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Reckitt Benckiser Group PLC
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Ladies and gentlemen, thank you for standing by, and welcome to the RB Q3 2020 trading update. [Operator Instructions] I must advise you that this conference is being recorded today.I would now like to hand the conference over to your speaker today, Mr. John Dawson. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Welcome to Reckitt Benckiser's third quarter trading update. With me here today are Laxman, our CEO; and Jeff, our CFO. As a reminder, this call will be recorded and available for replay later on today. As usual, we'll go through our normal prepared remarks and then go straight to questions and answers.So with that, let me pass you over to Laxman and Jeff for their opening comments. Laxman?
Hello. Good morning, and welcome to our third quarter trading update conference call. We hope all of you are safe and well. It was exactly a year ago when we first met at our Q3 call in 2019. Who could have foreseen the magnitude of developments in the last 12 months? A year ago, I outlined some of the challenges we had to address as a business and likened RB to a good house in a great neighborhood. 4 months later, we announced our plans to make RB a great house again. And in the 8 months that followed, we've seen our markets and growth opportunities redefined by a pandemic that will have lasting implications for us all. We've achieved a great deal in that time, and it's testament to the people inside and around RB that we've come so far. We also appreciate the incredible efforts of those on the frontline who keep us all safe and protected. Thank you to them, and our thoughts and deep appreciation for their dedication as we prepare for our first full winter with COVID-19. I hope you've all had a chance to review our third quarter statement. We have 3 messages for you this morning. First, our plan to rejuvenate sustainable growth at RB is gaining momentum, thanks to the exceptional efforts of the RB team and the improved execution we have been building in the business.In meeting the significant challenges of COVID-19, we have shown that we are a stronger and more agile business than we were at the start of the year. In fact, we are well on the way towards completing the first phase of our strategic plan, to stabilize and perform. We are now seeing the positive impacts that the investments we are making are having on the business, investments in capabilities and also capacity and flexibility to drive top line growth. We are building a better and stronger RB, and I'll share some examples in a minute. Second, our near-term outlook is positive, although there were a number of headwinds to overcome. We are on track to delivering low double-digit growth for the year as a whole. Our other guidance is unchanged, and we'll provide our first guidance for 2021 with our full year results in February where we expect our full year results to be strong. Finally, our markets are being redefined by this pandemic, and this is giving us both additional firepower to invest in the business and bigger markets in which to capture new growth opportunities. While there is still a great deal to do, not least to improve the performance of infant nutrition, the strong progress to date gives us further confidence that the plan we have in place will achieve our mid-single-digit revenue growth target a year earlier than expected and with greater certainty. Let me take you through our progress to rejuvenate sustainable growth, then Jeff will discuss our Q3 performance and outlook. And then I'll share some more thoughts on our medium-term plans. We will then take your questions. So first, on to our strategic progress to date. In February of this year, we set our strategy for rejuvenating sustainable growth at RB. Our objective was and remains to rebuild a strong earnings model and outperform with mid-single-digit organic revenue growth, mid-20s margins and 7% to 9% earnings per share growth by the mid-2020s. We outlined in detail how we would achieve this through a temporary margin reduction and enhanced multiyear productivity program. Taken together, this allows us to invest over GBP 2 billion in principally growth-led initiatives. So how are we doing against that? First, we are generating the savings needed to reinvest in capabilities. Our enhanced GBP 1.3 billion productivity program, a key part of financing the reinvestment into sustainable growth, continues to make good progress. Cumulative savings have now reached over GBP 300 million, and we are looking at ways to further enhance our productivity.Second, good progress in strengthening the core capabilities essential for sustainable growth. As set out in February, we are making significant investments to build a better business. Key areas of investment in this first phase of the plan focus on our supply chain and key growth enablers such as R&D, product development, e-commerce, marketing and sales excellence. We have made further progress in each of these areas in the third quarter. Improving our supply chain performance has been an immediate area of focus, with customer service previously at unacceptable levels. Quick and effective action that we began in September of last year to improve performance has enabled us to increase capacity for our most important disinfection SKUs by over 100% year-on-year. This has been achieved through internal process improvements, qualification of new co-packers and the addition of new raw material suppliers in record time.As a result, we are now well positioned to meet future demand for Dettol, Lysol and related products. While we have more to do to improve on-shelf availability and eliminate out-of-stocks, we have received significant recognition from our customers for our response during the early heights of the pandemic, and our internal measures show that product fill rates continue to improve. We have continued to invest heavily in key growth enablers, including new people and ways of working. For instance, in September, Dr. Angela Naef joined us to lead R&D activities and drive our innovation agenda. In addition, we have now established 4 centers of excellence focused around e-commerce, marketing, sales and medical sales.We have built out our teams with internal and external talent in order to cultivate best practice, and we have already started to share learning globally with the development of commercial playbooks. Benefits are already being seen in improved sales execution and the consistent approaches to market development. Our e-commerce progress to date reflects the investments we have been making to build on and enhance the strong capabilities we already have in this area. This has been complemented by the early wins of integrating our digital marketing and e-commerce development with our marketing excellence and eRB capability centers. Third, our revenue performance reflects fundamental improvements in how we drive growth. As we set out in February, we frame our revenue growth opportunities around 4 drivers: increasing penetration, increasing market share, and entering into new places and into new spaces. First, on penetration. In the first 9 months, we have made good progress. For example, in the U.S., our hygiene products are now used in over 50% of households compared to less than 45% a year ago. In India, we have seen a continued increase in the penetration of Harpic following behavior change campaigns, with over 20 million more households using the brand compared to last year. Let's turn to market share. Overall, our positive market share performance was broad-based, particularly within Hygiene and Health, and not only from Dettol and Lysol. 75% of our revenue from the Hygiene business was in category market units where we held or gained share. 