Reckitt Benckiser Group plc

Ladies and gentlemen, thank you for standing by and welcome to the RB first quarter trading update conference call. At this time all participants are in a listen only mode. After the speaker presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 on your telephone. I must also advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Head of Investor Relations, Mr. John Dawson. Please go ahead.

Thank you Sabina and good morning everyone. Welcome to Harvey's Q1 Trading Update. With me here today are Lakshman, our CEO, and Jeff, our CFO. As a reminder, as the operator has already said, this call will be recorded and available for replay later on today. As usual, we'll go through our normal prepared remarks and then go straight to questions and answers. So with that, let me pass you over to Lakshman for his opening remarks.

Thank you John. Good morning everybody and welcome to our first quarter trading update conference call. We hope all of you are safe and healthy. We meet at an unprecedented time. It would be fair to say that none of us have ever lived through such extraordinary circumstances. Our thoughts and gratitude are with the doctors, nurses and healthcare workers and the innumerable others around the world who are fighting at the front line to make a difference. We are grateful to our customers, suppliers and partners who are doing everything feasible to serve consumers and the communities. I am grateful for the extraordinary work being done by my colleagues across RB worldwide while respecting everything that is needed to stay safe and well. It is indeed a privilege to lead them. I hope you all had a chance to review our first quarter statement. I have three messages for you this morning. First, we have made an encouraging start on our journey to rejuvenate sustainable growth at RB. We are managing the unprecedented environment presented by COVID-19 as well as possible, with a strong focus on the welfare of our teams and working closely with our partners and customers. And finally, while we have started the year well, we face an uncertain outlook. At this early stage of the year, we expect to perform better than our early expectations, but would caution against being too positive, as there are many uncertainties ahead. Let me first start with where I left off over two months ago in our full year results for 2019. In February, we set out our plans to rejuvenate sustainable growth at R&B. Our objective is to rebuild a strong growth and earnings model and outperform with mid-single digit organic revenue growth, mid-20s margins, and 7% to 9% EPS growth. At that time, we outlined in detail how we would achieve this with a temporary margin reduction and an enhanced multi-year productivity program. Taken together, these allow us to invest around two billion pounds in principally growth-led initiatives in three phases that will initially establish consistent performance, then build revenue momentum. and finally achieve sustained outperformance. From a strategic point of view, we have started our journey well with a strong focus on executing our plan during this transformational period. One that lays the foundations for our success in the future. As we laid out in February, we are a good house in a great neighborhood. There are four trends that are shaping our business, which are brought into even greater focus with what is happening around us today. First, urbanization and global warming continue to drive hygiene as the foundation of health. Pressures on state-funded healthcare are driving demand for self-care to release pressure on health systems. Sexual health and well-being are big societal issues that are growing demand for effective protection and related products. And an aging and growing population is driving demand for infant and adult nutrition. At the same time, technology and e-commerce are changing the way consumers know what and how to buy and where to look for information and for advice. With this as background, we articulated our purpose. Why we at RB exist is to protect, heal, and nurture in the relentless pursuit of a cleaner and healthier world. We recognized we would organize the business into three global business units, hygiene, health, and nutrition, while China and our e-commerce business and digital RB, each with specific playbooks and focus. I am pleased with the progress during this transformational period, investing in our people, brands, and operations, improving delivery performance, and increasing productivity. While there may be changes to the pace and sequence of some of our investments, as we focus on doing what is right to serve the market's needs at this time, our destination is clear. We are showing encouraging progress to us becoming a great house in a great neighborhood. We remain on track to have our new organization largely in place by the 1st of July and to deliver the expected benefits of our strategy in the medium term, sustained mid single-digit organic revenue growth and mid 20s margins by 2025. Moving on to COVID-19, Our newly announced compass, purpose and fight have never been more relevant in these unprecedented times. Our response to COVID-19 is guided by our purpose to protect, heal and nurture in our relentless pursuit of a cleaner and healthier world. A purpose that has been embraced by the organization at all levels. Despite the significant pressures presented by COVID-19, our global teams have worked around the clock to ensure continuity of supply while prioritizing the safety of our employees, partners, customers, and the communities where we live and work. This is a uniquely challenging and uncertain time. The exceptional demand has resulted in some customers and consumers facing shortages of some of our products. RB has responded with its typical can-do attitude, ramping up production in a few cases to multiples of what we produced last year around the world. Streamlining our SKUs and working with customers and suppliers to overcome significant barriers while incurring additional costs and investing with agility in the supply chain. I'm incredibly grateful to all our employees and also to our partners and customers for their patience as we work tirelessly to protect the front line and increasing supply to meet the unprecedented demand. Our strong brand portfolio provides RV with a unique position to help build healthier communities with a portfolio that