Haleon PLC (HLN) 2023 Q2 法說會逐字稿

Good morning or good afternoon all, and welcome to the Haleon Half Year 2023 results Q&A session. My name is Adam, and I'll be your operator for today. (Operator Instructions) I will now hand the call over to Head of Investor Relations, Sonya Ghobrial, to begin. So Sonya, please go ahead when you are ready.

Thanks very much, Adam. Good morning, everyone, and welcome to Haleon's Half Year 2023 Q&A Conference Call. I'm Sonya Ghobrial, Head of Investor Relations, and I'm joined this morning by Brian McNamara, our Chief Executive Officer; and Tobias Hestler, our Chief Financial Officer.

Just to remind listeners on the call that in the discussions today the company may make certain forward-looking statements, including those that refer to our estimates, plans and expectations. Please refer to this morning's announcement and the company's U.K. and SEC filings for more details, including factors that could lead to actual results to differ materially from those expressed in or implied by such forward-looking statements.

We've posted today's presentation on the website this morning with prepared remarks running through the results in detail. So with that, we'll go straight and opening the call for Q&A. Thank you.

(Operator Instructions). And our first question today comes from Iain Simpson from Barclays.

Two questions from me, please. Firstly, that 7% to 8% full year '23 organic sales growth guide, that implies 4% to 6% in the second half, which is obviously in line with your medium-term guidance. Is that how you should think about it, you're basically booking the strong first half and just delivering on the algo in the second half?

And in terms of the moving parts within that second half, there was some nervousness that tough cold and flu comps in respiratory might be an H2 headwind. Do you feel more relaxed about those now? Or do you expect strength elsewhere in the business to offset tough respiratory comps in the second half?

And then in terms of second question, just wondered if we could unpick the moving parts in the margin. So you're guiding 7% to 8% organic top line, 9% to 11% constant FX EBIT, so margins adding 2% to 3% to EBIT. But then in terms of FX impact on the business, we seem to be looking at sort of 4% top line, 6% to 7% EBIT, so a 2% to 3% drag from FX. So in terms of margins for the year, should we be thinking underlying margin delivery a little bit better than expected, FX headwinds maybe a little bit worse than expected, net-net margins probably staying flat in line with your previous guidance?

Thanks, Iain. I'll take the first question, and I'll pass it to Tobias on the margin. So as you said, we had a very good first half, and we feel growth -- good about the growth in the first half and the fiscal year outlook. I think there's two things in the first half that won't repeat in the second half. And the first one you mentioned is cold and flu. So if you look at the 22% growth we had in the first half, that contributed about two points to our overall growth.

And in this outlook, we're expecting an average season, which would be below last year from a volume perspective. Now I want to be clear, it's hard to predict cold and flu season these days, but we've taken an assumption that we believe is right at this point. So we're talking about volumes being down, but pricing largely offsetting that. So roughly a flat category in the second half.

Also in the first half, we did see strong growth in China, with over 20% growth. And that was -- we had good performance across the portfolio, but Fenbid and Contac in particular, which is a pain relief brand and a cold and flu brand, saw a significant demand coming out of COVID lockdown, and as a -- zero COVID. And as a reminder, in zero COVID those brands were actually on sales restriction because they treated COVID symptoms. So in zero COVID, they didn't want that.

So there's two dynamics. One was lockdowns coming off, getting back to a normalized level for those brands, and then some incremental demand based on COVID actually going through the country. So that's where the full year guidance comes. You're right that the back half would imply a 4% to 6%, up more thinking about it of the dynamics in the back half and what we're seeing. Tobias?

Yes. So on the margin, so I mean clearly we've said 7% to 8%, on top line for the year, 9% to 11%. So I think that gives you, I think, a very strong underlying improvement and strong underlying margin improvement. And as such, just to clarify, that includes offsetting the transactional FX losses in the business. As you've also seen in my prepared remarks in the -- we had 60 bps of margin improvement operationally that fully offset the transactional losses in that. So underlying, absolutely an upgrade and an improvement coming through on the margin from the strong performance in the business.

And then yes, FX, and that depends a little bit on where you build it from. But I mean, ultimately, the consensus was around 5% to 6% CER growth. Our improved guidance is 9% to 11%. So you should add at the midpoint 4 to 5 points of profit growth. And then you deduct from that incremental translational, which is 6.5%. So a small down -- slowdown on AR profit growth, and again, if exchange rates would stay where they are in June, and I've given you a little bit more color on how to model that in the appendix of the slide deck. So we've added a few more of the currencies to help you model that out.

