Reckitt Benckiser Group PLC

LSE:RKT

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Q3 2018 Trading Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Richard Joyce, Head of Investor Relations. Please go ahead, sir.

[Richard Joyce, Senior Vice President of Investor Relations]

Good morning, and welcome to RB's Q3 trading update. As usual, we will say a few prepared remarks and then we'll go straight over to Q&A. So without any further ado, I'll hand over to Rakesh Kapoor, our CEO.

[Rakesh Kapoor, CEO & Director]

Yes, good morning, and welcome to RB's Q3 Trading Update Conference Call. I understand today's a busy day for trading updates, and hopefully, our slightly later-than-usual start has helped to avoid any conference call conflicts.I will take you through a summary of today's announcement, and then Adrian, our CFO, and I will be pleased to take your questions. I would like to remind you that this is a trading update only rather than a full set of results. I have 3 key messages for you today. Firstly, our new, more focused and accountable operating structure, aimed at delivering growth and value creation, which we call RB 2.0, is firmly embedded within the organization. We are starting to see some good momentum from this as you would have seen from our base Health and Hygiene Home performance in Q3. Secondly, the integration of Mead Johnson remains on track as does our confidence in delivering on the medium-term metrics to which we committed at the time of acquisition. I will provide you with some more details about the disappointing temporary manufacturing disruption we saw in Q3, but this does not change our confidence in the long-term value-creation opportunity that will be delivered. And lastly, I want to give you a quick update on full year targets, which we are reiterating, given the good momentum in our base Health and Hygiene Home business units. So let me give you some color around these messages. It was almost a year ago that we announced internally and then externally that we were working to create 2 focused and agile and fully P&L-accountable business units, Health and Hygiene Home, to become effective from Q1 2018. As you know, we have achieved a huge change program involving almost the entire organization in under 3 months, such that RB 2.0 was operational from January 1, 2018. This is now our third quarter of results operating under RB 2.0. And while we have much more to do, I feel that we are making good progress on both improving our operating performance and creating strategic flexibility of 2 structurally independent business units. You would have seen from our trading update published this morning that we delivered plus 4% like-for-like growth in both our base Health business as well as from Hygiene Home. Our top line growth is not where we -- what our ambition is, but Q3 was another quarter of progress, and I am seeing good momentum returning to the business. I am particularly pleased that the increased focus and accountability from Rob and his passionate team is showing better results with our business performing ahead of underlying market growth rates. On the base Health BU, we also continued to make progress. Our plus 4% growth in the quarter was a further improvement on previous quarters. We have seen good growth from a number of our innovations like our recently launched 24-hour Nurofen patch and further progress in e-commerce, including direct-to-consumer and cross-border. The Health BU has undergone a bigger change agenda with the integration of Mead Johnson. We have Mead Johnson people getting used to the RB Portfolio and the RB way of performance management. And in the heritage RB, we are having to learn more about infant nutrition. So overall, another quarter of progress, but we are not performing as we should within our Health Portfolio. I have every confidence that we have the right structure, the right management teams in place to deliver our ambitions. Turning to my second key message around Mead Johnson. I remain tremendously excited about the value-creation opportunity in this hugely important category, where we can play a role in nurturing the best start in life. We are well on track in terms of both the integration of our business into Health BU as well as on delivering the financial model and returns that we outlined to you in February 2017. Year-to-date pro forma growth in the IFCN business is plus 3%, a significant turnaround on the minus 1% decline we saw in 2017. Market growth this year has certainly been strong, particularly in China. But more importantly, we've undertaken a number of actions to address the share decline, improve operational performance and we have made significant investments in infrastructure, innovation and people to provide a sustainable platform for long-term growth and outperformance. I've shared many of these with you already, and whilst we have again so much more to achieve, I'm very pleased with our progress so far around improved in-market execution, our acceleration of the pipeline and our success in new channels, including e-commerce. Now let's turn to Q3. You would have seen from our announcement today that our IFCN business declined by minus 6% on a like-for-like basis in the quarter. And so I want to take a few minutes to explain the issue and our corrective actions. Firstly, our North American business had a good quarter with some solid growth of around low to mid-single digits, where we have seen improving share trends, innovation success with our recent launches of Enfamil NeuroPro and good progress on the new channels. We knew when we took on this category that we have work to do to build additional capabilities, including innovation and supply chain. We knew that we took on a very concentrated supply chain, and as a result, we approved significant CapEx to diversify the supply chain, increase capacity at existing factories and upgrade quality. During the quarter, we experienced a temporary disruption in manufacturing at our European manufacturing facility, which caused materially lower production and supply into several markets served from this factory. This principally affected Asian and European markets with the largest impact in Greater China. This was more of a supply issue rather than an on-shelf consumer availability issue. However, the restocking timetables, begun in Q4, imply there will be some shelf availability constraints and consumer losses in Q4. Clearly, I'm very disappointed. Q3 would otherwise have been another very good quarter of growth for our IFCN business. We are working hard with our channel partners to minimize this disruption for parents and babies. The issue was resolved in the quarter and manufacturing resumed. However, you will have seen from today's results that the impact of around GBP 70 million in Q3 to our net revenue. The bulk of this impact has occurred in Q3, but there will be some residual impact in Q4 and into early 2019. At the same time as achieving the promised synergies, we have increased investments in infrastructure, innovation and capabilities, including the approval for the purchase of a spray dryer and manufacturing facility in Australia last year to increase capacity to key Asian markets. So we are doing the right thing to create a sustainable platform for long-term quality, growth and outperformance, and we remain confident we can deliver the medium-term financials as explained at the time of the acquisition. So on to my final message. My final message is that we are reiterating our full year net revenue target of 14% to 15%. This is better momentum -- there is better momentum in both the U.S. IFCN business and in our base Health and Hygiene Home businesses. We remain confident with our target for the year, and therefore, reiterating it today. So to conclude, while we have still a significant amount of work to do, we are, for sure, making progress and we have some good momentum in the business under RB 2.0. The Mead Johnson integration is progressing well, and from an operational perspective, we are on track for delivery of our medium-term objectives. In the nearer term, we have reiterated our increased full year net revenue target of 14% to 15% as we see good progress and momentum throughout the business. With that, Adrian and I will be pleased to take your questions. Let's have the first one, please.

