasonal impact. In North America, we returned to growth in Q2 with the continued strong momentum of Lysol as well as the launch of Mucinex 12HR cold and fever in June. Together, core record delivered 4.2% like-for-like net revenue growth in the quarter. I want to come back to innovation as it continues to strengthen our competitive position, enhance our category leadership and support premiumization. There are lots of great examples of recent new launches on this slide, but just to call out a few. That's all active Bardney, our naturally formulated range of disinfection solutions continues to significantly exceed our initial expectations in China as it resonates very well with consumer desires for enhanced sensory experiences. Following that success, we have launched Active Bardney across additional markets in ASEAN and Europe as part of our global expansion. Our latest innovation in Vanish, the new turbo formulation designed for quick wash and tough stains has driven strong results in the market, particularly in Europe, taking advantage back to like-for-like growth in Q2. Across intimate wellness, we continue to expand the Deric intensity platform, which has now been launched across 19 markets. The range is performing well and is a great example of how superior innovation can grow categories while strengthening our premium position. In North America, we've continued to broaden the range of Lysol air sanitizer with seasonal extensions. And in Q2, we began to ship Mucinex 12HR cold and fever, 1 of our most significant innovations in recent years. which I'll come back to a bit later. Execution is not just about in-market performance and innovation. We have faced challenges across our input costs and supply chain resulting from the war in the Middle East. Our experience in navigating these external headwinds positions us well to mitigate the impact. I want to give you some examples of actions we're taking across our supply and procurement functions. We're securing critical supply and building strategic inventory in key materials such as solvents and plastics. We have moved sourcing and manufacturing to markets seeing lesser impacts where alternative raw materials are available, we have amended sourcing and formulations, including increased use of post-consumer recycled plastic. We will continue taking these actions and others to mitigate the ongoing volatility in the commodity environment. So in summary, I'm pleased with the progress that we've made in the first half. Our focused portfolio continues to deliver with growth accelerating in the second quarter and improving across all areas and categories. Our power brands are operating in attractive categories with strong structural drivers of growth. And our innovation pipeline continues to strengthen our position and the quality of the growth. As always, there's more to do. and I will come back to our priorities and the opportunities ahead shortly. Now let me hand over to Shannon to take you through our financial performance.

