Reckitt Benckiser (RB) has released third quarter results showing like-for-like sales rose 2%, as progress in Health and Hygiene brands was offset by weak sales in Infant Formula and Child Nutrition.
While that takes year-to-date net revenues up 13% to £9.3bn (including the impact of the acquisition) that's behind the behind the 14-15% growth expected over the year.
The shares on fell 3.8% on the news.
Third quarter results highlight the split down the middle of Reckitt.
The legacy RB business carries on its merry way, with sales rising as a result of shifting increased quantities at higher prices. That's largely a function of the tried and tested double act of marketing and product innovation.
Admittedly, not all of the brands are flying (Scholl in particular has been a serial underperformer in recent times) but when you run a stable of 18 powerbrands there's always going to be one or two bucking the wider trend.
A more robust performance has helped the shares recover from 2018 lows. The current valuation is 18.8 times expected earnings - above the group's ten year average but still some way below the 25+ the shares were trading on back in 2016.
We think Reckitt will only recover that kind of premium rating if the performance of child nutrition specialist Mead Johnson, which was acquired in 2017 for a $17.9bn, improves.
The rationale behind the deal is sound enough. Around half of Mead Johnson's sales are generated in Asia, a region to which Reckitt was arguably underexposed, and these emerging economies should be capable of growth for years to come.
We can expect $300m per annum of cost synergies by 2020, while Reckitt's impressive cash generation should mean it can easily stomach the extra debts taken on to fund the deal.
However, the acquired brands are hardly stellar. Sales growth struggled in the years before the acquisition, and the deal will require more work than a straightforward addition to the portfolio.
There are also concerns about Mead Johnson's market and geographies, which are unfamiliar to Reckitt - particularly China. That makes the supply chain issues unveiled in Q3 results particularly unwelcome. A difficult start to life with the baby brand might mean management aren't exactly sleeping easy.
Still, it would be foolish to ignore the group's track record. Over the long-term, Reckitt has been able to leverage established brands to build margins and cash flow. The dividend has grown 560% in the last 15 years as a result, although records as exceptional as this are not guaranteed to be repeated. The shares currently offer a prospective dividend yield of 2.8% next year.
Trading details (at constant exchange rates)
Sales in the Health division, which account for 62% of the group total, were flat on a like-for-like basis at £1.9bn. Higher volumes and prices helped RB's base health brands deliver like-for-like sales growth of 4%. However, that progress was offset by a 6% decline in the Infant Formula and Child Nutrition (IFCN) business, where sales fell to £659m.
Temporary disruption at the European IFCN plant impacted sales by around £70m. Underlying progress in the North American business is strong, but lower birth rates in China is a headwind.
In Hygiene Home, which accounts for the other 38% of group sales, LFL sales rose 4% as strong growth in North America and Developing Markets helped offset flat like-for-likes in the Europe and Aus/NZ division.
Looking ahead, RB says it remains confident of hitting its goals of 14-15% although it expects some residual impact from the IFCN disruption to linger into Q4 and 2019.
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