Haleon plc

Good morning, everyone, and welcome to Halian's half-year 2023 Q&A conference call. I'm Sonia Gabriel, Head of Investor Relations, and I'm joined this morning by Brian McNamara, our Chief Executive Officer, and Tobias Hessler, our Chief Financial Officer. Just to remind listeners on the call that in the discussions today, the company may make certain forward-looking statements, including those that refer to our estimates, plans, and expectations. Please refer to this morning's announcement and the company's UK and SEC filings for more details. including factors that could lead to actual results to different material from those expressed in or implied by such forward-looking statements. We've posted today's presentation on the website this morning with prepared remarks running through the results in detail. So with that, we'll go straight to open call for Q&A. Thank you.

As a reminder, if you'd like to ask a question today, that's star followed by one on your telephone keypad. If you wish to withdraw, that's star followed by two. Prepared to ask you a question, please ensure you are unmuted locally. And our first question today comes from Ian Simpson from Barclays. Ian, your line is open. Please go ahead.

Good morning, everyone. Two questions from me, please. Firstly, that 7% to 8% full year 23 organic sales growth guide, that implies 4% to 6% in the second half, which is obviously in line with your medium-term guidance. Is that how you should think about it? You're basically booking the strong first half and just delivering on the algo in the second half. And in terms of the moving parts within that second half, there was some nervousness that tough cold and flu comps in respiratory might be an H2 headwind. Do you feel more relaxed about those now? Or do you expect strength elsewhere in the business to offset tough respiratory comps in the second half? And then in terms of second question, just wondered if we could unpick moving parts in the margin. So you're guiding seven to eight organic, top line, 9% to 11% constant FX EBIT, so margins adding 2% to 3% to EBIT. But then in terms of FX impact on the business, we seem to be looking at sort of 4% top line, 6% to 7% EBIT, so a 2% to 3% drag from FX. So in terms of margins for the year, should we be thinking underlying margin delivery a little bit better than expected, FX headwinds maybe a little bit worse than expected, and Net-net margins probably staying flat in line with the previous guidance. Thank you very much.

Thank you. And I'll take the first question. I'll pass it to Tobias on the margin. So, as you said, we had a very good first half, and we feel good about the growth in the first half and the fiscal year outlook. I think there's two things in the first half that we'll repeat in the second half, and the first one you mentioned is cold and flu. So if you look at the 22% growth we had in the first half, that contributed about two points to our overall growth. And in this outlook, we're expecting an average season, which would be below last year from a volume perspective. Now, I want to be clear, it's hard to predict cold and flu season these days, but we've taken an assumption that we believe is right at this point. So we're talking about volumes being down, but pricing largely offsetting that. So roughly a flat category in the second half. Also in the first half, we did see strong growth in China with over 20% growth. And that was, you know, we had good performance across the portfolio, but Fenbit and Contact in particular, which is a pain relief brand and a cold and flu brand, saw a significant demand coming out of COVID lockdown, or zero COVID. And as a reminder, in zero COVID, those brands were actually on sales restriction because they treated COVID symptoms. So, you know, and Zero COVID didn't want that. So there's two dynamics. One was lockdowns coming off, getting back to a normalized level for those brands, and then some incremental demand based on COVID actually going through the country. So, you know, that's where the four-year guidance comes. You're right that the back half would imply a four to six, more thinking about it of the dynamics in the back half and what we're seeing.

Yeah, on the margin. So, I mean, clearly, we've said 7 to 8 on top line for the year 9 to 11. So, I think that gives you, I think, a very strong underlying improvement and a strong underlying margin improvement. And also, just to clarify... That includes offsetting the transactional FX losses in the business. As you've also seen in my prepared remarks, we have 60 bps of margin improvement operationally that fully offset the transactional losses in that. So underlying, absolutely, an upgrade and an improvement. coming through on the margin from the strong performance in the business. And then, yes, FX, and that depends a little bit on where you build it from, but, I mean, ultimately, the consensus was around a 5 to 6 CR growth. Our improved guidance is 9 to 11, so you should add at the midpoint 4 to 5 points of of profit growth, and then you deduct from that incremental translational, which is six and a half. So, you know, a small down, saw down on AR profit growth. And again, if exchange rates would stay where they are in June, and I've given you a little bit more color on how to model that in the appendix of the slide deck. So we've added a few more of the currencies to help you model that out.

The next question comes from Guillaume Domas from UBS. Guillaume, your line is open. Please go ahead.