The next question comes from Guillaume Delmas from UBS.

Two questions for me, please. The first one is on pricing. I was wondering what the outlook was for pricing as we think about the second half. In particular, are you planning additional pricing actions? Or kind of the opposite, would you be looking at some price downward adjustments, maybe increasing promo activities to maintain your level of competitiveness and maybe improve your volume share momentum. I know I think it's more a value share number you're looking at, but I noticed that 55% of your portfolio was gaining or holding shares at the end of the first half versus 2/3 at the end of last year. So any color on that would be helpful.

And then my second question is on translational FX, because it's looking like it will be a significant headwind this year that you'll be able to mitigate. But big picture-wise, how should we think about this impact? Is it the case of trying to offset it when it goes against you and letting some of the benefit fall through to the bottom line when translational FX is more favorable? So for instance, if we were to see some reversal next year, should we expect better than moderate margin improvement in 2024? So anything you can say about your mindset when it comes to translational FX would be very helpful.

Thanks, Guillaume. Let me address the question on 55% share, and then I'll pass it over to Tobias to talk pricing in the back half and big picture. So yes, year-to-date, we are 55% of the business maintaining and gaining share. We have seen that number strengthen in recent months. So we think there's a positive trend there. And you mentioned it, but this is a value share measure. So we were impacted a bit earlier in the year by the phasing and timing of price increases. So just to bring that to life, I'll give you one example. Tums, for instance, in our U.S. business, we took pricing at the end of Q1; some competitors happened to take pricing earlier in the year. We are now -- so we didn't grow share in Q1, and now we're back to strong share growth. So there's a bit of that dynamic happening.

And just on promotions, we tend to be a lower promoted business even in categories that can be high promotion like Oral Health, because of our strategy of therapeutic Oral Health. We invest more behind the dental detailing and the marketing in connection with consumers then we do promotion. We don't anticipate changing that strategy, and OTC in general also tends to be a lower promoted category. So we didn't anticipate any change. But Tobias, on pricing and big picture.

So the pricing, I think, I mean, for the half 2, probably mostly rolled over from what we've done in half 1. Also, don't forget, we took increased pricing during half 2 of last year as well. Of course, I mean, in emerging markets, we would keep pricing up as we can and as we've always done and then look here or there, when we see there's an opportunity to do something, we would do it, but I wouldn't expect widespread further pricing increases. And Brian has already answered you the promotional question on pricing. So I wouldn't expect anything going backwards on that either.

And then on translational, look, I mean, I can't plan for translational. So I think -- and I believe in the way we've guided and the guidance change we've made, I think we're giving you the CER growth on profit and then I'll update you on a quarterly basis around what the translational impact is, and this might go one direction or might go the other. And I hope with the additional color I've given you on more currencies in the backup, that helps you also model it through yourself and have a bit more upfront visibility on that.

The next question comes from Rashad Kawan from Morgan Stanley.

Just two for me, please. The first one on VMS, obviously positive in Q2, but in the press I know you mentioned you expect continued pressures on immunity in the U.S. with emergency specifically. Does that alter your midterm outlook on VMS at that kind of mid- to high single-digit growth overall?

And then just a second question on the consumer broadly. Are you seeing any changes in terms of behavior or any change in terms of down-trading trends or shifts to private label, especially in Europe, as you've taken more pricing? I know volume dynamics still seem to be robust, but any color you can shed there would be great.

Great. Thanks, Rashad. So first on VMS. As you said, we were down 3.7% in Q1 and up 2.7% in Q2. So for the year, we were down 0.5%. And if you just break that down across regions, we were mid-single-digit growth in Europe, Middle East, Africa and Latin America and in APAC, but we were down double digits in North America. And two things impacted that. One was the lapping capacity coming on stream last year where we built inventory. So that was a negative impact. And then on immunity subcategory, which you mentioned, we are seeing a bit of a change in consumer behavior of the immunity category going back to more pre-COVID type levels.

Now we saw incredibly strong demand in the base period, as you know, as COVID spikes came in. Now that was a category that always had good mid-single-digit growth. So it was a healthy category pre-COVID, fully expect it to be a healthy category post normalizing, but we do expect, and in our outlook we're assuming, that that will still be a drag on the VMS business as we look at the back half of the year.

