RB delivered another "excellent year" of growth and margin expansion in 2015, with the shares up 5% in early morning trading.
Net Revenue was £8,874m, an increase of +5% at Constant Exchange Rates (flat at actual rates), and +6% on a like-for-like (LFL) basis (excluding the impact of acquisitions and disposals). Gross Margin increased by +140bps to 59.1% and Adjusted Operating Margin increased by +210bps to 26.8%, benefiting from mix effects, lower commodity prices and c. £100m of cost savings from Project Supercharge. This led to a 12% rise in both adjusted operating profit (to £2,374m) and earnings per share (CER).
- Q4 net revenue up +7%, in-line with Q3.
- Consumer Health had an exceptional year of +14% LFL growth. Hygiene, Home and Portfolio Brand categories all grew by low-single digits.
- Europe & North America (66% of sales) achieved LFL growth of +5%. Developing Markets (30% of sales) LFL growth was +9%, with improving trends in H2.
- Final dividend up 12%, full year dividend unchanged at 139p per share.
RB is targeting:
- LFL Net Revenue growth of +4-5% in 2016.
- Moderate operating margin expansion over the medium term, supplemented in 2016 by part of the remaining Project Supercharge efficiencies.
There aren't many companies that can raise sales and margins year in, year out, in almost any economic environment. But Reckitt Benckiser (RB) has done just that over the last 10-15 years. 2015 was another excellent year.
RB's business model acts like a virtuous cycle. It has 19 Powerbrands (examples include Dettol and Nurofen) which are sold in almost 200 countries, account for more than 80% of sales and attract the highest margins. Every year RB invests more behind marketing these brands and introducing new innovations. This drives sales and margins, allowing more to be invested behind the brands. The cycle repeats.
RB's focused portfolio helps to explain why it is outperforming its peers. Procter and Gamble has too many non-core brands. It is having to slim down and restructure, and as a result has struggled to grow sales and profits over recent years. Unilever's performance has been better, but again it has a lot of brands that aren't really doing very much, which only serve to increase the complexity of the business. RB doesn't have a long tail of stale brands.
Margins are being helped along by Project Supercharge, which is creating a simpler, more agile organisation. This has delivered £100m of cost savings in its first year; with a further £50m of savings targeted over the next two years. Lower commodity prices are also helping and this tailwind looks likely to persist in 2016, given the recent declines in the oil price.
The ordinary dividend has been held flat for the year, but this is slightly misleading. Investors who held on to their shares after the demerger will also be receiving a dividend from Indivior, the former pharmaceutical business. RB shares currently yield 2.1%, with the payout forecast to grow broadly in line with earnings from here.
The shares are trading at around a 40% premium to their long run average P/E rating on 23.8x earnings, but the balance sheet is in good shape. We wouldn't be surprised to see RB looking to bring new brands into the portfolio. Historically, such deals have been very well received.
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