[Operator]

[Operator Instructions]

[Richard Joyce, Senior Vice President of Investor Relations]

Okay, thanks very much. We've got a few questions here lined up. So first one is from Celine Pannuti at JPMorgan.

[Celine A.H. Pannuti]

My first question on IFCN. You said that you had increased market share in North America. So good -- versus the minus 7 number that you have produced today, would you be able to tell us what is the sell-out number in the quarter? And specifically, could you tell us what has been your performance in China? My second question related to that and to the full year outlook, so you had GBP 70 million lost sales in the quarter. How much of a drag should we pencil in for Q4 and presumably, the first half of next year? And having done 2% year-to-date like-for-like, you said that you want to be at the top end of the 2% to 3% for the year or so. It seems there should be an acceleration in the fourth quarter. Could you give us a bit of a building block behind that? And if you could also reiterate that you're happy with the consensus, which I think stands at 26.7% margin for the year.

[Rakesh Kapoor, CEO & Director]

Right. I think you asked the questions, Celine, as usual, which would last the whole call. So -- but let me try and see if we can decompose this. So first of all, we said there is an improving market share trend in the U.S. Clearly, when we acquired the business in the U.S., we were losing market share and we were quite open about that, and we have slowly but surely reversed that trend. And now the trend in the latest period is a big positive, which is very, very pleasing. A lot of work still to do, but as you've seen, we've accelerated innovation, we've improved our performance in growth channels and that seems to bode well for the future. So that part is clear. But in terms of your other question on what is the sell-out performance in the quarter, and in particular, in Greater China, as we said, that the quarter was more impacted by sell-in because of the stock issues that we had from a production point of view, from a technical supply disruption point of view and less of a sell-out problem because there was channel inventory in, let's say, in the whole channel, in both warehouse channels, but also in our customers. And therefore, in terms of consumer disruption, it was less of a consumer disruption in Q3. As we restock in Q4, clearly, there will be some sales benefit in Q4. But clearly also, there will be temporary disruption issues on shelf availability and from a consumer point of view. And this we want to flag as we consider that they're cohorts in this category. And if we do not fulfill consumer supply needs, there could be disruption into Q4 and into a potential 2019, which is what we've called out. You asked how it impacts -- what it means in terms of Q4 guidance or what it means in terms of, as I've said, our whole -- the guidance that we've indicated for the year, which is reiterating our 14% to 15%, bakes in all these factors clearly. And you've asked also a question in terms of what it means in terms of like-for-like, and you said that our full year guidance implies the upper end of 2% to 3% in like-for-like, and we are also reiterating that. Now how do we get to that? Clearly, as I've pointed out, we have improved momentum in our base business, both Health and Hygiene Home, and also there is some restocking impact from a channel point of view. So I do feel that we are comfortable in our guidance for the full year. Your last question was around margin, and maybe Adrian should explain that so that maybe...