includes not only leading brands such as Getol and Lysol, which break the chain of infection, but also Mucinex, Lemsip, Durex, Nurofen, Strepsils, as well as our nutrition and our vitamins, minerals, and supplements portfolio. As our company embraced our purpose, we took up our commitment around our fight, our fight for access. We launched our RB Fight for Access Fund in March. Through this, We will invest the equivalent of 1% per annum of our adjusted operating profit in a wide range of initiatives, working with partner organizations to help frontline health workers promote behavior change and help communities. Our fund has already been mobilized to meet the urgent needs, including a £6 million investment to the frontline health workers and new mothers in Wuhan, China. a $2 million commitment in the USA to support the Center for Disease Control Foundation, the donation of Dettol, Lysol, and Harpic products in India, and the partnership in Africa to distribute products to 22 countries, and with UNAIDS to distribute products to HIV-positive patients. On behavior change, the Dettol India Hand Wash Challenge with TikTok has reached nearly 88 billion views to date. And the COVID-19 myth busting website has reached over 1 million views. These compliment the many local initiatives that have led to significant community involvement and support for health services around the world, like the National Health Service in the UK. We have made an additional commitment of over 8 million pounds of COVID-19 cost savings through the R&D Fight for Access funds in support of local initiatives and communities. Turning briefly to our performance in the first quarter. Clearly, we have started the year strongly with like for like growth up 13% and consistent growth from both hygiene and health. We have also seen improving market share trends and delivered strong growth in e-commerce where we have benefited from our technology platforms and stronger customer relationships. as well as our focus on execution and customer service improvements. Looking at our performance in more detail, the impact of COVID-19 has been different in each market, reflecting our product mix and the timing of government actions, particularly around movement restrictions. The brands most positively affected by COVID-19 are Dettol and Lysol, where high penetration and frequency of use has led to exceptional and sustained growth. Given their exposure, this has mainly benefited North America, parts of Europe, and some of our developing markets, including China, where Dettol has a strong presence, and India. Higher penetration has also benefited several of our vitamins, minerals, and supplements products, where we have seen exceptional growth across North America. We have also seen strong growth from our OTC portfolio, as customer service has improved. Although the proportion that is pantry loading is probably higher, and we expect that to unwind over time. Several brands, including Durex, saw overall demand fall. Although for Durex, we saw a strong shift to e-commerce as a result of purchasing behavior and demand changes under lockdown conditions. Overall, as expected, our IFC and business declined 2% on a like for like basis in the quarter. As expected, developing market revenue declined, particularly in March, as the business lapped a stronger Q1 in 2019 when the business progressively improved product availability after the manufacturing disruption in H2 2018. And as we are going through a planned super premium product transition in China. Trade through Hong Kong was also weaker than a year ago, reflecting the ongoing unrest together with significant COVID-19 effects on cross-border traffic. In China, the restocking in 2019 made for a tough comparator, but adjusting to this, ISCN would have delivered encouraging growth in the mainland, consistent with positive consumer optics. North American growth was led by A particularly strong barge as consumers dealt with the impact of COVID-19, including some pantry loading, and in Lysol, some penetration increase. In IFCN, growth was strong for both Enfamil and Efamigen, although we do expect some pantry unloading in this category. Finally, looking at e-commerce, we saw exceptional growth with our direct sales to consumers and platforms up over 50%, and our total growth e-commerce sales now over 10% for the first time in Q1. Turning to our outlook for the balance of the year. We have seen strong consumer demand, particularly in March and April, but the split between defensive buying and high levels of underlying consumption is unclear. At this stage, it is uncertain how quickly this will change in the months ahead. Improved penetration and usage particularly for products like Dettol and Lysol may well sustain, although we will likely see some unwinding of pantry load as we work our way through the crisis. The near-term operational challenges to meet additional demand and handle lockdown conditions with the associated costs are also likely to continue for some time. As a result, after an encouraging start, we now expect our performance to be better than originally expected, However, the outlook for the balance of 2020 remains uncertain, with significant COVID-19 challenges across our markets. We expect to incur higher operating costs, particularly in our supply chain, as we keep our people safe, mitigate disruptions, and serve the needs of consumers. We continue to make progress on the implementation of our new strategy. We're investing in capacity to meet growing demand. We're also investing to capitalize on new growth opportunities as they emerge. However, we will need to adapt and rephrase some of our initiatives into the second half and we'll be in a better position at mid-year to refine expectations and update our transformation plans. Looking to the medium term, our outlook for sustained mid-single-digit organic revenue growth and mid-20s margin by 2025 remains unchanged. Thank you for your attention. We remain committed to serving our consumers and communities as well as we possibly can during these unprecedented times. I would like to thank once again our people, our customers, our suppliers and our partners who are working tirelessly to make that happen and thank all those at the front line who are keeping us safe and confident of a successful future. And with that, I'll hand you back to John and to open the call up for any questions. Thank you.

