Haleon plc

Ladies and gentlemen, welcome to the Halion Q1 2024 Trading Update conference call. I am Dhawan, the chorus call operator. I would like to remind you that all participants will be in the listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over the conference to Sonia Gabriel, Head of Investor Relations. Please go ahead, madam.

Thanks very much. Good morning, everyone, and welcome to Halian's first quarter trading statement conference call. 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 filings for more details, including factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. As usual, we'll take you through some prepared remarks before opening the call to Q&A. For those listening to our webcast who'd like to ask a question, please use the dial-in details on page 3 of today's release. Also, whilst the focus today is on revenue performance, we've also provided group profit and margin detail on both a reported and an adjusted basis, with a full reconciliation including one for organic revenue growth in the appendix. As a reminder and for information, we do not intend to provide quarterly profit data on an ongoing basis and will only do this for as long as Pfizer reports our results as part of its financial statements and until our registration rights agreement with Pfizer terminates. With that, I'd like to hand the call over to Tobias.

Thank you, Sonia, and good morning, everyone. Let me first start with our highlights for the quarter. We had a solid start to the year with 3% organic revenue growth, driven by 5% price, and volume mix down 2%. Positive volume mix in EMEA LATAM and APAC was offset by a decline in North America. However, once growth was held back in the U.S. from inventory adjustments by some retailers, Hadeon's consumption in the U.S. was up mid-single digit and ahead of the market. Adjusted operating profit of £707 million was up 12.8% on an organic basis. with gross profit up 5% organically, funding strong growth in A&P. As pricing is normalizing and cost inflation easing, combined with our productivity program, you can see that our growth algorithm is delivering, even in a low-growth quarter, and is enabling increased reinvestment. We've made continued progress in the evolution of Halion to become more agile and competitive, and we're now seeing the results of the productivity program announced last year. We also shared in today's release the proposed closure of our maidenhead manufacturing facility, transferring production to our Levice site in Slovakia over the next two years, an important step in Halion building a more efficient global supply chain. As a reminder, with our full year results in February, we announced that we expect to allocate 500 million pounds to share buybacks in 2024. To date, we have purchased 102 million ordinary shares, for approximately 350 million patents. The solid start to the year gives us confidence in delivering our full year 2024 guidance as stated in our release this morning. So let's look in more detail at our Q1 results. Revenue of 2.9 billion reflected 3% organic revenue growth. Turning to slide six. Coming back to organic revenue, we had guided that Q1 revenue would be just below the lower end on our 4% to 6% full-year organic growth guidance range. However, in this quarter, we also saw some inventory adjustments in the U.S., resulting in volume mix a little weaker than expected. Overall, volume mix declined 2%, with EMEA and LATAM returning to volume growth after two quarters of volume decline. Asia-Pacific also saw positive volume mix despite lapping tough prior year comparatives in China following the end of COVID-19 lockdowns. And although North America volume mix was down, consumption was good, reiterating healthy demand for our brands. Price was up 5% and included both. Carry forward price from last year, as well as incremental pricing taken during the quarter. Going forward, we expect the carry forward benefit to reduce a little through the year. Organic revenue growth was more than offset by a 460 basis points adverse impact from translational foreign exchange. Year-on-year sterling strength relative to the dollar and Chinese remittance were the main drivers. Given how FX rates evolved through 2023, we always expected the impact of foreign exchange to be most pronounced in the first quarter. Therefore, no change to our full-year outlook. Net M&A was minimal and reduced revenue by 0.6%. Looking now at performance across our categories, I was particularly pleased that oral health revenues grew 10.6%, with Sensodyne, Paradontax, and Polygrypolident all up double-digit, further building on last year's strong performance. This was underpinned by a number of successful innovations, such as Sensodyne Clinical White, scientifically proven to whiten teeth by two shades without worsening or causing sensitivity. VMS revenue grew 9.9%, continuing momentum from Q4 2023 and demonstrating our brands remain well-positioned and continue to outperform. CalTrade was up double-digit with strong growth in China. Strong Centrum growth was underpinned by performance in North America and continued activation of cognitive function claims for Centrum Silver. Emergency grew mid-single-digit gaining share and outperforming the immunity category in the U.S. Pain relief revenue declined 4.8%, mainly reflecting tough comparatives from Q1 2023 with Fenvid in China, and also Advil declined double digits, partly due to elevated demand in Canada last year, as well as inventory adjustments by some U.S. retailers. Panadol declined low single-digit, driven by a softer performance in Asia-Pacific, given the decline in Australia, and Voltaren grew mid-single-digit, with strength in Europe. As expected, respiratory revenues were down, lapping the strong prior-year comparative. In Q1 2023, from contact in China, as well as the prior-year rebuild of inventories, mainly in the US, given low levels at the end of 2022, when cold and flu incidents spiked late in the year. Finally, digestive health and other revenue increased 2.4%, with digestive health and skin health up low single digits, smokers' health declined low single digits. Turning to regional performance, emerging markets, which had 36% of revenue, saw 7.7% organic revenue growth, with the benefit from pricing and hyperinflation economies now capped. and despite China being down low