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Reckitt Benckiser - revenues rise despite falling volumes

Reckitt's first-half revenue rose 6.0% on a like-for-like (LFL) basis to £7.4bn, with growth in all regions.

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Reckitt's first-half revenue rose 6.0% on a like-for-like (LFL) basis to £7.4bn, with growth in all regions. All business units contributed positively, including a strong performance from the important Health division. Price increases of 10.4% more than offset a 4.4% decline in volumes.

Underlying operating profit fell 2.4% to £1.8bn, ignoring the impact of exchange rates. This was largely due to higher costs from inflation squeezing margins.

Free cash flow rose by £31m to £758m as the group focused on carefully managing production and reducing inventory levels. Net debt improved from £8.6bn to £7.9bn in the period.

The group's reiterated its 3-5% LFL net revenue growth target for the full year. Underlying operating margins are now expected to be slightly above 2022 levels, compared to previous guidance of "in line with or slightly above 2022 levels".

A first-half dividend of 76.6p per share has been recommended, up 4.9% on last year.

The shares fell 2.5% following the announcement.

View the latest Reckitt Benckiser share price and how to deal

Our view

Reckitt is the maker of household and hygiene staples like Air Wick, Harpic and Vanish. Price hikes remain the aim of the game for Reckitt - helping to push the top line higher despite falling volumes.

Digging a little deeper into the numbers, the drop in volumes comes mainly from the Hygiene division as demand for these products normalises post-pandemic. The positive news is that the rebase is significantly ahead of pre-pandemic levels. And after a shaky first quarter, it's encouraging to see sales of Lysol products are heading back in the right direction.

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 reiterated and includes 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 still on the cards.

First-half margins came in weaker than last year. 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 now expecting a slight improvement in underlying operating margin for the full 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 14% 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 improving - now down to 2.0 times cash profit (EBITDA). 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 first-half dividend saw distributions up nearly 5%. 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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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 26th July 2023