Many thanks. Morning, Brian, Tobias, and Sonia. Two questions for me, please. The first one is on pricing. I was wondering what the outlook was for pricing as we think about the second half. In particular, are you planning additional pricing actions or kind of the opposite? Would you be looking at some price downward adjustments, maybe increasing promo activities to maintain your level of competitiveness and maybe improve your volume share momentum? I know I think it's more a value share number you're looking at, but I noticed that 55% of your portfolio was gaining or holding shares at the end of the first half versus two-thirds at the end of last year. So any color on that would be helpful. And then my second question is on translational effects, because it's looking like it will be a significant headwind this year that you'll be able to mitigate. But big picture-wise, how should we think about this impact? Is it a case of trying to offset it when it goes against you, and letting some of the benefits fall through to the bottom line when translational FX is more favorable. So, for instance, if we were to see some reversal next year, should we expect better than moderate margin improvement in 2024? So anything you can say about your mindset when it comes to translational FX would be very helpful. Thank you. Great. Thanks, Guillaume.

Let me address the question on 55%. So, yes, year-to-date we are 55% of the business maintaining and gaining share. We have seen that number strengthen in recent months, so we think there's a positive trend there. And you mentioned it, but this is a value share measure. So we were impacted a bit earlier in the year by the phasing and timing of price increases. So just to bring that to life, I'll give you one example. Tums, for instance, at our U.S. business, We took pricing at the end of Q1. Some competitors happened to take pricing earlier in the year. So we didn't grow share in Q1, and now we're back to strong share growth. So there's a bit of that dynamic happening. And just on promotions. we tend to be a lower promoted business, even in categories that can be high promotion like oral health because of our strategy of therapeutic oral health. We invest more behind the dental detailing and the marketing and connection with consumers than we do promotion. we don't anticipate changing that strategy. And OTC in general also tends to be a lower promoted category. So we didn't anticipate any change. But to me, it's on pricing and big picture.

Yeah, thanks, Gil. So on pricing, I think, I mean... For the half two, we mostly rolled over from what we've done in half one. Also, don't forget, we took increased pricing through half two of last year as well. Of course, I mean, in emerging markets, we would keep pricing up as we can and as we've always done. And then, look, here or there, when we see there's an opportunity to do something, we would do it, but I wouldn't expect widespread further for the pricing increases, and Brian has already answered you the promotional question on pricing, so I wouldn't expect anything going backwards on that either. And then on translational, look, I mean, I can't plan for translational, so I think And I believe in the way we've guided and the guidance change we've made, I think we're giving you the CER growth on profit. And then I'll update you on a quarterly basis around what the translational impact is. And this might go one direction or might go to the other. I hope with the additional color I've given you on more currencies in the backup, that helps you also model it through yourself and have a bit more upfront visibility on that. Thank you.

Thank you. The next question comes from Rashad Kawan from Morgan Stanley. Rashad, your line is open. Please go ahead.

Hey, good morning, Brian, Sonia. Thanks for taking my questions. Just two from me, please. The first one on VMS, obviously positive in Q2, but in the present, you mentioned you expect continued pressures on immunity in the U.S. with emergencies specifically. Does that alter your midterm outlook on VMS of that kind of mid to high single-digit growth overall? And then just the second question on the consumer broadly, are you seeing any changes in terms of behavior, any change in terms of downtrading trends or shifts to private label, especially in Europe, as you've taking more pricing. I know, you know, volume dynamics still seem to be robust, but any color you can shed there would be great. Thank you.

Great. Thanks, Rishabh. So, first on VMS, as you said, we were down 3.7 in Q1 and up 2.7 in Q2. So, for the year, we were down a half a percent. And if you just break that down across regions, we were in single digit growth in Europe and East Africa and Latin America and in APAC, but we were down double digits in North America. And two things impacted that. One was the lapping capacity coming on stream last year where we built inventory, so that was a negative impact. And then on immunity subcategory, which you mentioned, we are seeing a bit of... you know, a change in consumer behavior of the immunity category going back to more pre-COVID type levels. Now, we saw incredibly strong demand in the base period, as you know, as COVID spikes came in. Now, that was a category that always had good mid-single-digit growth. So, it was a healthy category pre-COVID, fully expected to be a healthy category post-normalizing, but we do expect, and in our outlook, we're assuming that that will still be a drag on the VMS business as we look at the back half of the year. So nothing has changed in my medium-term outlook, and obviously we'd update, you know, for next year when we get there, but we feel like it's still a very good category. You know, 35% of our business is UF. We like our geographic footprint, and we're seeing, you know, good growth outside that. On consumer behavior, and you specifically have asked about Europe, you know, to date we are not seeing that. Now, a reminder in Europe is that we have very little private label dynamic, because there is very little private label dynamic on oral health, which is in mass market. Obviously, there's lower price brands, and we're seeing good dynamics on our oral health. And then in the OTC business, we're sold through pharmacies, and there's really no private label, quote-unquote, to speak of. There is generic products in pharmacies. They tend to be behind the counter in the drawer, so people aren't going up to the shelf and doing comparisons. So to date, we haven't seen that shift. Obviously, unprecedented times where we're keeping close eye on it to see if anything changes there, but to date, we've really seen the categories hold up.

