Reckitt Benckiser Group PLC

LSE:RKT

Earnings Call Transcript 2022-Q4

[Richard Joyce, Investor Relations]

Good morning, everyone, and welcome to Reckitt's Full Year 2022 Results Presentation.

Before we start, I'd like to just draw your attention to the usual disclaimer in respect to forward-looking statements.

Now we have five members of our Global Executive Committee presenting to you today, following which they'll be happy to take any Q&As that you may have.

So without any further ado, I'd like to introduce our CEO, Nicandro Durante, to kick things off.

[Nicandro Durante, Chief Executive Officer]

Thank you, Richard, and welcome, everyone. Thank you for joining us. Three years ago, we started our journey to rejuvenate sustainable growth at Reckitt. We continue to make strong progress on this journey, and I look forward to sharing this update with you today.

Today, I will start by running through some key questions, message. And Jeff, our CFO, will then take you through our results, plus our 2023 targets. Then after a few brief insights from me, our three global business unit presidents will talk to you about highlights from 2022 and our focus for 2023.

For those of you who might not have met yet, we have Volker Kuhn, our President for Hygiene; Kris Licht, our President for Health; and Pat Sly, our President for Nutrition. Once we have wrapped up, we will be delighted to take any questions you may have.

A lot has happened over the last 12 months. There have been significant geopolitical events, and we have all faced inflationary conditions, unseen for many years. For Reckitt, specifically, we have also seen unprecedented demand for a number of our products, causing more pressure on our supply chain, normalization of disinfection business as we left off COVID comps, and of course, the departure of our CEO, Laxman Narasimhan.

I am therefore pleased that 2022 was a year of delivery and momentum for Reckitt. We delivered a year of strong revenue growth and profit delivery and free cash flow. And given the healthy state of our balance sheet, I'm delighted that the Board has approved a 5% increase in our total dividend for 2022 with the aim of delivering sustainable dividend growth in future years.

Underpinning this financial delivery were further execution improvements across our supply chain. Whilst we deliver a strong 2022, it is important to reflect on the journey we have taken over the last three years following the announcement of our strategy to rejuvenate sustainable growth at Reckitt.

We have always operated in categories with a significant runway for long-term growth with trusted market-leading brands. An investment has been made to make Reckitt more competitive, more resilient and to strengthen our pipeline in science-backed, consumer-led innovations. As a result, Reckitt has delivered a best-in-class three-year like-for-like revenue CAGR.

But before we proceed any further, I know you are keen to understand more about the progress on the appointment of a longer-term CEO. Listen, this is an important process. It needs to be taken with due process and diligence as we find the best person to take this great company on the next stage of this journey. We continue to make good progress and expect to be able to provide some news during the first half of this year.

I will now provide you with a few highlights from 2022. Like-for-like revenue growth in Q4 was 6.2%. For the year, we delivered like-for-like revenue growth of 7.6% and adjusted operating margins of 23.8%, or around 23%, excluding the temporary mix and volume leverage benefit from the competitor supply issue in our U.S. Nutrition business. This was a very stable and resilient performance in the face of very high inflationary pressures.

The revenue margin delivery, combined with some ForEx tailwinds, enabled us to deliver adjusted EPS of £341.7 billion, growth of over 18%. And with a strong cash flow generation and healthy balance sheet, the directors recommend a 5% increase in our total dividend. This results in a dividend per share of 183.3p for the year.

I will now hand over to Jeff to take you through our financials in more detail and our outlook for 2023.

[Jeffrey Carr, Chief Financial Officer]

Well, good morning, ladies and gentlemen, and it's a pleasure to see so many of you in person. And thank you, Nicandro.

As you can see, total revenue at actual exchange rates grew by 12.5% to £14.5 billion. As you mentioned, like-for-like revenue grew 7.6% for the year, and this was a year, of course, when this was weighted towards price growth due to the unprecedented input cost inflation. The impact of price and mix for the year was 9.8%, and volumes for the year were down 2.2%. And as we've, of course, discussed during the course of this year, the negative volume has been largely a consequence of Lysol rebasing from the peak levels of 2021.

Like-for-like net revenue growth in the quarter was 6.2% with improving trends in Hygiene, which returned to growth in the quarter, and the strong performance in Health and Nutrition. The price and mix effect at 12% was consistent with quarter three, and group volumes were down 5.8%, similar to quarter three, but with weaker China Intimate Wellness and stronger comps in Health, which, as Nicandro mentioned, on Intimate Wellness, we expect to improve in 2023.

Versus 2019, for the three-year like-for-like net revenue growth was 28%, with volume and price driving this growth, not just price. As Nicandro stated, we're now bigger, a stronger business and will continue to grow now from this expanded base. I'm very pleased that adjusted operating profit reached £3.4 billion, up 9.2% versus last year at constant currency with a margin of 23.8%, up 90 basis points versus 2021. And with cost inflation running at 17% for the year, this is really a truly commendable performance.

Now I'd like to look at the breakdown of group margins in a little bit more detail. As I've mentioned, cost of goods inflation impacted gross margin, which was down 70 basis points to 57.8%. Now there's a lot of moving parts here. But in summary, our pricing action, favorable mix, especially due to stronger OTC sales, and our excellent productivity initiatives meant we recovered some 90% of the cost of goods inflation during the course of the year. And with pricing actions stronger in the second half of the year, this really positions us favorably as we look to 2023.

Brand equity investments were up 5.7% at actual rates and essentially flat at constant currency. And BEI as a percentage of net revenue was down 80 basis points. Now this was due to reduced investment in Russia and the fact we did not increase our BEI spend in proportion to net revenue growth in two key areas: U.S. Nutrition and for our cold and flu products. Elsewhere, BEI was generally in line with 2021 as a percentage of net revenue.

Fixed costs or other costs, as we show here, were up 4.7% at constant exchange rates to £3.2 billion. The leverage impact from the stronger top line growth meant that as a percentage of net revenue, fixed costs were 80 basis points lower than last year at 22.2%, all of this flowing down to adjusted operating margins of 23.8%.

Now separately, let me just refer to the situation in the U.S. related to the infant formula market. This had a significant impact on top line growth and on our adjusted operating profit margins. Breaking this out, we believe the benefit on like-for-like net revenue growth was approximately 2.5% in the year, and the impact on adjusted operating profit margins in 2022 was approximately 80 basis points.

Now I'd like to go through each of our three global business units in turn, starting with Hygiene. Hygiene net revenue was £6.0 billion for the year, and like-for-like net revenue was down 3.1%. And as you are aware, this includes a decline of around 25% in the year for Lysol. The remainder of the portfolio grew in the year 5.1%. And as you can see from the chart that we're showing here, the sequential improvement in the quarterly year-on-year Lysol performance has resulted in an improvement in Hygiene business unit such that we saw a return to growth in the fourth quarter with 1.3% like-for-like net revenue growth.