[Adrian Nevil Hennah, CFO & Director]

Surely, Rakesh, yes. So obviously, Celine, this is a trading update, and we had mentioned we won't be giving any quantified guidance for the year. That said, as your question implied, this issue is clearly harmful to revenue growth and it's clearly not helpful to margin in a way we had not expected in the year. And of course, it does come on top of some pressures like the input costs that you've heard from elsewhere. But frankly, there are also positives in the business for margin. The progression of the underlying business or main parts of it, most of the business is doing very well. And you would have seen in the recomposition of particularly the higher growth between price/mix on the one hand and then volume, some early encouraging -- as I said, early, but encouraging signs on price, which is also helpful. So taking that in around, frankly, our broad view on margin for the year has not changed.

[Richard Joyce, Senior Vice President of Investor Relations]

Thanks, Celine. Okay, next in queue we've got Robert Waldschmidt from Liberum.

[Robert Russell Waldschmidt, Consumer Goods Analyst]

Just wanted to ask a little bit more about infant and supply chain, if I may. Firstly, can you give a little bit more detail as to the nature of the disruption? Secondly, can you -- you mentioned that you license plants in -- or there are licenses per manufacturer in different markets. Can you tell us a little more about the nature of these licenses? Are you saying that it's contract manufacturing or not? And lastly, with respect to this, is there any business interruption insurance as well, which if it says there is, could offset some of this GBP 70 million loss in the period?

[Adrian Nevil Hennah, CFO & Director]

Yes. So the nature of the disruption, it was a technical engineering issue at our Netherlands facility, which is our main European facility. It does supply Europe a little. As you know, our Infant Nutrition business in Europe is quite small, but it also is a significant supplier to the Far East China, in particular. And the reference to licenses is around -- there are many markets in the world where you have to license to a specific plant which, of course, doesn't mean you're not completely fungible in your sourcing and supply to a particular month. So that was the reference to licenses. So when we had a disruption at the Netherlands facility, it had a knock-on impact on the specific markets that were licensed for that facility. The -- and just on the question of business interruption issue, there is nothing material that we have and we'll mitigate that issue.

[Robert Russell Waldschmidt, Consumer Goods Analyst]

So -- okay. So just to clarify, so you've a technical engineering issue, is that now resolved?

[Adrian Nevil Hennah, CFO & Director]

Yes, absolutely. So just -- again, maybe just -- maybe to slightly expand or [ kicking off ] the previous question. And yes, so the issue is now completely resolved. Supply is back up to normal. And just to sort of, again, fully decompose the impact on the numbers. The impact in Q3 was the result of a reduction in sales to the channel. So we had the technical disruption. We did not have the supply available to sell to the channel. So that's where you saw the GBP 70 million of lower revenue. In Q3, much of that was absorbed by the channel [ right ] having reducing its inventory. So there was limited impact in Q3 on the consumer offtake on the shelf. But then as we get into Q4, certainly, we are now happy to march to the month of October. We are in a position, where although we are supplying and restocking the channel, up to the ability of our supply to do it, the pace and extent we can do that is supply constrained. We are now in a phase, we thought there is some absence of products on the shelves, where we are losing customer demand. And why we flagged the Q4 and a little bit into 2019 is that in Q4, we'll have the net of the positive of the restocking of the channel clearly and unequivocally positive. But at the same time, there will be some consumer loss. And that's clearly a loss the first time a parent comes in and tries to buy our brand and can't get it. But then, of course, is the question, what does that do for the repeat purchasing, which is too early to tell, which is why we have -- we want to be completely transparent. We said out that we do expect some impacts on that demand knocking on but of course, we're doing huge number of things in all the markets that have been disrupted, in particular, China, to make contact with the mothers and the parents, in general, and to mitigate that. But we do expect there to be some effects. So that's rather -- what we're trying to say in full, in the fullness is there's obviously transparency.