I think you asked on the U.S., I think private label, no change visible in our category. So I think when you look in aggregate, private label shares actually are slightly down across all of our categories. Of course, you have some subcategories where it's slightly up, slightly down, but no shift visible in sort of consumer behaviors when they're in front of the shelf vis-à-vis the private label that is there. Thank you very much.

Thank you.

That's a reminder that staff followed by one on your telephone keypad to ask a question today. The next question comes from Chris Pitcher from Redburn. Chris, your line is open. Please go ahead.

Thank you. Good morning, all. A couple of questions. Firstly on China, thank you for the extra detail in the presentation. Can I just make sure I've got the messaging right for the second half? Growth moderated but was still double digit in Q2 based on your disclosure. You're talking about a normalization in FENBID, but it does look like there's still strong opportunity amongst BMS. Could you talk a bit about oral health and how you'd look to grow that in terms of strength of local and international competitors? And in terms of your raised four-year guidance, does that still imply double-digit growth in China in the second half? And then just secondly, on the Lamisil divestment, obviously helping the deleveraging, can you give us a bit of a feel for the sales and profit impact there? cash impact on that. Thanks very much.

Thanks. Thanks, Chris. I'll take the first question and then pass it to Tobias. So, as you said, we had a good first half in China. We grew over 20%. And obviously, we benefited from the COVID lockdown or the zero COVID policy going away and been in contact. The VMS business also is growing, so in good shape. So we continue to see trends there. And then on the oral health business, what we saw was the category declining as we entered into the year. We are still seeing the category declining, although declining less. And in most recent periods, we're growing share, so we're declining less than the category. We expect that to, in the back half, continue to stabilize. Listen, we feel good about Sensodyne in China. There's no question that there is a competitive environment in China that can be a bit different in the sense of local competitors, and they're not to be taken lightly. But we've been there, and we've been competing against them, and that's something that's always been something we look at. But we feel good about our business in China. And on the back half, we didn't give specific guidance on China, but we expected – to be able to see growth in China as we go into the back half. Obviously, we'll see less of that COVID impact. The lockdowns were still in place. Zero COVID was still in place a year ago, so sales restrictions were still on things like contact and FedBid. But obviously, in the first half, we saw COVID waves coming into the country, which drove demand above that. to be of Lamisil.

Yeah, so on Lamisil, so it was 54 million off of revenue last year, I think, with a very healthy, you know, gross margin. It's an OTC brand and small A&P, so I think you get... you get clearly a negative hit from that on the OP. And then from the margin, with the $54 million, I think we sold it at a very healthy sales price. So that is about a four times seven times revenue multiple that we get. And, of course, it was declining in sales, so it was slightly diluted for sales growth. But, I mean, that's really a tiny difference. And then we would, of course, expect to offset the negative impact from the divestment on for-profit with the benefits from the productivity program next year.

And maybe just to follow up, would we expect similar brands potentially to come out, or are you done now for divestments?

No, look, I mean, as I said before, right, I mean, we said at Foliere we're going to be active in our portfolio. You've seen us do two things this year so far. I mean, we've divested Lamisil, which I think at a very good price, and this is a classic example of, I think there's a better owner out there for that brand, and we got good value for it, so it makes sense to divest that because I think it's clearly above our own key valuation that you see from the price. We've also agreed to deal with Futura, so we brought something into the portfolio, and you would expect us in a company with about 100 brands to look at things if they create value or not, so I think we do this, but it's You have to test the market to see if you get value for it or not. And that's exactly what we've been doing. And that is still an example. So expect us to be active. But if something comes through or not, we don't know. You can't plan for it. And we would, of course, always tell you when something is coming through.

Thank you very much.

The next question comes from Alicia Flory from Investec. Alicia, your line is open. Please go ahead.