80% of our revenue from the Health business was of category market units where we held or gained share.We have gained share in all the key markets for the Dettol and Lysol portfolio. For example, in the U.K., our Gaviscon market share was up over 400 basis points versus last year. In the U.S., Finish continues to take share, up over 70 basis points against strong competition. Within OTC, in addition to Gaviscon, as another example, Mucinex has held share in the markets in which it operates. In sexual wellbeing, Durex has gained share in both China and India, key emerging markets for the business. Next, in terms of new places. Meeting the global demand for Dettol and Lysol has been a priority for the business. Since the start of the year, we have taken Dettol and Lysol into 19 new countries and expanded the reach of different products, for example, taking Dettol hand sanitizer into 20 new markets and Dettol wipes into 13 new markets. At the same time, our global business solutions team continues to sign partnerships, most notably with Amtrak and Airbnb in this quarter as well as Cricket Australia and Major League Baseball in the U.S. Finally, new spaces. As an example, Air Wick Essential Mist broke new ground in the aromatherapy category, and it's grown over 50% in the U.S. over the last 12 months. Alongside Enfamil NeuroPro, Mucinex Fast Max All-in-One and Lysol Laundry Sanitizer, our Air Wick Essential Mist range was 1 of 4 RB products recognized as Top 25 Breakthrough Innovations in this year's U.S. BASES awards, in part reflecting their strong in-market performance; positive, as these 4 brands essentially cut across our portfolio. Before I turn the call over to Jeff, I would like to share a few thoughts on our Nutrition business. In February, we talked about the changing external dynamics in the infant nutrition part of the business, particularly the heightened competition in China, including changes in the regulatory environment and market share increases by local competitors. We also highlighted our planned internal supply chain upgrade in Latin America, the impact on our sizable Hong Kong business with the social unrest and reduced travel due to COVID-19, and our intent to invest in our e-commerce capabilities and the competitiveness of the business. Since then, COVID has had a further impact on the overall infant nutrition business, as evidenced by reduced birth rate, both this year and next, and a slowing rate of premiumization. Against this backdrop, we have been executing our plan well. In Mainland China, our in-market execution year-to-date across off-line and online channels has improved, as evident in our market share where we are holding share in Mainland China. For example, online, we've developed the impact of social commerce capabilities as well as live streaming to engage more effectively with consumers while continuing to improve our execution in off-line channels.Elsewhere, we feel good about the progress in the Americas, while progress in ASEAN is mixed. Our business in Hong Kong remains a challenge. Our pipeline of innovations is strong, and we continue to see opportunities in broader nutrition, for example, in adults, and are working hard to address some of the other challenges that I have mentioned. Overall, across all fronts, we are pleased with the progress we have made, building the underlying business and positioning it for the long term. Overall, we are starting to see the early benefits of our investments and improved execution and growth. We will continue to invest in the fundamental capabilities that drive successful category penetration, market share gains and expansion into new places and new spaces. The current environment opens up new opportunities, and we will target any additional investments to realize them. Let me now hand over to Jeff, please. Jeff?
Thank you, Laxman. Now let me turn to the performance in the quarter. Group revenues were GBP 3.5 billion with like-for-like net revenue up 13.3%, mainly driven by strong volume growth. Reported revenues grew by 6.9%, reflecting a foreign exchange headwind of 6.4%, mainly due to weak Latin American currencies and, to some degree, a weaker U.S. dollar. In the quarter, we saw market share gains across many of our brands, including Finish, Lysol, Durex, Dettol and Gaviscon. Additionally, e-commerce sales continued to grow rapidly. Year-to-date, we've seen growth of over 50% across all geographies in each of our main e-commerce channels. Looking briefly at each of our business segments, starting now with Hygiene. At Hygiene, net revenue grew by 19.5% on a like-for-like basis to GBP 1.490 billion in the quarter. All major Lysol markets delivered share gains, with most delivering revenue growth in excess of 60%. And overall, Lysol was up over 70%.Demand was particularly strong in North America where we continued to increase capacity, and there is more work to be done to fully balance the demand/supply equation. Air Wick and Finish continued to grow with double-digit growth, but demand for Vanish has remained weak, reflecting the impact of stay-at-home behavior on stain removal. Other key brands performed well. Now turning to Health. Revenue grew on a like-for-like basis 12.6% in the quarter to GBP 1.217 billion. We continue to see strong growth for Dettol, up over 50% in the quarter, with material share gains in all major markets with a number of key markets, including the U.K., seeing the brand more than double in revenue.Durex delivered double-digit growth in revenue, led by markets where the rate of pandemic infection has materially improved. In addition, we recently launched Durex 001, our first polyurethane condom, into the Chinese market. Year-to-date, our OTC portfolio has grown by 5%. However, revenues declined by 10% in the quarter due to continued pantry unloading for Mucinex and weaker demand for Nurofen. While earlier in the season -- while early in the season, we expect trading for the balance of the year to remain suppressed and -- for our cough and cold remedies in the flu season.Our portfolio of personal care products grew overall, with particularly good performance from Veet. Scholl also grew, showing an improved trend after a few weaker quarters. Finally, Nutrition, which grew 4.1% on a like-for-like basis to GBP 806 million. Infant and child nutrition revenue was unchanged year-on-year in the quarter, an improved performance compared to the first half of the year. Growth in North America was strong in the quarter, boosted in part by increased trade inventories, which will largely unwind in the fourth quarter.In China, sales were -- in China, sales were down because of the continued closure of the Hong Kong border. However, in Mainland China, sales were stable and in line with last year. As we mentioned in our release, there's also evidence that birth rates will be lower in the coming quarters as a result of behavior changes related to the pandemic. This is expected to have an impact on market growth in the near future. There have been material share gains in some of our vitamin, mineral and supplement brands, which together represent some 15% of the Nutrition portfolio. This has led to another strong performance from Airborne, which more than doubled in revenue in the quarter. Turning briefly to the outlook for the year. Following strong revenue growth in the first 9 months of the year, we're upgrading our full year like-for-like net revenue growth guidance to low double-digit growth from our previous guidance of high single digit. Other aspects of our 2020 guidance are unchanged. And as Laxman has said, we'll provide guidance for the 2021 with our full year results in February 2021. Now before I hand back to Laxman, let me quickly discuss our new reporting segments and the restatement of historic financial results, which are included in the appendix of today's statement. Our new structure, announced in February, came into effect on the 1st of July. And as a result, we have segment reporting which will feature 3 global business units: Hygiene, which is unchanged from the previous reporting; Health, which includes sexual wellbeing, OTC, Dettol, Veet, Scholl and other strong regional brands; and Nutrition, which includes infant nutrition and our vitamin, mineral and supplement brands, including Airborne and Move Free, amongst others. This segmentation better reflects our new structure and management responsibilities, our internal reporting and will allow more effective communication of the underlying performance of our business. While revenue has largely been previously reported, the margin breakout by segment is new, especially for Health and Nutrition. So let me spend a moment on these changes, which are shown in more detail in Appendix B. The margin for the new Health segment grew in the first half of 2020 by 150 basis points to 28.6%. And as previously reported, this was due to strong volume growth, and like-for-like revenue was up 17%, excellent productivity gains, and this was offset by early investments in capability, new growth initiatives and COVID costs. The margin of Nutrition in the first half of 2020 was 17.5%, down 410 basis points compared to the previous year. The decline in margin being attributed to significant price investments made earlier in the year, specifically IFCN in China, and additional investments in capability, for example, improved quality control processes. There has also been significant margin impact due to the reduction in the Hong Kong cross-border volumes, the costs associated with the driver overhaul in Mexico in the second quarter and COVID-related costs in the first half. As Laxman has said, infant nutrition is a major area of focus for the executive team. And while there are no easy wins, we do expect in the medium term to see revenue growth and margins return to previous levels. So with that, I'll hand back to Laxman.