Now importantly, Lysol net revenue is around 45% higher in 2022 than 2019. And we expect a stable performance in 2023 versus '22, eliminating the recent COVID volatility that many of you have commented on.

Cost of goods inflation had a more significant impact on Hygiene than our other two business units. Consequently, despite pricing and a strong productivity performance, adjusted operating profit at £1.2 billion was down 18% at constant exchange rates and at a margin of 20.4%, down 330 basis points.

So turning to Health. Again, net revenue was £6.0 billion, coincidentally. Like-for-like growth for the year was 14.7% and 6.7% for the quarter with much stronger comps in the fourth quarter of last year. Volume growth was strong, up 6.5% for the year, with the impact of price and mix of 8.2% for the year, of course, benefiting from favorable sales mix from OTC, which grew over 35% in the year.

But growth was broad-based. Intimate Wellness was up mid-single digits, VMS up high single digits, and Dettol sales were broadly flat in 2022 versus '21. With respect to our Biofreeze acquisition, due to increased discount rates resulting from the current macroeconomic conditions, and the short-term category slowdown, we've recognized this year an impairment charge of £152 million. However, we remain excited by the growth opportunity with Biofreeze. And after a slow start in the first half of 2022, we've seen sustained growth and market share gains in both H2 of last year and at the beginning of this year, and our growth plans remain in line with our original expectations.

Adjusted operating profit of £1.6 billion was up 24.3% on a constant foreign exchange basis, and margins of 27.5% were up 290 basis points, again reflecting the benefit of the positive OTC mix.

So moving on now to Nutrition. Net revenue for the year at £2.5 billion was up 19.4 basis points on a like-for-like basis in the quarter and 22.9% for the year, with the U.S. being up around 40% in the year. Importantly, our developing market business, unaffected by the U.S. market disruption, grew mid-single digits in the year with market share improvements across all key markets.

Excluding the benefit from the competitor supply issues in the U.S., like-for-like net revenue would have grown by around 5% in the year. The impact of price and mix was 14.8%, which reflects also a mix benefit from a higher proportion of non-WIC sales in the U.S. compared to WIC sales. Gross pricing actions across all regions for Nutrition in the year was around 8%. And as previously communicated, we did not proceed with planned price increases in the U.S. once we learned of the competitor recall in February '22.

Adjusted operating profit margin of 23.1% was up 710 basis points, and this reflects our turnaround and improvement in our earnings model in the developing markets, plus the positive leverage benefit from the U.S. Nutrition impact during the year. The impact, as I mentioned, of which was 80 basis points on a group basis, the group adjusted operating margins.

Now very quickly, it would be wrong not to mention our productivity program, and you've seen the benefit of that truly coming through in our gross margins this year. Our best-in-class program continues to deliver with efficiencies of £800 million during the year, enabling us to achieve our target of £2 billion gross margins this year. Our best-in-class program continues to deliver with efficiencies of £800 million during the year, enabling us to achieve our target of £2 billion of efficiencies by the end of 2022, a year earlier than our original target.

Our productivity muscle remains firmly embedded within the DNA of record and will continue to drive our earnings model in the future. And in 2023, we expect to deliver efficiencies of over £500 million.

So let me move on now to EPS. EPS has grown 18.4% from 288.5p to 341.7p, with significant contribution coming from the strong earnings delivery this year. And we also benefit, of course, from a positive foreign exchange rate due to the relative strengthening of the U.S. dollar.

I'm very proud and very pleased to say the free cash flow improved year-on-year by £773 million to £2 billion in the year, primarily, of course, driven by our strong operating performance. Cash conversion was 83%, a significant improvement from the prior year.

Now COVID has caused some volatility in our cash flows. But I now feel we have returned to a more normalized position with working capital at a sustainable level at around minus 11% of net revenue, and we're confident of delivering strong future cash flows and high cash conversion in the coming years.

Overall, it's been a strong performance across the board in 2022, but I'm very pleased that our balance sheet also continues to strengthen with net debt moving from £8.4 billion to just under £8 billion, and that's despite a negative £500 million movement due to foreign exchange rate movements, specifically with the U.S. dollar. This improvement in net debt, underpinned by strong free cash flow, has enabled us to deleverage to 2.1x adjusted EBITDA from 2.6x.

So turning to our view on capital allocation. We basically are maintaining our position in terms of the priorities that we previously communicated, with the exception of dividends. After a few years of holding the dividend flat, we're now proposing to increase our total dividend by 5% this year with the intention to sustainably grow dividends in future years, subject to any significant internal or external factors. And this reflects the strength of our balance sheet and our confidence in the cash-generating potential of our business as we look to the future.

So finally, let's turn to the outlook for the year. For net revenue, we target continued momentum with mid-single-digit like-for-like growth for the group, excluding the impact of the competitive supply issue in our Nutrition business in 2022, which, as I mentioned, was approximately 2.5% on 2022 like-for-like net revenue performance. Our target includes -- our targets include a return to growth in our disinfection portfolio from the current performance of around 40% larger base versus pre-pandemic levels.

We expect record cost inflation in 2023 to moderate with single-digit increases, and we have the benefit of the heavy lifting on pricing already implemented with significant carryover now into 2023. Therefore, we expect adjusted operating margins to be in line or slightly above 2022 levels when excluding the one-off benefit of circa 80 basis points related to U.S. Nutrition.

Within the guidance, we expect to significantly increase BEI support related to U.S. Nutrition. Within the guidance, we expect to significantly increase BEI to support our exciting innovation program. In the medium term, we expect adjusted operating profit to grow ahead of net revenue, and this means we remain on track to achieve mid-20s margins by the mid-20s.

So thank you. And now I'm going to hand back to Nicandro.

[Nicandro Durante, Chief Executive Officer]

Thank you, Jeff. I have long admired Reckitt's single-minded focus on categories with a strong runway for long-term growth. It's also the quality of the categories in which we operate, which underpins the high group margin structure of our business and which is key to a strong earnings model.

Over the next three years, Reckitt has grown at an average of 8.2% on a like-for-like net revenue basis or 7.4%, excluding the benefit from a temporary competitor supplies issue in the U.S. Nutrition business, and this is a best-in-class performance. A lot of this has to do with being in the right categories. But this performance is also underpinned by innovation, penetration building programs, taking our brands into adjacent categories and new geographies, growing distribution and gaining market share.