Thanks, Kris, and good morning, everyone. As you will have seen in this morning's release, in order to ensure our reporting is as clear as possible, we've made some changes in the presentation of our financial results. We're reporting core Reckitt and Mead Johnson together to ensure you have a clear view of our ongoing operating businesses. Our core -- our group numbers also include the Vestas transitional services profit. This is income that's both time-limited and low margin, which is why we believe it makes sense to separate it. For comparison purposes, we're comparing core Reckitt and Mead Johnson versus our previously reported 2025 group numbers. which do include essential home as these were the reported numbers at that time. As always, if you have any questions, please reach out to the Investor Relations team, and they'll be happy to walk you through the numbers. Turning now to the key financials for the group. Core Record and Mead Johnson like-for-like net revenue grew 2.6% in the half, with growth in core record of 2.7% and made Johnson of 2.0%. This reflects a much stronger Q2 with core record up 4.2% and made Johnson growing 7.2%. Core Record and Mead Johnson gross margin was 50 bps lower at 60.5% as the positive impact from the divestment of Essential Home was offset by increased input costs and change to category mix. Core record gross margin was 60.9%, down 110 bps year-on-year. Core Reckitt and Mead Johnson adjusted operating profit margin was 100 basis points lower at 23.6%, ahead of expectations due to a lower impact on gross margin from the Middle East war and the pacing and phasing of our Fuel for Growth program. Adjusted EPS was 9.7% lower at 152.1 in the period, largely driven by the divestment of Essential Home. Looking now at volumes, where Core racket delivered sequential improvement with volumes up 2% in Q2, reflecting momentum across all segments and a more balanced volume and price growth algorithm. We also delivered an additional point of growth from mix. Emerging Markets delivered volumes up 3.2% in Q2 or 4.4%, excluding Russia Hygiene. -- driven by continued strong performance of Dettol in China and India as well as our VMS portfolio in China. Europe volumes improved through the half against a challenging consumer backdrop. In Auto DISH, despite continued elevated promotional intensity, Finish maintained its market leadership position and delivered volume growth in the quarter. In North America, volumes grew sequentially to 4% in Q2, driven by continued strong performance in Lysol and supported by the launch of Mucinex 12-hour cold and fever. Mix contributed 1.4% in the quarter. Turning now to our area overview. Emerging Markets delivered like-for-like net revenue growth of 9.4% in Q2 and 8.5% in the first half. Excluding Russia Hygiene, emerging markets grew 10.3% in the half. Performance was broad-based in Q2, with growth across all regions and categories, excluding Russia hygiene. China delivered its 12th consecutive quarter of double-digit growth. driven by recent innovations, notably Deal active Bottone and across our VMS portfolio. India grew high single digits with broad-based growth across all categories, driven by continued sales force automation, wider distribution reach and strong in-store execution. Africa, ASEAN and Latin America all accelerated with a number of smaller markets up double digits. Finally, in the Middle East, operational and supply chain conditions improved through the quarter, following the initial Seafire contributing to growth across the region. We continue to monitor the situation closely, given the ongoing volatility. Half 1 adjusted operating profit margin increased 150 bps to 21.4%, driven by gross margin expansion, with benefits from category mix and selective pricing alongside our Fuel for Growth program, enabling increased marketing investments. In developed markets, performance improved in Q2. Europe was down 3% for the half, with performance improving sequentially. Like-for-like net revenue was down 1.5% in Q2. All categories delivered sequential improvement in Q2 as we moved out of the season and continued to focus on delivering strong in-store execution in our Household Care business. In Auto Dish, finish improved like-for-like net revenue and volumes, maintaining market leadership as we actively managed our promotional activity. Vantage returned