Thank you, Jeff.As you know, RB operates in attractive, growing market segments, underpinned by the clear trends and tailwinds that we highlighted in February 2020: first, urbanization and global warming and their impacts on the spread of infection reinforces the necessity of hygiene as the foundation of health; second, there's a growing demand for self-care, given the pressures on health systems and on governmental spending globally; third, there's a growing importance of sexual health and wellbeing and also underscored by the rising number of sexually transmitted infections; fourth, a growing and aging population with very specific nutrition needs; and finally, an ever-changing technology landscape, which is transforming consumer knowledge as well as purchasing habits. COVID-19 is accentuating a number of these trends, highlighted in our half year results, while introducing additional dynamics which are impacting our business today. Most importantly, the pandemic has heightened the social importance of hygiene, seen increasingly as a foundation for health by all.We're seeing that 86% of consumers are reporting that their hygiene practices have improved over the course of this period. Demand for our category-leading disinfectant products has been exceptional in recent months, with increased penetration and new consumers demonstrating a preference for proven heritage brands, therefore, driving growth. As a result, we expect structurally higher levels of demand to persist longer term as new consumer habits regarding cleaning and sanitization become engrained. Away from home, there is a growing consumer demand for reassurance over hygiene in public and shared spaces, for example, while using transport, in hotels, schools, colleges and offices. Providing trusted standards of hygiene represents significant market opportunity. And with a portfolio of leading disinfectant brands like Dettol, Lysol, Sagrotan and Napisan, we are well-placed. With a world-class portfolio of Hygiene, Health and Nutrition brands and a clear purpose to protect, heal and nurture in the relentless pursuit of a cleaner and healthier world, we're uniquely placed to help tackle the challenges the world is facing. Our plan to invest over GBP 2 billion over 3 years is on track. We are also reinvesting outperformance to capitalize on the strong demand for our products, particularly with Dettol and Lysol, and through e-commerce and the professional channels. In meeting the significant challenges of COVID-19, we have shown that we are becoming a stronger and more agile business. We are making strong progress in embedding a new culture and strengthening core capabilities. We are well on the way towards completing the first phase of our strategic plan, to stabilize and perform. Our improved execution and the investments in capability and growth, coupled with the underlying trends in our categories and the power of our heritage brands, will help us achieve our mid-single-digit revenue growth target a year earlier than expected and with greater certainty. Thank you for your attention. I would like to thank once again all our people, our customers, our suppliers and partners, and thank all those in the frontline who are keeping us safe and confident of a successful future. And with that, I'll hand you back to John to open up the call for any questions you may have. Thank you. John?
Thank you, Laxman. Thank you, Jeff.
So we've got some people in the queue. Why don't we open it up? And the first question is from Guillaume Delmas at UBS.
Expected COVID-19 headwind of 5% to 6% in 2021 that you mentioned at the results stage in the -- H1 results stage in July. I was wondering if your view has changed on this since the number of COVID-19 infections is on the rise again. And more importantly, you mentioned structurally higher levels of demand to persist longer term. So any change to that view?And my second question is on IFCN. I mean, clearly, some improvement in Q3, but still a very cautious outlook for Q4 and 2021. And I guess, big picture, when I look at the first 3.5 years of Reckitt's ownership of these assets, like-for-like sales growth has been fairly in excess of 1%. So it's consistently dilutive to the group's growth.So my question on this would be, how long will you tolerate this continuous dilutive impact? And what's the time frame for turning IFCN into an accretive business, at least on a like-for-like basis? And selling so, would you come to the conclusion that either you might not be the best owner of this asset or the infant nutrition category might not be the right category for you given your medium-term ambitions?
Guillaume, it's Jeff here. Let me address the first question. I think as we go through this crisis with the pandemic, I'm starting to feel that trying to analyze the business between underlying and COVID impact is becoming meaningless. We think the COVID impact is going to be long-lasting. The growth in disinfection is going to be longer-lasting, the expansion of our brands into new places and, as we mentioned today, 19 new countries that we've launched Dettol and Lysol into. Therefore, I think, to some degree, it becomes a little less meaningful to start breaking out performance between underlying and headwinds. Clearly, as we get into 2021, we're going to see headwinds relative to the size of the disinfection growth that we had in 2020. But I think that breakdown becomes less meaningful. The performance that we report today is a broad-based performance. Strong business performance across many of the brands, including Auto Dish with Finish, including air care, but also including Veet and, for example, Scholl where we saw improving performance. So I think, generally, yes, we'll continue to see headwinds. But I think trying to analytically break it out as 5% to 6% versus an underlying number becomes less meaningful the longer, we get into this pandemic and we see the long-term structural changes that we expect going forward.I think on the second question of IFCN, we do expect growth from this category to be return to the 3% to 5% level. We've said that in February, and we still continue to believe that. Undoubtedly, what you're seeing, as we see the positive effects of the pandemic on disinfection, for example, we see some negative effects in IFCN, which are related to birth rates, also related to the Hong Kong border closure, which is impacting us as well as other multinational companies. And so therefore, in the short term, for sure, IFCN is not growing at the levels we'd like. But in the medium term, we do see this category growing as a 3% to 4% category.