Thanks Laxman. We've got some people in the queue already. I know the operator will reiterate her instructions to press star 1 if you wish to ask a question. But for the time being, why don't we go to Salim Panouti for the first question.

Over to you Salim.

Morning Salim.

I think I managed to interrupt Celine's question. Apologies, Celine. Why don't we go to Richard Taylor, and Celine, if you wish to read that, we'll get you back in the queue. Richard, would you like to ask a question?

The growth number, obviously 13.3% are fantastic starts the year, but I just want to understand how we should think about it. So if we assume a kind of normalized growth number for Reckitt is around four, that means that we've got 9% extra growth, I suppose. So how should we think about that in terms of Thank you very much. I want to also ask about guidance I totally understand you want to keep expectations in check at this stage and there are lots and lots of uncertainties but if we start the year off with a 13 and then assume zero in Q2 and four in the second half on easy comps that easily makes a five for the full year and then of course on margins I know we've got the 350 basis points reset but clearly there's a big input cost tailwind A&P's tough to spend right now and then there might also be some operating leverage so I suppose it would be really helpful if you could call out some of the offsets on the margins as well please.

Well thank you Richard. Let me first start with the I'll just take you on a tour of the business if I could right. If I go to the hygiene categories and I go to brands like Dettol and Lysol, what you see there is you do see increased penetration and increased usage. And that's happening at home, but it's also happening on the go. If you go to a category like infant formula, we did see a tick up in sales, particularly in North America, and that is clearly pantry loading. If you go to the OTC part of the business where we have seen strong growth, we expect that that is also impacted by pantry loading and we expect a lot of that to unwind as we go through the next set of months or periods. If you go to the vitamins, minerals and supplements space, it's a bit of a mixed story. We actually have some where you do see increased penetration and usage and some where in fact you will see It unwind over time. So pretty much across the board what you see is you see different dynamics play out. And I think it's a little hard to predict exactly how much of the penetration and frequency increases particularly the hygiene categories will sustain. But what is clear is that what we are seeing from consumers and what we are seeing from customers is a greater desire to engage on this because they too are feeling but over time we will see a step up in both penetration and frequency in the case of hygiene. On your question about customers, we have really prioritized customers and engaged with customers in a very substantial way over the last eight months or so. We're in constant interaction with them and what you are seeing is systematically we are seeing progress In terms of what we are doing with regard to customer service fill rates and our relationships with them, we've had to be incredibly agile to respond to the changes in the outside world. It has meant cutting skews. It has meant partnering with them to ensure that the assortments we have reflect what they believe demand could be. It is about more tight integration of these customers into our supply chains which is beginning to happen and has happened Thank you very much. In terms of engagement, we are seeing engagement with regard to new spaces and new places. I think you saw our announcement last week with the Hilton Hotels chain, which was really around the brand Lysol, and the idea that Lysol would in fact be a partner with Hilton in defining clean spaces inside hotels. So we are seeing new engagement as well that is coming. So back to your question about the overall numbers though. It is really hard to predict what will happen. I mean, if you have lockdowns in some markets, you have a shutdown in supply in the case of others, you know, just a few weeks can change the picture quite a bit, which is why we are, all we can say at this point in terms of top line is we can say that, you know, we're certainly going to perform better than what we said in February, which is, you know, we'll grow more than we did last year. We think that's going to be more positive than that. But it's hard for us to give you a real firm guidance at this point in time. To your question on margins, Let me first talk about some of the tailwinds. There's no question you see commodity cost tailwinds in certain parts of our business. You also see volume leverage. In the case of brand equity investments, we have actually invested the brand equity investments that we plan to make. and some of it is really about the messaging also. What we have done is we have shifted some of the messaging to drive behavior change. I think I mentioned this TikTok campaign which is at 88 billion views. We're now scaling this across various markets. We've partnered with various health authorities to drive public service messaging around behavior change. So on the A and B side, or the BEI side as we call it, plus digital, where we've actually spent more, and I think it reflects a bit in the kind of growth rates you see on e-commerce, where we have had over 50% growth in e-commerce. So BEI, I believe that we will continue to spend the way we had planned to spend. But we do see operating leverage, as you said. So I think it's a little bit of a, you know, there are pluses and there are minuses. The thing about the minuses are the costs. If I take a look at some of the logistics costs that we have incurred, let me give you a couple of examples that actually give you a sense of what has happened. If you look at social distancing and how we've had to implement them in some factories where we provide transportation to workers, it has meant we've had to double or even triple the buses that we use in order to bring people into factories. We have in a very quick cycle fashion built cafeterias inside some factories. that help us also ensure that people are able to eat but do that within the rules of social distancing. Our Wuhan factory is a great example of this as well where if you look at raw material availability, if a factory in China that provides raw materials to the factory in Wuhan shut down because of a lockdown, we've actually scoured the world to figure out whether there's any raw material available elsewhere and where it has been, we have bought it and we have F-rated it to China. So we do see increases of that nature. We have invested in the supply chain. We have bought equipment and advanced that in order for us to increase capacity. And we're going to make even more capital investments as required in order to increase the capacity to deliver on the demand that exists. So it is a bit of a pluses and minuses. So on the margin side, I think good about where we are and where we are going. We do get some leverage, no question, but we also get some increase in cost. And I think what we will do is we will update you in a half year on our margin progression.

