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Reckitt Benckiser - price hikes push top and bottom-line higher

Reckitt reported full year like-for-like (LFL) sales growth of 7.6%, with net revenue of 14.5bn pounds.

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Reckitt reported first-quarter revenue of £3.9bn, reflecting like-for-like (LFL) growth of 7.9%. Higher prices carried over from last year, with pricing contributing 12.4%, offset by a 4.5% drop in volumes.

All business units contributed to growth, with Health and Nutrition in the double-digits. Hygiene was the weaker of the three. A high-teen decline in Lysol sales mostly offset double-digit growth across the wider unit. This should be the final quarter where Lysol sales come up against inflated comparable periods, and growth is expected to return next quarter.

Kris Licht, President of the Health unit, has been appointed as CEO designate and will take over from Nicandro Durante as CEO by the end of the year.

Reckitt's targeting 3-5% LFL net revenue growth in 2023. That includes the impact of the competitor supply disruption that acted as a tailwind over 2022 in the US Nutrition business, which had previously been excluded from sales guidance.

The shares fell 1.5% in early trading.

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Our view

Price hikes continue to be the aim of the game, and it's working. Sales growth was slightly ahead of consensus, and arguably more importantly, volume declines were better than expected. It was also good to see some clarity at the helm, with the board having chosen its new CEO. Giving Kris Licht until the end of the year to get up to speed is a good move and should make the transition as seamless as possible.

Digging a little deeper into the numbers, the drop in volumes comes from the normalisation of demand for certain Hygiene products, Lysol disinfectant spray in particular. Sales of these products have dropped off from the highs seen over the pandemic. The positive news is that the rebase is significantly ahead of pre-pandemic levels, and this should be the final quarter of tough comparable periods - growth's expected to return in Q2.

It's pretty clear now that heightened hygiene awareness is here to stay - a long-term tailwind for Reckitt's products.

Sales guidance for 2023 has been updated to include the impact of the tailwind from the competitor stock shortages in the US infant nutrition space last year. That makes the comparable numbers tougher to beat, yet 3-5% expected growth is on the cards - implying an upgrade from previous guidance.

We're still expecting a little bit of weakness in full-year margins. Higher interest and tax costs, plus higher planned investment in brand support come at the same time as the unwind of some of the infant nutrition gains.

All in though, cost management should act to balance the scales and management's only expecting a small drop in the underlying operating margin for the year. That would suggest it's in line to hold on to some of the margin improvement seen last year.

Reckitt's spent the last couple of years improving and sharpening its proposition and the portfolio's undergone a hefty shakeup. Meanwhile, a growing online presence means e-commerce continues to grow and makes up roughly 13% of total revenue. Long term, this could allow the group to bypass retailers - helping boost Reckitt's share of the pie.

The balance sheet's in reasonable health, with net debt now down to 2.1 times cash profit (EBITDA) last we heard. When you add in £2.4bn of expected free cash this year, there's firepower if needed. That's good news for investors, as the board's proposed final dividend saw full-year distributions up 5%, the first increase since 2019. Of course, nothing's guaranteed.

The current valuation doesn't look overly demanding and we're supportive of the direction of travel. The next few quarters are vital, though, volumes need to start trending back in the right direction as comparable periods get easier, or the pressure could mount.

Reckitt Benckiser key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Article history
Published: 1st March 2023