Excellent. Let's take the next question from Richard Taylor of Morgan Stanley.
Two quick ones from me and then a broader question. I know there's a bit of feedback on the line, so I hope you can hear me clearly.So the first question, the big standout in the statement for me this morning was bringing forward your midterm guidance by 1 year. Can you talk about what is giving you the confidence and visibility there? And am I right to interpret this pull forward, which I think is pretty vague previously, as a pull forward from '23/'24 to '22/'23? So that's the first question.Second one, I think you mentioned in the statement 23x you've gained market share across categories, regions and brands. So can I just confirm that despite doubling capacity in Lysol, you're still unable to fully meet the demand?And then my broader question, most staples companies over the last 10 years have been pretty poor at innovation, and I think Reckitt is probably included in that over the last 10 years. So what are you doing differently? And given the huge cash generation you had in the first half, and I suspect that's probably continued, how should we think about this for capital allocation?And if I can just give an example, Reckitt hasn't really participated in buying small brands and rolling them out globally for a long, long time. And as you've increased your investment, your penetration, your distribution, supply chain efficiency, all the things you talked about in your presentation, how do you think about buying small brands, sticking them in the Reckitt system and rolling them out globally?
Richard, thank you for that question. Let me first get to your question about the medium-term outlook. As I said, we are seeing significant behavior change in our categories. 86% of consumers are adopting better hygiene practices. We see in countries where the pandemic was more advanced earlier that some of this behavior change does sustain. We're seeing penetration increases that are very, very strong.It gives us confidence as well, given the heritage brands we have and the pull we are seeing, including in new places and new markets, that we have more confidence in the underlying growth of our categories. And so we're investing in accessing these more spaces and more places. And just given the strength of the portfolio as well as what we have seen as evidence of the trust that consumers place in our brands and with sharpening execution, which we clearly are seeing, that gives us the confidence to not only grow with the categories but also shape these categories over time. And that gives us the confidence to suggest that we will meet our medium-term growth objectives sooner. On your second question with regard to market share, Dettol and Lysol have seen, certainly in all the markets that they participate in, an increase in share. There are a couple of exceptions, but mostly, that is the case around the world. It is also true that despite the fact that we have increased capacity significantly, and there are examples of the fact that we have increased capacity, in some cases, by multiples, we're not meeting all the demand that does exist for these brands. On your third question, on innovation, it's a very good question, and it's the reason why we ended up going into the 3 global business units. The Hygiene business have the focus, have an innovation pipeline that is strong and the level of leakage that we saw in the pipeline was low. And what we are doing is continuing to invest behind it and maximizing the value of these investments in all the markets that we are in. And as we've said, Dettol and Lysol are now in 19 new markets through direct distribution than we were before. If you go back to your question about small brands, we bought UpSpring, a small brand in the prenatal vitamin space, a few years ago. This is a brand that we have expanded significantly. And we've also taken it to China, and it's actually done very well there. It's small, but it's doing very well.An explicit part of our strategy was the idea that we would buy or partner or take Reckitt brands and scale them up globally. We have a stake in several of these. We own a stake in Pharmapacks, which is a third-party reseller on Amazon. And through that, we actually get a chance to understand and learn which brands and which categories are growing significantly. And it gives us a basis for learning to figure out exactly how we would partner or acquire any small brands if at all we see fit and if at all there's value to it. So our platform is open. In fact, if you look at our models for e-commerce, we have 3 models. One is what we call Be Big, which is our omnichannel e-commerce business, which is all about how we maximize our value with the large online/off-line retailers. We have Be Fast, which is innovations that we do, that we scale up through our e-commerce business globally. And the third is Be Open and Be Able, which really is about investing in the capabilities of e-commerce and in our distribution system and our -- yes, to essentially be the platform for us to take different brands to our system around the world.So it's clearly on our list, not just for our own innovation, which we are focused on, and the creation of the 3 global business units brings real focus particularly to Health, but also what we're doing with the investments we're making in e-commerce is creating a system that is capable of taking even more on.
Thank you, Laxman. Let's take the next questions from Celine Pannuti at JPMorgan.
My first question, I would like to go back to Nutrition. There are several bits within that. So first of all, you mentioned the slowing -- the reduced birth rate, which probably is not so new, but accelerating in China, but as well slowing the rate of premiumization. Can you give example of that? And what exactly should we expect in terms of market growth in China? One of your competitors was talking about 3%. Is that realistic if we have negative birth rate and premiumization slowing?The other part of my -- of that question is you have added VMS into IFCN to form Nutrition. Could you explain the rationale behind that? And also, finally on that part, could you tell us what is the impact of the U.S. contract win or inventory build in Q3 that will reverse in Q4?And my second question, coming back on the opportunity in Health, could you give us the growth rate of some of the other brands in -- in Hygiene, excuse me, so Finish, Air Wick, just to understand as well how at-home consumption is driving growth? And would you expect some of those benefits if there were a vaccine to see a change in the way consumer approach hygiene in -- so that some of the new hygiene penetration that you have seen could unroll in case of a vaccine?
