Reckitt Benckiser Group plc (RKT) Earnings Call Transcript

Good morning, and welcome to Reckitt's Q3 trading update. I'm Nick Ashworth, Head of Investor Relations at Reckitt. I'm here with our CEO, Chris Licht, and our CFO, Shannon Eisenhardt who will take you through some prepared remarks before we then take your questions. Before we start, I would like to draw your attention to the usual disclaimer in respect to forward-looking statements contained on Page 8 of our RNS published this morning. So with that said, we'll start the presentation. I'll hand over to Kris.

Thank you, Nick, and good morning, everyone. We delivered 3.3% like-for-like net revenue growth across core record in the third quarter and 3.9% excluding Russia hygiene. We are driving good underlying performance with increasingly broad-based growth across our markets, supported by a good combination of both volume and mix. And excluding Russia hygiene, all our categories were in growth. As I said earlier in the year, our innovations are landing well and generating growth. Despite the continued weak consumer backdrop in Europe as well as a weakening consumer in North America, where we are seeing retailers under some pressure, our strategy is delivering as we continue to execute our clear priorities. We are encouraged by the breadth of growth across the business and the momentum we're seeing as we move into Q4 and 2027. Turning to each of our areas. Emerging Markets delivered another strong quarter with broad-based growth across these regions. We returned Europe to growth with many of our power brands performing strongly. However, our performance in North America was below expectations. We experienced a temporary manufacturing constraint at one of our sites, limiting our ability to meet strong consumer demand for Lysol. We have consistently said that a key priority is to increase investment in our North America supply chain to strengthen its resilience. In September, we announced plans to invest up to $600 million, of which $400 million is to build our new self-care factory in North Carolina and much of the further $200 million is to upgrade our 2 hygiene plants. With that work well underway, the upgrades to a small number of our lines at our Hygiene factory in St. Peter's caused production downtime that was greater than expected during the quarter. This constrained our ability to supply Lysol, but it is important to highlight that this was not a demand issue. Lysol sellout grew low single digits, and we continue to gain market share year-to-date. Our manufacturing network simply could not keep pace with that demand for a period of time. We do expect North America and Lysol to rebound in Q4. And more broadly see the investments we're making to address known constraints and build greater resilience across our U.S. network. Turning to emerging markets. We grew 8% in Q3, 9.8%, excluding Russia hygiene, with broad-based growth across every region. South Asia and India, ASEAN and Africa all grew double digits, with Latin America and China growing mid-single digit. Our power brands are performing strongly. All our self-care and germ protection power brands were up double digits in the area with finish also up double digits when adjusting for Russia. We are delivering against the ambitions set out at our emerging markets focused on event last December and doing what we said we would do. accelerating growth across categories and into new markets to complement the strength of our businesses in China and India. In China, despite lapping a challenging comparator and some category-specific headwinds, particularly in VMS, we delivered mid-single-digit growth after a strong run of consecutive quarters of double-digit growth. Dettol continued to deliver strong innovation-led growth, particularly behind active Activ-Botany. Durex continue to improve across the fastest-growing social e-commerce channels, returning to overall growth and we're seeing good consumer reaction to our new VMS content, focusing on the production of move free in the U.S. with growth accelerating in Q4. The drivers of growth in China remain firmly in place, and we continue to see significant opportunity to grow the business from here. In Europe, we returned to growth in Q3, demonstrating the benefits of the actions we have taken. Gaviscon grew double digit, supported by the rollout of double action. Durex grew mid-single digit with Durex's intensity continuing to perform well, and our improved execution in a highly promotional auto dish category is driving the turnaround in finish back to growth in Europe in the quarter. This is clear evidence that our strategy in Europe is working and underpins our confidence for the remainder of this year and into 2027. The other important factor as we move into Q4 is seasonal self care. As you know, cold and flu incidence has been low through much of the year, including in Q3, and and that has been a drag on our performance in both Europe and North America. Now as we enter Q4, incidences are running ahead of last year in several important markets, including North America. And we are well positioned. Mucinex 12-hour cold and fever is now on shelf with very strong initial consumer feedback, including 85% repurchase intent. And we have secured incremental shelf space across our seasonal OTC portfolio. With incidences moving higher, sellout has been showing positive trends, and we have been gaining share. You will have seen this morning that we have adjusted our full year 2026 net revenue guidance. Taking into account the Q3 Lysol manufacturing disruption and the slowdown in the China VMS category, together with the positive demand for our cold and flu products at the start of the season, we now expect like-for-like net revenue growth of plus 3.5% to plus 4.5%. Overall, we continue to execute our plan and make progress against our strategy. The consumer backdrop is weak, and it has weakened through Q3 in North America, especially. But our power brands are performing. Growth is broadening across our markets, and we're continuing to invest behind our brands and our capabilities to support future growth. You will hear more about this at our record focus on event in North America next month. So as we exit 2026, I feel good about the momentum we have and where we're headed as a business. Let me now pass you to Shannon to take you through our group and segment performance in Q3 and the drivers behind it.