As we look to 2023, we are well-positioned to sustain this momentum from a larger, stronger base. While we still have much to do, we continue to make progress operationally. Our in-market competitiveness remains strong with around 62% of our core CMUs on whom we are gaining share during the year, and we increased our share of total distribution points. We further improved our service to consumers and customers, recognized in both the advantage survey scores by Kantar United States and through some specific customers' awards.

We are not yet where we want to be, but I'm pleased that the Company continues to make progress with such important stakeholders. 2022 was particularly tough for our supply chain team who had to cope with some very strong demands in both our OTC and Nutrition business. They showed great agility by significantly increasing the volume of products we have been able to ship to our customers. And with a full rollout of our record production system across our factories, we have been able to increase efficiencies across cost sites in 2022 by around 20%.

On digital, whilst we still have more work to do, we have made some very good progress. For example, we have more than doubled the size of e-commerce platform over the last three years. Our e-commerce business represents 13% of our total net revenue, and we have plans to further increase this percentage in the coming years.

And we have also increased by 25% the numbers of consumer first-party data records, which provide us valuable direct connection with our consumers. And we continue to embed our sustainable ambitions with our business through our brands, in our supply chains, and in communities where we work. We have continued sustainable product innovation program. Our net revenue from more sustainable products was 24.4% for the year. This compared to 24.9% in 2021 with a slight decline coming from a negative mix impact as Nutrition has a lower ratio, but has delivered strong growth during the year.

Our carbon reduction program continues to achieve our 2030 target, achieving a 66% reduction in carbon emissions since 2015. Our work to enable fair society begins with our teams is strengthening inclusion throughout our business. Half of our managers at Reckitt are women and a third of all senior leaders. So we will have work to do here, but continue to make progress.

Our Fight for Access Fund has invested over £30 million in programs supporting water and sanitation, maternal and child health, and promoting sexual health and well-being. Our continued focus on these areas have enabled ongoing ESG performance against key ratings such as MSCI, Sustainalytics, and ongoing efforts for good presence.

Moving on to our people. It is pleasing to see our people leaving our cultural values and bringing their true service to work each day. I have been to many markets since I started as a CEO, and it has been a delight to see the engagement and the energy of our teams around the world exhibited every day, day in, day out, making Reckitt a great place to work.

We are being recognized externally as a top employer in many markets. But what is important to me is our internal post survey, where we ask and receive a direct feedback from employees on working at Reckitt. And as I said before, we still can do better, but I am pleased to see improvements in many fronts. And ownership remains very central to our culture with almost 50% of employees choosing to be shareholders in Reckitt.

I will now pass you over to Volker, who runs our Hygiene business.

[Volker Kuhn, Chief Transformation Officer]

Thank you, Nicandro. Good morning, everyone. Our GBU ambition is anchored in Reckitt's purpose to relentlessly pursue a cleaner and healthier world with purpose-led superior brands. We have a strong global presence. We focus on six core categories.

They account for about 90% of our revenues and an even bigger part of AOP. They offer attractive growth opportunities as their global penetration is low, yet growing, and they offer an attractive margin profile.

We have a leading position in each category with our well-trusted brands. Over the last three years, we delivered 7.6% net revenue CAGR. We added £1.1 billion in revenues. Our growth is broad-based in all categories and all geographies, and we are earning industry-leading margins.

Now as Nicandro and Jeff mentioned, 2022 was an extraordinarily challenging year. It put the resilience and grit of our teams to test, and they have risen to the challenges, as our people do. We delivered broad-based mid-single-digit growth across our portfolio, except for Lysol. Growth was driven by a very strong progress in Auto Dish, Fabric Additives and Lavatory Care.

Our transformation is bearing fruits. Since 2021, all core categories have delivered mid-single to double-digit revenue CAGRs. Going into 2022, we anticipated that our Lysol business would shrink given the high COVID-related comps, which impacted our volume significantly. However, the rest of our portfolio was only down mid-single digits in volumes. As expected, Lysol's trend improved through the year.

Importantly, POS remained well above pre-pandemic levels, and we exited quarter four with POS in the high 40s above 2021.

The biggest extraordinary impact was the unprecedented cost inflation that hit us. We partially mitigated this pressure by accelerating our best-in-class productivity program and by executing several rounds of pricing. This led to a gross margin stabilization in Q4. We gained or held share in most of our core categories. And after a dip in Q3 due to pricing-related customer issues in Western Europe, that all have been resolved by now, our shares are improving month-on-month.

All in all, our teams have dealt with the challenges very well. We delivered high single digit to double-digit growth in all geographies in 2022, except for the heavily Lysol impacted areas of North America and ASEAN.

As explained in the Capital Markets Day in '21, we are refocusing on our historic strength: one, to grow categories by driving penetration and premiumization with innovation and by creating new segments; two, to delight our consumers with preferred product and packaging experiences delivered by brands, their love and trust; and three, to execute with speed and rigor; four, to fuel growth and deliver shareholder return with our best-in-class earnings model powered by world-class productivity, very strong innovation, and leading premium brands with pricing power; and five, this is all executed by a capable organization that is focused to outperform with grit.

I'll explain with some examples how this is working. Harpic's purpose is to improve toilet sanitation, which aligns with the UN SDG Goal Six. As we grow, especially in developing markets, we are spreading good sanitation practice with education and economic support. Harpic's largest market is India, where we have a 78% market share. For Indian consumers, Harpic is synonymous with toilet hygiene.

We have reached 32% household penetration, and we are growing revenues in double digits. Last year alone, more than 20%, driven by increased go-to-market coverage, strengthened brand building, and our new premium 10x line.

Another example is Vanish, the number one global stain removal. A perfect example of our win, win, win, win model. A win for our consumers, they enjoy better results as Vanish gets the tough job done and hence keeps clothes looking like new for longer. A win for our customers. They enjoy significantly higher POS and margins per load -- detergent load alone.

A win for sustainability. Less clothes go into landfill and consumers can get results at much lower temperatures. And a win for us for growing mid to high single digits. That's our model, the model we operate with all our brands.

Now as you know, we made important investments and capabilities in all critical areas. Let me give you a flavor on how this is working with just two examples. One, our supply chain resilience program led to a good recovery of our backfill rate to 96%, a significant advancement versus previous years. We also made very good progress regionalizing our supply chain. We are now close to 90% regionally sourced.

Two, thanks to our strengthened go-to-market capabilities, more and more customers are recognizing us as a top-tier supplier. Our retail customers highly value our improved sales capabilities or stronger category growth contribution by our consumer preferred brands and our better customer service.

Now I'm going to dive a little bit deeper into how we are growing our three biggest categories that all generate well above £1 billion in retail sales. All of this is our biggest category. We are the global market leader. We delivered double-digit three-year CAGR, and we keep growing at that pace.