Well, Celine, thank you for that question. Let me take it on. Your question on the slowing birth rate, this has been a trend in China for a while. But what we have seen in the pandemic, particularly in the U.S., is a decline in birth rate. I know you didn't mention the U.S., but we expect that next year, there will be a slowing birth rate in the U.S. On your question on the underlying growth rate in China of being 3% plus, I think it depends a little bit on what we define as China. Because if we're looking at Mainland China and you're seeing a recovery in Hong Kong and a reopening of cross-border, it's a very different math versus Hong Kong being closed and cross-border not being open. So I think it's a little bit up in the air in terms of what it might be. Our long-term expectations that we have said for this overall category was 3% growth, and we expect for it to come back, but it does depend, as Jeff said, on the pandemic and how it unfolds in that part of the world. On your question on VMS and a wide spot of the Nutrition business, overall, what we have said was we are broadening the definition of nutrition in February. And we said this is about meeting the needs of consumers, young and old, and we see a real tailwind in seniors, and the growth rate in there is actually not small. What we are seeing is the science of Mead Johnson being the ability for us to play in that space. We saw that with Neuriva, which has obviously grown quite significantly. And you'll see that with some of the new products that we're developing, where we're leveraging the science of Mead Johnson into that space. So bringing it together into broader nutrition is clearly what we intend to do. But as Jeff has also said, we continue to provide a verbal commentary on how the infant formula business is doing. On your question on the U.S. contract, I think on Q3 to Q4, this is purely a -- I think it's a -- it's timing and I think it will reverse a bit, but I don't see that as being a structural situation going forward. On your question on Hygiene, we do see good growth in the stay-at-home categories. We don't break out growth by every single brand. But what we do see is good growth in stay-at-home categories as people nest at home. And I think what we all see is you do see people cook more at home. They're washing more plates. Some of these numbers are quite staggering in terms of the number of plates being washed at home versus what they were pre-COVID. Now we fully expect that as things normalize, and we can't predict exactly what the time is, I mean people have discovered the benefits of being at home. And we expect a slow, I would call it, change in behavior rather than a rapid change in behavior. We do expect some of these behaviors to stick. I mean people are seeing the value of family dinners. People are seeing the value of cooking at home. We're seeing that, by the way, with the growth of things like cooking shows and so on, where people are engaged far more in that and culinary IQ is increasing. And so to that end, what we see is that this will obviously unfold over time, but we are seeing greater penetration and behavior change. And by the way, the headroom on this, on some of these categories, are still very high and very strong.
Excellent. So let's take the next question from Tom Sykes at Deutsche Bank.
Just on the productivity program, obviously, you've alluded before to that being expanded. And I just wondered whether you could give us any thoughts or inclinations on what the scale of that expansion might be and where you might be able to get extra gains from. You obviously gave some details on white space expansion. You mentioned the 19 new countries for Dettol and Lysol. Maybe if you could sort of scale out the -- or flesh out the scale of that ambition and the scale of that expansion. And maybe related to that, is it possible to give a view on the developing markets' growth ex IFCN and maybe what the sort of price versus volume is doing there? And sorry, one final one is, obviously, you're generating or will be generating a reasonable amount of operational gearing in some areas. Could you maybe talk about the BEI investments and the sort of volume and intensity of that in the second half of this year and whether that is sort of getting behind the bigger brands, pushing some of the smaller ones in the tail? Maybe just some views on BEI would be great, please.
Why don't -- Tom, why don't -- it's Jeff. Why don't -- I'll take the first part of the question and hand back to Laxman. We're not at a point of giving a new target. What we've talked about is GBP 1.3 billion of productivity gains which we'll reinvest back in the business. What we reported today is that we're at GBP 300 million on a year-to-date basis. So we're well on track to delivering that. Obviously, this is the first year of the program. I expect it to step up next year. And potentially, come February, we'll be able to report in more detail about it.The program is really wide-based, from top to bottom in terms of the P&L, looking at everything from revenue management, cost of goods, manufacturing, conversion costs, logistics, right through to, including BEI and the efficiency of our marketing spend, right through, obviously, to our fixed costs. So each area, each line of our P&L has been touched by the program. But at this stage, yes, we are looking to grow the program, to further develop the program to become -- but we're not at the point where we're ready to talk about expanding the program to a new target, but keep the space open, and we'll discuss this in more detail in February.
Tom, to your second question, what has become apparent, if you just look at searches online in many of these countries, that our brands are uniformly admired and loved. And we realized there was a great opportunity in many of these markets for us to go further direct into these markets and invest in order to drive growth. So that's where these 19 new countries are. There clearly are more out there, but this is clearly an area of growth and of investment. And as we look at opportunities for our brands, the heritage brands that we have, it will be a further push that we will make. Onto your question on developing markets, I'll give you a bit of a tour around them. I think our business in India continues to perform very well, and we're pleased with the progress that the team is making. And the strength of some of our brands in India and the ability for them to navigate what is a complex operational environment is something I feel very good about.I think our business in Latin America, particularly with new growth, is actually looking strong, although there are clearly headwinds in that part of the world. I look at China and the business in China is continuing to perform well in the areas other than infant formula, which I've already addressed earlier. And so I think overall, what you're seeing is the fact that the ability for us to drive penetration for us to drive market share in a lot of the emerging markets is strong. We're clearly focused as well also, by the way, in ensuring that we have the right price points in many of these markets. Our business, for example, in Africa, clearly, a big focus for us, brands like JIK, which is a tremendous bleach brand that we have in many of our markets; also Dettol in many of those markets, a clear area of focus. So we're clearly concerned about ensuring that we have the right price points, we have wide distribution and that we're investing behind these brands in order to capture all the potential that exists out there. Your fourth question on the -- on cash and gearing and so on and the implications for BEI, we're doing 2 things. We're clearly ensuring and what we are doing is we are spending efficiently. So we've gone through a prepared work -- a process work as part of our productivity program to ensure that we're getting the most for what we spend. And that -- those tools, those approaches are being scaled up globally. We're not fully all there yet, but they're being scale up globally.But beyond that, we continue to invest behind our strongest brands. But we're also building capability, which you'll probably see more on the SG&A line than you'll see in BEI, around building some of the internal capabilities that we know we need in a world where e-commerce, digital, brand building, all that sort of comes together. And so clearly, we're going into that space, and you'll see us make more announcements as we go around what we're doing in that space. But it's clearly a target area of investment for us given the changes taking place in the way the consumer gets information, the way the consumer transacts and the way they're building relationships with our brands.
Thank you, Tom. Thank you, Laxman. Let's take the next question from Iain Simpson at Barclays.
Firstly, could you talk a little bit about the stock levels of the retailer and the distributor end with Dettol and Lysol? Does Q3 include any restocking benefit? Or will we likely see that in Q4? And how much is there left to go in terms of on-shelf availability improving?Secondly, could you give any color around the slowing premiumization trends you're seeing in IFCN in China? And you talk about holding share among the international players there. Presumably, that means you're losing it on a whole market basis. So what does this China IFCN business actually do for you strategically? And at what point would you review it, talking specifically about China IFCN?And finally, if I may, how far along the road of improving key capabilities is RB now? Gaining and holding share in 75% plus of Health and Hygiene is very impressive. But could this number even improve in subsequent quarters given the lead times around strengthening innovation? Presumably, there's more to do there.