Thanks, Kris, and good morning. In Q3, core Racket delivered like-for-like net revenue growth of 3.3%, taking our year-to-date performance to 2.9%. In the quarter, volumes were up 0.1%, with both price and mix each delivering growth of 1.6%. Excluding Russia Hygiene, Core Reckitt grew 3.9% in the quarter. As expected, emerging markets delivered the strongest growth with like-for-like net revenue up 8% or 9.8%, excluding Russia hygiene. This performance was broad-based with growth across all regions and was broadly balanced between volume, price and mix. China delivered mid-single-digit growth despite a challenging comparator and category-specific headwinds in VMS. Growth was driven by continued innovation-led momentum in Dettol, particularly Activ Botany. In Durex, we returned to growth on the back of improved execution and share progress in particular, through social e-commerce channels. However, growth in the cross-border VMS categories slowed significantly when false claims from smaller local competitors impacted consumer trust. We have launched media showing our VMS brands are U.S. manufactured, and this is already delivering improved growth. India delivered another quarter of double-digit growth. broad-based across all categories. We continue to drive growth through strong execution and route-to-market capabilities supporting strong underlying demand. We were also lapping a favorable comparator following GST changes, which we expect to be a headwind in Q4. Elsewhere in the area, ASEAN and Africa grew double digits, with strong performance across several smaller, high potential markets, including Indonesia, Vietnam, Thailand and South Africa. LatAm grew mid-single digits with Colombia delivering double-digit growth. As we talked about at our focus on event last December, this growth was led by continued expansion of Gaviscon into new regions as well as Strepsils sell-in ahead of the cold and flu season. Turning to our developed markets. Europe returned to growth in Q3, delivering like-for-like net revenue up 0.8%, driven by executional improvement and innovation launches. Volumes were down primarily from lower seasonal OTC sales, more than offset by pricing benefits following our actions in the quarter as we look to mitigate the impact of higher commodity costs, as well as benefits from mix. We delivered strong underlying performance driven by growth in Gaviscon, Vantage and Veet, with a return to growth in finish, Durex and Harpic despite limited category growth and a challenging consumer environment. Promotional intensity in auto dish continued to increase during the quarter. Despite this, our actions have returned finished to like-for-like net revenue growth with continued volume growth and maintaining its position as the #1 auto dish brand across our 7 largest European markets. While we're seeing the impacts on our portfolio of consumer value-seeking behavior, particularly in germ protection, this was more than offset by improved execution supported by continued innovation and premiumization programs. Examples include the ongoing rollout of Gaviscon double action and premiumization across the category, supporting double-digit growth in Gaviscon. Vanish continued to drive growth and gain market share following the rollout of Vanish Turbo and intimate wellness returned to growth, up high single digits in the quarter, driven by strong performance in Durex intensity supported by recent range extensions and ongoing rollout across Europe. Veet also benefited from a strong activation and seasonal trends. Moving to North America, where we were disappointed by like-for-like net revenue decline of 1.3% in the quarter. This was impacted by temporary manufacturing constraints at one of our lifestyle facilities, which kept us from meeting strong consumer demand. For the region as a whole, volumes and mix were both positive in total, up 1.5%. The However, this was more than offset by continued price investment, given the weaker consumer backdrop. Lysol continues to deliver strong sellout in the quarter and is growing market share year-to-date. As you heard from Kris, we continue to invest in our North America West supply chain capabilities to future-proof the increasing demand for Lysol, which we expect to rebound in Q4. You'll hear more about our supply chain and wider North America business at our focus on event next month in New Jersey. The broader consumer environment weakened across North America during the quarter. driving greater value-seeking behavior and increasing competitive intensity, particularly in auto dish where finish like-for-like net revenue declined mid-single digit. In addition, at the very end of the quarter, we experienced some retailer order phasing in the drug channel, which we expect to reverse in Q4. Finally, self-care