Now let me explain why. Five years ago, 100% of our detergent revenue was generated by hard press tabs. Since then, we have introduced different tiers of premium-priced thermoformed tablets. Now we generate almost 60% of our revenues with these new formats. This year, we are launching our best-performing detergent in Europe with our patented cycle-sync technology.

Cycle-sync doses consecutively, delivering better results in a more sustainable way as we use 20% fewer chemicals.

Auto Dish has enormous penetration upside. The global dishwashing machine penetration is below 15%. With a growing middle class in developing markets, families are starting to switch from hand washing to using a dishwasher. Right now, in markets like Brazil, China, India, the penetration is less than 2%. So therefore, we are actively partnering with leading dishwashing machine brands to drive consumer conversion to Auto Dish.

Moving to air care. Air Wick is the global leader in air care devices, and we are creating new segments here, too. A few years ago, we introduced essential mist diffusers in the U.S. By now a $100 million POS segment, and our share is above 90%, and this segment keeps growing.

On the right here, you see two innovations that we are launching as we speak. Our new Vibrant range delivers an improved scent experience using more essential oils and anti-fade technology. The other example is 24/7 Active Fresh. It's our first aerosol-free auto spray, and it delights with a new range of natural fragrances that consumers prefer. Both innovations are designed to grow the category as they deliver superior consumer delight at a premium pricing per dose.

On to the surface and disinfectant category. We are the market leader with our brands. Now let me zoom into the U.S., by far Lysol's biggest market. Lysol is an outstanding brand. It's the second most trusted brand by U.S. consumers of all brands in all categories. As mentioned and anticipated, 2022 was a very tough year for Lysol, simply due to the high COVID comps. We are now in the last quarter of very tough comps with Omicron in the base period.

However, Lysol is much stronger now than pre-pandemic. Over the last three years, we added 16 million new households to our franchise globally. And we extended our market share by 300 basis points, and we have grown revenues with double-digit CAGR. During the Capital Markets Day in September '21, I told you that we gained 5% penetration with our Lysol laundry sanitizers. Since then, we doubled it to 10%.

We're now generating around $200 million of POS in the U.S. alone. So we have a strong, category-focused innovation pipeline, and we have much more headroom to grow penetration like on laundry sanitizers.

Now let me sum up why we are excited about the future of our Hygiene business. First, we have world-class brands in each of the attractive categories we play in. Second, we have a clear and consistent consumer category growth model in place. Our DNA is to create and grow categories through consumer-preferred innovation and growing penetration. And we have an exciting innovation pipeline for the years to come.

Third, we continue to strengthen our capabilities everywhere. We are not satisfied with our status quo as we always aim to raise the bar. Importantly, we keep improving how we leverage data, technologies, partnerships and our scale. And fourth, we earned industry-leading margins, thanks to the strength of our brands, our category growth focus and our best-in-class productivity programs. This is why we are excited about our future and confident about our Hygiene growth outlook.

I'll now hand over to Kris, who will talk to you about the great progress on Health.

[Kris Licht]

Good morning, everyone. For those of you I have not yet met, I'm Kris Licht, I'm the President of our Health business and our Chief Customer Officer.

Geographically, our Health business is well-balanced across developed and developing markets. We have a strong presence in developing markets with our disinfection business, Intimate Wellness brands and a fast-growing smaller VMS and OTC business. In developed markets, we are more weighted to our OTC portfolio. That's all in Europe, and VMS in North America.

From a category perspective, we have a very significant OTC portfolio with intimate wellness and germ protection making other meaningful contributions. And taken together, these three categories currently make up over 80% of our portfolio. We have strong, trusted, market-leading brands across the categories we compete in. And I'm pleased to say that we've created a business over the last three years, which is £1.4 billion larger than it was in 2019.

In 2022, we delivered a strong performance of nearly 15% like-for-like growth. It was led by our OTC portfolio, where we both drove strong market share gains across the majority of our brands and benefited from a long, strong cold and flu season. But I was pleased with our broad-based growth in 2022, with all our Health regions in growth for the year, including those without a large OTC business.

Intimate Wellness had a strong year despite weakness in China due to the extended COVID-related lockdowns. Outside of China, Intimate Wellness grew 10%. And our Germ Protection portfolio had a stable year as expected, maintaining around 40% higher demand levels than pre-pandemic. Dettol grew net revenues two out of the four quarters of the year, including in Q4.

As Volker said earlier, an important driver of both our growth and category growth is innovation. In China, we identified an opportunity to leverage Dettol's strong position in the laundry sanitizer segment with the laundry pod differentiated with Dettol's strong germ protection. In one of our fastest ever innovation cycles, we launched these pods in June 2022, following an innovation cycle of just eight months from idea to launch, and quickly achieved a 6% value share within the category.

In OTC, we know that overuse of antibiotics today is a leading concern. Since sore throats are usually caused by viruses and not bacterial infection, antibiotics are, in many cases, ineffective. U.S. consumers now have a new way to treat sore throats with the launch of Mucinex InstaSoothe. We mentioned this to you last year when we initially launched the product.

And I'm pleased to say that the combination of Mucinex's strong equity and the numbing powerful relief delivered by InstaSoothe has led to 6% category penetration in the U.S. sore throat category in just 18 months since we launched.

Our strong performance in 2022 and solid plans for 2023 would not be possible without being able to deliver for our customers and our consumers. Our agile and resilient supply chain increased output by 30% on average across our OTC portfolio to help us meet the strong demand for our products.

Another building block was the improvement in our business in the area of sales execution. For example, in India, we started the year with a goal to increase our direct reach to customers by around 50%. In a carefully planned effort, we integrated our sales organizations across Health and Hygiene to create a more unified and larger field force. We made changes to our distribution network, we upgraded our sales force technology and we undertook extensive training of the sales force.

We're now seeing the returns on this investment. As an example, Durex in India is now in 300,000 more stores than it was a year ago, which has been a major contributor to growth of Durex in the year of over 45%.

Moving to OTC. We have delivered a double-digit CAGR over the last three years and now have a business which is 40% larger than pre-pandemic. With the symptoms of COVID becoming more flu-like over time, the lines are blurring between the two. This has led to strong category growth over the last three years. And it's too early to call this a rebasing of the category, but it certainly looks to us to be stabilizing well above pre-pandemic levels.

But just relying on category growth is not enough. Our OTC team have worked hard to broaden the shoulders of our trusted market-leading brands through innovation, entering adjacent categories and even entering some new geographies. Like in Germany, with our adult Nurofen proposition. For those of you that have followed us for a while, you will know that we entered the pain category here a number of years ago with our product, Nurofen for Children, in order to create the Nurofen equity in the market. We now have a meaningful presence in the German pain segment and a strong adult offering, which is delivering very good growth there in 2022.