Thanks, Lachlan, and congratulations on a great start.

Thank you. Thank you Richard. Let's take the next question from Ian Simpson. Ian, what's your question?

Thank you very much. So firstly just digging more into that supply chain, even before COVID-19 you said you needed to put more capex in. Since then you've seen demand step up and presumably COVID-19 makes it a bit more challenging to actually spend that capex given the need for social distancing during the construction phase. So how concerned should we be about risks to supply chain as we go through this year and how are you thinking about that and managing that? And I noticed that you've pushed back some investment into the second half and is that related to that? Secondly, just digging a little bit into China infant formula, I think there's been a freeze on new products Thank you very much. Thank you, Ian.

First on supply, although we spoke in February, we have been working on this from September. Our planning systems are in much better shape than they were in September. And I think what you're seeing is a tighter linkage to demand and supply. Our supply team has done some very heroic things in order to really meet the demand. Just to give you a couple of statistics if I could. In May, we will produce the hand sanitizer quantity that we produced in all of last year. By June, we should be at 20 times the number. If you look at some of the other product areas, you know, some of the ones that are highly popular, we have cut down SKUs. In some cases, in China, for example, that's all. We cut 80% of SKUs. But what we did was you had a massive increase in volume because of run length that we had. Now, by the way, that's back up already to, you know, we only have a 20% SKU reduction in China and the volumes are back and, you know, we're growing. We have a bunch of partners we're working with to ensure that we can ramp up supply rapidly. We have made investments. Examples would be molds or some of the things that we need in order to ensure we have the raw materials in place. So we have made those investments. We have bought lines and we're bringing them into our factories. So my sense is that we are doing everything we can to further ramp up supply. and I feel very good about the progress the team has made in order to ensure that they can get there. Now it doesn't solve the longer term questions that I think we've had and we're working through to further strengthen our supply chain and the investments that we are making. We are making good progress on productivity. We are at or above our plan for productivity in the first quarter. The team has done a great job in that by the way. And we have the plans in place in order to further ramp up capacity that we've looked at. and we will approve them as appropriate. Now your point is absolutely correct that the execution of some of those plans will depend a bit on our ability to pull that off in this kind of environment where there's issues around physical movement and the like. But I know one thing for sure, working with our partners we will be able to ramp up supply in order to meet it. We may not ramp it all the way up to meet all of it and we're working with our customers in order to ensure that this is there. Clearly it all depends on how long this goes and what behavior change we see over time. But we are preparing very aggressively in this area. I mean, this is an area of great focus for the entire team and I compliment our supply chain team, our IT team. The teams in the markets were working incredibly hard to ensure that they stay safe, they put the investments in place to keep our people safe, but at the same time respond to the unprecedented demand. On China, on the question of IFCM. First of all, in the first quarter, we were lapping a pipeline fill in the first quarter of 2019 that came from the manufacturing challenges that we had in 2018. So there's clearly a lap there. The other negative is Hong Kong. We've had disruptions there which I think are very public. And the border closure. and the visitor market has essentially been completely closed since early February. So clearly two negatives. The positives, we've been working through this premiumization that we have talked about and in fact if you look at it, our super high premium brand, Infinitas, was 30% of our mix in Q1 of 2019. 30% of our mix in Q1 of 2019. and these are Nielsen numbers and it's now about 46% of our Q1 in 2020. So the super-premialization for us continues to grow. If you look at our shares, our shares, again the Nielsen shares, are marginally better. They're certainly sequentially much better than Q4, but year over year they are marginally better. Q1 of 2019 to Q1 of 2020. If you also look at the performance with the stage one part of the business, our shares at stage one have progressively improved and have gained steadily from August until March. If you look at our e-commerce shares, they have also steadily improved. So Q1 of 2020 versus Q1 of 2019, Nielsen Theta, about 50 basis points of improvement. We're also seeing momentum in the lower tier cities. We are seeing it, but clearly the big winners in the lower tier cities are the are the local competitors who have done a great job and have a great business. So that's the business in China. In terms of new product introductions in China, we do have a couple planned for the later part of the year, but not for now. So they're going through right now. We've already introduced grass fed in the latter part of the year, and that kind of migration is happening even as we speak. It's not a new product we need to introduce this month, but it's certainly something we have plans for for the latter part of the year, and we will see how it plays itself out. Infant China is still a work in progress, but we're happy to see some green shoots emerge.