[Richard Joyce, Senior Vice President of Investor Relations]

Yes, thanks, Bob. Right. Next on the line is Martin Deboo with Jefferies.

[Martin John Deboo, Equity Analyst]

Martin Deboo of Jefferies. I'm sorry, but I'm going to have to obsess a little back to Q4 along with everybody else and slightly regret doing that. But I think given the pressure under it, it's understandable. The simple maths are, first of all, can I ask -- can I confirm the full year target is an LFL, not pro forma target? Assuming it is, you need 5% to 6% sales growth in Q4 against a tougher comp and with the issues in IFCN you flagged, I'm just trying to use plain language here, gentlemen, I'm just trying to understand, is the guidance -- I'm just trying to understand the difference between the restock effect and the falling demand effect. Are you essentially saying that you expect a big swing back in IFCN in Q4 from the restock that will be greater than any underlying diminution in consumer sales? Is that the sort of logic of the guidance? Because I observed that the comps in OTC get tougher and the comps in Wellness and Hygiene and HyHo are broadly similar. So I'm just sort of struggling a bit to understand the moving parts of Q4.

[Adrian Nevil Hennah, CFO & Director]

Lets just take a step back, first of all, it is like-for-like guidance. And then currently, that was the guidance we set out at the start of the year. That's the guidance we're reiterating. The only -- I don't quite see the sort of numbers that you just quoted, the 5% or 6%. The -- we see first half, which had 3% like-for-like growth, we delivered a disappointingly low [ 2% ] for the reasons you described, and I hope we're giving you the best sense we can of the Q4 dynamic, and we said we're going to be at the higher end of 2% to 3%. So I don't quite see the issue that you're referring to, Martin. And again...

[Martin John Deboo, Equity Analyst]

Adrian, it's based on 9 months LFL of 2%, that was what lay behind the comment.

[Adrian Nevil Hennah, CFO & Director]

Right. And of course, we do, do individual reporting so you got to be -- you got to go behind it. So when you look at 3 years -- 3 months -- 3% for the half year and 3% for the quarter, you can pick a few bets. I hate to tell you this but on the strength of the two, so I really don't quite see the level of acts in your question, Martin. If I'm missing something again, please come back or maybe come back to Richard afterwards.

[Richard Joyce, Senior Vice President of Investor Relations]

And Martin's question about whether Q4 is driven by a big uplift in IFCN?

[Adrian Nevil Hennah, CFO & Director]

Well, again, I do think that is a very good question, Martin. not that the rest of it wasn't, but that is a very good question. And we are signaling the two. There will be channel restocking. I mean, there have been a significant channel restock. We are in full supply. There is channel restocking going on, as we speak. There is also a loss of consumer demand, and we can see the first month's impact. We are going to have to see that and how it plays out.

[Rakesh Kapoor, CEO & Director]

I think the full impact of this is only going to be felt during the course of the quarter because as we said, the last quarter did not see much of a on-shelf availability issue. It is much more -- it would be much more in this month than maybe to an extent in the first couple of weeks in November. And therefore, what -- how the 2 forces play out will be seen. But I think, like I said, we are not going to give you a target by category, by quarter. We have given you the whole picture as we see it, and we are comfortable with where we are with the whole picture.

[Richard Joyce, Senior Vice President of Investor Relations]

Okay. Thanks, Martin. So next on the line, we've got Karel from Kepler Cheuvreux. So I'm not going to say your surname, Karel, given I might mispronounce it. So apologies.

[Karel Zoete, Equity Research Analyst]

It's Karel Zeote speaking. I've got 2 questions. The first one is on the supply chain issues in infant nutrition. According to local press, there was some ammonia leakage in the freezer. Is this the incident you're referring to? And also in 2017, there was an incident at the Nijmegen facility. So a more broader question is how you can assess the quality of the safety systems at this facility. The second question is on pricing in Health. That is now turning -- it's nicely positive during the third quarter. Can you talk a bit there what you see in terms of where pricing is actually improving expectations from here onwards?

