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Reckitt - revenue up, volumes fall

Group net revenue rose 7.4% on a like-for-like (LFL) basis, to £3.7bn.

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Group net revenue rose 7.4% on a like-for-like (LFL) basis, to £3.7bn. Net revenue saw an 8.5% boost from a weaker sterling relative to the US dollar.

Higher prices and the mix of products sold offset a 4.6% decline in volumes, largely a result of the continued normalisation of Lysol sales. Excluding Lysol, volumes fell around 1%.

Growth in Nutrition was of note, up 24.7%, with the group benefitting from heightened demand given a lack of supply in the US infant nutrition market. Health was up 10.7%, while Hygiene fell 1.2% due to normalising demand for Lysol.

Reckitt expects LFL net revenue growth of 6-8%, with growth in underlying operating margin. Inflation's expected to push costs higher, in the mid-teens, for the year.

The shares fell 3.0% following the announcement.

View the latest Reckitt Benckiser share price and how to deal

Our View

The surprise exit of the now former CEO, Laxman Narasimhan, back in September took markets by surprise. The hunt for a replacement is underway and we're hoping to hear some more concrete news when full-year results are released.

Aside from the drama at the helm, all eyes are on volume declines seen in the third quarter.

Price hikes were all but guaranteed given the double-digit inflation in certain costs. Up till now volumes had remained resilient. Third quarter trading was the first hint that consumer demand is starting to fall under the pressure of falling real incomes and higher prices.

Digging a little deeper into the numbers, the core drop in volumes comes from the continued normalisation of demand for certain Hygiene products, Lysol disinfectant spray in particular. Stripping that out, volumes were only a fraction down. That feels like a relatively good result in our book, testament to the defensive nature of Reckitt's portfolio, cleaning and hygiene products are hardly going to be the first things left off shopping lists when wallets are stretched.

Whilst the incredible demand for the Lysol and Dettol maker's products continues to taper, demand looks like it will remain elevated (compared to pre-pandemic levels). That adds weight to the argument that heightened hygiene awareness is here to stay, which would make for a long-term revenue bump.

Deep pockets should give the group an edge too - cooking up superior products is what supports brands' premium price tags, which should ultimately underpin margins. Reckitt seems to be making genuine headway on improving supply chains and stock availability already - both crucial if you want to grow sustainably.

Meanwhile a growing online presence means ecommerce continues to grow and makes up roughly 12% of total revenue. Long term, this could allow the group to bypass retailers - helping boost Reckitt's share of the pie.

Reckitt's spent the last couple of years improving and sharpening its proposition and the portfolio's undergone a hefty shakeup. The group's offloaded the Scholl brand, entered the US pain treatment arena and sold its Dermicool and E45 businesses.

The balance sheet's in reasonable health, with net debt coming down to 2.4 times cash profit (EBITDA) at the half year mark. Plus, with over 50% of underlying net profit making its way to free cash, there's wiggle room if the group needs it.

The pandemic meant Reckitt items became a must-have in households all over the world, and management's done a good job leveraging that tailwind to create a refreshed business. As we've seen across the broader industry, cost inflation will continue to weigh on results throughout 2022, and likely into 2023 as well.

Despite earnings estimates that have actually pushed higher, the valuations came under pressure this year. That reflects uncertainties around how robust volumes will remain given the wider backdrop.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 26th October 2022