Thank you, Lakshman. Why don't we take the next question from Celine?

Yes, I hope you can hear me. Good morning. My first question is on hygiene. Look, I think you mentioned there was both increased I just want to try to understand between categories if you could dig a bit and tell us within hygiene the different performance within categories and whether if you have seen from customer surveys or any insight of exactly where they are using more products. So that's to try to understand a bit the hygiene performance here. My second question is on emerging markets which was in fact slower for hygiene than the rest of the regions. And I saw that India was negative. So could you give us a bit of a color of what has happened in different emerging markets? Have you also benefited from some country loading in Latin America, for instance, or Middle East? And what should we expect in terms of ramp up in India? And just finally, I would like to, if you could clarify your outlook on the first question on margin. You talked about the positive and the negative. Am I right to understand that nonetheless you expect the margin to be better than the guidance of minus 350 that you gave in February? Thank you.

Thank you, Celine. Let me go to the hygiene category that you talked about. The second is emerging markets, and your third question was on margins. To start on hygiene, brands like Lysol, and by the way, Dettol too, are seeing increased penetration and increased usage. And I think you can understand the consumer sensitivity around this, particularly because they're all anchored on this idea of protection and breaking the chain of infection. You also have consumers who are sheltering at home and because they're sheltering at home there are certain things they're doing both to keep their spaces clean inside the house they're also cooking more as you see that from all your food companies but also they're cleaning more the dishes and the like so what you see there is a brand like Finnish benefiting from the fact that you have people at home who are behaving differently than they have in the past you also have brands like Airwick that are actually benefiting from the fact that people are at home So physical movement, physical mobility could have an impact on those brands, but at this point in time, they're actually doing well. So in the hygiene business overall, what you see is because of the fact that you have increased penetration and frequency driven from an inside around hygiene is the foundation of health. That one is one that we expect will actually continue for as long as there's sensitivity around this. Depending upon how consumers behave and where they shop and what they do with their time, will impact some of the other categories that are inside the business. The pantry loading effect is more pronounced in OTC and definitely pronounced in the case of the IFC and business where we fully expect that those will in fact evolve over time. On to your third question on margins. We will update you in the middle of the year On our view and margins, at this point in time, what I can tell you is really the pluses and minuses as I framed it. And we've also said that our performance overall will be better than what we said to you at the end of February. The specifics of that, we will update you in the middle of the year. There are a lot of uncertainties out there, Celine, and it's very hard for us to really predict how Q3 or Q4 is going to look like right now. I mean, we have all kinds of scenarios we're working with. we have teams that have obviously modeled various scenarios and they range all over the place so it's really hard for us to give you a number and hold ourselves accountable to it so we really appreciate your understanding of this and we will update you in the middle of the year to the best that we know There was a little bit in Celine's question about India and developing markets That's right, sorry, that was the third one So overall developing markets, we had mid-single digits growth in emerging markets overall. And that is important, particularly given the fact that going ahead, it's 40% of our business, and so it's important that that engine fly. And what you're seeing here is clear demand for products like Veja in Brazil, JIC and Detol across Africa, Dettol in India which actually had a mid single digits performance as well as if you look at some of the businesses in Southeast Asia and China where you see very strong performance of brands like Dettol I think in the case of the hygiene business in India we did see a single digits decline again driven by some of the shutdowns and some of the physical dislocations we are seeing that our factories are now back up and running Thank you very much. The kind of usage difference that we've seen over time in the hygiene business in India have been very strong. And so we are good about the fundamentals of the business and we recognize we need to work through some of the physical dislocations in India that will help us get back to, I would say, stronger performance over time.

