I am encouraged by our progress to date and have four key messages for you today:
First, we have had a solid first half of the year, despite a strong comparator and a slower Q2, with a very strong 2 year revenue stack of over 13%, inclusive of IFCN China.
Second, we continue to make good progress in building a better house in a great neighbourhood
Third, we are addressing near-term cost pressures, while actively managing our portfolio.
And fourth, we remain confident in meeting our medium-term targets of mid-single digit revenue growth, and mid 20s margins by the mid 2020s.
As usual, our agenda will comprise of three parts. I will give an overview of the half year, Jeff will go to the financial details and then I will provide a strategic update.
In the first half, like-for-like revenue excluding IFCN China, was up 3.7% and our 2 year stack growth is up nearly 18%, building on the very strong performance last year.
Including IFCN China, our like-for-like revenue grew by 1.5%, reflecting more challenging trading in China in Q2, the continued rebasing of our disinfectant business, and a record weak cold and flu season.
As anticipated, our margin, EPS and free cash flow are down year-on-year. This is driven largely by our step up in investment, which is funded by productivity; increased commodity inflation, the mix impact of lower OTC revenue, and the performance in IFCN China.
Given the moving parts in understanding the current performance of the business, it is helpful to split our portfolio in two. Separating out the brands that have been more impacted by COVID - namely Lysol, Dettol, and our key cold and flu brands, from the rest of the portfolio. There is of course some impact of COVID in the remaining 70 percent - both positive and negative - but the variance in brand performance is typical and manageable as a portfolio. This part of the portfolio which makes up 70% of our business is in effect performing consistent with our medium term objectives.
The remaining 30% is down slightly in H1 over lapping last year's particularly strong performance.
Let me take you through that portion of the portfolio in a little more detail starting with the disinfection brands.
First, Lysol and Dettol together make up 25% of the Group's revenue. As we have said before, we expect to see these brands normalising above 2019 levels, but they will likely reduce from the 2020 peak. Every market has different characteristics, either with regard to current behaviours, germ sensitivity, as well as pandemic response. It is hard to extrapolate from one market to another, in terms of level or timing. For Dettol, demand in markets, such as China, reflects more advanced rebasing, while demand in other markets reflect the sensitivity with new variants emerging. Both brands however are significantly up versus 2019 on a two-year basis, Lysol by over 100%, and Dettol by over 40%.
Overall, performance so far in 2021 is largely consistent with our expectations. Growth is slowing as expected after an extraordinary year, but rebased upwards from pre-pandemic levels. During the first half, we've seen growth in Lysol (and it also grew in Q2) and a decline in Dettol. Our challenge in Q2 came from a somewhat weaker than expected performance in North America, where a more accelerated vaccination program, coupled with government guidelines, led to some moderation in demand and earlier pipe fill. Our Lysol Disinfectant Spray (LDS) business continues to be strong, but for us, the wipes category, which has grown significantly through the pandemic, particularly reflects this earlier rebasing.
In terms of equity metrics, both brands are stronger today than they were pre-pandemic. Of particular note has been the further strengthening of these brands with their core users, and how even occasional users have come to the brand in times of need. Our brands frequently define their categories and are therefore well placed to benefit from new opportunities.
Over the past year, we have already entered nearly 70 new markets while establishing the GBS business. Our performance from market expansion is on track to expectations. Our Global Business Solutions business, which is now a year old, is off to a strong start and it has built the marquee partners, distribution and demand creation programs consistent with its long-term potential. The near-term volumes from this business will reflect the strength of sectors such as travel, offices and small and medium enterprises which are in various stages of normalisation.
And at the same time, our equity has also allowed us to broaden the shoulders of the brands, addressing new usage occasions which greater germ sensitivity has uncovered, particularly for
our core base of heavy users with innovations like laundry sanitizer, Dettol Tru Clean and Lysol Pet.
As we look at current sales rates we continue to expect that the rebasing of disinfectants will be gradual, particularly in light of new variants, vaccination levels, the cold and flu season and government guidelines. We continue to track near-term underlying demand drivers carefully, and our management teams remain flexible to respond to near-term shifts.