single digits. Developed markets grew 0.5% organically. Looking at each region in more detail, starting with North America. Organic revenue declined 3.3%, with positive price up 4.5% and volume mix down 7.8%. Our health grew mid-single digits driven by Sensodyne. VMS was up double digits, And pain relief and respiratory health both declined due to challenging comparatives and inventory management by some US retailers. Let me take you through this in a bit more detail. While some inventory management is expected through the quarters, this quarter was a little unusual. You will remember that the cold and flu season had an early and strong spike in Q4 2022, very much towards the end of the year. And this resulted in restocking of depleted inventories in Q1 of 2023. Normally, what we would expect and what we saw in Q1 this year was destocking in the quarter as retailers sell out stock and reduce inventories towards the end of the season. As a result of this, and given the comparative, there was a much higher than usual year-on-year change in selling, resulting in the majority of the volume decline seen in the region. Additionally, and to a lesser extent, we saw some inventory adjustments by some US retailers on other categories, which also impacted sell-in. However, looking at consumption data on the market, our consumption increased mid-single digit, and both the market and Halion performance improved in Q1 compared to the last 12 months. More importantly, Halion outperformed the market, both in value and volume, demonstrating consumer demand for our brands remained healthy. Turning to Europe, Middle East, Africa, and Latin America. Organic revenue increased 8.6%, with 7.5% price and 1.1% growth in volume mix. Pricing partly benefited from carry forward from 2023, and also the benefit of incremental pricing taken in the first quarter. Volume mix was positive, despite some offset from a decline in Middle East and Africa. Across the categories, our health saw double-digit growth, driven by all three power brands. VMS increased mid-single digits, with good growth in both Centrum as well as local brands. Pain relief in the region saw mid-single-digit growth, reflecting good growth from Voltaren. And respiratory sales increased mid-single digits, despite lapping a challenging prior year comparator. Finally, turning to Asia Pacific. Organic revenue increased 3.3%, evenly balanced between price at 1.7% and volume mix at 1.6%. A really good performance, particularly given the expected decline in China in Q1. Within the categories, oral health saw double-digit growth, underpinned by strong growth across key markets, including China and India. In VMS, we saw high single-digit growth underpinned by cut rate, with pricing, easing of inflationary cost pressure, and efficiencies from the productivity program allowed us to strongly invest into the business and into A&P. Net M&A had a negative impact of 12 million and was a 30 basis points drag on adjusted operating margins. Finally, there was a 59 million or 80 basis points adverse impact from translational foreign exchange. This mainly reflected movements against the US dollar and Chinese renminbi. Taken together, this resulted in a 2.3% increase in adjusted operating profits and a 24.2% margin. Remember, as you've seen in prior years, the quarters are very volatile, and as such, neither the Q1 absolute margin nor the organic profit growth should be extrapolated for the full year. We continue to evolve and implement change across the business, to become a more agile and competitive organization. The productivity program is delivering the expected savings and is funding increased investment in the business and driving growth. In addition, we announced plans for the proposed closure of our manufacturing facility in Maidenhead, which is expected to result in a total restructuring cost of around £90 million over the next two years, the majority of which is non-cash. There is no change to Lamisil and Chapstick impact, which I guided at with the full year results, but I can confirm that we expect Chapstick to close in May 2024. Also in the quarter, we completed a share buyback of 315 million for 102 million ordinary shares, all of which were subsequently canceled, reducing the number of share in issue by circa 1.1%. This was part of the 500 million pound share buyback, we expect to complete in 2024 announced without full-year results. The expected impact of translational FX remains unchanged with an adverse impact of 2% on full-year 2024 revenue and 3% on adjusted operating profit. This assumes rates as at the 31st of March 2024 hold for the rest of the year. All other full-year 2024 guidance remains unchanged. So, to sum it up, Halion delivered a solid first quarter performance despite lapping challenging comparative. We delivered organic profit growth ahead of organic revenue growth, benefiting from improved gross profit as well as efficiencies in the business. Our business is evolving as we implement change to improve agility in our competitiveness. Finally, following Q1, I remain confident that we are all well-placed to deliver on our full-year guidance. Before we move to Q&A, I wanted to briefly say a few words on my own personal news from last week. As you will have seen, I'll be leaving Halion at the end of the year. It wasn't an easy decision to make, but I'm really proud of the strong foundations we've built and what we have achieved. It's been an amazing period, both professionally and personally. I was very open about wanting and needing to create more balance in my life, not least Because as you get older, managing type 1 diabetes becomes more and more important. So that's been a driving factor in my decision. I'll be focusing on advisory and non-executive work from next year, which is an exciting new phase for me. You also have seen we announced that Don Allen, currently the CFO at Tate & Lyle, will be joining at the end of October to succeed me. He's an exceptional leader and will bring deep consumer and international experience to the business. Halion is in good hands. In the meantime, it's very much business as usual. I'll be leading us to Q3 and then working with Don for a couple of months handover before leaving at the end of the year. Anyway, with that, let's now move to Q&A and I will hand back to the operator to open up for questions. Thank you.