Excellent. Thank you, Lakshman. We'll take the next question from Chris Pitcher. Chris, over to you.

Thank you very much. A couple of questions, please. Firstly, on the supply chain again, I imagine the first quarter has put, as you mentioned, a lot of stresses on the supply chain. Are you comfortable that some of the old issues of the past are now resolved? You mentioned in the statement that you expect lower revenues in developed market child nutrition due to, I think, some and many other capital projects there that look like remedial rather than proactive. And then secondly, in terms of the hygiene business, Lysol was incredibly strong in North America and probably contributed, I don't know, 40, 45% of the category growth. Can you tell us how much finish has grown by and whether you think you're winning holding share in that category? And then finally, could you give us a bit of an outlook on, you mentioned that the full year results that you would expect working capital to work against you this year. Should we expect even more of a working capital movement given extended credit terms, payment terms, and so forth? Thanks.

Just before I get started, I'm going to let Jeff take on the working capital question when I get done with the others, but let me just work through first. The first one on supply chain and stressors. We've been working since September in order to address some of the challenges we have seen on supply. The areas we focused on were our planning and just ensuring a much tighter link into the demand signal to ensure that we had products where we needed to have them in order to improve our fill rates with customers. And that has actually happened. If you look at the performance at the end of February with many of our largest customers, it was actually much stronger than it ever was. By the way, there's still more headroom, no question, and our customers have been very understanding and been working with them very closely. I've personally been very involved in this, and we continue to see steady progression in terms of the way our customer service has improved. In terms of your question on some of these capital projects, these were planned. We have the migration that's happening in China on a product that's actually much more regulatory driven. We have a dryer in Latin America that was actually planned for an upgrade and is happening now. It would be great if it hadn't happened just one time, but it is the way it is. It is something that needed to be done and has been in the plans for a while and is being done and actually is done. We will expect that Q2 will be obviously a type of wrap-up for this business. You won't see it there yet, but in the back half of the year, hopefully, we will have that addressed. So that's your question on stresses on the supply chain. You should also know that we have invested in capacity and we are continuing to look at plans to further invest in capacity. Our partnerships with our co-packers is very strong and we furthered that up and we really thank them for their partnership. All of that put together has led us to actually meeting the supply needs that we had. It has meant extremely agile movement and our supply teams, by the way, these are calls that are happening literally every single day. are working extremely hard to meet this kind of demand and to deal with the physical challenges that you have if a port shuts down or if there's a physical flow lockage somewhere or we have a challenge because of a raw material not being available in some place. It has required extremely agile working and I really celebrate the can-do attitude of the RB team worldwide particularly in supply, in IT, and in our sales teams who have actually really risen to the challenge because they know how important this is, and they've done it keeping in mind safety. On your question on hygiene, yes, Lasso had a terrific quarter. On finish, the performance was strong, and I think it's driven in great part by the fact that people are showing behaviors. When you're staying at home, they're washing more, and finishers certainly benefited from that. On to working capital, Jeff, perhaps you want to take that question on? Yeah.

No, thanks a lot, Laxman. The bottom line is we're not seeing a lot of movement in our net working capital. We have seen some expansion of payables, but overall it's not significant at this point. And so I wouldn't change from the guidance that we gave in February that we would expect working capital to be increased modestly in 2020. So I don't see any reason to change that guidance. We remain on track to deliver strong cash flows in 2020 and we don't currently see a significant swing in working capital.

Excellent. So let's take the next question from Martin DeBoo.

Morning everybody. My question is really around supply chain. They've all been answered. The one small one I'd probably What was your sense of where your inventories were at the end of the quarter, both your own inventories and stock in trade, and just how does that play out in Q2?

Maybe, Laxman, if I take our own inventory and then talk about the trade. Martin, overall, our inventories weren't significantly down. We clearly saw some areas, some brands, Lysol, Dettol, where inventories were down significantly. However, we're building up in terms of raw materials in significant areas. So we have more raw material in the pipeline as we look to increase production. So overall, inventory was actually flat, pretty flat versus a year ago and pretty flat versus December. So no significant movement in inventory on our own balance sheet.

Laxman in the front. Yeah, in terms of trade, I think in some of the products like Lysol and Dettol, I think it's fair to say that the consumer offtake has been strong. And it has meant that they clearly, the inventory levels with the trade in some of those are Thank you very much for joining us. that we are meeting the demand as appropriate for what was needed for the flu season later in the year.

Okay, thank you.

So let's take the next question from David Hayes. David, over to you.