declined low single digit. Seasonal OTC was marginally down as we lapped the Mucinex sinus portfolio reset. Looking forward, with the launch of Mucinex 12-hour cold and fever, and the incremental shelf space secured for our seasonal OTC portfolio, we're well positioned heading into the start of the season where early incidence levels have been trending higher year-on-year and category sellout has been up double digit year-on-year for the past 5 weeks. Now moving on to our categories. Across self-care, we delivered 2.2% like-for-like net revenue growth in Q3. Excluding seasonal OTC, self-care grew 4.2%, driven by strong double-digit growth in Gaviscon. VMS performance weakened in the quarter, mainly reflecting the cross-border category challenges in China. Seasonal OTC performance was marginally lower in Q3 with strong growth in emerging markets, offset by lower cold and flu incidents across Europe and North America in the quarter, and the Mucinex sinus reset lap in North America. Germ Protection net revenue grew 6% on a like-for-like basis. Growth was broad-based across emerging markets with continued momentum in Dettol and double-digit growth in Harpic. Consumer demand for Lysol was strong in North America, and we continue to make share gains year-to-date. Although, as I've said, temporary manufacturing challenges prevented us from fully meeting consumer demand. Household Care net revenue declined 1.5% in Q3. However, excluding Russia Hygiene, net revenue grew 1%. The finished returned to growth in Europe and delivered double-digit growth across emerging markets, excluding Russia, offsetting a more challenging consumer and competitive environment in North America. Vantage also returned to growth ex Russia led by the successful rollout of Vantage Turbo and improving market share performance in Europe. Intimate wellness like-for-like net revenue grew 6.4% in the quarter with growth across all areas. Durex delivered mid-single-digit growth, driven by continued momentum in Europe and a return to growth in China and emerging markets remains a key contributor to growth. We delivered double-digit growth supported by strong activation and favorable seasonal trends. Now turning to Mead Johnson Nutrition, which delivered like-for-like net revenue growth of 2.7% in Q3. Performance reflected normalized trading conditions following the disruption caused by the Mount burn in tornado in 2024. The International business delivered low to mid-single-digit growth led by Latin America. Innovation remained focused on portfolio expansion, including the right-based product launches introduced earlier this year in Mexico and the Philippines. Turning briefly to the buyback. As we announced at half year, our GBP 500 million share buyback program commenced on the fifth of August. As of October 23, we've completed GBP 90 million of the program. Now on to our guidance. As Kris talked about, we now expect core record like-for-like net revenue to be 3.5% to 4.5% growth for 2026. In Q3, we've seen constraints with Lysol supply as well as the slowdown in China VMS. However, seasonal incidences have so far been trending ahead of our initial expectations and we've seen positive demand for our seasonal cold and flu brands in early Q4. Given these recent trends, we're now planning for an improved seasonal performance versus our prior expectation of incidence levels to be slightly higher than the prior season. We continue to expect to deliver high single-digit growth in emerging markets for the full year. We continue to expect Core Reckitt plus MJN adjusted operating profit margin for full year 2026 to be in the range of 24.9% to 25.6%. With respect to our technical guidance, our adjusted net finance expense is now expected to be lower in 2026 in the range of GBP 250 million to GBP 270 million. This is versus GBP 346 million in 2025. This is primarily driven by the successful tender of our Mead Johnson bond in Q3, which provides a one-off benefit. Although we wouldn't normally guide on next year's net finance expense at this stage of the year, given the abnormally low level, now expected for 2026 and it's worth setting out some of the moving parts for 2027, Absent the specific one-offs benefiting 2026 of around GBP 75 million, and both the current rate environment and a higher gross borrowing level, we currently expect 2027 net finance costs in the range of GBP 390 million to GBP 410 million. We now expect our effective tax rate for 2026 to be in the range of 26% to 27% benefiting from some one-offs with our longer-term effective tax rate remaining around 27%, and we reiterate our ambition to deliver long-term sustainable EPS growth acknowledging in 2026, the headwind from the dilution resulting from the divestment of essential help. With that, let me hand back to Kris to wrap up.