Moving to our Dettol portfolio. At our Capital Markets Day in September 2021, we made the bold assertion that Dettol has stabilized and that we expect it to sustainably grow the business and deliver at around 40% above pre-pandemic levels. I'm pleased to say that we have done so. This is a consequence of our drive for greater household penetration, which Dettol led to outperformance in the category by landing differentiated innovation like our Dettol four-in-one pods in China and Dettol Botanicals, trusted germ protection now with 100% plant-derived actives.

Over the past three years, we've increased household penetration by 10%, grown market share by over 180 bps, and achieved a good balance of growth between price and volume. I'm excited about the significant opportunities ahead for Dettol in the future, and we are well-positioned to grow the business in 2023 and beyond.

To summarize, we delivered a year of very strong growth in 2022 and remain well-positioned to grow by mid-single digits in 2023. It won't be easy to comp this strong performance, but we are up for the task. We will continue to focus on capacity and agility within our supply chain and ensure that we keep delivering for both our customers and consumers. We will continue to grow distribution for our brands, as we land our strengthened innovation pipeline. And we will continue to strengthen the capabilities and the talent in our organization.

The Health GBU has a very attractive earnings model, underpinned by strong top line growth, high gross margins from the select categories and segments in which we operate with our market-leading brands. It is these high gross margins, which fund investment to support our innovation pipeline, whilst delivering industry-leading operating margins in our segment. Continuing to drive this great earnings model remains a core priority for me and my team.

And with that, I'll hand over to Pat to talk about our excellent Nutrition business.

[Pat Sly, President of Nutrition Business]

Good morning, everyone. For those of you I haven't had the chance to meet, my name is Pat Sly. I'm the President of the Nutrition business for Reckitt, and I've been working in the industry for over 20 years. I'm delighted to be meeting with all of you today.

It has certainly been an interesting year for our business in 2022. And the exciting times we have ahead of us are something that I really look forward to in the future. Our Nutrition business is a £2.5 billion business based primarily in five markets where we have strong market shares of greater than 20%, established infrastructure, and leading go-to-market capabilities. The United States is the largest market and makes up around half of our global business.

From a portfolio perspective, we have our core Infant Formula and Child portfolio led by our Enfa family of brands, and we are particularly strong in the fastest-growing segment within this portfolio, products that improve digestion. We also have a meaningful presence in the fast-growing specialty segment, comprising mainly of products that address allergies, led by our Nutramigen brand.

The business has delivered an 8.1% compound annual growth rate over the last three years or about 3% excluding the temporary benefit from the U.S. competitor supply issue in 2022, as our developing markets business had been in decline since 2017, until 2022, where we turned these businesses around and which I'll talk about in a bit more detail in just a minute.

Let me start with some key highlights in 2022. Firstly, we grew our North American business by around 40% in the year. This has historically been a consistent mid-single-digit growth business, but was impacted significantly by the well-documented competitor supply issue last year. While the numbers look good, they don't do justice to the incredible work done by the team to quickly react to the national prices that took place in order to provide significantly more safe high-quality formula to parents across the country. The work the team did across our supply chain and with all key stakeholders, including the U.S. administration, was exceptional.

Our developing markets team also did a great job in 2022, turning around our business during the year and into growth for the very first time under Reckitt's ownership, and the results speak for themselves with 100% of our core CMUs now holding or gaining share. As a result of this great progress in 2022, I am proud to highlight to you today a summary of some of the key strengths of our Nutrition business as we enter 2023.

In North America, we are now the number one infant formula manufacturer in both the United States as well as Canada. Enfamil is now the number one most trusted brand, both by parents and health care professionals. And our allergy brand, Nutramigen, is the number one selling allergy brand in North America. In the United States, our market share of non-WIC, i.e., the formula which parents choose and pay for themselves, is just under 50%, up from around 38% at the beginning of 2022.

In developing markets, we strengthened our reputation with health care professionals, or HCPs, during the year. Having the trust of HCPs is critical as it is the HCPs who interact with parents and help them make the choice of the right formula for their babies. This improvement in our go-to-market capability is delivering results with market share gains in Mexico and Thailand and a significant turnaround in our Philippines business throughout the year. We have more work to do here, but I'm very encouraged by the progress that we are making.

I'm aware that the events of 2022 have created a lack of visibility for 2023. So I just wanted to provide you with some high-level data points and our views on how we believe things may play out. Please bear in mind, things are still fluid, and we don't have a crystal ball either. If we break out our total GBU growth in 2022, our underlying business grew around 5%. This is perhaps lower than what we would have achieved because we delayed some planned pricing increases in North America during the year, as it wasn't the right thing to do during a national crisis.

We saw a circa 18% uplift due to the competitor supply issue. Of this, 9% came from WIC consumers in states where our competitor holds the WIC contract. Due to the shortage of available formula, the government allowed parents to purchase formula for manufacturers who did not hold the WIC contract in that state.

With the product shortage now broadly resolved, as of the end of February, the WIC program has normalized. So this additional revenue stream to WIC will be zero from March onwards. And in fact, it's been relatively immaterial in the last months anyways as shelfs became more stocked with competitive product. The remaining 9% uplift has come from parents outside of the WIC program who increasingly have chosen our brands. And this has increased our market share of the non-WIC formula market from 38% at the beginning of '22 to almost 50% in December.

It is difficult to know exactly how much of this increased share we will retain. I think it will be relatively sticky in the short term, as parents don't tend to switch brands when they're happy with their baby's formula. However, there's no doubt the market will become more competitive in 2023. But I can assure you that with our leading brands and stronger reputation with health care professionals, including being the number one recommended brand by pediatricians in the U.S., we will be fighting hard for every new parent who enters the category in 2023 and beyond.

We also have a strong innovation program for 2023. Some of our key launches include the following: the enhancement of our Enfa brand range with the continued addition of HMOs or human milk oligosaccharides that help support immunity. With this innovation, Enfa becomes the only product with MFGM, expert-recommended levels of DHA, and HMOs, delivering on the benefits that parents want most: better mental development, digestion, and immunity.

We continue to expand our offering for the management of cow's milk allergy with the only hypoallergenic formula with the probiotic LGG, now also tailored to toddlers and available in more markets. And we are beginning to build out our adult nutrition portfolio by leveraging the strong Sustagen brand equities with a new senior range scientifically designed to meet the nutritional needs of the 50-year plus consumer.

Finally, we'll be entering into the fast-growing medical rehydration solution market. This new product is clinically proven -- provides clinically proven hydration that allows electrolytes to be absorbed faster, thanks to our proprietary blend of amino acids.