Thank you so much for the opportunity to ask the question. So just two from me. The first one I guess is just to clarify maybe on the LATAM question. Infant Formula spray dryer capacity. Just to understand your comment, has that been a constraint, a bottleneck on supply on sales levels in various geographies in the markets and is that you're saying going to come off that bottleneck in the second half and will support better growth? And the second question is more broad. You talk about in the release obviously significant management change that's ongoing to the 1st of July but a lot of top positions changing. Can you outline what you're expecting from those people, what they're going to bring that wasn't there before beyond just delivering the medium-term targets? What characteristics have you got in those people that wasn't present in the people they were placing? Thank you so much.

Great. Well, on the left-hand drive, this has been a planned project for seven years, so there's nothing new about it. If you look at our market shares in this business in Mexico, they've actually gone up. What we are doing is a planned upgrade of the dryer. It will have an impact because you have to take down the line for a period of time and then you will end up having to rebuild it, which is the way it is. We've obviously looked for ways to fill that demand from other places. There are obviously registration questions and the like that we have had to work through. So to me, this is a planned upgrade. in a very similar way, I think, that you would. It just so happens that this is a factory that supplies a lot of our product in Latin America. On the management change, we have a combination of two things. We have a combination of existing RB people who are terrific, who have been promoted, and who are occupying key roles inside the company, and there will be more of those as you'll see over time. In addition to that, we have made targeted hires of people to come in and these people are people who are bringing in very specific expertise, experiences and the ability to guide our organization to what we want to do which is position this company for strong growth in the medium term with a top line emphasis. Jeff Carr for example is a great example of that. I know he's on the line here but part of the attraction of Jeff as you know as I mentioned in the previous call was Jeff brings a great deal of experience both strategic leadership, operational leadership and the ability to build a great finance team that will help us really strengthen the business for the future. And we've begun working really well together despite the fact that we are always doing this on Microsoft Teams. And so in a very similar way, we are bringing people in with very specific expertise and experiences to round out our team.

Thank you.

Let's take the next question from Alicia Flory from Investec. Alicia, over to you.

Hi. Good morning, everyone. I wanted to ask about the market share gains that you reference in both your health business and in hygiene. Can you tell us whether those are versus private label, other brands, and how sustainable do you think this development is? Secondly, R&D was a key part of the strategic evolution in FY20 prior to this crisis. What's the outlook for R&D, new product development, et cetera, sort of near term as a result of COVID-19? And then finally, if I could just circle back on China infant nutrition briefly. You mentioned that growth was encouraging on an underlying basis. While that's positive, it doesn't sound especially dynamic. Can you update us in a bit more detail what's going on with the portfolio and your brands on the underlying basis and growth outlook for that? Thank you.

Thank you. First, the question on market shares. I think that what you're seeing is actually, you know, is solid to strong performance on market shares pretty much across the board. And part of it is driven a bit by consumers essentially migrating to large brands that they have trust in and in knowing that that will help them through various periods of time. So, you know, on market shares, you know, it's a broad question. There's many, many parts to our portfolio. But I think what you see overall as a broad theme is as consumers move to larger brands, we're seeing the impact on market shares. On your question on R&D, this is a big priority and a big emphasis for us. And the R&D team is working incredibly hard to ensure that, you know, we are reflecting what is happening in the world around us and translating that into ideas and innovation platforms that will stand us in good stead for the future. So it's a very dynamic process right now. We already have plans for next year. And as we look at what's going on, we continue to look at this and update this as appropriate for new products that we will bring up over the course of next year. On your third question on China IFCN, This is still work in progress, but the progress is encouraging. And as I think I've given you some of the statistics on our premiumization, what we've been able to do with e-commerce, what is it that we're really doing? We are focused on offline execution in stores in China. The team understands this and we are really focused hard on ensuring that we actually get that piece of it right. Second, e-commerce is a big area of focus for the business. and has done well, but we can continue to make investments and make that better. Third, we have invested in the competitiveness of the business. No question that that was needed and we've done that. And fourth is we are innovating with new models that help us address the opportunity in tier two and tier three, tier four, tier five cities. We're seeing momentum. It's clearly not at the level that the local Chinese companies have, which is why they have these big share gains, but our performance relative to others is not bad. It's not enough, but it's not bad. On the overall IFCM business, I think the team understands clearly my perspective on this is that performance is going to be important for us to deliver a consistent, sustainable performance. They are absolutely on it, but they understand my view that performance is going to matter. And I am all over them, if I can say that, in order to ensure that we get there.

Thank you.

Shall we take the next question from James Edward Jones? James over to you.

