Reckitt Benckiser Group plc

Greetings and welcome. I hope you and your families are safe and well in this very difficult time. Our hearts go out to the many communities around the world who are facing the challenges of COVID-19. As a company, we are trying our best to play a small part in helping these communities. Clearly, what we do as a company is much smaller than what is happening outside. I'm incredibly grateful to all our RB associates, customers, partners and suppliers who have gone beyond the ordinary to help us navigate an exceptionally difficult time. There are four key messages I would like you to take away from today's presentation. First, consisting with our messaging on our Q1 trading update, RB is off to a stronger than expected start for 2020. Importantly, in addition to the demand tailwinds for COVID-19 on several key brands, we are pleased that are underlying sales trends are also performing above our plan. Second, RB is making good progress regarding the strategy outlined in February, designed to rejuvenate sustainable growth. I believe we have made significant strides in improving our execution. We're also making good progress building an organization with the right capabilities and culture to realize the long-term opportunities for the company. Third, COVID-19 is having a profound impact on consumer behavior, not just for a few months or quarters. Our research suggests that the increased interest in hygiene and health is likely to be sustained over time, albeit at more moderated levels. And our portfolio is well positioned to benefit and navigate the additional macroeconomic challenges we expect. There is no question that our purpose and fight, which we announced at the end of February 2020, are even more relevant in these times. Fourth, we plan to leverage our strong outperformance in early 2020 by increasing the level and expanding the scope of our investment spending. Also, before moving on, let me address up front what I suspect is top of mind today For the analyst community and for our investors. Since February, when we laid out our long-term financial algorithm, we are reporting better than expected performance of our underlying business. We see structural shifts in consumer engagement in hygiene and health that favors several of our categories. And we are announcing an increased level and expanded scope of our investment spending designed to further accelerate growth. The obvious question then becomes, why aren't we increasing our long-term EPS growth expectations above the 79% level we committed to over the medium term, or moving forward the timing of performing against our mid-single-digit revenue growth target? The answer to this question has three parts. We unquestionably have greater confidence in achieving our median-term growth and margin goals. Second, while we feel more confident and perhaps even lean toward being more bullish, we recognize that we are operating in highly uncertain times, which very well could lead to significant public health and economic dislocations. Third, We are six months into the implementation of our strategic plan and transformation, are pleased with the early progress, but we do not want to get ahead of ourselves and we'll update you next February on our journey. Over the course of this presentation, I'll provide an overview of the first half with some reflections on what has changed as a result of COVID-19. Jeff will then take you through the first half results in more detail. Then we'll together provide a detailed strategic update, including our expanded plan and an outlook for the year. Before highlighting our first half results, let me spend a minute to remind you of the plans and long-term objectives that we set out in February. Our plan to rejuvenate sustainable growth at RB is based on investing in the business to create a platform that is capable of sustainably delivering mid-single-digit growth, mid-20s margins, and therefore 79% earnings growth in the medium term. Our plan calls for investing two billion pounds over three years in a series of investments in commercial muscle, innovation, and consumer value, coupled with a higher level of capital spending to support the anticipated growth acceleration. We expected a reset of margins in 2020, declining by 350 basis points from the 2019 levels, before returning to the mid-20s by 2025. Our expanded productivity program is expected to create savings to invest in capabilities and address any shortfalls along the way. As you hear, we made a good start in many respects, despite the operational headwinds caused by COVID-19 with strong executional proof points. We still have a lot more to do and we have new opportunities as well. As I mentioned earlier, Arby's A to 1 top and bottom line results were stronger than expected. In addition to the demand tailwinds from COVID-19 on several key brands, I am very pleased to report that are underlying sales trends are also performing above our plan. We delivered 11.9% life-for-life growth, reflecting the 3-4% estimated underlying growth and a significant COVID tailwind. Our growth has