[Rakesh Kapoor, CEO & Director]

Right. I think the first one is quite simple. It has got nothing to do with the ammonia leakage and there's no connection to 2017 issues that you might be flagging, which I'm not aware of, by the way. And therefore -- and there's no quality and safety issue here. So I would say, it's just a supply -- technical disruption of supply. On your second question on Health, I would say that you might have seen from our previous reporting also, there was a modest pricing in Health in the first 6 months, too. And the last quarter, we've indicated on base Health about a split of price/mix and volume. So I would not take anything more in the trends of pricing on Health. On Hygiene Home, clearly, there has been a material change from the first 6 months of the year on pricing to the last quarter. Again, I don't want you to read too much from the price/mix combination in third quarter because the third quarter I think from a 4% growth, we had 2% volume and 2% price/mix. We do see, and I did flag that a number of times actually in previous quarters, that I did expect to see in the second half of the year some pricing return in the market as a whole. And clearly, we will be carefully looking at our pricing and our competitive situation in that context and make the right calls. And I'm not saying that, therefore, there is full-blown price increasing going forward. But clearly that evidence of early pricing in the market and where we have also participated seems to have to have happened in Q3, as we've shown in our results.

[Richard Joyce, Senior Vice President of Investor Relations]

Right now, we've got Richard Taylor from Morgan Stanley.

[Richard Taylor, Equity Analyst]

A few questions from me. The first one, it would be really helpful for us to understand a little bit more about the nature of the issue in the manufacturing facility, just so that we can judge a little bit more about the impact. So we're obviously a full month after the end of the quarter. So I'd be really curious to know when exactly the issue came out, how long did it last for, what exactly was the [ nature ]. I know you said it wasn't to do with ammonia. And given the impact we're seeing on the share price today, how have you thought about the timing of announcing the issue? So that's my first question. The second one, obviously, another strong quarter of growth from OTC. But maybe if you could give us a little bit more color around how you're thinking about that and the sustainability of that growth. And then thirdly, just on pricing, can you give us some color around pricing discussions and how you're thinking about pricing going forward? You've previously been a little bit more cautious than perhaps some of your peers who were sounding a little bit more optimistic.

[Adrian Nevil Hennah, CFO & Director]

So let's just address your first question first, which is the -- it was a technical engineering issue at the -- at our Netherlands [ making ] plant as the previous question I referred to. It's an issue developed at the time. It took a while to investigate thoroughly. You absolutely expect us to investigate something like this extremely thoroughly. The -- it then took us a while to develop remedial actions, both in terms of within the facility, but also in terms of within the supply chain to make sure our customers were served as best as we could, given the difficulties, and indeed, there still is some uncertainty today about exactly how consumers will respond to stock outages when they return for the next purchase. So this was developing through Q2, Q3 in terms of identifying the issue, identifying the root cause and making sure we have proper remediation in place and can start our full production again, working with the customers, with the inventory we did have. And as we spelled out, actually -- because we have a substantial new facility coming available in Australia at the end of the year, and the growth in the markets served by this plant in Netherlands has been strong, it's been a tight supply chain. We had less inventory than what was ideal, so that, also we needed to manage it particularly carefully. The -- and then I think very importantly, we are reaffirming our full year revenue guidance. So I think those were sort of the issues that we've been working on since this time. And so in that context, the absolute, the appropriate thing was to bring it to the investors' attention, along with these numbers, Richard. So that was our logic as we went through sort of identifying and then remediating and then ameliorating dealing with this issue.

[Rakesh Kapoor, CEO & Director]

I think there were couple of other questions, Richard, from you. One was about pricing going forward. Clearly, as I've said, we should see pricing, modest price increases in the market going forward, which we saw some evidence of in Q3. And I would imagine that over the next several quarters, you would see some more trending of pricing in the market. This is my expectation. Now clearly, we operate in a competitive market and we operate in a market, which has many other factors to be seen. But I do expect better pricing environment in the next several quarters than we've seen in previous several quarters, as you take the last quarter out of the discussion. In terms of OTC growth, generally speaking, actually, over the last many, many years, we've had good growth on OTC. Many of the Health growth rates have actually been swung around by the negative performance of Scholl in the past. And you're seeing that OTC has generally performed well ahead of the market, and clearly 6% is materially ahead of the market because we are -- and we are making good market share progress here. But I would not say that OTC growth rates at 6% is something that you can write in a model because clearly there are lots of changes that happen in quarters and over maybe some times, years, based on seasonality, based on innovation and based on several other factors, including, for example, the Mucinex factor of private-label entry -- reentry rather in this case. So I would -- I'm not giving you any specific target or a guidance for OTC growth rate, except to say that the underlying performance of our OTC brands remains very solid, very good and ahead of the market.