Iain, let me take this on. I think as far as the on-shelf availability and implications for Dettol and Lysol, we're clearly working to ensure that we bring on stream a lot of capacity. It certainly takes time to do, but we have actually done a tremendous job in bringing on tens of co-packers in various supermarkets, in addition to investing in capacity and our lines to drive availability.It is also, though, evident that the strength of these brands and the demand that they have exceeds what we're able to keep on the shelf. So there's work still going into this, but I think we have opportunities to further enhance on-shelf availability as we go. And I think there's more capacity coming on stream over the course of the rest of this year and the early part of next year, leading into Q2. So that's the first question. On your second question, on premiumization, I think what you've seen there is, in fact, rate of intensity in price competition across channels. And that, of course, manifests itself in terms of premiumization. Now on your question on share, we talked about holding share in the overall market across off-line and online. It isn't just holding share with multinationals. It's the overall market. And it is both online and off-line. In terms of the China IFCN business, this is an area obviously of great emphasis and time being spent with the management team. I think some of it is, of course, driven by Hong Kong and what we expect will happen there in the opening up cross-border. It is an area of great focus. And as we've always said, we continue to manage the portfolio for mid-single-digit growth over time. And we will be back to you with the improvements that we are making in this area. In terms of key capabilities, I feel good about the progress we are making. But there's still more to do. I think that the business has shown an amazing ability to be agile, an amazing ability to meet consumer demand and needs. But I think what we are doing is taking stock, particularly on innovation, I think it's particularly in Health that we're spending time. We feel good about what we have done over the course of the last year, but there's still more to come. And I think there's more upside in terms of what we can realize, particularly around innovation, and that will sustain some of the share gains that we have seen.
Excellent. Let's take the next question from Alan Erskine at Crédit Suisse.
Three questions for me: one clarification, one modeling question and one bigger-picture question. On the clarification, in the Health business, you saw a price/mix improvement, 3.5% in Q3. I would have thought that with OTC negative, you might have seen the reverse there. And what implications does that have for gross margin?On the modeling question, I know this is a sales call, but you have given more detail on the historic margins for the Nutrition business. And I wonder if you could help us to understand, was the VMS business dilutive to that division's margins in the first half? And are the U.S. margins accretive to that first half performance?And then my third bigger-picture question is, I totally get that consumption of disinfectant products is -- has elevated. I'm probably using more disinfectant than I did last year. But I'm not sure I'm going to use any more next year. So it's almost like it's a step change in the ongoing consumption of the product rather than transforming the growth potential of the category. Is that the way you see it? I'd be interested on your perspective.
Laxman, let me...
Jeff, go ahead.
Yes, let me jump in on the first 2 parts of that question. We do see higher than perhaps expected price/mix on Health. That's predominantly due to lower trade spend specifically against Dettol relative to last year. So there's no net price -- no gross price adjustments really going through of any significance, but there is some significant movements on trade which ultimately, of course, does have a small impact as well in terms of margin for Dettol.But having said that, overall, you have to remember that Dettol in Health is not the highest-margin business in Health. So it doesn't necessarily mean the margin for the total Health business is better than expected. So I think, certainly, it's mostly related to the trade spend that we see in this quarter related to Dettol.I think on -- in terms of -- I didn't quite get your second question, Alan. Was it in terms of the modeling of Nutrition in the first half relative to VMS and the other moving parts?
Yes. It's just to help us model the business going forward. I just wanted to -- does -- is VMS margins below the new divisional average? Does it drag it down? Or is it accretive and...
No, no. No, VMS is slightly higher than the average within that segment. So VMS, in total, has a slightly higher margin, and IFCN is slightly lower.
And then geographically, would North America margins be slightly higher?
Well, we're getting into a lot of detail there, but generally, we don't really break out the margins of the individual categories by geography. But I think it's fair to say that within our IFCN mix, North America has a stronger margin than the develop -- well, certainly, China, for example.
Alan, to get to your third question, I'm glad to hear that your personal consumption of disinfectants is up. As I look across the overall market and we look at the headwinds -- sorry, at the headroom that exists, there is significant headwind in the space. I think I've been -- the UN study suggests that less than 20% of the people wash their hands after going to the bathroom worldwide. And as we look at the ability for us to drive behavior change and to get penetration and to get frequency up, we see opportunities worldwide. And we have the right portfolio for it, and we are working to make it happen.
Excellent. Let's take the next question from Bruno Monteyne.
The sales are clearly much better than initially guided. Your sales are great. Now it didn't seem to result in any higher margin expectation for the year. So is there no operating leverage that comes with this higher sales growth? And what does it tell us potentially about next year? If you're going to have some headwinds, to what extent you will worry about deleveraging?The second thing, in that exhibit you are referring to about the margin for H1, the new breakout, now you can clearly see the big margin investment in Nutrition. But I can't see any margin investment, again, Health and Hygiene. Is that mainly because you're expecting more to do in the second half? Or should we actually expect most of that margin investment only to be visible in the Nutrition segment?
Thanks, Bruno. In terms of operating leverage, we were clear in July, and let me -- and Laxman said as much again today, but let me just reiterate that we will continue to reinvest our operating leverage for the medium-term future growth of the business. We see significant opportunities to expand our disinfectant franchise. And in fact, where -- if you look at the household cleaning aisle and think of that aisle in the future, disinfection will have a much bigger place in that post COVID. And I don't think a vaccine or a quick reversal of the pandemic is going to change that view. So we see real opportunities. And as you saw in the release, we're launching Dettol and Lysol into new countries. We've taken wipes and hand sanitizers into 20 and 30 -- 13 new markets, respectively. And so we will continue -- and certainly, we're investing in our global business services, our professional business. So we'll continue to reinvest the sales potential in terms of the leverage into future growth opportunities. And I think that is the right place to go, and that helps us. As we, again, said in the release, we are more confident about achieving our midterm targets and achieving the net revenue targets earlier than previously expected. I think in terms of the historic numbers, what we said at the half year was we do see operating leverage in Health and Hygiene. And that operating leverage, plus the fact that we had strong productivity improvements in the first half of the year, means that you do see margins increase in Health and Hygiene compared to last year. And at the same time, we were investing, but we were just starting the investment program in terms of capabilities and in terms of the new growth channels.And what we said at the half year, and this remains the case, is that we would step up those investments in the second half of the year. And we are stepping up those investments both in terms of accelerating growth initiatives into new CMUs, but also in terms of the investments into capabilities in terms of people, in terms of our centers of excellence, which we're increasing. So you will see a step-up in the investments in the second half of the year. And the investments are there, but obviously, in the first half of the year, they're not so visible because of the leverage and because of the productivity savings that we had in the first half of the year.