to growth in the quarter, supported by the latest innovation, Vanish Turbo. In intimate wellness, Durex delivered volume growth in Q2 with a modest decline in like-for-like net revenue, reflecting targeted pricing investments. Half 1 adjusted operating margin was 27.7%, down 300 bps year-on-year. This reflected supply chain cost inflation ahead of our offsetting measures in the second half. partially mitigated by Fuel for Growth productivity savings. Turning to North America. Like-for-like net revenue grew 0.8% in the half, up 2.8% in Q2, driven by strong volume growth. Lysol continued to outperform, benefiting from strong consumer demand in adjacent categories, including air sanitizer and laundry sanitizer. Self-care returned to growth in the quarter, supported by initial shipments of Mucinex 12-hour cold and fever, and Household Care remained softer in the quarter. Finished performance reflected weaker category demand in the grocery channel. Half 1 adjusted operating profit margin was 27.0%, down 260 bps year-on-year. Like Europe, higher input costs impacted profitability ahead of mitigating measures in the back half. partially offset by ongoing productivity gains. Moving now to our categories. Growth was broad-based in the half year, with 3 of our 4 categories, delivering like-for-like net revenue growth and all 4 categories improving performance in Q2. Self-care grew 2.4% in the half, driven by continued strength in the nonseasonal business, with strong growth from Gaviscon across ASEAN, Latin America and Europe, alongside the BMS portfolio in China, which continues to benefit from innovation launches. Growth was partially offset by a weaker cough and cold season across Europe and North America, which impacted seasonal OTC brands in Q1. Germ Protection grew strongly at 10.5% in the half, driven by continued impressive performance from both Dettol and Lysol. Growth was supported by innovation-led momentum in emerging markets, where Harpic delivered sequential improvement through the half. Household Care declined 6.6% in the half, reflecting a 250 basis point impact from Russia Hygiene as well as elevated promotional intensity in the European auto dish category. This was partially offset by Vanish returning to growth in Q2. And intimate wellness grew 0.5% in half 1, reflecting strong Direct performance in India and Latin America offsetting the impact of VAT changes in China. Vet delivered broad-based growth across all 3 areas. Through May, 45% of core racket top CMUs were in gain or hold versus 55% at the full year. It's important to remember that this is a binary metric and large CMUs have a material impact. Mucinex U.S. and Durex China are 2 examples of large CMUs that currently sit outside of gain hold territory. We remain focused on driving strong share performance and achieving our target of 60% and flipping these 2 CMUs back into growth would largely close our gap to that target. Now turning to our non-core businesses, starting with Mead Johnson Nutrition. Like-for-like net revenue grew 2% in the half with strong price mix of 5.9% and offsetting volume decline of 3.9% as it lapped elevated inventory build in the prior year. The international performance was led by Latin America. Innovation remained focused on portfolio expansion with new rice-based product launches in both the Philippines and Mexico during the period. Finally, Vestas generated GBP 235 million of net revenue, delivering adjusted operating profit of GBP 12 million from the service agreements we have in place. Moving now to adjusted operating profit. Core Record and Mead Johnson adjusted operating profit was 14.5% lower at constant currency following the divestment of Essential Home in 2025. The 23.6% margin was 100 basis points lower year-on-year, although ahead of our expectations. This reflects a lower gross margin impact from the Middle East war and continued reductions in fixed costs through our Fuel for Growth program. which roughly offset the impact of stranded costs from the sale of Essential Home in the first half of the year. Looking at fuel for growth in a little bit more detail. We've talked about savings coming from 4 areas with strong progress coming from organizational simplification and the rightsizing of investments. Now looking at the other 2. In shared services, we continue to make progress expanding our global operating