Haleon plc

Good morning, everyone, and welcome to Hylian's conference call for our third quarter trading statement. I'm Sonia Gabriel, Head of Investor Relations, and I'm joined this morning by 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 guidelines for more details. including factors which could lead to actual results to differ materially from those expressed in or implied by any such forward-looking statements. Today we plan to run through some slides before opening call for Q&A. For those listening on our webcast who would like to ask a question, you can find the dial-in details on page 2 of today's press release. As you know, whilst the focus today is on revenue performance, we've also provided a group offer in margin details on both the reported and an adjusted basis. with a full reconciliation, including for organic revenue growth, in our appendix. For information, we do not intend to provide quarterly profit data on an ongoing basis, and will only do this for as long as FISA reports our results as part of its financial statements, and until our registration rights agreement with FISA and JFK terminates. With that, I'd like to hand the call over to Tobias.

Thanks, Sonia, and good morning, everyone. As we first start with our first quarter highlights, As you will have seen from our release this morning, we had a good third quarter with 5% organic revenue growth, 6.6% price, and a 1.6% decline in volume mix. This performance was underpinned by continued share gains across our business. Across the quarter, growth was driven by a number of categories, including continued strength in both oral health and pain relief, and it's encouraging to see EMS being back to growth. Respiratory also had a good quarter with normal seasonal cold and flu sell-in. Digestive health saw good consumption growth, but our results were negatively impacted by one of the inventory movements from some U.S. retailers. The latter was the primary driver for the volume mix decline in Q3. Equally important, we saw continued good operating leverage with inflationary cost pressures more than offset by price and efficiencies across the business, resulting in operating margin expansion of 90 basis points. On the back of today's strong numbers, I'm pleased to reiterate that we remain firmly on track to meet our full-year guidance to grow organic revenues by 7% to 8% and operating profit 9% to 11% constant currency, resulting in margin expansion. Finally, it's worth highlighting that we closed the sale of Lamisil in the last couple of days, earlier than we expected. We'll recall that we announced the sale of the brand with our happy results. This demonstrates our commitment to optimize the portfolio to active brand management. Now turning to our third quarter results. Revenue of 2.8 billion reflected 5% organic revenue growth. Successive operating profit was up 8.8% constant currency, resulting in a 24.6% margin of 90 basis point constant currency. As expected, the adverse impact of FX was more pronounced in the third quarter due to year-on-year strength in sterling against the U.S. dollar and the movement in a number of emerging market currencies, which negatively impacted Martian and actual rates. Looking at the drivers of revenue growth in more detail, we delivered 5% organic sales growth in pricing, 6.6% price, and a 1.6% decline in volume growth. Pricing in the quarter included some incremental price, as well as the carryover of pricing taken over the last 12 months. As I have said previously, we will continue to take prices needed and remain confident in our ability to do so, given the strength of our innovation and brand and market positions. However, going forward, this will be at a lower level than it seems so far this year. In Q3, We also had a one-point benefit from high inflation economies, Turkey and Auschwitz. We saw continued volume mixed growth in APAC, our health business, although overall, this was offset by two factors. One, anticipated decline in emergency, where the category has reverted towards pre-pandemic level, which has now stabilized. And two, one of retailer inventory stock adjustments in digestive health in North America. We had an inventory build last year following a temporary supply shortage, which we have now left, and we saw some U.S. retailers reduce their inventory this year. Importantly, consumption in digestive health continues to see good growth. Including both these impacts, volume mix would have been flat across the group, and I would expect improved volume mix in the fourth quarter compared with what we have reported from Q3 today. Turning now to our performance across the categories. Looking at the quarter, I was particularly pleased that our health revenues were 9% with healthy growth in price and volume mix. Sensodyne was up double digits underpinned by continued share gains, benefiting from innovation and strong growth across a number of markets, including India, Japan, as well as good performance in the US. VMS is back in growth with continued strong performance of Centrum, which more than offset the expected decline in emergency. The double-digit revenue growth of Centrum was driven by positive price and volume mix, helped by geographic expansion and activation in a number of markets. Indreleaf also delivered good revenue growth, up 6%, with Panadol driven by strength in Middle East and Africa, and Voltaren growth underpinned by performance in Europe from new innovations. Advil declined mid-single-digit, largely due to more competitive market conditions. Respiratory revenue was up 4% and strong growth in parafluid robitussin from selling ahead of the cold and flu season, which more than offset both the lower out-of-season news of cold and flu products and a decline in flow names following a weak adduction season. Altogether, this demonstrates the strength and the diversity of our portfolio, delivering 5% organic growth for the group. And we now move to look at geographic segment performance. Looking across the region, we saw slightly differing trends from one region to another, with strong growth across EMEA and Latin America and Asia Pacific and a slight decline in North America. Our emerging markets saw 11% growth, which included the benefit from pricing taking in high inflation economies. Emerging markets made up a third of our