Excellent. Let's take the next question from Karel Zoete at Kepler Cheuvreux.
I have one with regards to supply chain and then 2 on VMS. You mentioned in the press release multiple times that you're doing better on supply chain. Can you share with us the improvement in your service level, for example, in your North American business, where you today stand versus industry benchmarks compared to 12 months ago? That would be the first question.Then on VMS, it's clear that within, you're seeing very strong demand today. On Hygiene, you speak about structurally higher demand also post the COVID crisis. What is the medium-term outlook for VMS? Do you expect sustainable, higher level of consumption here as well?And somewhat related to that, within VMS, you have a strong North American and then also emerging Chinese business. What's the potential for VMS to spread more widely across the globe? Those would be the 2 questions.
Well, thank you for the question. Let me take it on. I think it's fair to say that last year, about 12 months ago, I think we were challenged. We've gone through a transition that didn't work so well and we were not well-placed. I think it's also fair to say that we're not all the way there. But having said that, the degree of progress that the supply chain team has made from then until now has been tremendous. People have worked their heart out to ensure that they can meet the demand. And at the same time, what we have done is we've brought on additional capacity and we brought on additional co-pack capability in order to meet the demand.If you take a look at individual service levels, obviously, we don't break these down individually, but what you are seeing is you definitely have it there. And over time, what has happened is the service levels have gone up significantly.Now demand in some of the disinfectant brands in some SKUs is incredibly high. And we are bringing capacity on at levels that, frankly, we never thought possible, right? When you have a 5x increase in one SKU with Lysol or a 20x increase in another SKU in Dettol, those are the kinds of numbers that, frankly, we never thought possible a year ago. And yet, in some cases, we're not fully meeting the demand that's out there, and that is clearly a focus for the team.We expect that as we work through the rest of the year and the early part of next year, what you will see is demand and supply in some of the SKUs clearly improve. But what you are seeing is far better communications with our customers and far better process improvements inside, with still more to do, but I feel good about the progress. And as you know, we've also beefed up our teams. Sami Naffakh has joined us. And Sami, obviously, have worked in RB years ago. And he and his leadership team are working very hard with the businesses in order to ensure that we are well set for the future.
On VMS, Laxman?
On VMS, the thing about VMS is that it's a descriptive category of the products. But I think below that, there's this question about what do those products really address? Be it cognition, be it digestion, be it immunity, and we're at that level. We're looking obviously at opportunities in each one of those spaces and more. We clearly have brands in the space that have done very well in the U.S. and in China. We have opportunities globally. The regulatory environment, in some cases, is different globally. So we have to work there. But I think this is an opportunity that has global legs.
Excellent. Thank you, Laxman. So let's take the next question from John Ennis at Goldman Sachs.
A couple for me, please. My first is on competition within the antibacterial sector and how that's evolved over the year. We've seen some other HPC players try to migrate towards that segment. So has it become more competitive in the second half of the year? And has that level of competition differed by subcategory? That's my first question.And then my second is a follow-up, please, on IFCN. Can you detail how much of a boost you had, either in pounds or percentages, from the North American inventories in 3Q to try and help us factor in the potential unwind into 4Q? I think it was asked before as part of another question, but I just wanted to follow up on that.
Well, let me take the first one on and then I'll hand it over to Jeff to talk to you about the second one. There's no question that the overall area of germ kill and germ infection -- or germ protection has attracted a lot of new competitors. We certainly welcome it because what it is doing, in a lot of ways, it is expanding the category and making more people aware of what they can do in order to ensure that they can protect themselves from this particular virus, but just more broadly, from other virus system bacteria. So we appreciate and still welcome that. Having said that, I think what I feel good about is the fact that we have a portfolio of heritage brands that have actually worked for decades. I mean Lysol is a brand from 1888. Dettol is a brand from 1931. These are brands that are deep household brand names and that have a huge, I'm going to call it, a huge recall, and they're a huge part of people's lives at various points of life. And what it is doing is it is playing into a sense of comfort that consumers need in these types of environments.And so we have to ensure that we're available and that we have a full portfolio of products. In some cases, we've had to narrow our SKU range in order to meet the overall demand that exists. But as we begin to open that up and we start looking at new channels that we traditionally have not been or new places we haven't been or, frankly, new spaces, just looking at some of the pull that we're getting from the business side of things, I mean, just some stats here, right, if you just look at it, 91% of consumers expense -- expect businesses to implement additional protection measures. 60% of consumers are extremely concerned about germs out of home. 86% of people are saying that they have got some hygiene practices.The fact that you have heritage brands that we're investing in and that we're going to innovate around and we are innovating around, but also driving availability, positions you in many ways to capture this opportunity. So we clearly think it's more competitive, but it's also expanding the category quite significantly. And that's why you see some of the share gains we are seeing despite the added competition. With that, let me hand over to Jeff for the second question. Jeff?
No, just to be very clear. Thanks. John, the impact from the trade that we mentioned is probably, for Nutrition, something in the range of 1% to 2%. So that -- obviously, total Nutrition was flat in this quarter. We had a benefit of 1% to 2%, which we will see unwind in quarter 4. Sorry, IFCN was flat in the quarter. Nutrition in total was up obviously over 4%.
Great. Let's take the next question from Fulvio Cazzol at Berenberg.
Most of them have been answered. So I'll ask one high-level one, if I may. Just generally, you sound a lot more confident than you did at the half year, particularly on the delivery of your medium-term ambitions. Can I ask what it is that has given you this increased confidence in the last 3 months? I guess I'm asking what visibility you have today that perhaps you didn't have 3 months ago, please?