Thank you John. I understand that you're reluctant to be drawn on the outlook but you are much better placed than most of us to anticipate what's going on. In longer term I know it's all very uncertain but is your best guess for say 2022 and beyond that This crisis fundamentally changes things, or do you expect things to revert to something like the previous normality?

I think the longer we see the behavior changes that consumers are being forced into, the more pronounced the changes will be in the long term. Just so you know, in terms of how we're organized around this, we clearly have a team that is focused on our people and on safety. We have a team that is focused on supply and doing all the heroic things in order to ensure we meet the supply requirements that we have. There's a team that is looking at demand in the near term and looking to see what we need to do in order to ensure we truly understand the demand picture and respond to it with supply along with our people and keeping them safe. That's sort of I would call it current business. I do have a small team working directly for me and what we are doing is looking at the long term and what that means. And there's no question that as we look ahead you are seeing some fundamental shifts. I mean take a look at our e-commerce business. E-commerce business today has grown north of 50%. It's been pretty much across the board. Every single region, every channel within e-commerce has had strong growth. We're in 43 countries. We have 40 direct-to-consumer sites that are operational across our brands. And as I said, on February 27th, e-commerce and technology and digital is going to be a big emphasis for us. And it's clearly proving itself out in Q1. And I don't expect that this will change. The level of change we see, particularly digitally, is massive. and we will intend to respond to that and make the investments as appropriate for it. So I do not expect that 2022 or 2023 is going to look similar to what 2019 looked because consumers are going through massive change in behavior and we will respond to that with the appropriate investments. We are blessed with a portfolio that makes us play in the right neighborhood across both hygiene, health and nutrition and what we have to do is capitalize on that with the right investments, with the right execution with the right talent and team, and the organization that has purpose and fight central to it. And that's the real focus for us.

That's really interesting. Thank you.

Thank you, Lakshman. We'll take our last question, if that's okay, from Jeremy Fialkow. For those who don't have a chance to ask questions and who want to, please call me during the day. My number's in the press release and you can reach out any time. Jeremy, over to you.

Hi, morning, Jeremy Fialkow, HSBC here. A couple of questions to finish off. Thanks for fitting me in. Firstly, could you just talk a little bit about the January, February results versus the March numbers? Because clearly March was when you had the pantry loading and the biggest COVID effects. So just to get a sense of what the The underlying momentum was pre the big demand spike in March and how that was comparing with your original expectations. And then secondly, expanding a little bit on the e-commerce point, clearly as the customers are shifting more to ordering online, there's a natural boost that everybody gets through e-commerce, i.e. people buying Tesco online versus online. Going into the store. And so if you could perhaps split out a little bit what your e-commerce performance has been like relative to the market and where you think that you have been able to take advantage of your e-commerce capabilities to do better than how the market is doing. Thanks.

Great. Well, we were pleased with our performance in January and February. We felt that there was real underlying momentum that we were seeing initial progress on the strategy that we were implementing. For example, if you look at customer service, the improvements that we saw there. If you looked at some of the penetration increases we were seeing, we were seeing increases there. If you looked at some of the ability for us to move into new channels, clearly there. Our e-commerce business was performing well. So I think if you look at it from an underlying perspective, just the strength of the brands, what we were doing, we felt good about the performance in January and February. We had nothing to be alarmed about. In fact, it was positive. Then of course March came and you saw some big shifts, particularly in North America, but also in Europe. and so I think that our teams have held up very well but you shouldn't take away from the fact the underlying executional strength of the business was stronger in January and February than we have seen for a while. To get to your second question on e-commerce, we've grown north 50% in e-commerce and I don't think that's a particularly bad number. If you look at our shares, In some of the geographies, and I mentioned China as an example where we have data on this, at least the data that is captured to the element that it can be, we are seeing share increases over there. Durex, despite the fact that the category was impacted, Durex grouped double digits on e-commerce. So I think that the portfolio that we have, the investments we've made in e-commerce and ERB over time, that we are rapidly and agilely scaling up. I mean we literally have increased the headcount in that business in the last three to four weeks by 10% to capitalize on the various opportunities. That has meant that the businesses in the place that is performing with the rhythm, that is actually terrific and I think more to come.

Okay, thanks very much.

Excellent. Well, look, thank you all very much for taking part. We're up to the hour, so thank you all for your attention. As I mentioned, anyone who wishes to contact the team should reach out and we'll be trying to get in and have a conversation. Thank you all for taking part.

Thank you very much. Stay safe and we really appreciate you all joining this call.

That does conclude our conference for today. Thank you all for participating. You may now disconnect.