model. We're deploying shared services across our HR, finance, IT and supply organizations, and now have our 3 global hubs up and running. Our focus is on extending shared capabilities further within these functions around the world as well as across additional functions. We're also accelerating the application of digital and generative AI across the business and believe there's a long runway in this space. to drive both growth and productivity. Kris will come back to this shortly. We remain focused on delivering these efficiencies while managing stranded costs associated with the separation of our non-core businesses. Looking at the numbers. Fixed costs remained broadly in line with half 1 2025 at 20.1% of net revenue, with Fuel for Growth savings broadly offsetting the essential home stranded costs. The program remains on track to deliver our upgraded target of fixed cost below 19% of net revenue by the end of 2027. We -- in terms of the cost to deliver the program, we continue to expect it to be around GBP 1 billion and for this to be around GBP 350 million in 2026. Now turning to EPS. We delivered [ 152.1p ] in the half. The 9.7% decline versus the first half of 2025 was primarily driven by loss of income from the sale of Essential Home and lower operating profit in Core Reckitt and Mead Johnson due to higher input costs in the period. This was partially offset by income from the essential home vehicle a lower share count from the share consolidation alongside the GBP 1.6 billion special dividend and our ongoing share buyback program. It's been another strong period of cash returns. We've paid an GBP 800 million full year dividend, repurchased GBP 600 million of shares through the share buyback program and returned GBP 1.6 billion following the sale of Essential Home. In total, we've returned over GBP 3 billion to shareholders in the period, taking total cash returns to shareholders to over GBP 6 billion since we announced our strategic plan in 2024. We -- this is in line with our capital allocation policy, where we prioritize investment in organic growth and a progressive dividend while maintaining a single A credit rating. Excess cash will be returned to shareholders. Turning to cash flow. In the first half, we generated free cash flow of GBP 419 million, with the majority of the year-over-year impact, reflecting the loss of the operating profit from Essential Home. This has led to cash conversion of 42% as we continue to invest behind our Fuel for Growth program. The half year dividend is increasing 5%, in line with prior year. Our balance sheet remains strong with net debt to EBITDA at 2.5x, in line with our expectations following the GBP 1.6 billion special dividend paid in February of 2026. As we said in March, we expect leverage to start to trend back down through 2027. In line with our commitment to return excess cash to shareholders, we've announced a new GBP 500 million 12-month share buyback program this morning. Finally, turning to our expectations for the remainder of 2026. We're encouraged by our half 1 performance and the momentum across our business. Our guidance of 4% to 5% like-for-like net revenue growth for core record in full year 2026 is unchanged. For the second half, we expect emerging markets to deliver ongoing broad-based growth similar to half 1. In Europe, we expect to return to like-for-like net revenue growth in half 2. with sequential improvement through the half, supported by strong execution and innovation launches as well as planned pricing actions. And in North America, we expect to deliver a stronger half 2 weighted towards Q4 given the challenging comparative in Q3. Across all geographies in our seasonal OTC business, we're planning for incidence levels to be slightly higher than the prior season. Our adjusted operating profit margin guidance remains unchanged and is expected to be in the range of 24.9% and to 25.6% for core Reckitt and Mead Johnson for the full year with a significantly stronger second half. Commodity prices continue to be volatile but we're confident the actions we're taking will mitigate any impacts over the course of the full year. We reiterate our ambition to deliver sustainable long-term EPS growth. acknowledging the headwind from the dilution resulting from the divestment of Essential Home. I'll now hand back to Kris to talk about our strategic priorities.