Oh, hi. Good morning, Brian and Tobias. A couple of questions from me. I wonder if you could update us on the inflationary picture that you're seeing across the operating cost base, so beyond COGS. Any color would be helpful. And then on the A&P spend, I assume given the market share performance that remains, you know, quite poor, positive that you're happy with the current rate of A&P spend versus sales. Should we expect any change in the growth rate of A&P relative to sales going forward over the near term? Thank you.

Yeah. So, look, on inflation, right, I think let me maybe start with commodities. I mean, you know, some stabilization, but we haven't seen prices massively come down. Sugar prices, sorbitol prices, still very, very, very, very high. Packaging comes down a little bit, but I mean, still way above before the inflationary headwind where it was. And I think outside of that, I think it's mainly mainly on people. So we just need to see where inflation rates are. So I think, as you've seen, I think we have strong operating leverage in half one. We were able to offset that. So I think from that point of view, I think the ability in our model should be able to offset that through pricing and efficiencies. And on the A&P spend, so looking up, I mean, first of all, I think we're happy with with the level we are in percent of revenue. So we don't think there is a major shift in any direction. We've increased our consumer-facing A&P spend 8%, if you exclude Russia, where we stopped advertising last year. So I think we are healthily invested into the brands. And you should expect us to continue doing that going forward. Of course, I mean, you have a year with, like we had, you wouldn't expect us to spend A&P ahead of that ratio. So, I think you spend heavily, and of course, we also look for efficiencies in the non-consumer-facing A&P spend as well.

Thank you. The next question is a follow-up from Ian Simpson from Barclays. Ian, your line is open. Please go ahead.

Thank you so much for allowing me a follow-up. I'm going to be cheeky and ask another two questions, if I may. Firstly, could you just remind us how we should think about working capital seasonality? It's something to get our heads around because you're being a relatively new company. Typically, we see working capital kind of as an outflow in the first half and then an inflow in the second half for most consumer companies. Would you be any different or how should we think about that? And then secondly, in terms of your efficiency program, you're talking about some quite large numbers in terms of gross savings for that efficiency program. You also just said that you think AMP is in the right place as a percentage of sales. So I was just intrigued as to how much you think about where those efficiency savings will be going Will they be reinvested back into the business? If so, where? Give your comments to my MP. Or what proportion might fall through to the bottom line medium term? Thank you so much.

Good. Thank you. Let me start with working capital. So I think, yes, I think we probably see similar pictures as you mentioned. I think for us particularly, I think in half one, We've always seen working capital outflows, and that's largely driven by us building cold and fluid inventories ahead of the big season selling that's in Q3. Of course, this year it was a bit more pronounced given the strong sales growth. Just to give you a color, I think our day sales outstanding actually have improved. So from 55 to 50 days and half one. So I think this year is a bit more pronounced given the strong sellout. But you would always expect, you know, working capital outflow half one and then I think a – it's reversing out in the second half of the year. And I think as a result, our cash flow, free cash flow, and by the way, you saw it last year also, what we did between separation and year end, you would expect a much stronger free cash flow performance in the second half of the year. And then while I'm at cash flow, just I think for you to note, as I had guided, I mean, of course, this year, first time we have the interest cost cash out period, because the payment of the interest is arrears, so that has normalized, and also the cash tax has normalized, because we had a benefit in the force of both, as I had guided you for half a minute.

Yeah, and Ian, on your question on the efficiency program, as we previously communicated, 300 million pounds, majority of which will happen in 24 and 25. And I think Tobias' comments on IMP were certainly, for this year, we feel like it's in the right place. And the reason I say that is, you know, we'll provide guidance at the year end on what that looks like. But this $300 million certainly gives us the flexibility to understand what is the best way to move forward. If there's more growth opportunities to go after, we have the opportunity to look at that if we feel like we get the right returns. If not, then, you know, there's an opportunity to use those funds in other ways. So it's really about the flexibility of that, but certainly as we get into, you know, the end of this year, we'll give more clear guidance next year on where we think that will come out. Thank you so much.

The next question is from Olivia Nicolai from Goldman Sachs. Olivia, your line is open. Please go ahead.