I think we're spending a lot of time understanding what consumers are doing. And you obviously have different markets in the world where, if we look at June, in some cases, 3 months is a lot more information than you had even in June around behavior change and what is sticking versus what is not sticking. You're also seeing the pull in terms of new places and new spaces. You're also seeing the expansion that I just touched on around Dettol and Lysol now being available in over 19 countries with direct distribution that we're investing behind.So I think if you look at those, plus you look at the underlying strength of execution and how that's improving and the ability for us to direct our firepower in order to deliver long-term growth, which is, frankly, the single-minded focus for us, and certainly, at the right margin levels, just ensuring that we do that, but growth is really where it's at, and so the ability for us to do that and meet that is what gives us confidence.
Excellent. Let's take the next question from Jeremy Fialko, and then we probably got time for one more after that.
Jeremy Fialko here, HSBC. So I guess 2 questions. The first question is, you've talked quite a bit about using co-packers to help you meet some of the demand. Maybe you could talk a little bit more about that in a slightly more sort of strategic context in that, obviously, they give you a certain amount of flexibility. But then clearly, there's a [ dent ] of margin, which you're having to pay away to the co-packer.So when you think about the sort of where you set your business up, especially in some of these disinfectant categories, to what extent do you want to kind of keep on relying on the co-packers? Given it gives you a bit of flexibility in demand, does it revert back to more normal levels? Or would you want to really sort of make sure you're bringing the majority of the production kind of in-house to capture the full kind of value?And then just a much shorter question on Scholl. So after many years of difficulty, it sounds like this brand is now back to growth. Can you just give us a bit of a sense on kind of what this brand is now in terms of kind of gadgets, non-gadgets and kind of what the strategy for that brand is over the sort of period going forward?
Let me just quickly address both questions. I think the first one, our co-pack is our partners. And we work with them closely to ensure that we have the right levels of availability wherever we are, wherever we see demand. We best balance flexibility with commitment. And we also have commitments with our co-packers, which we obviously will honor. And yes, some of them do involve a higher cost because, as you said, there is an added cost of having somebody else do it. But at the same time, from a risk standpoint, a risk mitigation standpoint, these are partners of ours and we grow with them. And so we -- they are clearly part of our strategy going forward. And of course, if it comes to it that we find that it's far more competitive from a return on invested capital standpoint for us to make the investments ourselves, we will, obviously, in a risk adjusted basis. On the Scholl question, I think this is a brand that has had challenges. And I think that as we look at consumers becoming more mobile, we find that the brand is clearly getting pulled. It's a brand that we are leveraging the existing innovation pipeline that we have and ensuring that we have availability in order to meet the needs of consumers overall. And maybe it's part of a set of brands that are benefiting from some of the trends you are seeing around an increase in mobility in our consumers.
Thank you. Let's take our final question, if we may, from David Hayes at SocGen.
So 2 for me. One on just on the Nutrition margin, the second one on portfolio management. So just coming back to this Nutrition margin disclosure today, 400 basis points down, you talked about that recovering back to the prior levels over time. Can you talk about whether there's any one-off costs in that margin drop in the first half of the year? And then just talk us through the journey to getting that margin back given some of the comments you've made about less volume growth outlook and the premiumization being less prolific, just trying to understand what brings that margin back through in the next couple of years or so.And then the second area, on portfolio management, you probably saw, I'm sure, some speculation articles that you'd put Clearasil, Scholl and a couple of other brands up for sale. I mean I think they went as far as saying you put details out to some potential buyers on those brands. Can you comment on that at all, possibly? I suspect not, but maybe. And then more broadly on that, is that something that we will see Reckitt is doing more of going into next year, portfolio management, selling some of these brands and trying to focus more on core areas?
Let me, David, take the first part of that question. Nutrition margins, as you see, were down over 400 basis points versus last year at 17.5%. And yes, there are some one-time costs in the first half of the year. And those are mostly related to the changeover of the Mexican dryer, which we talked about and flagged in February. And those were reasonably significant costs.The other big impact -- the other 2 big impacts that we've talked about is, obviously, the impact of the closure of the Hong Kong border, which was a margin-accretive business. And that has an impact, therefore, on the Nutrition, not just volumes and leverage, but also on the absolute margins. And the other impact is obviously the ongoing COVID costs. And I think it's important that we remember, we are still operating in a pandemic environment. And we are -- we reported in the first half of the year just around GBP 70 million of onetime COVID-related costs, and these have certainly continued. That's across all 3 business segments, and these have certainly continued into the second half of the year. So what is it that we need in order to bring margins back? Obviously, we need the category to grow. Our brands are highly leverage-based, and we need to see category growth. And we do believe the pandemic impact on birth rates is not necessarily a long-term thing. And the birth rate at these levels, a falling birth rate at these levels do create pressure on the overall market growth. What we also expect to see is that Hong Kong market will open up again. That is a matter of timing. It's difficult to estimate that. So those are 2 of the key aspects that we need in order to see the net margins of these -- of the Nutrition business return closer to the group margin level -- average margin level, which is what we expect it can deliver.
If I can just take on the second question, but just one small other point, Jeff, I could add is, we see significant productivity opportunities as well inside the Nutrition business. To answer your second question, just on -- we don't comment on speculation. But to get to your question more broadly about how we think about the overall portfolio, we are completely focused on long-term growth as the key enabler for us to deliver shareholder value. And we will invest in order to achieve that, much like we are doing. We see significant upside to the plan in terms of making that happen if we are focused on it. But what we have to ensure is that we continue to execute on the strategy and realize the upside potential in this business.As far as the portfolio goes, we are also -- we have no baggage. We are -- we manage for shareholder value, and we'll do it in the right way. And so if we have something new to tell you, we will. But I just want you to be aware that at the end of it, we are completely focused on the long-term growth and are delivering shareholder value in the right way.
Great. Well, look, I think that is a great place to bring the call to a finish. Can I just thank everybody for their participation and to Laxman and Jeff for presenting and taking us through those questions so thoroughly.Thank you all very much. We look forward to engaging with you in the weeks ahead, and we'll speak again in February next year. Thank you.
Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may now all disconnect. Thanks.