Thank you, Shannon. I want to spend the remaining time discussing our priorities across each of our areas and the work we're doing to position Record for long-term sustainable and consistent growth. Starting with emerging markets. This is our largest growth opportunity and continues to deliver excellent results. Our priorities across the area are consistent and our new operating model is allowing us to unlock accelerated performance. We are increasing penetration in mature categories. We're developing new categories, and we're scaling the next generation of growth markets. At our event last December, we showcased a lot of what we're doing in these areas. When we think about penetration, this is being delivered by our enhanced execution in markets like India and China through very different consumer engagement strategies, offline led in India and online led in China. The learnings and the best practices from these markets are being taken into other markets today. Self-care is a significant opportunity for us as we expand education and activation around nascent categories in this space. We're seeing results from this today. Self-care grew double digit in emerging markets in the first half, led by Gaviscon and continued strength of our VMS portfolio. And we've been focused on scaling in a number of smaller high opportunity markets to deliver more broad-based growth across the area. With the exception of Minot, all of our regions delivered like-for-like net revenue growth in Q2. In China, we delivered a 12th consecutive quarter of double-digit growth in Q2. This continues to be driven by strong innovation and executional excellence, particularly online. The consistency of our growth in China really demonstrates the breadth and strength of our portfolio in that market. India continues to perform very strongly with consistent growth across each of our categories, driven by our loved and trusted power brands and activated through increasingly smart distribution. ASEAN grew high single digit with Indonesia and Vietnam leading growth in the region. Colombia continues to be a very strong growth market with Latin America overall returning to mid-single-digit growth in Brazil showing an improved performance. In Africa, although small today, we see exciting long-term opportunities and the region was in growth in Q2. Now turning back to China. In July, we opened our new Shanghai Science and Innovation Center, which speaks to our priorities and intentions across China and emerging markets. We're really proud of this facility, our ninth global innovation hub. This investment represents an important milestone in our continued commitment to China and the country's growing role in our global innovation. The center combines consumer insight, innovation and local expertise to help us create the next generation of products for consumers in China and around the world. integrating R&D with real-time consumer feedback through live streaming capabilities will help us improve the quality and relevance of innovation, accelerate speed to market and support stronger consumer preference. This is another example of how we're localizing capabilities in our most important growth markets. and equipping our teams with game-changing digital science. Turning to Europe. The operating environment remains challenging and category growth continues to be subdued. However, -- we're encouraged by the continued improvement we've seen through the half, supported by innovation, premiumization and stronger in-market execution. This drove an improved performance across each of our 4 categories in the area in Q2. In a highly competitive auto dish market, we have taken selective actions to protect our market leadership positions and we've continued to trade consumers up to the premium tiers of finish. Eric's intensity is a great example of innovation driving premiumization with continued strong results from this first to the world product as we launch into new markets and bring extensions into the range. Looking into the second half, we have a strong pipeline of new innovation launches, and we're focused on consistent execution to drive growth. That is our plan. A great example of the way we do this is Gaviscon. The rollout of Gaviscon double action continues across Europe. It is a case study in highlighting what we can deliver when we execute a successful playbook for a power brand with consistency. With local educational materials market by market, all tied to a consistent message we're growing through format extensions, flavor extensions and bringing relief to more consumers every day. Gaviscon has been a consistent strong performer, and this continued in Europe in the first half with like-for-like net revenue growth of 9% and hitting new market share leadership positions across 8 countries. In North America, our priorities are centered on innovation, customer partnerships and operational excellence. Our nonseasonal portfolio continues to perform strongly with Lysol delivering high single-digit growth in the first half. This performance is driven by the equity and trust consumers have for the Lysol brand, 1 of the strongest brands in North America overall. A sharper execution across both our supply chain and with key retail partners, where we're growing in the fastest-growing channels, particularly omnichannel platforms and the continued expansion of the range with successful recent innovations now delivering multiyear growth. As we look to the second half, we will continue to focus on executional excellence across the whole of the North America portfolio. A great example of this will be Mucinex 12-hour cold and fever which we began shipping at the end of Q2. Our teams have done a great job driving engagement around the launch and the response from retailers has been fantastic. We've secured multiple shelf facings including up to 9 in some stores, which is really a strong result for a new launch. We have the assets in place to grow awareness and education around this launch, and we've started shipping into stores already. Mucinex 12-hour cold and fever will be incremental to our upper respiratory portfolio, and we're pleased with the additional distribution points that we've obtained. As such, we're well set for a strong activation ahead of the season. I've spoken a lot about innovation today. I hope many of you were able to join our recent showcase on digital science. At the event, we demonstrated how digital capabilities are being embedded across our R&D function. This is enabling faster innovation cycles, better consumer understanding and more effective product development. We talked about the huge increase in virtual experiments we've undertaken this year. and the number of users already reaping the benefits of our righted AI tool. These capabilities are already driving an increase in pipeline and innovations with enhanced consumer preferences. These are tools embedded in how we operate today, and they're delivering results in the examples we shared across our power brands. Our next event will be on the 19th of November in our North America headquarter in Nutley, New Jersey, where Jerome and team will provide more insights into the drivers of growth in our North America business over the coming years. Now let me close with our outlook. We delivered good growth in the first half with performance accelerating through the second quarter. Our innovation pipeline is strong and is landing well in the markets. Our Fuel for Growth program continues to be well on track to deliver fixed costs below 19% as we exit 2027. And our supply chain and digital capabilities are becoming increasingly powerful enablers of growth. While the external environment remains uncertain, our strategy continues to deliver. We, therefore, remain confident in our outlook and we reiterate our expectation for 2026 to deliver 4% to 5% like-for-like net revenue growth in core record as we continue to build a stronger record and create long-term sustainable value for shareholders. Thank you for listening. Shannon and I will now be happy to take your questions.