So to summarize, 2022 was a very unusual year, but one where we made significant progress, strengthening our brands in our core markets. The team and I are very focused on continuing this in 2023 and beyond. And with true Reckitt focus, we aim to win in the fast-growing spaces in the market. The strong equity of our brands, our innovation pipeline and our strengthened go-to-market muscle position us very well to win here. By focusing on these areas, I believe we are in a good place to grow by mid-single digits in 2023, excluding the impact of the competitor supply issue in the United States.

Nicandro, back to you.

[Nicandro Durante, Chief Executive Officer]

Thank you, Pat. And in particular, for the outstanding job that you and the team did to help mothers across the U.S. gain access to high-quality, safe formula under such difficult circumstances.

Well, we all have heard from Jeff and our three GBU presidents today on our performance in 2022 and our outlook for 2023. But to summarize, we had a very strong performance in '22, and we are transitioned from transformation to delivery. We delivered broad-based revenue growth, strong earnings growth, and improved free cash flow, which has enabled us to further delever the balance sheet and increase our dividend.

We target further broad-based growth across the business, whilst recognizing that we still have to lap the sustainable portion of gains from the competitor supply chain in our U.S. nutrition business. Whilst momentum and delivery will continue, we must get better. We are united in our focus to further improve our execution muscle in '23 and to provide strong support around our exciting pipeline of innovations that we are going to roll out this year.

We remain fully focused on the delivery of our strategy to protect the human nurture in the relentless pursuit of a cleaner, healthier world.

Thank you. And we'd be more than happy to take your questions now.

[Nicandro Durante, Chief Executive Officer]

So we would like you to start at the back.

[Iain Simpson, Barclays]

It's Iain Simpson from Barclays. A couple of questions for me, if I may. Firstly, I was really intrigued to hear the revenue uplift that you got from combining your Health and Hygiene sales forces in India. Are there other geographies where you could do that and we could expect revenue synergies from sort of unwinding some of that RB 2.0 separation?

And then the second question, just thinking through the headwind from U.S. infant formula unwind in '23. So it was a 2.5% uplift. It sounds like you expect to hand back all of the WIC, but keep a decent chunk of the non-WIC. So should we be thinking about a smaller headwind to group than the 2.5%?

I know maybe more like 1.5% or 2% this year. And should we also be thinking about a smaller headwind to group margins than 80 bps this year? Because, again, if you're keeping some of the top line, I'd expect you to keep some of the margin.

[Nicandro Durante, Chief Executive Officer]

Thank you for the questions. Let me start with the Health and Hygiene separation, they are 2.0. We are looking for opportunities whenever we can. So we saw an opportunity in India. We implemented that.

We are learning with that. And what I can say now is that, yes, we see further opportunities across the world to improve the way that we execute, the way that we reach consumers, the way that we interact with customers. So some of these opportunities are really in our plans and we are looking at that. I cannot give you much more detail now. But there are a lot of work in progress in order to streamline the operation and be more effective.

So some of them, as I said, is already in the plan. Yes.

[Jeffrey Carr, Chief Financial Officer]

Let me, Iain, address the guidance question. Yes, as I think was clear from Pat's presentation, the full effect last year was 2.5%, of which half of that we gave up straight away. Of the other 1.25%, we'd expect to keep an element. Now we're not giving specifics as to whether we take -- what percentage of that we retain because clearly, Abbott will come back into the market very strong and fight very hard to gain back market share. But we'll keep an element of that.

And similarly on margin, we're not uncomfortable with consensus on margin, which implies, yes, we'll keep an element of that 80 basis points. And I'm not really looking for consensus to change when it comes to margins. So there will be an element of that.

[Nicandro Durante, Chief Executive Officer]

Okay. We have here a question and then we go to you.

[Chris Pitcher, Redburn]

Chris Pitcher from Redburn. Following up on the U.S. Nutrition situation. In terms of the profitability of the WIC versus non-WIC that you gained, are those broadly comparable?

And then if we look at the U.S. Nutrition business ex the benefit, it looks like the margin was about 18%. All the other divisions called out industry-leading margins. You used to have industry-leading margins in Nutrition. How should we think about the margin rebuild in the core?

Is the political environment back where you can take price increases now with the consumer? Or is it still too soon?

[Nicandro Durante, Chief Executive Officer]

Listen, I'll ask Pat to answer the first question. The second one, in terms of pricing, I think that Pat has mentioned, we are moving to a price increase at the beginning of February, February 1, double digit. And something that we have negotiated with customers, has been well received so far. We haven't been able to introduce prices last year because of the situation that we were there when the price has gone through already. I'm letting you know because this is already in the market, it's public knowledge.

So it has gone through 1st of February, will help us to recover margins as you would expect.

In terms of the first question about WIC, non-WIC, you'd like to take it?

[Pat Sly, President of Nutrition Business]

Sure, I can take that. As you're probably aware, normally, when you have a WIC contract, you pay heavy rebates for that. Last year was unique because the WIC volume we gained with WIC consumers, the 9% that I referred to, we didn't have to pay the rebate. So the profitability of WIC was actually similar to non-WIC in what we gained, which is a very unique dynamic and is now normalizing, as I said, as of the end of February and won't be material this year. But the profitability on that WIC was similar to non-WIC.

[Nicandro Durante, Chief Executive Officer]

You have a question here?

[Pilar Rocafort, UBS]

Pilar Rocafort from UBS. So the volumes in Europe, New Zealand, Australia, they have deteriorated in the Q4 at around minus 8%. I think you mentioned that there was some market share losses, but I was wondering if also you suffer from maybe elevated price elasticity. And how should we think about those trends into the first half?

[Nicandro Durante, Chief Executive Officer]

Yes. Your question is specifically on hygiene, I understand. Yes, Hygiene. Quarter four, we had a similar decline in terms of volume that we had in Q3. Let's start from there.

And there are some elements that we have to take into account. We had some three negotiations that we didn't have some of our products in the trade for some months. That's one of the reasons for this deterioration. And those things have been resolved.

I expect, going for '23, considering that the price is going to be much more benign, we expect to have much lower pricing going for '23. We had single-digit inflation. We have a fantastic carryover going for the '23 because the majority of the price was taken at the beginning of the second half. And also, we have a great pipeline of innovation, mainly Hygiene. I think that's unheard of in the last years.

And that's why we mentioned that we have a significant increase in brand investment behind those innovations. And every time that you come up with innovation, you end up pricing up the innovation, the way of getting price in a good way because you are getting something else to consumers.

