Shares in Reckitt Benckiser fell 1.5% this morning after the company released their second quarter and half year results.
The group have incurred exceptional charges of £319m which have dragged reported first half operating profit down 19%. These charges primarily relate to a link between Humidifier Sanitizers (HS) sold in Korea between 2001 and 2011 and lung injuries.
After stripping out these charges, the group have reported adjusted operating profit of £1.1bn, up 13%. Net revenue is up 5% to £4.6bn.
Overall, LFL net revenue growth was 5% for the half, with the second quarter slower at +4%.
First half LFL net revenue growth was 3% in ENA (Europe and North America) with growth across most major markets, other than Russia which had a weak first half. DvM (developing markets) growth is 9%, with the Zika virus continuing to sustain demand for pest control products in Brazil.
In the group's divisions, LFL net revenues were up in Health (+8%), Hygiene (+5%) and Home (+1%) but down in the Portfolio division (-3%). New product launches included initiatives in the Veet, Air Wick and Nurofen brands.
Gross margins are up 240bps to 60%, primarily driven by the benefits of Project Supercharge. An increased marketing spend (up £39m at constant exchange rates) means that adjusted operating margin is up 180bps, to 23.7%.
The interim dividend is up to 58.2p (2015: 50.3p) in line with its stated policy to pay out about 50% of basic adjusted earnings per share.
Group CEO Rakesh Kapoor reaffirms the group's full year LFL net revenue target which, given the impact of the HS issue, is now at the lower end of the +4-5% range. He adds that the group are "also targeting moderate adjusted operating margin expansion in H2, following the excellent +180bps achieved in H1."
With interest rates low and uncertainty swilling around the global economy, investors have recently been drawn to consumer goods companies due to their defensive and resilient characteristics. Many, such as Reckitt Benckiser (RB) themselves, have an excellent track record of increasing profit margins and raising dividends year after year .
What has set Reckitt apart from the sector in recent times is their concentrated business model, which acts as a virtuous cycle. It has 19 Powerbrands (examples include Dettol and Nurofen) which are sold in almost 200 countries. These 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.
By way of a comparison, 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 by the end of 2017 . Lower commodity prices are also helping.
The shares, on a forecast PE of 24.6 are trading at around a 40% premium to their long run average, but the balance sheet is in good shape. With interest rates set to stay low, and the outlook for the global economy far from clear, we see little chance of the conditions that have driven investors to more defensive shares like RB changing in the short-term. Although the expected yield is just 2% next year, the potential for a rising payout is clear.
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