revenues and included double-digit growth in India, and broad-based growth in other emerging markets. Developed markets grew 2%. Looking at each region in more detail, starting with North America, organic revenue declined 1.5%, with a 2.6% price increase and a 4.1% decline in volume mix. As I mentioned earlier, this decline in volume mix largely reflected two factors. First, a one-off reduction in digestive health brand inventories from retailer stocking movements, and second, an expected decline in emergency. Including both students' impacts, the volume mix would have been slightly positive. Across the categories, we saw mid-Singleditchy growth in oral health led by Sensodyne, underpinned by consumption and new innovations, including pronamyl active shields. EMS increased low signal digits, the strong performance of Centrum that more than offset the declining emergency where demand has now stabilized. Centrum benefited from the activation of cognitive function claims on Centrum Silver and the launch of our prenatal blend. AID relief declined mid-single digits driven by Advil. Respiratory health was down low single digits with growth in cold and flu, offset by a decline in allergy products due to weak seasons, resulting in inventories being run down to normalized levels. Finally, digested health and other fell in single digits, largely due to a double-digit fall in digested health revenue, as I already explained. Turning to Europe, Middle East, Africa, and Latin America. Organic revenue increased 10.8%, split 12.7% price, and a 1.9% decline in volume mix. As you will recall, this region is the most exposed to higher inflation economies, Turkey and Argentina, which had a 3% impact on organic growth. The decline in volume mix was driven by Latin America, where volumes declined double-digit from weakness in Colombia and Mexico, which was more than offset by strong pricing. Looking across this segment, there's strong growth in the Middle East and Africa, helped by Canada. In Europe, Revenue was up mid-single-digit with broad-based growth, including strong results in Germany. Across the categories, oral health saw double-digit growth, largely driven by Sensodyne and VentureCare. We're seeing good consumer uptake for a number of brand innovations, including Paradigm Tax Active Gum Repair. In BMS, the region saw a low single-digit decline, driven by some local brands. In fed data, central was up strongly, helped by continued activation and strong execution in markets across the region. Pain relief revenue was up double digits, connecting strong growth from Panadol and a number of successful campaigns, featuring our specialist ranges and growth in Voltaren. Respiratory sales increased in the mid-single-digit range, driven by price and the selling of cold and food products ahead of the season. We continue to drive innovation in this category and recently launched Otteroo Nasal Mist, which delivers an improved consumer experience in both comfort, ergonomics, and efficacy. At Best of Health and Other, saw sales up double digits with good growth across most of our brands. Finally, turning to Asia Pacific. Organic revenue increased 5.9%, with 2.9% from price and 3% from volume mix. China, our second largest market overall, was up mid single digits after a very strong first half following the easing of COVID-related lockdown restrictions, leaving China up mid for the nine months. Elsewhere, India grew double digits, and Australia and New Zealand was up low single digits. Within the categories, our health saw high single-digit growth, underpinned by strong growth in methadone, particularly in India, Japan, and China. In VMS, we saw low single-digit growth, helped by successful consumer campaigns for Centrum, partly obsessed by declining culture. In pain relief, old parents saw strong growth, particularly in China and Australia. As expected, 10-digit revenues declined after extraordinary strong growth in China during the first half, and this ensured inventories have returned to a more normalized level. Respiratory revenues were up double-digit, driven by strong growth in Teraflux. Turning now to our operating performance. Adjusted operating profit was up 90% constant currency driven by positive operating leverage. Looking at the bridge in more detail, standalone costs were tenderly lower than last year as we run down our TSH with GSK. at least to report strong execution with pricing and efficiencies offsetting inflationary cost pressures and negative volume, resulting in positive operating leverage. Importantly, short continued investment in consumer-facing ANP drew ahead of organic growth. Finally, as expected, about 100 million pounds or 140 basis points had been for material movements and foreign exchange on a translational basis, which particularly impacted the quarter. Even together, this resulted in a 5% decline in adjusted operating profit and actual exchange rates and a 24.6% margin. As a reminder, Q3 is typically our higher margin quarter in the year, given advanced sales of cold and blue products ahead of the season. This takes our year-to-date adjusted operating profit constant currency growth to 9% and a margin of 23%. 10 basis points constant currency. As I mentioned earlier, we're pleased to reiterate our confidence in our full-year outlook. We continue to expect to achieve organic sales growth of between 7% and 8%. We see another year of positive operating leverage and expect the adjusted operating profit to grow between 9% and 11% constant currency. This will therefore result in adjusted operating margin expansion on a constant currency basis. So, to sum it up, Hadeon has delivered a strong third quarter performance, demonstrating the strength and diversity of our portfolio and execution across our market. We live at 9% adjusted operating profit growth at constant currency and strong positive operating leverage across the business. As such, we have reiterated our full-year guidance Given the momentum across the business, in what remains a challenging market environment, we remain confident of delivering on our medium-term guidance, as we stated in this morning's results release. With that, I would like to hand back to the operator to open up for questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Richard Kawan, Morgan Stanley. Please go ahead.

