Haleon’s second half underlying revenue grew by 3.2% to £5.5bn (3.4% expected), with price increases contributing towards most of the growth.
Underlying operating profit for the first half was up 10% to £1.2bn, driven by strong pricing and efficiency gains without pulling back on brand investment.
Underlying free cash flow was up £184mn to £734mn. Net debt came in at £7.7bn.
The interim dividend was raised 10% to 2.2p per share. Over the period the group deployed around £370mn of its £500mn share buyback.
Full-year underlying revenue guidance has been downgraded from 4-6% range to around 3.5%. Underlying operating profit growth is expected to land in the high-single digits for the year.
The shares were down 4.4% in early trading.
Our view
Haleon’s first half results painted a robust picture for profit growth, but investors were a little spooked by weakening demand in the US. In moments like these it’s tempting to prioritise cash conservation but under-investment in difficult times is a little short-sighted. So we’re glad to see Haleon prioritise investment in marketing and product development. That will help the group in its fight for market share leadership for its key brands but doesn’t provide complete protection from difficult economic conditions.
But Haleon’s broad financial footprint means its not overly exposed to one geography. Outside of the US growth is still holding firm. That includes mid-single digit growth in China which helps validate the recent move to take full ownership of its Chinese distributor of non-prescription medicines.
For now, Improving profitability provides the firepower for the company to support its well-recognised brands. These include several household names such as Sensodyne toothpaste, Otrivin nasal spray, Panadol painkillers, and Centrum multivitamins. Continued investment in innovation and marketing is, in our view, essential to maintaining Haleon's leading brand positions. But that may also dilute the bottom line benefits of ongoing efforts to improve gross margins.
Customers tend to happily stomach a higher price when it comes to medicines they trust. Sluggish volume growth suggests Haleon may not have much room to raise prices further in the current environment. But so far, we're impressed with Haleon's delivery of new and improved products, which we view as key to growing market share and maintaining brand loyalty. Successful innovations of note include the introduction of new delivery systems for painkiller Voltaren (patches) and the Otrivin decongestant (nasal mist).
Tariff risks remain something to be mindful of, but the direct risks are likely to be mitigated through local production in the US and limited sourcing from China.
Despite the headway being made on debt levels and shareholder distributions, the dividend is still lagging most of the peer group. The strong commercial focus and efforts to improve cash generation should help net debt head towards its target of 2.5 times underlying cash profit.
That could open the door to higher payouts to investors or opportunistic acquisitions. But there can be no guarantees of either. If demand remains shaky, improvements could be slow to show up in the financial results.Meanwhile a valuation above the long-term average also adds pressure to deliver.
Haleon key facts
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