Hi, good morning, Brian, Tobias, and Sonia. Just two questions on my side, please. First, a follow-up on China and Samsonine. So the growth last year for Samsonine was affected by the lockdown for oral health, I mean, in general, was affected by the lockdown. How are we compared to pre-COVID levels? Is there still much of a catch-up to be done in China for oral health? And secondly, question is more for Tobias on this one. You're obviously expecting a stronger growth for this year than the beginning of the year. Your cash flow tends to be much stronger in H2. You've done one disposal at a really good price. And the bulk of your debt is in dollar, which is weakening. So could we expect your net debt to be that, to be below three times? maybe at the very beginning of 2024, which will still be within the guidance, or even at your end. Thank you.

Good. Let me start on China. Yeah, we... We are seeing, like I said earlier, we are seeing a little bit of softness in that category. And again, our negative category, we're slightly less negative than that. So we had C-share growth in the most recent periods. We do expect it to stabilize. I mean, it was certainly a dynamic that began towards the second half of last year. So in the back half, You know, we're hoping to see that category, expecting to see that category more stabilized and us being in a position where we can get back to growth on the business.

Yeah. So on the leverage, so I mean, we've guided you less than three during 24. I think doing, you know, the divest, I think, gives us, you know, increases that confidence that we get to that place. I mean, as you mentioned, yes, there is currently a benefit coming through on the US dollar debt. However, also remember on the leverage side, it goes against the adjusted EBDA number, and on the adjusted EBDA number, you take the currency, the translational currency hit as well. So I think there is a bit of an offset. I mean, over time, I think it evens each other out, but it really depends on exactly where it lands if you get, because you never get like 12 months or 12 months. So in the long term, I think we've broadly aligned our currencies of debt with the currencies where we have our earnings as we spread the debt across the dollar, the euro, to a small extent, the pound, and the Chinese renminbi as well.

Thank you.

The next question comes from Bruno Montaigne from Bernstein. Bruno, your line is open. Please go ahead.

Hi, good morning. Toby, I just want to come back to something you said earlier. You say investors wouldn't want to see A&P grow above the 10% organic or sales growth. I don't really recognize that investor sentiment. I think if you are able to grow A&P ahead of sales growth, we invest some of the operating leverage in more A&P and actually further strengthening future growth. I'm pretty much sure that most investors would actually be happy about it. So was it just a short-term observation? How do you think about it in the medium-long term?

Yeah, thanks, Bruno, and thanks for checking back, right, I think. It was meant as a short-term comment, right? I think when we get, you know, benefits, strong benefits, short-term coming through from cold and flu or the benefits from China, right, I think that's not where you pump in more money to deliver that. I think long-term is, I think, exactly what Brian said before. Of course, you know, keen to invest in A&P and looking for the growth opportunities that we have in the business.

Thank you. As a reminder, that's star followed by one on your telephone keypad to ask a question. And the next question comes from Tom Sykes from Deutsche Bank. Tom, your line is open. Please go ahead.

Yeah, morning. Thank you. I just wanted to clarify some of the things you were saying on APAC and the APAC margin, because I think the minority is up by quite a lot. I think the minority is up by 60% or so, which I thought the majority of that all was. the JV you had in China, and yet that's obviously a long way above what the organic operating profit increase was for the APAC region. So could you just explain, and I know you gave some other points in the slide on APAC, so thank you for that, but could you just explain what is happening to profitability outside what is included in that JV? And maybe could you just remind us what of that pie chart you gave, what goes through that JV which comes out in the minority, please?

Yeah, sure, Tom. So the joint venture in China has the over-the-counter medicines business in it. So it's about a third of the sales in China, so it's really the OTC sales that go through that. And, of course, that's where you have where we had in half one, the major pickup in revenue because in both Fendit and Contact, which were the ones that were blocked before, and then you have the massive demand coming through that we're able to meet given our local production footprint there, and also the production footprint is also in that joint venture. So I think really strong support locally to run the production 24-7. So that means that, of course, part of that upside, we have to share with our JV partners, and that's why you see that increase in the minority. And that, of course, is predominantly in half one where that's stepped up, right? And then I think... The JV doesn't share, you know, for example, cost allocations on the standalone costs and so on that are applied to the overall region. That's why you get a difference in the overall region margin picture compared to what sits in the JV as part of the JV agreement. So I think it's a bit, you know, unusual to then have one just given that strong benefit and contact growth coming through there.

Okay. Thank you. As we have no further questions, I'll hand the call back to Brian McNamara for closing remarks.

Great. Thanks, everyone. Appreciate your time and questions. As we said, we feel great about how the first half has gone, and we're confident in the outlook that we laid out today. So hope you all have a great summer. And if you have any further questions, feel free to reach out to Sonia and the investor relations team. Thanks again for your interest.