Reckitt Benckiser share price: Half-year LFL net revenue rises 5%

Reckitt Benckiser (LON:RB) has updated investors on its half-year performance.

**Highlights from the company statement:**
Half year (“HY”) 2016
Total HY net revenue was £4,569m, a LFL increase of +5% (+4% total at constant rates due to the impact of net M&A).
ENA net revenue grew at +3% on a LFL basis driven by broad-based growth across Western Europe and North America. Russia was weak due to planned retailer destocking in Q1 and a slowdown in market growth. DvM grew at +9% on a LFL basis against a backdrop of continued mixed market conditions. Overall trends remain similar – positive in India, China and North Africa, but mixed in LATAM, Middle East and other parts of Africa.

From a category perspective, growth has been broad-based across Health, Hygiene and Home. Health was strong at +8% LFL, with good growth across our health powerbrand portfolio, behind innovations such as Durex Invisible, the sell in of Scholl Wet & Dry Express Pedi, and Mucinex Fast Max Day/Night gelcaps. Our VMS brands had an improved performance with strong growth from Airborne, Move Free, and Digestive Advantage in Q2. Hygiene grew at +5% LFL led by Dettol and Harpic in our emerging markets, and Finish across both developed and emerging markets. Home grew +1% LFL with growth improving in Air Wick.
HY gross margin increased by an exceptional +240bps to 60.0%. Input price tailwinds continued to be an important driver. The spot prices for a number of inputs increased during HY – however, the first half has benefited from the lagging effect of forward buying and the inventory cycle. This lagging protection will largely end during H2. We also saw beneficial mix from growth in consumer health brands, savings from cost optimisation programmes (“Project Fuel”) and supply related efficiencies from Project Supercharge.
We remain committed to investing in the long-term growth of our brands and in HY 2016 we invested 14.8% of our net revenue in brand equity investment (“BEI”) which is +40bps versus the prior year (actual rates) and an absolute increase of £39m (constant) and our highest ever level of investment.
Overhead costs remained relatively stable in HY at +20bps. Project Supercharge continued to deliver additional savings and efficiencies, predominantly within gross margin, as we executed a number of supply and factory related initiatives. We remain on track to achieve the upper end of the £100m-£150m estimated annualised savings by the end of 2017.

Operating profit was £762m, -19% versus HY 2015 (-22% constant). The reported performance was impacted by exceptional charges of £319m for HY, mainly relating to the HS issue. These charges relate to our best estimate of currently quantifiable costs associated with the HS issue, including an estimate of compensation expected to be paid to RB related, potential Category I&II victims from rounds 1-3 of the South Korean government’s HS application process. Round 4 has only recently commenced and there are currently no published number of applicants. We have noted potential liabilities arising from round 4 Category I&II victims and other potential issues as a contingent liability. A more detailed description of the HS issue, applicants from each round and categorisation criteria used by the South Korean government, is set out on pages 9-10 of this report. On an adjusted basis, operating profit was up +13% (+11% constant) to £1,081m. The adjusted operating margin increased +180bps to 23.7%, driven primarily by strong gross margin expansion.
Net finance expense was £11m (HY 2015: £18m). The underlying tax rate was 23% (HY 2015: 23%). The effective tax rate is 30% (HY 2015: 23%), the difference driven by the exceptional charge.
Net income as reported was £528m, a decrease of 26% versus HY 2015 (-29% constant), impacted by exceptional items. On an adjusted basis, net income grew +14% at actual exchange rates, and rose +12% on a constant basis. Diluted earnings per share of 73.4 pence -25% lower on a reported basis; on an adjusted basis, +16% to 114.7 pence.

Second quarter (“Q2”) 2016
Total Q2 net revenue was £2,266m, a LFL increase of +4% (+3% total at constant rates).
ENA (+2% LFL) saw a steady performance from North America (+3% LFL) and a slower quarter from the rest of ENA (+1% LFL). Western Europe had broad-based growth across key markets, although at a slower rate compared with 2015. This was primarily due to a combination of slightly slower market growth, and the impact of lower Scholl sales. Scholl revenue growth across many markets in Europe was impacted by both a high comparative (including a number of launches), and lower than expected consumer uptake of our recently launched “Wet & Dry” innovation. Russia / CIS revenue declined mainly due to a marked slowdown in market growth.
DvM had a strong performance, with India, China and Turkey significant growth contributors. LATAM also had a good quarter in challenging macro and competitive conditions. Middle East, particularly Saudi Arabia, continues to be soft, as do parts of Africa. In the quarter, DvM grew by +8% on an LFL basis, although excluding the impact of the HS issue, growth would have been double digit on a LFL basis.
On a category basis our overall Health growth slowed to +5% LFL in the quarter. We continued to see strong, broad-based growth across most of our powerbrands, with the exception of the Scholl / Amopé franchise. As noted above, this was due to a combination of a high comparative base and lower than expected consumer uptake of our recent innovation. Hygiene had a very strong quarter at +7% LFL growth, also with broad-based growth across our major powerbrands of Dettol, Finish, Lysol and Harpic. Our pest franchise also had a good quarter, aided by the impact of the Zika virus in Brazil. Home and Portfolio brands experienced a weaker quarter. Vanish and a number of local laundry detergent brands are a significant part of the South Korean portfolio.
Commenting on these results, Rakesh Kapoor, Chief Executive Officer, said:
“We have delivered a strong, HY performance with balanced and broad based growth across both markets, and categories, and delivered further margin expansion. These results reflect our continued focus on our power markets, power brands and our virtuous earnings model. Growth was underpinned by a combination of innovations, such as Dettol Gold and Durex Invisible, and penetration building initiatives, particularly in emerging markets.

Our strategic focus on structurally attractive health and hygiene categories and exciting innovation pipeline positions us well for another year of growth and margin expansion, despite the uncertain macro environment and softening consumer demand. Our global footprint means we expect no tangible impact from uncertainty over Brexit. We therefore reaffirm our full year LFL net revenue target which, given the impact of the HS issue, is at the lower end of the +4-5%. We are also targeting moderate adjusted operating margin expansion in H2, following the excellent +180bps achieved in H1.’
As of 07:20 BST, Friday, 29 July, Reckitt Benckiser Group Plc share price is 7,438.00p.