been broad-based. We delivered double-digit growth in China, the UK, Germany, Mexico, and Australia. North America was up over 25%. India was also up high single digits on a like-for-like basis, despite the severity of the early lockdown. And Brazil was up mid-single digits. Just under 1.7 billion of adjusted operating profit, up 15% on the prize year. Our margin was 24.5%, up 90 basis points. As a result, we delivered earnings per share of 166.5 pence, which was 14.5% up on the prior year. Our free cash flow at 1.9 billion pounds was exceptionally strong. Finally, we're announcing an interim dividend of 73 pence per share, unchanged year on year, as we said in February. On to the underlying business. I'm incredibly proud of what our teams around the world have achieved in an extraordinarily challenging environment. We have worked tirelessly to keep our people safe, meet the needs of our consumers and customers, and all the while actively play a positive role in the communities in which we live and in which we work. We have invested to strengthen our supply chain performance both before and during the COVID-19 crisis. This is perhaps best illustrated by how the team responded to the exceptional growth in demand for Lysol's market leading disinfectant spray. This is our biggest selling SKU in the Lysol power brand family. Demand has exploded in the U.S. and we have worked across the supply chain and with partners to increase capacity by 150% in the first six months to meet demand. As a result, in the first half of this year, we sold two and a half times as much as we did last year. As a result, with Lysol growing over 70% as a whole, the spray now represents 30% of the Lysol family. This rate of growth has been seen across the Dettol and Lysol families, making RV the undoubted leader in disinfecting products worldwide. In addition, the sudden spike in consumer demand for key products like Dettol, Lysol, Finish, and Airborne caused customers to significantly increase order sizes, which in turn resulted in delivery performance tailing off post-March. The progress we had made before COVID-19 had already had a material positive impact on our customer relationships, particularly after a difficult Q3 in the U.S. and provided the goodwill necessary to help us work in partnership through these difficult and subsequent challenges. Without the work we commenced in September to enhance customer relationships and service, we would be in a very different place. At the same time, we've made a good start to our enhanced productivity program. We set a 2020 target of 340 million pounds, over 100 million pounds higher than our traditional run rate. In the first six months, we are ahead of plan, a testament to the focus, a can-do attitude of our people and the execution with agility of our teams. In many cases, they deliver the different projects from their living room tables, from their bedrooms, or from their home offices, as well as from the floors of our factories and distribution centers, all while ensuring safety. Let me now address a question that many of you are asking. What changes are we seeing in consumer behavior? We see five significant changes. First, our research suggests that COVID-19 is driving a meaningfully increased interest in hygiene and health, a behavior that is likely to be sustained over time. Experience tells us that a change in behavior for over 60 days causes consumers to permanently change what they do over time. Over 85% of people have already improved their hygiene habits as a result of COVID-19, leading to a large increase in household penetration and frequency of product use. Importantly, as we have discussed in the past, this is an underlying trend that anchors RB's strategic direction, and the COVID-19 pandemic has both brought it to the forefront and accelerated the adoption curve for many people. We do have headwinds in a few brands, but we expect these will moderate or even reverse over time. Second, the pandemic led to pantry loading, particularly for many of our OTC and nutrition products. As we pointed out in April, we expected much of that would unwind, either quickly or as we've seen with infant formula, or more slowly as we're seeing with OTC. Drawing out the unloading over the second, third, and possibly fourth quarters. Third, the partial or full lockdowns or stay-at-home guidance evident in over 100 countries at various times have also led to large populations of people nesting at home and engaging in less social interaction. Such consumers are cooking more and are looking for ways to make their homes cleaner and better. Fourth, We see massive shifts across the world in online spending, over 77% increase in spending year over year in May. Finally, we continue to see challenges on the horizon on the economy, with over 51% of American consumers worried that their finances will be impacted by COVID-19, a trend we need to be sensitive to as we plan for the future. Our portfolio is very well positioned against the changes we are seeing in consumer behavior. Greater awareness of hygiene and health will increase consumption