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Reckitt Benckiser restructures as it warns about full year sales after quarterly decline

Last updated: 11:02 18 Oct 2017 BST, First published: 08:02 18 Oct 2017 BST

Nurofen
A cyber-attack in June caused supply issues with Nurofen in Russia

Reckitt Benckiser Group PLC’s (LON:RB.) announced plans to reorganise the business as it issued its second full year sales warning for the year and said third quarter revenue fell after a cyber-attack in June disrupted operations.

The group now expects flat full year like-for-like revenue, compared to its already downgraded forecast for 2% to 3% growth.

READ: Reckitt Benckiser shares fall as it confirms cut to full year revenue forecast

Revenue in the three months to September 30 totalled £3.2bn, down 1% on a like-for-like basis and missing consensus forecasts for 0.6% growth. Including foreign exchange headwinds and the acquisition of infant formula manufacturer Mead Johnson Nutrition (MJN), revenue rose 30%.

The like-for-like figure excludes the impact of India's introduction of a goods and sales tax. With the GST included, like-for-like sales fell 2% in the quarter.

Shares fell 1.07% to 6,960p in morning trading.

The owner of Nurofen painkillers, Durex condoms and Vanish laundry products issued a sales warning in July, blaming the impact of the so-called ‘Petya’ ransomware attack that blocked access to computers and demanded US$300 in Bitcoin to release them.

Cyber-attack causes supply issues 

The company said the attack had an impact on supply, reducing sales by an estimated 2% in the third quarter.

A prolonged period spent in restoring support systems, particularly in the group’s health factories, led to a backlog in supply and Reckitt said it has still not completely caught up.  

The supply issues particularly hurt business in North America where the group was unable to meet demand for its cold and flu medicine Mucinex. The cyber-attack also caused supply issues with Nurofen in Russia.

Supply constraints coupled with weak trading environment in the UK, Australia and New Zealand markets led to a 3% like-for-like decline in revenue in the Europe North America (ENA) business. ENA represents 60% of net revenue.

"Q3 was a soft quarter as we experienced both the tail end of known issues, and the impact of a continuing challenging market environment,” said chief executive Rakesh Kapoor.

“Our underlying performance was in line with current market growth of around 2%.”

Double-digit growth in China

Kapoor added that MJN had a “better quarter, particularly in Greater China, and is progressing well against its second half target for a like-for-like revenue range of a 2% decline to flat.  

Net revenue in the third quarter from infant formula and child nutrition was £720mln in the third quarter and £846mln from June, when Reckitt completed the acquisition of MJN, to the end of September.

In the developing markets arm, the company delivered a 3% increase in like-for-like revenue to £793mln, boosted by doubled digit growth in China where there was strong demand for Durex, Dettol and Move Free products. 

Reckitt launches corporate shake-up as it cuts sales forecast

In an effort to accelerate growth, Reckitt is reorganising the business by separating its core consumer health business from other operations. 

Kapoor will run the consumer health unit, which includes Nurofen, Durex and Mucinex, while Rob de Groot will head the hygiene and home unit, which includes Air Wick fresheners, Cillit Bang cleaners, and Vanish. De Groot has been at Reckitt for the past 29 years and is currently in charge of ENA. 

Clearasil acne treatment, Dettol antiseptic and Veet hair removal cream will be moved over to the consumer health unit from hygiene and home.

The changes will be put into place from the first quarter of next year.

“We expect strong growth trends in the broader consumer health category in the medium term, and our new organisational structure will provide us with a platform for growth and outperformance,” Kapoor said. 

Investors not too concerned but not everyone convinced, says AJ Bell

Despite Reckitt's lower third quarter revenue and the downgrade to its sales forecast, investors do not seem too concerned, according to AJ Bell

Russ Mould, investment director at AJ Bell, noted that shares have already fallen by 12% since the July sales warning and the third quarter sales decline of 1% eased from the 2% drop in the second quarter, helped by an improvement in its healthcare business and a return to growth in hygiene. The reorganisation was also welcomed by investors, Mould said.

“However, not everyone will be convinced by today’s figures," he added, citing flat underlying sales for the year, risks to the reorganisation and the stock trading on a huge premium to the UK market. 

He said the corporate reorganisation will be seen by sceptics as a "means of changing how Reckitt presents its figures at divisional level and thus muddying the waters when it comes to measuring underlying performance".

Reckitt's shares are trading on just over 21 times forward earnings for 2017 and 19 times for 2018, compared to 15 times and 14 times for the FTSE 100.

"Reckitt’s brand strength, lofty margins and record of consistent profit and dividend growth can justify the premium rating but the lack of organic growth, admission of pricing pressure in areas such as Home (Vanish) and Laundry and the growing reliance on both acquisitions and cost cutting all raise the issue of whether the stock deserves such a lofty valuation," Mould said.

Analysts speculate on Reckitt takeover of Pfizer's consumer health unit

Liberum said: "In our view, the new structure may be a prelude to a split of the business or a sale of RB Hygiene Home, particularly if an attractive asset such as Pfizer's consumer health division becomes available. RB trades on a calendar year 2018 price-earnings ratio of 18.8x a nearly 13% discount to Consumer Staples peers and offers a dividend yield of 2.7%."

Pfizer has said it is looking to sell or spin off its consumer healthcare division, which could see it fetch up to US$14bn of cash.

Liberum repeated a 'buy' rating and target price of 8,700p on Reckitt. It said Reckitt's strategic focus on faster growing, higher margin health and hygiene categories, coupled with strong execution, "powers top quartile 4-5% organic sales growth in the medium-term", excluding Mead Johnson.

Whitman Howard also thinks Reckitt should make a bid for Pfizer's consumer health arm. "In particular, with due regard for valuation and price paid, such an acquisition would put Reckitt Benckiser in #2 position behind Johnson & Johnson in terms of global consumer health market share," the broker said.

"It would also bring the Advil and Nurofen painkiller brands under one roof."

Whitman maintained its 'buy' rating and target price of 9000p.

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