So nothing has changed in my medium-term outlook. And obviously we'd update for next year when we get there, but we feel like it's still a very good category. 35% of our business is (inaudible), we like our geographic footprint, and we're seeing good growth outside that.

On consumer behavior and specifically about Europe. To date, we are not seeing that. Now a reminder in Europe is that we have very little private label dynamic because there is very little private label dynamic on Oral Health, which is in mass market. Obviously there's lower priced brands, and we're seeing good dynamics on our Oral Health business. And then in the OTC business, we're sold through pharmacies and there's really no "private label" to speak of. There is generic products in pharmacies. They tend to be under the -- behind the counter in the drawer, so people are going up to the shelf and doing comparison.

So to date, we haven't seen that shift. Obviously, unprecedented times where we're keeping close eye on it to see if anything changes there. But to date, we've really seen the categories hold up.

Rashad, I think you asked on the U.S., I think private label, no change visible in our category. So I think when you look in aggregate, private label shares actually are slightly down across all of our categories. Of course, you have some subcategories where it's slightly up, slightly down, but no shift visible in sort of consumer behaviors when they're in front of the shelf vis-a-vis the private label that is there.

(Operator Instructions) The next question comes from Chris Pitcher from Redburn.

A couple of questions. Firstly, on China. Thank you for the extra detail in the presentation. Can I just make sure I've got the messaging right for the second half? Growth moderated, but was still double digit in Q2 based on your disclosure; you're talking about a normalization in Fenbid, but it does look like there's still strong opportunity amongst VMS. Could you talk a bit about Oral Health and how you'd look to grow that in terms of strength of local and international competitors?

And in terms of your raised full year guidance, does that still imply double-digit growth in China in the second half? And then just secondly, on the Lamisil divestment, obviously helping the deleveraging. Can you give us a bit of a feel for the sales and profit impact -- cash impact on that?

Thanks, Chris. I'll take the first question and then pass it to Tobias. So as you said, we had a good first half in China, we grew over 20%. And obviously, we benefited from the COVID lockdown or the zero COVID policy going away and Fenbid and Contac. The VMS business also is growing, so in good shape. So we continue to see trends there. And then on the Oral Health business, what we saw was the category declining as we entered into the year. We are still seeing the category declining, although declining less, and in most recent periods we're growing share, so we're declining less than the category. We expect that to, in the back half, continue to stabilize.

Listen, we feel good about Sensodyne in China. There's no question that there is a competitive environment in China that can be a bit different in the sense of local competitors and they're not to be taken lightly. But we've been there and we've been competing against them and that's something that's always been something we look at. But we're -- we feel good about our business in China.

And on the back half, I wouldn't give specific guidance on China, but we expect to be able to see growth in China as we go into the back half. Obviously we'll see less of that COVID impact, the lockdowns were still in place. Zero COVID was still in place a year ago. So sales restrictions were still on things like Contac and Fenbid. But obviously, in the first half, we saw COVID waves coming into the country, which drove demand above that. Tobias, Lamisil?

Yes. So on Lamisil, so it was GBP 54 million of revenue last year, I think with a very healthy gross margin as an OTC brand and small A&P. So I think you get clearly a negative hit from that on the OP and from the margin with the GBP 54 million, I think we sold it at a very healthy sales price. So that is about a [4.7x] revenue multiple that we get. So -- and of course, it was declining in sales. So it's slightly -- very slightly, slightly dilutive to sales growth. But I mean that's really tiny.

And then we would of course expect to offset the negative impact from the divestment on the profit with the benefits from the productivity program next year.

And maybe just a follow up, would we expect similar brands potentially to come out, or are you done now for divestments?

No, look, I mean, as I've said before, right, I mean, we said at full year, we're going to be active in our portfolio. You've seen us do two things this year so far. I mean we've divested Lamisil, which I think at a very good price, and this is a classic example of being there's a better owner out there for that brand, and we got good value for it. So it makes sense to divest that because I think it's clearly above our own [key] valuation that you see from the price. We've also agreed to deal with Futura. So we brought something into the portfolio. And I mean, you would expect us, in a company with about 100 brands, to look at things if they create value or not.