for key brands like Dettol, Lysol, Sagartan, Napisan, and Airborne, which in 2019 represented around 20% of our portfolio and are national beneficiaries. We expect to see sustained uplift from consumers in-store and online, but also in the professional channel where consumer brands can now provide real hygiene quality and effectiveness assurance to their customers whether in accommodation, travel, or other service industries. Pantry loading and unloading has had a marked effect on our OTC and nutrition business where we expect the initial lifts from panic buying to balance out over the course of the year. Additionally, sustaining hygiene and physical distancing protocols can negatively impact the flu season. Nestle Get Home has definitely had a positive effect on brands like Finish in particular. This has more than offset the low demand for Durex, Vanish, and Shoal today. We expect these businesses to improve as more social interactions happen. Of note, our business in China provides some early indications. As China came out of the severest stages of lockdown, demand for structural well-being products are rebounding quickly. One of the most pronounced changes over the last five months has been an acceleration of growth in e-commerce. We've been advantaged in this space as a result of the investments we've progressively made in recent years and accelerated since January. As a result, the growth has been very strong. Our second quarter e-commerce growth across the whole business was over 70%, and our first half growth was over 60%. and now represents around 12% of our group sales in the half. Our growth has been strong across all forms of e-commerce, including pure plays, marketplaces, bricks and clicks, as well as direct-to-consumer. We saw a near doubling of the business in the first half of the year. Looking forward, we expect there will be some turbulent times in different markets. as we all come to terms with the economic and social cost of this pandemic. As a result, we fully expect spending power will be impacted much as we saw a decade ago. Our portfolio is well positioned to navigate the additional macroeconomic challenges we expect, which will have an impact on consumer spending. We're taking steps to anticipate this, learning from our past, and are building on the actions we talked about in February to ensure Our products are well positioned with different consumer value propositions across our ranges. Remaining relevant for all shoppers is key to success and we are investing as planned in doing just that. Overall, we feel our portfolio is well positioned to endure in a potential economic recession where our purpose and fight could not be more relevant. In light of the better than expected start of the year, we have decided to step up our investment spending plans as we see opportunities to capture additional growth. Our current plans expand on the plans we announced in February to invest in price competitiveness where appropriate, build our commercial muscle, invest in research, development, and quality, as well as invest in further strengthening supply. We see three additional areas where we plan to invest further. First, we are going to reinvest incremental upside delivered today to grow our leading position in disinfectants with brands like Dettol, Lysol, and Sagrotron. Dettol and Lysol together are powerful brands with retail sales over 3.5 billion pounds and strong consumer preference. Our additional investments focus on expanding and investing in these brands behind growth opportunities in an expanded number of category market units, or CMUs. For instance, we launched Lysol in Brazil in April this year, several months ahead of plan, including with local manufacturing. We are seeing strong initial interest. Second, we will further accelerate our digital and e-commerce investments to ensure we're at the forefront of market developments, capturing growth in this fast-changing business across all channels and categories. We are moving with speed to build on our momentum and further strengthen the business. For instance, we're investing in further supply capabilities and hiring a significant amount of talent in this environment through targeted recruiting and moving some of our best people internally into functions supporting this growth. Third, we are capitalizing on our brand strength by moving into the professional category, white space, for the benefit of a wider consumer audience. The agreements of companies like Hilton, Avis Budget Group, JLL, and Delta are great examples of a larger set of opportunities. Additionally, in the near term, we will also increase the capital expenditure to address the increased demand for disinfectants. These include New lines of existing funds, automation, as well as molds and co-pack investments to meet the demand. Given the favorable shifts in the environment and our expanded plan, we have greater confidence in achieving our medium-term goals that we set out earlier this year. I will talk about this more after Jeff has given you a review of the first half financials. Let me hand over to Jeff.

