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Reckitt Benckiser cleans up in fourth quarter

By Oliver Haill

Date: Monday 18 Feb 2019

Reckitt Benckiser cleans up in fourth quarter

(Sharecast News) - Reckitt Benckiser mopped up the final quarter of last year in fine style and the maker of consumer brands ranging from Dettol to Strepsils said it expects that momentum to continue into 2019.
Net revenue of £12.6bn for the calendar year was a 10% improvement on the previous period, boosted by £3.3bn in the final three months, which was up 4% on a like-for-like basis versus the average analysts forecast of 3.3%.

Adjusted net income at the FTSE 100 group grew 11% to £2.4bn as the adjusted operating margin grew 20 basis points on a pro forma basis to 26.7% but was down 60bps on a reported basis, as analysts expected.

Adjusted earnings per share improved 7% to 339.9p, benefitting from 10p from the resolution of various tax matters, compared to the 328p consensus estimate. At the bottom line at the reported level, incorporated discontinued operations, EPS was down 65% to 304.8p.

With free cash flow generation of £2.0bn, down from £2.13bn the year before, directors recommended a final dividend up 3% to 100.2p making for a total dividend for 2018 of 170.7p, an increase of 4%.

Chief executive Rakesh Kapoor, who surprised the market last month with his plan to retire by the end of this year, characterised 2018 as "a year of good financial progress, achieved in an environment of both significant change within the company, and challenging market conditions".

He hailed the revenue growth at the upper end of target and the acceleration of cost synergies from the acquisition of baby food specialist Mead Johnson Nutrition, with £158m achieved during the year.

The year also saw the company's strategy develop, with the RB2.0 project focused on growth and increasing market share, with the division of the group into two end-to-end accountable units, RB Health and RB Hygiene Home.

Last year the Health business grew 2% on a LFL basis, with improving performance from Infant and Child Nutrition but lower than average incidence of cold and 'flu in the fourth quarter, which will create a drag on the first quarter of 2019.

Hygiene Home made a good improvement with 4% LFL growth, broad-based across brands, led by growth in Harpic and Lysol, and strong performances also from Finish, Air Wick and Vanish.

"For 2019 we expect momentum to continue, and target +3-4% LFL net revenue growth," said Kapoor. "We expect to maintain the adjusted operating margin as we generate our usual RB cost and efficiency savings, and deploy them into building two even stronger businesses."

His chairman, Chris Sinclair, said the search for a successor to Kapoor was under way, with both internal and external candidates needing to "fit with the distinctive culture of RB and consistent with execution of RB2.0".

The shares rose 4.5% to 6,288p by mid morning on Monday.

As Goldman Sachs saw it, growth was driven by strong growth in the US, offset by slower growth in China owing to the effects of the supply disruptions in the third quarter impacting on-shelf product availability.

While IFCN was short of expectations, the rest of Health was ahead and Hygiene Home also outperformed expectations.

"Management's guidance implies modest downgrades to consensus earnings expectations for 2019, all else equal, owing to the adjusted operating margin guide which is 40bp below consensus."

Morgan Stanley noted that after the Kapoor's retirement announcement, the stock had fallen to three-year lows "on concerns for a weak Q4, a major margin reset and a potential change of strategic direction under a new CEO away from the planned split into two internal business units".

MS analysts said they believed these "solid results, chairman statement, LFL guidance, mini-reset and extended presentation later today provides significant reassurance...Of course, to some the stock will remain a 'show me story' (not least with the reset and cautious Q1/Q2 guidance on Mead and Flu) and it is still easy to make the argument that the shares will remain in the penalty box".

But MS sees the shares "offering very good value, with a growing operational momentum/turnaround and clear strategic optionality".

George Salmon, analyst at Hargreaves Lansdown, said: "An improved performance from the recently acquired infant nutrition business has helped Reckitt's results come in slightly ahead of expectations. However, a strong showing in North America is masking continued problems in the key Chinese market, which is still hamstrung by weaker demographics and ongoing supply chain issues.

On Kapoor's retirment after eight years at the helm, he said whoever takes over "will be inheriting an attractive business, but after incurring the disruption of a cyber attack and the infant nutrition business still causing a few sleepless nights, there are teething problems to overcome".

"With Reckitt's divisions clearly divided into Health and Hygiene and Home, we wouldn't rule out the new CEO following in the footsteps of GSK and overseeing a break-up of the business. Whatever lies ahead, it promises to be an intriguing year for the group."

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