So I think we do this, but it's -- you have to test the market to see if you get value for it or not, and that's exactly what we've been doing, and Lamisil is an example. So expect us to be active. But if something comes through or not, we don't know, you can't plan for it. And we would, of course, always tell you when something is coming through.

The next question comes from Alicia Forry from Investec.

A couple of questions from me. I wonder if you could update us on the inflationary picture that you're seeing across the operating cost base, so beyond COGS. Any color would be helpful.

And then on the A&P spend, I assume, given the market share performance that remains quite positive, that you're happy with the current rate of A&P spend versus sales. Should we expect any change in the growth rate of A&P relative to sales going forward over the near term?

Tobias?

Yes. So look, on inflation, right, I think -- let me maybe start with commodities. I mean some stabilization, but we haven't seen prices massively come down. Sugar prices, sorbitol prices still very, very high. Packaging comes down a little bit, but I mean still way above before the inflationary headwind where it was. And I think outside of that, I think it's mainly on people. So we just need to see where inflation rates are. So I think as you've seen, I think we have strong operating leverage in half 1, we were able to offset that. So I think from that point of view, I think the ability in our model should be able to offset that through pricing and efficiencies.

And on the A&P spend, so look in half -- I mean, first of all, I think we're happy with the level we are in percent of revenue. So we don't think there is a major shift in any direction. We've increased our consumer-facing A&P spend 8% if you exclude Russia, where we stopped advertising last year, so I think we healthily invested into the brands. And we would expect -- you should expect us to continue doing that going forward. Of course, I mean, you have a year with 10%-ish sales growth like we had, you wouldn't expect us to spend A&P ahead of that ratio.

So I think you spend heavily. And of course, we also look for efficiencies in the nonconsumer-facing A&P spend as well.

The next question is a follow-up from Iain Simpson from Barclays.

I'm going to be cheeky and ask another two questions, if I may. Firstly, could you just remind us how we should think about working capital, seasonality is something to get our heads around with you being a relatively new company. Typically, we see working capital kind of as an outflow in the first half and then an inflow in the second half for most consumer companies. Would you be any different? Or how should we think about that?

And then secondly, in terms of your efficiency program, you're talking about some quite large numbers in terms of gross savings for that efficiency program. You also just said that you think A&P is in the right place as a percentage of sales. So I was just intrigued as to how we should think about where those efficiency savings will be going? Will they be reinvested back into the business? If so, where, given your comments on A&P, or what proportion might fall through the bottom line medium-term?

Let me start with working capital. So I think -- yes, I think we probably see similar pictures that you -- as you mentioned, I think for us, particularly, I think, in half 1 we've always see working capital outflows, and that's largely driven by us building cold and flu inventories ahead of the big season sell and that's in Q3. Of course this year it was a bit more pronounced given the strong sales growth. Just to give you a color, I think our days sales outstanding actually have improved, so from 55 to 50 days in half 1. So I think this year it's a bit more pronounced given the strong sellout. But you would always expect working capital outflow half 1 and then I think it's reversing out in the second half of the year.

And I think as a result, our cash flow, free cash flow -- and by the way, you saw it last year also, what we did between separation and year-end, you would expect a much stronger free cash flow performance in the second half of the year.

And then while I am at cash flow, just for you to note, as I had guided, I mean of course, this year, first time we have the interest cost cash out because the payment of the interest is arrears. So that has normalized, and also the cash tax has normalized because we had a benefited before. So both as I had guided you for half 1 in.

Yes. Iain, on your question on the efficiency program. As we previously communicated, GBP 300 million, majority of which will happen in '24 and '25. And I think Tobias' comments on A&P, we're certainly -- for this year, we feel like it's in the right place. And the reason I say that is -- we'll provide guidance at the year-end on what that looks like, but this GBP 300 million certainly gives us the flexibility to understand what is the best way to move forward. If there's more growth opportunities to go after, we have the opportunity to look at that, if we feel like we get the right returns. If not, then there's an opportunity to use those funds in other ways.

So it's really about the flexibility of that. But certainly as we get into the end of this year, we'll give more clear guidance next year on where we think that will come out.

The next question is from Olivier Nicolai from Goldman Sachs.

Just two questions on my side, please. First, a follow-up on China and Sensodyne. So growth last year for Sensodyne was affected by the lockdowns for Oral Health, I mean, in general, was affected by the lockdown. How are we compared to pre-COVID levels? Is there still much of a catch-up to be done in China for Oral Health?