[Richard Joyce, Senior Vice President of Investor Relations]

Thanks, Richard. Right, now we've got Guillaume Delmas at BAML.

[Guillaume Gerard Vincent Delmas, Director]

A couple of questions from me. The first one on the HyHo division. I mean, in the press release, you're again saying that the category growth is towards the lower end of the 2% to 3% range, but for the third consecutive quarter, you've reported 4% like-for-like sales growth. So you're basically going at twice the pace of your categories. Wondering what's supporting the substantial share gains and whether this is sustainable or not. The second question is on rest of Health and within this, the other subdivision. We've seen 2% like-for-like, a small improvement relative to Q2, where it was flat organic sales growth. I thought with Scholl now in the base and some relatively easy comps for Dettol in the Middle East, we would have seen a stronger acceleration in that third quarter. So what are the key moving parts there? And is Scholl really out of the woods?

[Rakesh Kapoor, CEO & Director]

Right. Okay. So on the first question, I think, Guillaume, you're right. The HyHo performance has been very consistent this year actually. I'm very pleased with this. Really, first of all, we need to be -- I mean, this is a business that we always believe had the potential of growth. We had good innovation going into this year, so we -- and we have indicated those. And we had a strong pipeline of innovations with a missed product on Finish. We've had a new launch in the U.S. So I think the innovation going into this year has been very good. I personally judge that the increased focus and passion from Rob and his team has actually made sure that the innovations have been maximized to their fullest that we've actually got the wins that we needed to get behind these brands. We've invested more in some cases, and you can see some of that showing into slightly better -- we're gaining modest market shares, too. So I can't write this again as a trend because, clearly, these are early days, 9 months is not a lifetime, but we are very encouraged by the performance of HyHo. And I think that is -- that I did not -- I would say, I knew that the intrinsic opportunity in HyHo to do better was absolutely in front of us, and RB 2.0 unleashes that and that's what -- that makes me happy because obviously this is what I wanted to see. On the rest of Health, I think you're talking about the OTC -- non-OTC part of...

[Guillaume Gerard Vincent Delmas, Director]

Non-OTC, yes.

[Rakesh Kapoor, CEO & Director]

Yes. So it's a very, very big success. So clearly, there are some moving parts here and some parts doing better than others. Scholl is less of a drag in the quarter, then it is not out of the woods. I would not say it's in growth. It's not a tailwind, but it's not a material headwind. And I think that is the one thing I would want you to take out of this. Slightly better trends on wellness and so on. But I would not -- on the rest of Health, I would say, there are better trends. Dettol also, yes, Dettol also, better trends in Q3. Middle East is still, I would say, is still a drag. It's not as much of a drag, but it's still a drag. I don't think there were favorable comps in Middle East in Q3. There might have been in Q4, but not in Q3.

[Richard Joyce, Senior Vice President of Investor Relations]

Okay. Thanks, Guillaume. Now we've got Marion from Raymond James.

[Marion Boucheron, Financial Analyst]

Well, thanks for the question. But actually, they've all been answered already.

[Richard Joyce, Senior Vice President of Investor Relations]

Okay. Excellent. Okay, thanks a lot. Now we've got Eddy Hargreaves from Investec.

[Edward John Hargreaves, Analyst]

Just returning to the full year guidance on sales of upper end of 2% to 3%, I'm taking it that by definition, that means 2.6% or above. And it would be really helpful to get some idea of the 2% year-to-date reported, whether that's closer to 1.6% or to 2.4% or somewhere in the middle. I know you don't like talking decimals, but given obvious uncertainty about what you need to do in Q4, It'd be really helpful if you could give us some color at least on where you stand within that range year-to-date.

[Adrian Nevil Hennah, CFO & Director]

Yes. I think we're not going to go into those decimal places, as you can imagine. But given the year-end and market earlier and others I'm sure are focused on this, I think what we can point out, if you look at the half-year number, it was a 3% and then we've got a 2% here. So I think you can reasonably infer it's a strong 2% in the year-to-date, and therefore, I think you can see perhaps why we are not -- we haven't come to the same conclusions that Martin's maths was doing, which was maybe rounding in other way and so -- with an underlying -- with a business excluding IFCN growing at 4% as we've just been discussing, and with an IFCN in Q4, as we've described, I don't think we see the maintenance of guidance as being a remarkable thing for us to be doing at all.