[Operator Instructions] I will start with Guillaume. Over to you.

A couple of questions for me, please. So the first 1 is on your like-for-like sales growth guidance for the core. So can I just check, it does include hygiene in Russia, so that 70 to 80 basis points dilution you're likely to get in 2026. And assuming it is the case, I mean it does imply 5% to 7% like-for-like in the back half when comps get a bit tougher. So my question is what underpins your confidence in that meaningful sequential acceleration. Is it because you expect more pricing to land in the back half? Or you do expect some regions, categories to be significantly better?And also, would it be fair to assume that it's going to be relatively back-end loaded. So it's going to be a much stronger Q4 than Q3. . And then my second question on North America, could you maybe talk about what you're seeing on an ex cough and cold basis in the second quarter? Because if I remember well, in Q1, ex Cough and cold North America was up a mid-single-digit territory seems like it slowed quite significantly in Q2. So wondering what's driving this? Is it category, retailers destocking or some market share development?

All right. Thank you. I think I'm going to start with these 2. So the first one, look, on the like-for-like guide, we guided for the year 4% to 5%. As you know, we have encountered some headwinds. We are dealing with those headwinds I would say I'm quite pleased with how we're dealing with those headwinds. And so yes, our guide is 4% to 5%, and it does not assume that the Russia transaction is closed. So I think that's probably the first element of your question. . Why do we believe that's achievable? I think is your second question. Yes, it's a pricing element, but actually, what you're seeing is very balanced growth in our results, and you saw this sharp acceleration in our business and a really good performance. We expect that to continue, right? So really, the anomaly in the year was Q1, very much a function of the weak season. We do have a very strong innovation plot. And I think in my remarks, I just expanded quite a bit on that, and that's giving us a lot of confidence. What's great to see is that meaningful innovation lands really well in the market and consumers are willing to pay a premium for it. even in this environment, even with the headwinds that the consumers face. And so we actually expect to do very well with innovation in the back half as well. So we have the building blocks. We think our business will continue to perform well through the fall. -- and we're holding the guide for that reason. Just in terms of the North America business, we did see some destocking, and it did continue into April as a function of the season. and a little bit of destocking elsewhere. Actually, North America was pretty resilient. It was a good performance in Q2, and the nonseasonal business continued to do well it wasn't quite as high as Q1, but it was very strong. So we feel comfortable with North America going forward, albeit, of course, we have a bigger comp in Q3 and then we expect a bigger Q4 to come through. So yes, in aggregate, I think your last element of the question was, is this going to be somewhat back-weighted in terms of Q4? It is. But at the same time, this acceleration that we've seen in the business, we expect to now be the level that we're going to be performing at I hope that answered your 4 or 5 questions in a question.

So [ Olivier ], and then we'll go to Ed, just a signal out. So over to you, Olivier.

Kris and Shannon, I'll stick to 2 questions. So first is seasonal OTC, you're planning for incidence level to be slightly higher than the previous season. What gives you the basis for this? And then secondly, just going back to the GBP 500 million share buyback is lower than the 1 you've done historically. Considering the lower free cash flow generation should investors expect a lower rate of buyback going forward as the cash generation remains a bit more under pressure?

So maybe I'll respond on OTC and Shannon take the buyback. So on the OTC planning assumption, I actually think this is quite prudent. So you will remember that the last season that we just went through Q4, Q1 taken together was abnormally low and really to a significant extent. And so when we look at historical averages, including pre-COVID, it was a very low season. We don't expect to recover all the way back at least we're not planning for a recovery back -- all the way back to a normal pre-COVID average season, but we are expecting to do slightly better to see slightly higher incidences. That strikes me as prudent. We have no facts to suggest that anything other than that would happen. We still believe that the variations that we've seen are largely a function of seasonal variations, which have always been the case. And of course, we had COVID in sort of the base for a few years, and that has now come out. So I think it's a good planning assumption, and that's why we're taking it. I don't think it's aggressive. I think it's prudent.

Yes. And then on the share buyback program, our share buyback program is really an output of our capital allocation principles, and we go back to those and share those pretty frequently. The magnitude of the program we managed to ensure that we're able to, first and foremost, invest organically behind our business and drive top line growth. And so to your question on should we expect to see the magnitude change over time? Absolutely. So our expectation is that the program is an important piece of how we return value to shareholders. but that it will change over time in line with our capital allocation principles. .

Ed, you are up next.

Just on Emerging Markets. Can you talk to any kind of disfication you saw from I guess, events in the Gulf and local suppliers or local competitors, which would have benefited your results in Q2, whether that's a factor as what I consider for the rest of the year? And then also, there's a comment around gross margins in emerging markets, which I remember this time last year, they were pretty strong. It sounds like they improved again. And so can you just talk to that and the opportunity around the gross margins?