Thank you, Shannon. So to wrap up, emerging markets continues to deliver strong broad-based growth in line with the ambitions we've set out. And after a challenging period, Europe is now back in growth. We're seeing encouraging momentum across the business as we move into the final quarter of the year. We are disappointed with our performance in North America this quarter, and there's clearly more work to do. But importantly, demand for Lysol remains strong. The issue we experienced was one of supply, and we expect that business to rebound in Q4. Stepping back, there is a lot going well across Reckitt. We're seeing that in our brands with direct back in growth in China, strong growth in Gaviscon and Veet and Finish back in growth in Europe. I remain confident in our strategy and in our ability to deliver against it. And with that, Shannon and I will be happy to take your questions.

[Operator Instructions]

All right. Let's start. We've got Nicolas from Bank of America first, and then we'll go to Olivier Goldman afterwards. So if we can start with Nicolas, please.

Just on the guidance cut for the full year by 50 bps, I think you mentioned Lysol and VMS in China. Could you maybe help us quantify the impact of these 2 items on the full year because I'm not sure they look that big to me. Am I missing something on the quantum of the impact? And secondly, on China, maybe if you could help us understand what growth rate do you expect in Q4? Is mid-single digit in Q3 the right amount that we should think about for Q4 as well.

Sure, happy to take those 2 questions. If you think about -- I'll start in order. If you think about the full year guide, we've shifted that range down by 50 bps on -- and we've called out 3 real reconciling items. So the first would be the impact of Lyall that we saw in Q3 from our manufacturing challenges and an inability to fully meet consumer demand. And I think the way I'd try to frame up sort of the magnitude of that challenge in Q3 would be. We saw a sellout of Lysol continuing to be or in low single digits. We saw our Lysol results for North America down low single digits. And that sellout of Lysol in low single digits that we saw in Q3 was impacted by some canceled promotions that we couldn't meet for customers as well as we did have some out-of-stocks on shelf that impacted our ability to drive sellout in Q3. The good news is, as we look into the first month of Q4, we're seeing that Lysol sell-out accelerate back into mid-single digits. And we're feeling confident in our ability to supply that demand. So that's sort of the book ends of the magnitude of impact of Lysol in Q3, and we are rolling that full impact into our guide for the full year. The second one from a China VMS standpoint, we've been seeing China VMS in the front half of the year, growing strong double digits. If you look at our China VMS results in Q3, it was roughly flat. And so that's the magnitude of that China VMS impact. It's also important to note that as we look forward, it's not a dynamic where that growth of China VMS will instantaneously be popping back up to double-digit level. So while we're seeing positive results from the content that we've put out in China, showing the legitimacy of our brands and the manufacturing facility in Salt Lake, and we're seeing that have an impact. It's not something that will be back to prior levels immediately. The last piece to think about the guide would be the good guide that we're calling out around the season. So we tried to be very clear at our half year results that our assumption for the season was slightly better than the prior year season. And we know that the prior year was a historically low weak season. What we have seen positively around the seasonal development is that we have 5 consecutive weeks in the U.S. where we've seen our sell-out, which is really the most important data point for us in double digits versus prior year. So that's a good guide that we've built into that season. Then you had a question around China, but can Nick remind me what it was?