[Richard Joyce, Senior Vice President of Investor Relations]

Good. thanks, Eddie. Now we've got James Edward Jones from RBC.

[James Edwardes Jones, Managing Director and Analyst]

I have to say, the repeating of technical engineering issue, it isn't very helpful, but on the basis that, that's all we're going to get, can I ask if the disruption to Netherlands' plant was a result of work you've been doing to take costs out of Mead Johnson? And how confident are you that it won't happen elsewhere?

[Adrian Nevil Hennah, CFO & Director]

So James, an extremely fair question, and I would say we are absolutely clear this has nothing to do with cost savings at the Nijmegen plant or anywhere else. And as you could imagine, as this thing came to life, that was one of the questions firmly on our mind. It's very, very clear if this would have happened under the previous ownership. And we are very, very clear that actually in the period since we've owned this, we have been investing in capacity, and frankly, quality and other aspects, and in particular, the significant new capacity that's coming online in Australia by the end of this year. So we couldn't be more categoric to a very, very fair and legitimate question, James. And we could not be more categoric that the answer is, this is wholly unconnected with that.

[Rakesh Kapoor, CEO & Director]

Can I just remind everyone on the call that the synergies that we had targeted at the time of the Mead Johnson acquisition had much more to do with procurement synergies and back-office synergies. Procurement synergies in the form of raw material, packaging material. We buy cardboard boxes, we buy tins, and we buy media together. And on back offices, also at the head office synergies, just to -- which tend to be quite significant actually in nature, we did not put a huge synergy target. We have been emphasizing over the last many quarters as soon as we got the Mead Johnson that we've been investing more in this business in terms of innovation capabilities, in terms of supply chain, in terms of other quality and capabilities. This has been a business unlike any other that we have taken, both in the magnitude of the savings that we've targeted from a synergy point of view and the extra investments we've made to actually bring back the business from where it was, trading at minus 1% last year, actually minus -- it was actually minus 3% in the first 6 months of last year to where it is now, which, in 9 months, has been plus 9% and with a desperately disappointing third quarter -- sorry, desperately disappointing. I cannot tell you how disappointed I am. I'm really disappointed. But this is something we need to do well. This is a category where we need to handle even the smallest technical issue with the greatest responsibility. This is what we want to do. And if it means that there is a technical issue to be -- technical thing to be taken care of, so be it. And I'm -- [ the part ], as disappointed I am, that all the plate work we've been doing in this category and the momentum we created does not show in the third quarter. But equally, I feel that if we do not take these things as seriously as we do, it's not also the right thing for the long term of this business, and that's what we have done, James.

[James Edwardes Jones, Managing Director and Analyst]

Just to be clear, and sorry to [ hark ] on about this, but can you categorically assure us that the issues in the Netherlands plant won't -- are not issues in any other Mead Johnson plant?

[Rakesh Kapoor, CEO & Director]

I can -- yes, absolutely, yes.

[Adrian Nevil Hennah, CFO & Director]

Yes. And we have looked at the specific issues, looked at them technically, looked at all the other plants for something similar. Yes, huge, huge amount has been -- work has been done on that.

[Richard Joyce, Senior Vice President of Investor Relations]

Thanks, James. Right, we've got Rosie Edwards from Berenberg.

[Rosie Edwards, Analyst]

Infant nutrition, but maybe slightly a different angle. Just -- is the Australian plant approved to supply into the Chinese market? Do it have the required regulatory approval?

[Rakesh Kapoor, CEO & Director]

I think the Australian plant comes onstream in Q4 in -- towards the end of this year and will be in time approved for China supply, although what we are going to do is to take some parts of the easier supply that we are doing from the current Dutch facility off into the new plant, and therefore, create more supply chain optionality.

[Rosie Edwards, Analyst]

Okay, sure. And you say in the press release market growth in China moderated. I think in the first half, you were referencing mid-teens. Is it still in double-digit levels? Or are we into single-digit in terms of the market growth now?

[Rakesh Kapoor, CEO & Director]

I don't think we were referencing mid-teens market growth rate in -- did we? Richard, did we? Mid-teens in the first half?

[Richard Joyce, Senior Vice President of Investor Relations]

Yes, we did.