And secondly, question is more on the -- more for Tobias this one. You're obviously expecting a stronger growth for this year than at the beginning of the year. Your cash flow tends to be much stronger in H2. You've done one disposal at a really good price, and the bulk of your debt is in dollar, which is weakening. So could we expect your net debt-to-EBITDA to be below 3x, maybe, at the very beginning of 2024, which would still be within the guidance, or even at year end?

Good. Let me start on China. Yes, we are seeing, like I said earlier, we are seeing a little bit of softness in that category. And again, our negative category were slightly less negative than that. So we had to see share growth in the most recent periods. We do expect it to stabilize. I mean, it was certainly a dynamic that again towards the second half of last year. So in the back half, we're hoping to see that category -- expecting to see that category more stabilized and us being in a position where we can get back to growth on the business.

Yes. So on the leverage, I mean, look, we've guided to less than 3x during '24. I think doing the divest, I think, gives us -- increases that confidence that we get to that place. I mean, as you mentioned, yes, there is currency benefit coming through on the U.S. dollar debt. However, also remember on the leverage side, it goes against the adjusted EBITDA number, and on the adjusted EBITDA number you take the currency -- the translational currency hit as well. So I think there is a bit of an offset. I mean, over time, I think this evens each other out, and it really depends on exactly where it lands, if you get -- because you never get like 12 months to 12 months.

So in the long term, I think we've broadly aligned our currencies of debt with the currencies where we have our earnings as we spread the debt across the dollar, the euro, to a smaller extent, the pounds and the Chinese renminbi as well.

The next question comes from Bruno Monteyne from Bernstein.

Tobias, I just want to come back to something you said earlier, you say investors wouldn't want to see A&P grow above the 10% organic sales growth. I don't really recognize it's investor sentiment. I think if you are able to grow A&P ahead of sales growth, you invest some of the operating leverage in more A&P and actually further strengthening future growth, I'm pretty much sure that most investors would actually be happy about it. So was it just a short-term observation? How do you think about it in the medium and long term?

Yes. Thanks, Bruno. Thanks for checking back, right? I think it was meant as a short-term comment, right? I think when we get benefits, strong benefits, short term coming through from cold and flu or the benefits from China, right, I think that's not where you pump in more money to deliver that. I think long term is, I think, exactly what Brian said, was said before, of course, keen to invest in A&P and looking for the growth opportunities that we have in the business there.

(Operator Instructions) The next question comes from Thomas Sykes from Deutsche Bank.

I just wanted to clarify some of the things you were saying on APAC and the APAC margin, because I think the minority is up by quite a lot. I think the minority's up by 60% or so, which I thought the majority of that or all was the JV you had in China. And yes, that's obviously a long way above what the organic operating profit increase was for the APAC region. So could you just explain -- and I know you gave some other points in the slide on APAC, so thank you there -- could you just explain what is happening to profitability outside what is included in that JV?

And maybe could you just remind us what -- of that pie chart you gave, what goes through that JV which comes out in the minority, please?

Yes, Sure, Tom. So the joint venture in China has the over-the-counter medicines business in it. So it's about 1/3 of the sales in China. So it's really the OTC sales that go through that. And of course, that's where you had -- or we had in half 1, the major pickup in revenue, because on both Fenbid and Contac, which were the ones that were blocked before, and then you had the massive demand coming through that we're able to meet given our local production footprint there, and also the production footprint is also in that joint venture.

So I think really strong support locally to run the production 24/7. So that means that, of course, part of that upside we have to share with our JV partner, and that's why you see that increase in the minority. And that, of course, is predominantly in half 1 where that stepped up, right?

And then I think the JV doesn't share, for example, cost allocations on the stand-alone costs and so on that are applied to the overall region. That's why you get a difference in the overall region margin picture compared to what sits in the JV as part of the JV agreement. So I think it's a bit unusual in half 1, just given that strong Fenbid and Contac growth coming through there.

(Operator Instructions) As we have no further questions, I'll hand the call back to Brian McNamara for closing remarks.

Great. Thanks, everyone. Appreciate your time and questions. As we said, we feel great about how the first half has gone, and we're confident in the outlook that we laid out today. So I hope you all have a great summer, and if you have any further questions, feel free to reach out to Sonya and the Investor Relations team. Thanks again for your interest.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.