So we've delivered mid-single digits in Q3?

Oh, what we're expecting, yes. So I think on China, what I'd say is, again, we think the headwinds that we're seeing in China that have capped us from continuing what was an incredible streak of 12 consecutive quarters of double-digit growth. We do think those are temporary, but we will see a headwind from China VMS in Q4. We were very pleased to see Durex returning to growth in Q3 and we anticipate that, that trend will continue in Q4. And as we head into 2027, we're optimistic that we'll get these headwinds behind us and get China back into strong growth.

We're going to go to Olivier. And then after Olivier, we're going to go to Celine. Olivier, over to you.

Thank you, Nick. Just 2 questions, please. First, what has changed in auto dish in Europe for your performance to improve this quarter and how do you see the competitive landscape evolving over the next few quarters? And secondly, if I may ask about COGS. I mean your margin guidance is unchanged for core and for [indiscernible] this year. Could you provide an updated COGS expectations within that? And is there anything you could say about next year and your hedging levels so far?

Thanks, Olivier. I'll take the first one. So auto dish in Europe, look, we've been in this highly competitive environment for some time, as you know. Our team has been very focused on the details of how we compete in the marketplace. And there's a lot of sort of promo mechanics and things you can do that can enhance your performance and drive greater ROI on the trade spend that we're investing in. So we have stepped up our promo investment in Europe to respond to the environment. and competitive activity. And I think we have gotten quite a bit sharper on how we do that and drive growth in this environment. So I'm pleased with the executional improvements that we're seeing around that and at the same time, acknowledge that we are stepping up investment to respond and be competitive. And that's really what's driving it. I expect this to continue. I don't think we will see a dramatic change in this environment. But obviously, as I've said before, we have no interest in driving promo down to levels that take value out of the category. And I do hope that we can get ourselves to a place where we are driving category expansion, driving premiumization and focusing on all the right things to create the most value everyone. So I think it will be competitive for a while, but we have clearly demonstrated that we can succeed in that environment.

Great. So from a COGS standpoint, at the end of Q1, we did provide some modeling around $110 barrel. And obviously, since then, what we saw were oil prices actually declined and were under that $110 mark for quite a while. In recent weeks, what we've seen is that we've been hovering closer to that $110 mark and actually breaking above it. I don't have new specific guidance to share, but I'd say the overarching principles remain the same. We're very committed to and feel confident in our ability to offset the impacts in 2026 that we're seeing from commodity inflation coming out of the Middle East. As we look forward into 2027, we continue to remain focused on delivering against that same objective. And so that's what I would say on that point. And as we've mentioned before, we feel confident that we have a number of levers that we're focused on and that we're showing success to manage against those commodity inflations that are headed our way.

Thanks, Olivier. All right. We're going to turn to Celine, JPMorgan and then we'll go to Sarah Simon at Morgan Stanley. So Celine, over to you.

My first question is on the U.S. So sorry, maybe there will be 2 sub-questions there. The first one is really on Lysol. You explained that you had some downtime that prevented you from a full capacity. But I think it's been frustrating to hear another of the issues from a manufacturing standpoint that we have heard from Reckitt in the past. And I know you have increased your CapEx. So -- and Chris, you've been talking about using more technology to also improve with the overall end-to-end production and delivery. So are you spending enough? What is it that -- what does it take to prevent this kind of hiccups that unfortunately are popping in? And then maybe my second question on the U.S. would be like if you could talk about the mine 12 hours and how that specifically been doing? And then my second question is on emerging markets beyond China, if you could give us a bit of a roundup of what has sustained the high growth rate there?