[Rakesh Kapoor, CEO & Director]

Okay, my memory fails. But certainly, in Q3, it has moderated to -- moderated as we expected it to. And actually there are some predictors of market growth, again, to reference what I've said at the July call. Stage 1 growth, Stage 1 is 0 to 6 months. Stage 1 growth is the lead indicator for what might happen into Stage 2 and 3, and we see Stage 1 growth rate to be flat to modestly declining. Now that's a full reflection of birthrates, that over '17 were a decline over '16. How can we judge exactly what the birthrates in '18 are going to be and how that impact '19 is, of course, something to be seen. But there is still pricing stroke premiumization in the market, and that pricing is -- and RB, Mead Johnson plays in the premium segment of the market, what we call the high premium and super high premium segment of the market. So the markets in which we are -- or the segments in which we are operating basically do show good growth. Now we know that the Chinese government on the other side is also working on relaxing the -- opening up with the one-child policy and looking at whether incentives need to be given. I'm not so sure what exactly the endgame out from this will likely to be. But I know that the Chinese government is not happy with the progress that they have made in encouraging birthrates with the opening up of the one-child policy, and whether they are going to do more to boost growth rates going forward is something to be seen. But clearly, China remains an important opportunity. We should not forget that we are still under, I would say, under-leveraged in new growth channels like mom-and-baby stores and e-commerce versus our traditional channels. And there is a huge amount of work we are doing to gather pace here. For example, as I spoke about potentially in our half year call, we partnered JD.com to go into many more cities. I think in the third quarter, I saw the data. We are nearly in 250 more cities than where we were at the start of the year. That's significantly higher than what we would otherwise have achieved, and there's a plan to ramp up -- that up going forward. So there is a huge amount of underlying work that looks very good, even in a very disappointing, desperately disappointing quarter that we've seen on IFCN, which is -- which, of course, we have to move out of and get back to our positive momentum in this category.

[Richard Joyce, Senior Vice President of Investor Relations]

Thanks, Rosie. [Operator Instructions] Right, got a question from Pinar at UBS.

[Pinar Ergun]

I have two questions. The first is a very quick technical follow-up. I believe last year, the cyber attack was around 82% drag on your Q3 growth. Could you please remind us whether this proportionately impacted any of your divisions? And so when we look at 4% growth rates in the HyHo and base Health in Q3, should we bare the easy comps from cyber in mind when we think about growth rates -- growth run rates as we go into 2019? And now my second question is on IFCN. You've indicated in H1 that you've had a bit of trade loading in this division this year as you rolled out new products. And today, you've made some comments about moderating market growth rates. Do you think consensus expectations for more than 4% growth in IFCN next year are in line with your expectations for market growth and your own performance?

[Adrian Nevil Hennah, CFO & Director]

Let me take the first one, Pinar, on the impact of cyber last year flowing through to this year. Yes, there's no doubt Q2 and Q3 last year were clearly harmed by the cyber experience. And therefore, yes, as you look at the numbers in Q3 this year, and particularly, wouldn't be able to talk about HyHo, why was it 4% when the market -- we think the market's at the lower end of 2% to 3%, and we are growing a little bit more than market. The difference is essentially cyber. The -- so yes, Q3, it did have a cyber tailwind involved in it. I'm not quite sure about what you mean by '18 to '19. I'm not sure that by the time we get to '19, any cyber effect is going to be less in the year-on-year numbers. But you're quite right to point out that, that it does exist in the Q3 numbers, yes.

[Richard Joyce, Senior Vice President of Investor Relations]

And in terms of the growth rate with IFCN?

[Rakesh Kapoor, CEO & Director]

For '19?

[Richard Joyce, Senior Vice President of Investor Relations]

Yes.

[Rakesh Kapoor, CEO & Director]

I think, Pinar, clearly, we are not talking about '19 targets today. There will be a time for doing that, and I'm not convinced we are going to give you targets by category, by business unit, but we will give you aggregate targets for '19 as we come into '19.

[Adrian Nevil Hennah, CFO & Director]

And I would also say that our view of 3% to 5% medium-term range for IFCN growth is completely unaffected. I mean, clearly, China is going through some gyrations at the moment and it's coming down from some extraordinarily high growth from the last year. So -- but that does not affect our confidence of 3% to 5% medium-term IFCN market growth.

[Richard Joyce, Senior Vice President of Investor Relations]

Thanks, Pinar. Well, there's no more people in the queue. So thank you very much.

[Adrian Nevil Hennah, CFO & Director]

Goodbye.

[Rakesh Kapoor, CEO & Director]

Thank you.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.