So I think that for those reasons, I expect that volume going for 2023, will be slightly better. All those issues that I mentioned about trade negotiations is behind us. So I expect a better trend going for '23. Go ahead.

[Jeremy Fialko, HSBC]

It's Jeremy Fialko, HSBC. Two questions from me. So first one on the OTC market. Perhaps you can just expand on the point you made about -- obviously, you've had this impact of the cold and flu season. It's been long.

It's been quite a strong one. Just how you're thinking about comping that in 2023 in terms of kind of the base there. And if you might end up seeing some sort of reduced flu incidence, then what your assumptions are in terms of guidance? And then second question is on retailer inventories. Can you talk about where they are across your business?

Whether you saw any kind of destocking in the latter part of '22, or whether there are actually areas where the retailers are still kind of quite short of stock? And whether you're going to actually end up having a bit of sort of supply chain filling in '23?

[Nicandro Durante, Chief Executive Officer]

I don't think -- the second question, I'll start from that. I don't see any big movement in retailers stocking. We may -- it would be pretty much dependent in OTC, for example, on the size of the cold and flu season, but we don't see any big movement in retailing. I don't expect significant destocking. So that will be our second answer.

The first one, Kris, would you like to take it?

[Kris Licht]

Sure. Yes, as you said, it has been a very strong season. It was in the Southern Hemisphere, and it now is in the Northern Hemisphere. The shape seems to have been roughly the same, which is an unusually early and sharp spike in flu, which then sort of tapered off. And now we're running -- in most of the markets that we track that data pretty closely where we compete, we're running just above average levels.

So the total season is about 13% above a three-year average. So it's been strong.

As it relates to the future, as we cited in another part of the presentation, we don't have a crystal ball. But we do see that COVID is becoming endemic. We do see that consumers look to our brands to treat COVID symptoms and COVID-related illness. And so in that regard, we are not expecting any kind of very sharp drop off in demand. But we really don't know what the future season holds, and it's too early to speculate on that.

What I will say is that I'm very confident that our team has learned how to operate with unusual volatility. What we've been through in the last three years is anything but normal. And our teams have become much, much better, much more adept at navigating that. So I will say, regardless of the shape of the season, I feel confident that we will be good stewards of the P&L and that we will make good operating decisions to navigate it.

[Jeremy Fialko, HSBC]

So just maybe one clarification. Is the guidance for the division effectively predicated on an average season for cold and flu in '23?

[Kris Licht]

There is -- the concept of an average season is tricky these days. So there was a pre-COVID average. There is a current COVID average. And we've made a reasonably, I think, appropriate and conservative assumption around what we can sell in the coming year.

[Nicandro Durante, Chief Executive Officer]

Supported by a strong innovation pipeline, which gives us the confidence.

[Kris Licht]

Supported by innovation, supported by distribution gains. I mentioned the new businesses we've built in InstaSoothe and other brands.

[Nicandro Durante, Chief Executive Officer]

You should not underestimate as well the share gains that we have seen in the OTC category. It has been phenomenal. If you look at share in brands like Mucinex, Strepsils, Lemsip, they are from [indiscernible] against competition. So it's a little bit of a strong flu season, but we expect the brands to continue to grow with that kind of pipeline of innovations that we have. A lot of things are coming next year as well.

We have maybe here and there.

[Celine Pannuti, JPMorgan]

Celine Pannuti from JPMorgan. My first question on -- you're saying that you are coming out of the distortion of the past few years for the first time in '23. I think we just mentioned OTC. Maybe coming back to disinfectant and Lysol. So you alluded to a tough Q1, which I think we saw in the U.S. Nielsen panel. But I would be quite interested to gauge a bit your visibility on effectively the potential for the division -- disinfectant platform to be growing this year.

My second question on innovation, and I think it's probably more in Hygiene, that seems to be more on the premium side, which I think about air care, if I think about the Auto Dishwash, just wanted to see how you see the reception with retailers, but how you see that as well with the current environment and private label discussions. How would we balance that? Is there a risk it's a bit too late to do this kind of innovation at a premium level?

And maybe just finalizing on this. If I think about the reinvestment that we have made for the past three years, we can clearly see you invested well in CapEx and the supply chain was strong. The innovation is coming, R&D. I wonder if you are satisfied with your white space opportunities from those investments?

[Nicandro Durante, Chief Executive Officer]

Okay. Let me start with Lysol first, disinfection. We mentioned before that we still think that quarter one for Lysol is going to have a strong comparator at the beginning of '23. '22 was a very strong quarter. But coming out from Q1, we expect to see growth in Lysol, growth in disinfectants as a whole.

I think that we have said this several times in the presentation. So that's our view. I think that quarter one for Lysol is going to be a strong comparator yet. But if you look at quarter one for Lysol against quarter four, quarter three, you see further improvement. So quarter-by-quarter, you'll see further improvement.

Regarding innovation in hygiene, don't take as granted that all the innovations in hygiene is going to be a super high price point. We may have innovation in different price points in order to be able to give something for consumers to stick to our brands, to stick to our portfolio. But listen, you have to understand that in majority, our categories are not inelastic. So they don't suffer that much. If you look at private label, I know that private label has gained some share during the year.

But if you look at private label in our portfolio, they haven't made any loss. We lost, what, 20 basis points for private label last year in Hygiene; we gained 20 basis points in Health.

But you look at Auto Dish, for example, we have 11% price increase during 2022, and the volume was 1% down. It's very non-elastic. You look at, for example, fabric treatment with Vanish, 11% price up, 1% volume up. Of course, categories like hair care, which are very discretionary, you saw 5% price up, 7.5% volume down.

So I think that the majority of our categories are not inelastic. That's one thing that I'd like to say. But I think that the innovation comes to strength of our portfolio, to be able to keep performing as we are performing. As Volker highlighted, if you exclude Lysol, which I think that's much less to do with elasticity than high comparators because of COVID, the whole Hygiene portfolio grew pricing was, I think, that around 8% and volume was down 4%. So it's quite a solid performance.

Let me go back to Item three in terms of reinvestments. Yes, we are very satisfied with the level of investment that we have put behind R&D, investments behind supply chain. And I think that if we hadn't done that, I think that during the last three years, it would have been impossible to manage the business, mainly in terms of supply chain capabilities that we created and things like that. And the additional investment for next year is down basically because you have a fantastic portfolio innovation. You need to guarantee that you lend them well.

That's why you have additional BI.

If I didn't have those innovations coming to the market, we don't see an additional BEI. So BEI is pretty much related to the innovation pipeline that I have. But I think that I saw Volker stand there, because Volker should be -- some of the -- who would like to complement my speech?