Yes. Sounds good, Celine, I'll take all of those. So let's start with the U.S. manufacturing hiccup, as you said, I agree with you. It's quite frustrating. But I would also say that I know we're making a lot of progress in strengthening our global supply chain and our manufacturing footprint including in North America. This challenge that we experienced in Q3 was actually a function of investments we're making to make our sites more resilient. We make those investments all across the world all the time at the moment. We're upgrading most of our facilities. And the vast majority of those investments go off without any disruption and according to plan. So I would say our teams are broadly good at this. But we did find late in Q3 that we did not have the operational capacity that we expected to have coming out of the downtime from these investments in 1 specific plant in North America. And really, it's about 4 lines in that plant that caused us the challenge. Our team is all over this, as you might imagine. And we are absolutely going to address this issue and get the capacity back online. We do expect Lysol to have a good Q4, and we expect to be able to deliver that Q4 with improvements on these lines. So I think it's well underway in terms of being addressed. To your point, is a frustrating absolutely, trust me. Now we're going to continue to invest in manufacturing so that these things won't happen in the future. We have not historically invested as much in manufacturing as a company as I think we need to. And as you know, we've stepped up CapEx and we're very focused on this, and this will be addressed. Your second question was about 12-hour. Look, it's a little early. And I would just caution, we have this very positive trend that we're seeing in sellout in North America Shannon also talked about, but we're still in the beginning phases of the season. So we have to see how it develops. In that context, 12-hour has an exceptionally strong execution footprint. We have excellent display program sold in and agreed to with retailers, and we gained a lot of incremental shelf space. And so I think we are definitely excited about 12-hour. And we are now doing a lot of consumer engagement and really turning on the advertising, so that consumers can learn about this exciting new benefit. And so we'll give you an update as soon as that's appropriate in terms of how things are going, but I'm optimistic. And then on emerging markets, we know that we have a great opportunity to broaden our performance and really outperformance in China and India to other markets. And that's actually what's causing this acceleration, which is very broad-based across all our emerging markets regions. We are leveraging best practices in terms of sales execution, both in off-line trade and in online trade. As you know, we have some quite differentiated capabilities in China that we are broadening to other markets to compete online. And then we're actually building out our OTC portfolio quite significantly led by Gaviscon, but other brands following along as well. That's really strategically one of the most important things we need to do is to build these OTC categories across emerging markets. And the good news is that, that is working. So that's very much one of the things that's driving this accelerated performance. I'm very excited about that. It needs to continue, and I think it will.

Thanks, Celine. We are going to move now to Sarah Simon at Morgan Stanley and then we'll go to David Hayes, Jeffries. So Sarah, over to you.

So first one, just on -- back on Lysol again. Chris, you said that this occurred late in the quarter. Can you give us an idea of kind of what the sell-in rate was running at before this impacted? The second question, a quick one would be [indiscernible] in terms of Durex in China, have you done your sell-in for the innovations? Or should we expect more of that in -- and then just on the guidance for financing costs for 27, is that taking account of the Russia trapped cash or interest thereon being out of the perimeter ?

Okay. So on Lysol, I can't really get much more specific. I mean all I can say is as we said that there were some promotions that we unfortunately couldn't meet towards the end of that quarter, and so that impacted shipments. But again, we're seeing improvement already as we sit here in October, and we expect to be able to meet demand and and for this issue to be addressed. And for Lysol to have a good quarter. On Durex China, we do have a lot of good innovation. And actually, part of the recovery in Durex this year has been success with that innovation. As you know, there were some content restrictions that came in that we had to navigate. We felt that our team would be a good -- do a good job with that, and they have. So with the innovation platforms that they've been driving this year, it's actually been quite positive. And innovation is a big driver of Durex recovery and now back in growth in China, and we expect that to continue. In fact, we have a very good pipeline of innovation for Durex for next year. As you know, China is an extremely competitive market. And perhaps the most competitive consumer market we operate in anywhere in the world. And we are moving at a very high rate of speed, leveraging our Shanghai R&D facility and the investments we've made recently in China, such that we can innovate at a very rapid clip, much faster than we do in most parts of the world. So that's going to help Durex have a good year in '27, and I feel very confident about that.

Russia, yes, so our guide includes us owning the Russia business. as we continue to own it today. So the interest guide within that would also include the Russia [indiscernible] cash and the benefit from that. But I would say closing a transaction within the year, which is our expectation I wouldn't expect that to have a significant impact on that piece of the guidance.

For 2027?

Yes.