Thank you, Laxman. COVID-19 started impacting our business as early as January this year. And we have monitored not just the COVID impact on our business, but also our underlying performance. And we estimate the underlying performance during Q1 and Q2, as Laxman mentioned, at 3% to 4% growth. Significantly improved compared to 2019. Our half year and Q2 growth has also been impacted by our decision to adjust our revenue recognition in line with IFRS best practice and recognize revenue when received by customers and not at the point of dispatch. Our previous treatment has not impacted period-on-period growth rates but has a negative one-time impact on Q2 of 2.9% and 1.4% for the four-halves. Our hygiene and health business units have performed exceptionally well in this half, with sales growth at 16.1 and 18.6% respectively. We'll go into more detail later, but Lysol and Detol deserve a call-out with growth around 70% and 60% respectively, as consumers look for trusted disinfecting solutions in this difficult period. It's also worth mentioning at this point our exceptional e-commerce performance. The benefits Our investments in this area have resulted in growth of over 60%, and e-commerce now represents 12% of the group's net revenue. IFCN was down 4.8% in the period, but this had a tough lap in mainland China, headwinds in Hong Kong, and a planned dryer upgrade in Latin America. Importantly, we see positive momentum as we move into the second half of the year. Adjusted operating profit of $1.7 billion is ahead of expectations with a margin of 24.5%, 90 basis points ahead of last year. Gross margins are up 70 basis points due to a favorable mix and strong productivity benefits. BEI has been invested in absolute amounts in line with last year. But due to the strong top line growth and favorable rates, BEI was 160 basis points favorable compared to last year. Of course, we have adjusted our spend plans as necessary during this unprecedented period, and I'd expect an increase in BEI as we move into the second half of the year. SG&A costs were up 140 basis points versus last year, reflecting variable pay headwinds, as we flagged in February, Some one-time charges and capability investments in areas such as R&D, which will enable and accelerate our growth program in line with our rejuvenation plan set out in February. Now looking at the margin development through a slightly different lens, the big picture is that our productivity program is delivering in line with expectations, while our investments will now be more weighted into the second half of the year. and as we'll talk about later in our outlook statement, some investments will now be phased into 2021. The re-phasing of investments into the second half of the year is largely a consequence of COVID. During March, April and May, our team's key focus was serving our customers, protecting our people and establishing new ways of working. Consequently, some programs have been updated and re-phased. But we're getting used to this new norm. Our people have adapted with agility and pace and we have good visibility of the second half investment programs. In addition to the reinvestment of 190 basis points let me now break down the 310 basis points of COVID related costs and other headwinds. This includes the operating margin headwind largely variable pay which we flagged in February Additionally, we've incurred around 100 basis points of impact from COVID-related costs in this ARF and we do expect these to continue in the balance of the year. Lastly, we've also incurred around 100 basis points in one-off charges for certain items, including legal provisions for historic cases which are now judged more likely to result in a negative outcome. Now let me take a couple of moments to dive a bit deeper into our productivity program. This is due to deliver 1.3 billion pounds over three years, providing the fuel to our growth engine, and I'm delighted to report that we have a very active and successful program up and running. Importantly, while some areas are less advanced due to COVID, other areas such as direct procurement have stepped up and all in all, We have delivered $165 million in the first half of the year, ahead of our initial plans. Like all good productivity programs, this is not made from one or two big one-off items. Rather, we have thousands of individual efforts running, and I've included four case studies of this in the Appendix, which are typical of the program. RPE has a strong track record in this field. But like many large organizations, we see opportunities to continue to improve efficiency. And I'm confident we can deliver and even expand on our goals as we go forward. And now we're going to look at our two reporting segments, starting with hygiene. It's been an exceptional half for hygiene with net revenue of 16.1% and 19.4% in the second quarter. And due to the strong leverage Margin of 25.1% at 320 basis points ahead of last year. Volumes are up 15% and