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Reckitt Benckiser - US settlement reached

George Salmon | 11 July 2019 | A A A
Reckitt Benckiser - US settlement reached

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Reckitt Benckiser Group Plc Ord 10p

Sell: 6,597.00 | Buy: 6,599.00 | Change -60.00 (-0.90%)
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Reckitt Benckiser (RB) has announced an agreement with US regulators around the sales and marketing of opioid addiction treatment Suboxone by Indivior, a business that was separated from RB in 2014.

As a result, the group's existing $400m provision will be increased to $1.5bn, which is expected to cover the settlement and all expenses. This doesn't come as a surprise, as the group had already warned its provision would likely need to be significantly increased.

The shares rose 1.7% on the news.

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Our View

Reckitt is a consumer group that makes household products from Finish dishwasher tablets to Dettol sprays.

The settlement costs are significantly higher than the $400m the group had originally set aside, but the initial reaction from the market has been good.

That's a function of two factors. First, the group had already warned its original provision would likely need to be significantly increased. Secondly the settlement should remove the lingering uncertainty around the case and give the new CEO one less problem to worry about.

The settlement will be a meaningful drag on cash flow at a time when the group's looking to shift the debt taken on to fund the $18bn acquisition of Mead Johnson in 2017.But Reckitt should still be able to reduce that debt pile and increase the dividend in the years ahead, although of course there are no guarantees.

That's because a diverse customer base buying small, everyday items usually makes for a reliable cash flow. Added to that, the group's tried and tested formula of marketing and product innovation has helped sales, profits and dividends rise over the years.

Of course, there are no guarantees this record can continue - and not all of the brands are flying at the moment. For example, Scholl has struggled to find its feet in recent times. But to be fair when you run a stable of 18 powerbrands there's always going to be one or two bucking the wider trend.

And there are some external risks to consider. The sale of faulty products in Korea up to 2011 led to serious injury and the death of a number of people, and the number of compensation claimants continues to rise.

Within ongoing operations, the recently acquired Infant Nutrition business is central to the group's near-term fortunes. It's most important markets are unfamiliar to Reckitt, but after a difficult start it's starting to gain traction. Hopefully that trend continues.

The shares currently trade on 18 times expected earnings bang in line with the longer-term average, and offer a prospective yield of 2.9%.

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First Quarter Trading Update - 2 May 2019

Reckitt Benckiser's (RB) total sales rose 1% to £3.2bn in the first quarter, slightly behind analyst expectations, however the group remains confident of hitting its target of 3-4% like-for-like (LFL) revenue growth.

RB said it remains on track to deliver full year targets of 3%-4% LFL revenue growth.

Infant Formula and Child Nutrition delivered Q1 sales of £758m. LFL sales were 5% ahead, with strong trading in North America offsetting challenges in China.

Other Health LFL sales were flat, with 1% reported growth, to £707m, coming from favourable exchange rate changes. Dettol grew well in both developed and emerging markets, but performance from Scholl continues to be weak.

Over the Counter sales declined 9% to £470m. That comes from a disappointing cold and flu season in key markets, and the effect of retailers reducing the amount of stock they hold. Products from Nurofen and Gaviscon performed well in the period.

Hygiene and Home LFL sales were 3% ahead at £1.2bn, despite a slight headwind from FX movements. Growth was driven by increased prices, as Reckitt focused on premium innovation.

On a regional level, Developing Markets delivered strong underlying LFL sales growth, while underlying sales in Europe, Australia and New Zealand were flat in the period, and North America saw growth of 2%.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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