Hey, good morning, Tobias and Sonia. Thanks for taking my questions. A couple for me, please. The first one on the negative volume mix in a meal in LATAM, you talked about the declined largely a function of weakness in Mexico and Colombia. Can you get into that a bit more? What's driving that? Is it increased elasticity as a result of price increases, more competitive dynamics for peers? Any color there would be helpful. And then the second point, you're calling out the one-off retailer inventory adjustment and digestive health in North America, which means obviously it's material enough. Can you quantify that? And is that something that you'd expect to reverse into Q4? Thank you.

Sure.

Thanks, Richard.

So first on LATAM. So I think I'm not concerned about the overall price volume pricing dynamics. I mean, overall, I mean, you've seen LATAM has a strong quarter up double digit in revenue. When you look at Columbia, they still had a COVID wave in Q3. So they're cycling over that. think in mexico it has more to do with the shipments of cold and flu that are the difference between the quarters this year so nothing particularly concerning to call out i believe the team in that time has done a really good job and keep pushing up pricing and you know a very dynamic environment but also maintaining overall the ability to hold um to hold volumes um on north america um so I think you have two things. So I think the year-over-year, so first of all, I mean, the China digestive health, that's the biggest driver of why volumes were down, both for the North American market but also for the group overall. So that's the primary driver. What made Q3 a bit bigger is because last year we had built inventory because we had an out-of-stock situation that we re-piped inventory and built. So it was an inventory build last year. This year, there was an inventory burn because some retailers decided to hold a little bit less inventory at the beginning of the quarter. Most importantly, consumption is still strong. So we had, when you look at those half-year and also the Q3 numbers, consumption on these products is still up, which is the most important thing. And I don't expect that to reverse. Look, I mean, it's hard to predict what retailers are doing, but this will not repeat or come back in Q4 from our perspective.

Perfect. Thank you, Tobias.

The next question comes from the line of Guillaume Delmas, UBS. Please go ahead.

Thank you, and good morning, Tobias and Sonia. Two questions from you as well, please. The first one is on VMS. I mean, Tobias, can you shed a bit more light on the various brand developments in Q3? Because it seemed that Centrum, your largest brand there, accelerated very nicely from low single-digit in Q2 to double-digit in Q3. But then emergency remained a drag, call trade was unusually weak, and the local brand in Imia Latin had another soft quarter. So first, in terms of category growth, are you seeing an improvement in VMS? And then is it fair to assume that now that emergency is fully normalized and that I would assume call trade should be back to gross in Q4, that VMS could very soon be back to its medium-term gross range ambition of mid to high single digits. And then my second question is on your multi-year organic sales growth guidance of 4% to 6%. I appreciate it's early days, but can you already confirm that your ambition is to achieve 4% to 6% next year, so in 2024, despite the uncertainty around the respiratory division and the tough comps in China. Thank you. Thanks, Guillaume.