The other segment where COVID has had a material impact is in our cold and flu OTC brands. Despite much improved execution, brands such as Mucinex, Lemsip and Strepsils were down significantly as a result of the historically weak flu season last winter. However, we are now on an upswing with Mucinex, with encouraging POS trends, reinforced by viruses like RSV, and the brand has now returned to growth versus 2019. And the chart on the right shows year on year performance by US state, where the growth in Mucinex in the states where masks are not mandatory, is clear.
We're also actively monitoring trends in Australia. A lot has been written about the public data on flu incidences, which suggest unseasonably low numbers. Our point of sale data by contrast suggests that some consumer incidences are potentially not being captured, perhaps because consumers are choosing self-care versus seeking help. Looking at POS trends in Australia, transactions have until recently been mirroring the flu season in 2019. However, recent lockdowns in certain regions, such as Victoria, have resulted in POS transactions slowing, demonstrating the impact of government guidelines.
Therefore, the key message is this, for cold and flu brands, we are encouraged by the point of sale trends we are seeing. However, it is early days and lockdowns, social distancing, and government guidelines will all influence consumer demand in the balance of the year. We see these dynamics for OTC as short term and transient. Our long-term outlook for the category is unchanged.
Finally, on our in-market competitiveness. We reported this morning that 60% of our revenue from our core category markets or CMUs were in markets where we were gaining or holding share on a two year basis. But let me show you also how our comparisons have trended over time.
As you know, we made strong gains throughout 2020, shown here in the 18 month number, which excludes IFCN China. As we were lapping the COVID pantry loading, early in the year, that measure declined, but you can see good momentum here, and in the month of May, we
have returned to previous levels, with further strengthening evident in June, as our health business recovers.
Overall, our business is gaining share. We expect this picture to strengthen as the cold and flu trends improve. Our focus for share improvement is in the OTC area of the health business, some pockets in the Nutrition business (example our Philippines business for infant formula and Airborne, which is reversing some of its large gains last year) and some important competitive battles in hygiene. We move into H2 comfortable with our competitive position with plans in place.
As I have said, we are making good progress in building Reckitt into a better house and rejuvenating sustainable growth and I will detail our progress here shortly.
In the meantime, Jeff, over to you for the financials.
Jeff Carr, Group CFO
Thank you Laxman and good morning ladies and gentlemen.
Like for like Net Revenue for the group was plus 1.5% for the half and down 1% for the second quarter. Revenues were significantly impacted by weakening sales of IFCN China following the strategic review announcement and excluding IFCN China like for like sales growth was 3.7% in the half and 2.2% for the second quarter.
Since we are expecting the sale of IFCN China to complete in the second half of 2021, we will largely refer to performance excluding IFCN China.
The second quarter last year included a revenue recognition adjustment as we aligned to best accounting practice, this creates a tailwind in the current quarter of 2.8%.
In the second quarter we are facing tough comparative numbers in disinfection and for example in Lysol, we are seeing growth rates moderate from the peak in the first quarter. Having said that, Lysol was up double digits in the second quarter and our Hygiene business in total, was up just under 8%.
Additionally, in the first half we have seen a record weak cold and flu season, however our current point of sales trends are is encouraging as we look to the second half.
Overall, we have made great progress from 2019, our Group two-year stack growth for the half is 17.6% and 15.1% in the quarter.
Volumes were up 0.3% in the half and the impact of price and mix was 3.4%, largely resulting from lower trade activity in Hygiene in the first quarter and pricing actions to offset dairy inflation in IFCN.
Our adjusted operating profit margin in the first half was 21.6%, lower than last year by 290 basis points, largely as a result of lower gross margins.
At 57.8%, gross margins were down 310 basis points versus last year, we'll show a detailed margin bridge later, but in summary there were 3 main factors impacting gross margin. Firstly as anticipated our investments were weighted more heavily in the second half of 2020 and these rolled forward into 2021, the investments are largely funded by strong productivity savings which were spread across all lines of the P&L but the majority of which impacted cost of goods. Second, as expected, lower cold and flu sales from brands such as Mucinex had an adverse gross margin mix impact in the half, and finally, and not foreseen at the start of the year, we, like our peers are seeing significant commodity price inflation.
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Reckitt Benckiser Group plc published this content on 29 July 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 29 July 2021 09:46:09 UTC.