Maybe I'll take the first. So the impact in the Middle East has actually been somewhat significant for us. We have a plant in Bahrain that we actually had closed for the safety of our employees. And we have since reopened that, but it continues to be impacted certain days when there is a conflict, and there is a danger. We closed the plant back down. We also have more challenges getting inputs into the region. So that impacts production volumes. So we have actually seen a bit of a headwind to our Middle East business, as you would expect from this disruption it's manageable. And as you can see, we're still able to report very good results in emerging markets, but it's something that we have to continue to actively manage. So I wouldn't say that we have benefited from this in any disproportionate way. I don't think we have taken a step forward competitively in the region for this reason. So -- but we continue to manage it. And hopefully, we can get back to business as usual pretty quickly.

And then on gross margins in emerging markets, we've been seeing over the past few years, and we talked about this on the emerging markets focus on event that differential between gross margins in emerging markets versus our developed markets. narrowing. Our expectation is that we'll continue to see that narrow over time. It's largely a function of the category mix and where we're driving growth in emerging markets. Additionally, we called out the fact that you're also seeing the fact that executionally, we can price more quickly in emerging markets than we can in developed markets. And so we had the benefit of being able to take quick action around pricing in emerging markets as we saw the headwinds coming in from the crisis in the Middle East.

Jeremy, and then we'll go to David. So over to you, Jeremy.

Thanks for ask the questions. So first one, perhaps you could talk about sort of auto Dish. That's been a difficult category, both in Europe and in North America. So I'd be interested to hear why the category has become so kind of challenging and what you think as a category, you can do to get your business back into growth within that. And then secondly, perhaps you could talk a little bit more on pricing, maybe where you've implemented price rises already where you think you have to put them in? And if there's anything a bit about the kind of the magnitude of those price increases that you would need to see?

Great. So let me take them in turn. So Auto Dish, look, mentally, it's important to remember, this is a very attractive category. It's quite expandable. You can innovate. You can premiumize, and we've seen that over the years. There is a tremendous runway for growth in emerging markets. for Auto DISH, and we are seeing that come through, and we're very excited about the potential of that business over time. In Europe, in particular, it has been tough recently. Why is that? It's primarily because it's become very promo heavy beyond levels that we normally see beyond levels that we actually believe are rational. In Auto Dish, the game that we want to play, the strategy that we have is to expand the category, right, to premiumize and to expand the category. Whenever we as an industry forget that strategy, we get into a promotional cycle and especially during times like this, when consumers are value-seeking in Europe and retailers are looking to provide value, that can get into a bit of a loop. We are trying to manage this very carefully. We're trying to make rational decisions. We're trying to invest in things that make sense, but not promote at levels that don't make sense from a P&L standpoint, from a category standpoint. And I think that's the cycle you're seeing right now. I am very hopeful that, that will change. But for the time being, I expect it to continue to be fairly tough in Europe. We are holding a leadership and we will continue to defend market leadership. But again, we won't respond to every very deep promotional price point that we see in the marketplace. It just doesn't make sense. And as market leaders, we really shouldn't. So I would expect it to get better, but I don't expect it to get better soon. On pricing, we have been able to already execute pricing. Shannon just talked about pricing in emerging markets. That has gone well. There may be a little bit more pricing we have to take in certain markets in emerging markets. We will do so. I'm not worried about our ability to do that. In developed markets, we will also be taking some pricing. It's moderate in magnitude. It varies across markets, but we're talking about sort of single-digit price increases in some places. And largely, we have the pricing power to do that. And so we're going through that, and we're trying to be smart about it, and I expect that to be a building block in the second half.

So working across, I think we're up to David next, and then we'll go to Warren. So David.