So let me start with VMS, right? So, I mean, you pointed out Centrum, so... really strong about this brand. I mean, geographic expansion, activation, activating on the clinical trials and the claims that we're rolling out globally. So I think the brand is really strong. And overall, it was pleasing to see that VMS is back to growth. And then you mentioned there were a few of the local brands, for example, Polaris in Italy, which is more of a seasonal brand. It's a very mild summer in Italy, so there's a bit of ups and downs on those, so we're not broadly concerned about these brands. Also, we have a VMS brand in Russia that we stopped distributing, so we wouldn't be too concerned about those. And then Cultric was also more of a one-time thing. It was a distributor in change. in China, and then last year, South Asia was very strong. So again, I think I'm not concerned about calc trade also, particularly also not for China, where the biggest market is. On emergency, What is good to see over the last few months, that consumption has now stabilized. And it's stabilized pretty much at the 2019 levels in units. And then you have on top of that the innovation and the pricing we did. So it's been stabilized and it's now following the patterns where it was pre-COVID. Of course, it's going to take us probably two more quarters to to land there, so we fully cycle over it, but I think it's good to see that it's found the place at 19 and now going into the season, it's coming and starting to grow again, so I think that will be behind us, I would say, in the not too distant future. And more broadly in VMS, I think, you know, we remain confident in the category, and I think it's back to growth now. So, we had two strong years of growth in VMS, and I think now it's coming back with, you know, emergency a bit down, but Centrum more than making up for that. Then, your multi-year growth. question yes i think we'll guide we'll guide for full year uh with our with our full year results but i mean maybe i mean for us the four to six guidance is an annual guidance right this is our ambition that we grow four to six um every year and not just not just over a several year period that's the first thing the other piece is um take a step back at half year guided for seven to eight for the full year that's four to six um in the second half and we're right in the middle on that growth guidance with what we delivered in Q3, and we're very confident in our guidance and being in this guidance range for the year as well, given, you know, the strength of the portfolio and of the business that we have, the continued ability to take price as well.

Thank you very much.

Thank you.

Next question comes from the line of Celine Panuti, JP Morgan. Please go ahead.

Thank you. Good morning, Tobias and Sonia. My first question is a follow-up on what you just said in terms of the pricing. You said the ability to tell the price, but I think early on in your commentary, you were talking about going forward a lower level of pricing that we have achieved this year. Can you talk about, you know, what kind of underlying pricing that we should be looking at and then maybe, you know, Is there any commentary you can make on costs that you are facing this year and how 2014 cost deal is shaping up? 2024, excuse me, cost is shaping up. My second question is on volume. So you are guiding for volume to improve in Q4. If I take out the benefit or the impact, sorry, of the one of... issue in the US, I get to minus 0.6 volume at the group level. Is that the ballpark of what you should be aiming for in Q4? And then in 2024, maybe coming back on the previous question on that volume point, you know, like we are seeing this unwind of volume that you benefited from in 2022. So, here as well. I mean, do you expect that unwind to be an issue in the first half of the year?

