Reckitt Benckiser - Emerging market strength

Reckitt Benckiser (LSE, RB) saw first half 2012 like for like revenue in line with 2011 despite the eurozone crisis hitting consumer confidence.  Europe did see net revenue fall but was more than offset by growth in emerging markets and the pharmaceutical sales.  The key hygiene business also performed well.

Despite the European sovereign debt crisis erupting once more in the second quarter Reckitt has managed to hold up well.  In 2011 like for like sales at constant exchange rates was 4% and in the first half of 2012 the same growth level was seen.

As a reminder, Reckitt has organised its geographic focus into three blocks 1) ENA (Europe and North America) 2) LAPAC (Latin America, North Asia, South & South East Asia and Australia New Zealand) and 3) RUMEA (Russia, CIS, Middle East, Africa and Turkey).

In the first half of 2012 ENA saw a 1% fall in like for like sales while the region is the biggest revenue generators.  However, it was offset by good growth elsewhere with LAPAC seeing like for like growth of 11% and RUMEA seeing 9%. The pharmaceutical business also held up with a 6% like for like improvement.

Looking towards the bottom line and the group saw a 4% boost to adjusted net income to £818m at constant exchange rates (2% growth at actual exchange rates).  This was as the operating margin improved marginally to 24%.

Reckitt’s is looking for emerging markets areas to be 50% of “core” net revenue by 2016 (up from 42%) and health and hygiene to be 72% of core business net revenue by 2016 (up from 67%).  This is part of a focus on higher growth areas for the business.

During H1, the pharmaceutical division held up well. Reckitt is moving consumers to its film based Suboxone – a medication which helps rehabilitates drug addicts - which is patent protected and is a move away from tablets.

Looking at the group’s targets and these include outperforming its relevant markets by 2%, which they estimated would grow by 1-2% this year. Also to spend an additional £100m on brand equity investment and this was to be funded by cost savings.

Comparing this against their H1 results, it looks like the company is running as per the plan. Reckitt ex pharmaceutical did 4% like for like in Q2 which was the same in Q1. And so far they have spent £40 of the £100m to increase brand awareness.

Reckitt has seen fast growing markets offset Europe, pharmaceutical sales offset the threat of competition and its largest division, Hygiene, perform well.  This has meant that despite headwinds like for like sales in H1 was the same as last year at 4%.

The strategy of focusing on higher margin areas such as Hygiene and Health and reorganising the business around emerging markets looks sound.  As a simple rule of arithmetic as more sales go to high growth markets the overall sales rate for the business will improve.

This article was produced by Senior Research Analyst, Aman Mashiana