with negligible price movements, mix was favorable by 1%. North American net revenue was up 29%, largely driven by Lysol and Finis, which were up 67% and 31% respectively in the region. Across the total segment, Other key performances include double-digit growth as to the Bang, Galgon and Bajor and other brands including Mortin, Harpic and Airwick all grew while Vanish was down slightly in the half. Now moving on to health. Total net revenue was up 9.3% and margins of 24.2% were down 50 basis points due to higher investments in pricing and capability. Volume was up 7% and pricing was basically flat with a favourable mix in the period of 2%. Health is a more complicated picture in the period. For example, OTC grew 10.9% and a half with strong Mesonex sales and share gains. However, in Q2, OTC was down 12.7% reflecting pantry stocking and lower sales of strepsils and Neurofen. Misunek saw very strong sell-in in Q1 and was still positive in Q2. However, sell-out has slowed significantly, and with the likelihood of a weak cold and flu season, we expect OTC will have a challenging second half of the year. Other health grew 22.7% in the half and 28.2% in the second quarter, with the acceleration largely due to stronger demand from debtor with net revenue growth at 62% in the half, accelerating to 80% in the second quarter. IFCN revenues were down 8% in the second quarter and 4.8% in the half. And as we've mentioned, there were three specific headwinds. First, in Greater China, we were restocking the trade in the first half of 2019, and this created an unnatural comparative numbers The closure of the Hong Kong border has significantly impacted cross-border sales in the first half of this year. And finally, the driver overhaul in Mexico has resulted in some sales being impacted in the first half. Adjusted for these events, IFCM performed as expected, and we are encouraged, as I mentioned earlier, by positive momentum into the second half of the year. Adjusted EPS grew by 14.5% to £1.66.5 in the half. The growth largely driven by an increase in operating profits and finance expenses and adjusted tax were in line with expectations. So now moving on to cash. Free cash flow at £1.9 billion is unusually high. One billion pounds ahead of last year due to stronger operating profit and exceptional working capital improvement. Trade receivables decreased slightly despite the strong sales growth, and total payables increased by just under 800 million pounds, due mainly to high levels of manufacturing activity and volume-related trade accruals. It's important to emphasize that payable days outstanding remain in line with policy and in line with our historic levels. Capital expenditure was lower than expected due to the challenge from COVID-19, while short-term capacity increases were mainly the result of increasing throughput on existing assets and new co-pack facilities. In line with our strategy, we expect a significant increase in capital over the medium term as we step up our supply chain capabilities to meet consumer customer needs. I'm very pleased to see our net debt reduced 10.2 billion pounds as a result of a strong free cash flow and despite adverse exchange, foreign exchange movements of 0.6 million pounds due to the strengthening US dollar. The bond issuance in May significantly reduced our reliance on commercial paper and increased our average maturity to 5.4 years and 4.2 years at the end of 2019. Now let me wrap up, but before I hand back to Max, let me just reiterate our disciplined approach to capital allocation and our commitment to a single A credit rating. Our balance sheet is strong and we have declared an interim dividend of 73 pence per share in line with last year. Our capital allocation policy is built around strong free cash flow and I'll continue to ensure we remain focused on this while ensuring we invest in growth to deliver the full potential of our base. Thank you. And now let me hand back to Laxman.

Thank you, Jeff. Back in February, we set out a clear agenda for RB. We demonstrated that RB is a good house in a great neighborhood with the potential to be a great house again. We mapped out a clear strategy to rejuvenate growth, supported by investment plans, funded by productivity and a margin reset. And we set out how we would do this in a sustainable way, anchored with a purpose and fight. That provides a clear direction to the business. Together, these will provide the keys to lead and inspire the people of RB to succeed. Since then, we have already seen some material changes in our markets and environment, and these will influence our strategy. But the fundamentals don't change. In fact, they are even more relevant. The megatrends we highlighted in February are very clear, in many cases having strengthened by our experience with COVID-19. Hygiene has never been more clearly the foundation for health. COVID-19 is demonstrating the pressures on societies all over the world for higher standards of hygiene.