Good. Thanks. Thanks, Celine. So on pricing. So when you look at what we did in Q2, we had the peak in pricing. It was 7.9%. It came down to 6.6% in Q3, as I had said at half-year, right? And I would expect that trend to continue. So now, it doesn't mean we're not taking any pricing, right? So the team continues to take pricing, of course, clearly in the emerging markets where there's high inflation environment. But we also, for example, we took more price in the U.S. in September, mid-single digit to low-double digit, on a quarter of the portfolio. So I think we feel good about our ability to take price. Also, we have seen limited price elasticity today. So from that perspective, we need a reassurance of our ability to take and doing that forward. Now, of course, we're mindful on the consumer backdrop, but I think when you look, I think what the team has done, I think we found probably the good spots between pricing and volume, but of course, we're going to be responsible in the pricing we're taking overall in this environment. On the cost of information, I think we're down into the mid-single digits, so that is clear. There are, you know... few of the commodities start coming down, but then I think there's others that still stay stubbornly high, like sugar, anything that is sugar-related. But also, of course, I think the bigger topic right now is labor costs and how labor costs evolve. But again, I think what was said before with pricing, I think we should have the ability to offset inflationary headwinds with the price that is coming through. And then on your volume question, so I think for us, I think, as I said, it's going to be better than Q3 was. When you look at Q4, so the puts and takes, last year there was a recall. That helps. We don't expect to have a recall this year. And then, of course, the other direction is last year, fended in China and contact took off after the after the change in COVID strategy in China, and we had this very early peak on the cold and flu season. in the u.s so as i had guided at half year you would still expect volume to be down on cold and flu um in the uh in the second half of the year particularly in uh in q4 as well given uh given that dynamic right but if you can take a step back from it in aggregate for the business very confident about the four to six guidance we had given for half two and that then puts us very well into um into the seven to eight um percent uh percent range. And then going into next year, I think it's exactly the same comment, right? I mean, you've seen we did 5% growth in Q3 with ups and downs, with puts and takes on a digest. So I think the beauty in this business, in my view, is the diversity of this portfolio from a brand perspective. And you saw, I mean, high single-digit, nearly double-digit growth on our power brands that carry that forward. categories, sort of strengths across four categories that carry the growth. And then also the geographic mix with a good third of the business being an emerging market versus developed markets. I think that gives us the ability and I think the strong confidence that we can grow and continue to grow in this 4% to 6% range going forward.

Thank you.

Thanks, Celine.

The next question comes from the line of Karen Booty.

Yes, good morning all. Thanks for taking the question. I have two questions. The first one is basically a follow-up on China. You already provided some insights highlighting the difficult comparison base for the paint franchise. How should we look at the coming quarters ahead? Is that going to be something where you would anticipate, therefore, a decline? Or are there also offsets in China? And the other thing is on the U.S. pain franchise. You mentioned Upfall was down mid-single digits. And regarding Voltaren, you particularly mentioned the progress in the European markets. How is the brand doing in the United States? Thank you.

Sorry, I didn't get your last ones. I got China, Japan, or Poland at the US, but then you said Voltaren.

Yeah, Voltaren. Yeah, you highlighted that Voltaren is doing well in Europe. Now, that's good. Probably improvement in Germany too. But how is Voltaren doing in the US?

Okay, good. Thank you. I got it. So then let me start with China. So I think... Let me first explain a little bit what happened on Fenbit. So I think on Fenbit or in China, there was the second COVID wave in May. That was over May, June. Then the government in China expected another third wave. So they told retailers and pharmacies to keep stocking products. That didn't happen. So was it so luckily for China? for our colleagues in China. So ultimately, what then we decided during the third quarter is to ramp inventory down to normalized level, given there was not another wave. Now, last year, of course, you had the big pickup in Q4 and Q1. So we would expect a drag from that on the pain relief portfolio. But when you look at the rest of the portfolio in China, I think very strong brands. We see continued growth in the oral care business, in the cow trade business, and in the rest of the portfolio. So I think, yes, there's got to be a bit of a drag on the pain relief and on the China business as we cycle that over. But overall, we feel good about our ability to grow the Chinese business. On Advil in the U.S., you know, very competitive situation. Of course, you know, Advil's key competitor is Tylenol. They have done very well. So I think we've got a bit of work to do. Now, nothing surprising in a big portfolio like we have, right? Ended up paying really overall through 6%. All the brands did well in that, even with the small drag or the drag they had from Benbit in it. And then Apple was down. So he focused for us to put attention to that, which is sort of a price increase on it, which will support. But yes, I think it's one of those where we go head to head with a very strong competitor. And then I think on... on what's current. I mean, overall, I think this year, I think we've seen good growth on the brand in aggregate. So I think also it's doing well in the U.S. It's done particularly well in Europe now. I think coming off, you know, higher use of systemic pain relief products, that helps Voltaren because in times when people use a lot of tablets, they tend to reduce the use of coffee or pain relief medicines. Thank you.

Thank you.

As a reminder, to ask a question, please press star and one. The next question comes from the line of Chris Pitcher from Edburn. Please go ahead.