So out to our -- just a bit of an update on China [ InterWellness ] in a bit more detail about the current trends and how you're adapting to the regulation changes. And I guess you talked about a lot of supply, some smaller competitors and pricing pressure. Is that still the situation? Or is that starting to ease and work its way through now as you go into the second half? And the second question, just on the margin in the first half. Obviously, back end of April, you were guiding to 200 basis points down much, much better than that, which is great. But I just wonder if you can talk us through what happened in May, June that saw that improvement in performance? And is there anything to do with timing in that? Is there something we should be aware of that certain things are being pushed back and it all into the second half to just smooth that a little bit more for the full year.

Okay. I'll start on China. Look, I just wanted to say the first thing is that we've now had 12 quarters of double-digit growth in China. I mean this is a remarkable business. It's a genuine success story. And what's great about it is that it's broad-based, right? So this is not something that hints on 1 brand or 1 category. We have a multitude of leading brands, a multitude of brands that are growing very fast. That all is our largest business in China and doing really well. VMS is very large, too and doing really well. You're right that after years of very strong performance from Durex, this first half was soft for Durex, but we know why there was the VAT increase. There was the content restrictions that came in, and there was some fairly deep promo from some of our competitors, again, where we chose not to match all the way. I feel good about that. We're very optimistic about the outlook for Durex. We expect that to recover. We're growing very fast on the platform that matters most in China, and we're doing really well with social commerce. So -- the content restrictions turned out to be something that we could navigate. That's what we said earlier in the year, and our team has been able to do that so we can effectively communicate. We just have to change the messaging change the emphasis a bit, change the content. But we can do that very quickly with our content studios. So we have been able to do that. So that's no longer a headwind, and we are growing on the most successful platform with Durex. We also have good innovation coming behind Durex. So I think this was a bit of a temporary set of events that caused the business to be a bit soft. But if you zoom out, it was very strong for years before. We fully expect it to be strong again.

Great. Then on margins. In Q2, we saw a couple of different dynamics that allowed us to deliver a bit stronger operating margin than what we discussed at the end of we're really pleased with the performance. I think the things worth noting are, of course, as always, and we say this a lot, we always strive to provide guidance that's prudent guidance. What we saw play out over Q2 were a few dynamics. One is the fact that the headwinds we saw come through in the Middle East or from the Middle East in Q2 were a little bit less than what we had expected when we were initially guiding at the end of Q1. At the same time, we also saw just some pacing and phasing of Fuel for Growth savings that moved into the front half that we weren't fully expecting to land in the front half. And so that drove that 100 bps over delivery versus what we've set out as expectations. When you think about operating margins for the full year, we remain very squarely in the place of believing that we'll deliver operating margin between that 24.9% and that 25.6% bookend that we've been discussing for the past couple of quarters. As you think about what that delivery looks like, again, fuel for growth, it's pacing and phasing across haves, but we expect to largely offset those stranded costs that are coming in from the essential home divestiture. When you think about Middle East, it's obviously a volatile situation, but we remain committed to mitigating the headwinds that we see from the Middle East over the course of the second half. And so that really gets us into that same place between those bookings. We also really want to maintain our flexibility to fuel our BEI investment to the extent we have that opportunity to do so and see ideas that we think are worth investing behind.

Okay. Let's move on to Warren and then one after Warren. So Warren, over to you.

So 2 for me as well. The first one, just on destocking in the U.S. Can you maybe give us a bit more detail? It looks like it's VMS, how much impact was there in the quarter? And then looking into H2, Kris, do you think there's any risk that U.S. retailers look to more destocking to conserve cash and a more cautious U.S. consumer, where Arista becomes a more pervasive issue in the U.S.? Because I'm looking into the second half in the U.S., it looks like a lot of moving pieces on kind of comps and other stuff. So how should we think about the cadence of the U.S. in the back half, Q3 versus Q4? And then secondly, just on Europe, with emerging market growth expected to be similar in H2 versus H1, obviously, Europe then becomes a bigger delta to deliver your uplift. So what's driving the confidence on this European recovery given it doesn't sound like Auto Dish will get much better. So is it category? Is it innovation? How are you fitting on that?