February 27, 2020 / 8:13 AM / a month ago

Reckitt takes short term pain for long term growth

(Reuters) - Reckitt Benckiser’s (RB.L) new CEO unveiled plans on Thursday to spend 2 billion pounds over the next three years to spur growth, as the company took a 5 billion pound writedown on the value of its baby formula business Mead Johnson.

FILE PHOTO: Products made by Reckitt Benckiser; Vanish, Finish, Dettol and Harpic, are seen in London, Britain February 12, 2008. REUTERS/Stephen Hird

The British maker of Durex condoms and Strepsils lozenges reported like-for-like 2019 sales growth of 0.8%, in line with guidance but lagging peers including Procter & Gamble (PG.N) which is targeting underlying growth of 3-5%.

Reckitt bought Mead Johnson for about 13 billion pounds in 2017, betting on the rising demand for branded baby formula products in developing markets, especially China.

But the slow integration of the Mead business, especially in Latin America and in Asian markets, and slowing birthrates and competition from local players in China have resulted in a loss of market share. China accounts for more than 10% of group revenues.

Its writedown on the business resulted in a 3.7 billion pound group net loss for 2019.

Reckitt shares fell as much as 5% before rebounding into positive territory, which analysts said was because Reckitt did

not “overpromise” on its targets.

The FTSE-listed stock was up as much as 2.8% in midday trading and including those gains, is up 8% since the end of October, when new CEO Laxman Narasimhan said he would release the results of a broad strategic review during its annual results.

NEW PLANS

Narasimhan’s plans include pouring in 2 billion pounds in investment over three years to help return Reckitt to mid-single digit sales and earnings per share growth of 7-9%.

Former Pepsico executive Narasimhan shied away from selling businesses in the review.

Instead, the company plans to fund new investment through internal “productivity savings” of 1.3 billion pounds that will lower its adjusted margins by about 3.5 percentage points and a 20% drop in adjusted earnings in 2020, it said.

“I think this is the right approach. However, it does mean earnings downgrades for 2020... We will have to see if the margins bounce back to 25% as suggested,” Tineke Frikkee, head of UK equities at shareholder Waverton Investment Management told Reuters.

It will align its brands around three categories - Hygiene, Health and Nutrition, and focus more on Greater China, integrating its businesses there and rebranding its “Hygiene and Home” unit “Hygiene”.

“In theory Reckitt has a lot of the right ideas, but it’s now about execution. 2020 has been pegged as a transitional year, and is where the hard work begins,” said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown.

“We can’t rule out further ups and downs – it takes a lot of effort to turn a giant of Reckitt’s size around,” she said.

Reckitt also said it was too early to fully assess the impact of the coronavirus outbreak but it had seen disruption at retailers, in distribution and supply chains.

The virus was driving online orders for Dettol and Lysol disinfectant, it said.

Reporting by Siddharth Cavale in Bengaluru; editing by Patrick Graham and Elaine Hardcastle

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