Thank you very much. I've got a couple of follow-ups and a question. Are you able to say what China growth would have been X to D stocking impact of FEMB bid and contact? I appreciate it's going to be an issue in the next couple of quarters, just to get the underlying growth there. And then on the question about volume growth into Q4, Can you give us a bit of colour about the mix effect you would expect within that, particularly with potentially lower respiratory sales? And then an underlying question, India, you highlight the strength of oral health, but can you say how digestive health performed and how the rollout at Central is doing?

Thanks. Yeah.

i think for me i mean i mean china overall has grown right so i really don't want to go so into the ups and downs right everything i mean ultimately i think um the china performance overall is strong the defendant was you know was a small drag there on both the pay to release category globally and that but i think i mean ultimately what the team's been doing i think they've offset these impacts very well um very well so far and good news is, you know, we have a broad portfolio in China that carries us through. I think on Q4, I mean, yes, I think, as you mentioned, right, I mean, we would... part of our guidance, we would expect volumes to be down in respiratory. Now, look, this is an assumption, so we need to see what the season does. But I think that is clear. There's going to be another drag clearly on fenbit and fenbit because that's when the consumption started. And then when you look at digestive health and others, there should be a small help because last year we had a recall on Tums. I think that's probably the biggest puts and takes in the portfolio. And then, of course, you have to remove Lamisil from the model as well. I know it's small, but I think given we closed that a bit earlier than we expected. And then I think the rest of the portfolio, I think, would expect continued strong momentum and performance. And then you asked about India.

Yes, on India, what I was saying, digestive is always pretty strong, so it's double-digit, so that's obviously Eno doing particularly well in the market.

And the rollout of Centrum still going to plan?

Yes, absolutely.

Thanks. Thanks, Chris.

The next question comes from the line of Tom Sykes, Deutsche Bank. Please go ahead.

Yeah, morning everybody. Firstly, just on the gross cost savings, the 300 million, I wondered if you could maybe just give us an update on when those should hit the P&L and perhaps how much of the 150 million, just to be clear, you would expect to spend in full year 23. And just on standalone costs, I mean, will there be any difference in seasonality in full year 24 versus 23, like there has been, obviously, in 23 versus 22? And if I can, just a quick one, is there any part of your VMS business that has seen a GLP-1 impact at all? And do you expect an impact of at all people taking vitamin supplements at all if they start embarking on taking those medicines. Thank you.

Thanks, Tom. So about the cost savings, we said the impacts are going to be 24 and 25. We are making good progress, so we made announcements. So we are, and given the announcement, you know, largely impact populations in Europe. We're in the middle of the, we're in consultation phase, so it always takes a bit of time then for the savings to realize, because as for labor law that we have in those countries, you have to get before people can exit the company. So from our perspective, we've made good progress on that, but we would expect the savings to hit in 24 and 25. On the standalone costs, I think that is now stable. I mean, we're just ramping down now the TSA. They weren't a big amount, but year over year, you get the small benefit. And I think that's going to be complete quite soon. So from that point of view, this is history. And I would hope that from next quarter on, I don't need to talk about standalone costs anymore because they're in the base. There is no phasing. There is nothing to to worry about that going forward. I put it in the bridge now, even if it's only 10 million, because it was such a topic before, but that's going to be history now very soon. And then, Jock, on your GLP-1 question, we don't think we have a direct impact from GLP-1 from consumers potentially changing behaviors. I mean, ultimately, we believe it's a good thing if people want to take care of their health and want to live healthier. So I think that should be, you know, overall benefit us in my view, but I don't think there's any direct impact. And it's also way too early to tell what it could do, but I don't see any direct consequences on our business at this point.

Okay. Thank you.

There are no more questions at the time.

I think we just finished, so just a couple of quick comments.

Yeah, that's good. So, look, thanks, everyone, for your time and your interest in Halion. And as you've seen, we had a good quarter. I look forward to updating you on our progress next year together with Brian. And if you have any questions, please do reach out to our IHR team. And also worth mentioning, we'll be hosting our first Halion Highlights mini deep dive that will be on oral health. the 7th of december in london and we'll also get cast at so thank you and bye bye for now thank you