[Volker Kuhn, Chief Transformation Officer]

So on Lysol, I think just let me add on this. You asked, Celine, the question on -- obviously, we still go down in quarter one. But if you look at the Nielsen data, you referenced to it, you see actually that the recent week was the first week where POS actually started to stabilize and slightly go up. That's one point. So we see what we expected that, that thing will flatten and really start to grow, point one.

Point two, we have really fantastic innovation coming, and we can't talk about it yet, but I think that will further drive growth. And as I said, when you look at the different subsegments of Lysol, we're pretty much growing across the board share except for one segment. And lastly, I mentioned the laundry sanitizers. Our growth continues to grow very nicely, and we have much more headwind -- headroom, not headwinds, tailwinds -- headroom, and growth also with the innovation that is coming. So therefore, we really are very confident that post quarter one, we return back to growth on Lysol.

On the premium innovation, it's all about consumer value. Actually, when you look at the dish category, you see that the premium segments are growing faster than the low-tier segments, and that's simply because the results are much better. Consumers are actively switching everywhere in the world from the low tier to the high tier. So that's why we believe it's actually still good timing. And what we have also seen in previous crisis is that there is normally always two areas that win and one that's losing.

The two areas that are winning is the high tier, where you get better value, then some dent on the very low tier or smaller sizes and the mid-tier is the one that is struggling.

So all in all, I don't think it's a timing issue. Actually, I think innovation that brings consumer value is always at a good timing and can always come faster. But that's why we also invest behind it. And the receptivity of customers was, to your point, extremely positive, because they believe in our ability to grow the categories, attract consumers, as we have done that in the past. So all in all, that's something that really gives us more confidence in our future as we're accelerating our innovation pipeline.

[Nicandro Durante, Chief Executive Officer]

We had a question there, before we go.

[Tom Sykes, Deutsche]

Tom Sykes from Deutsche. Just on the margin ex -- the underlying margin ex the Nutrition, you said that that's sort of flat to slightly up. If costs come in below where you expect at the moment, will you invest more into BI? So is that a sort of maximum or is that a sort of best guess as the outcome at the moment?

And then just a couple of follow-ups on what you've already said. Could you just say when you expect Lysol to actually in volume flat rather than total growth flat, please, if possible?

And in OTC, was there any reason -- or has there been any reason to top up inventories at retailers more than usual in what all in Q1? You seemed to have maybe had a higher level of sell-in in Q3. Perhaps that was slightly lower in Q4 year-on-year, but there seem to be some shortages. So was there any extra top-up that has occurred in Q1 that's going to help, please?

[Nicandro Durante, Chief Executive Officer]

You'll take the margin and the...

[Jeffrey Carr, Chief Financial Officer]

It's early in the year. So we've given the guidance, the clear guidance of underlying margins, ex the 80, to be flat or slightly up. It's very early in the year. We've said we're not uncomfortable with consensus, which assumes we keep a little bit of that 80 in 2023. And as we go through the year, those are the type of trade-offs that we manage all the time, whether or not to invest more in more top line growth and how we manage that.

So I'm not going to start talking about upside or things like that. We've given clear guidance, and we're comfortable with consensus. And as we go through the year, we get to speak to you guys quarterly. If there's any change, then we'll come back and we'll give you that update in those intervals.

[Nicandro Durante, Chief Executive Officer]

The Lysol question, you want to...

[Volker Kuhn, Chief Transformation Officer]

Yes, on Lysol, first of all, even if you compare versus pre-pandemic, we have grown volume nicely in the double-digit area. And we expect clearly our volume trend to improve post quarter one. Quarter one is still with the Omicron peak that we have and that you can all read will be negative in volumes and then our trends will improve.

[Jeffrey Carr, Chief Financial Officer]

Yes, I'm not going to comment too much on trading in Q1, but I can say that, as I said in the presentation, we shipped a lot more OTC volume than we have historically done. Actually, we had a really big Q4 in '21 as well, as we talked about. So that was a high comparator, but we did ship more in Q4 of '22. But demand is high. And I mean, obviously, you have access to the POS data as well, and you can see what's happening in the marketplace.

[Nicandro Durante, Chief Executive Officer]

Okay. We have a question over there. We'll go here then.

[Alicia Forry, Investec]

It's Alicia Forry at Investec. Sorry, I jumped ahead of you by accident. So my question is on the turnaround in the infant nutrition business in the emerging markets, which is great to see after so many years. I was wondering if you could talk a little bit more about what has enabled that? And also anything you can say about the profitability of that part of the business?

[Nicandro Durante, Chief Executive Officer]

Okay.

[Pat Sly, President of Nutrition Business]

Yes, happy to comment on that. I think one of the big inflection points was where we exited our business in China. We're now left with a much more homogenous business. Although there are important differences between ASEAN and LATAM and North America, how we go to market is much more homogenous, and that's allowed us to really drive focus and strengthen our go-to-market capability, particularly with how we interact with professionals. So that's made a big difference.

The China business was just such a different animal and, frankly, in the last years, was a bit of a management distraction. So now we've been able to really focus on driving our flywheel in these developing markets. I think the other thing that's been important is Nutrition is -- or at least infant nutrition is a bit more of a specialized category. And so we've strengthened our capabilities in terms of understanding that category and understanding the unique dynamics of that flywheel beyond where it was a couple of years ago. So I think those are the things that have really made a big difference for us.

[Nicandro Durante, Chief Executive Officer]

That is a question about profitability. Is the business profitable over there? Improving?

[Pat Sly, President of Nutrition Business]

Yes, it's similar -- it's not that dissimilar to North America. So at an operating margin level, our business in Latin America and ASEAN, the two regions where we're really strong is somewhat similar. Latin America, for example, is almost identical.

[Jeffrey Carr, Chief Financial Officer]

There was a question about the overall underlying margins of our infant formula business. And what we've said before is we do expect to get back to the low 20s in terms of underlying margin. That's one of the factors in our confidence in terms of the mid-20s for the group by the mid-20s. So we do see opportunity. It's been obviously a stellar year this year.

But underlying, we see opportunities to continue to improve the margins on that business.

[Nicandro Durante, Chief Executive Officer]

Yes. We have a question over there.

[Pinar Ergun, Morgan Stanley]

Pinar Ergun, Morgan Stanley. The first one is for Jeff. Leverage has fallen to around 2x. Would you consider launching buybacks in the near future?

The second one is for Volker. Competition in Hygiene categories have intensified in recent years. Can you discuss the drivers of multiyear margin expansion, of course, beyond easing cost pressures? What gives you confidence that your industry-leading margins will not come under pressure from an evolving competitive environment?

And then the final one is for Nicandro. Reckitt has invested significantly behind organic and inorganic growth opportunities in recent years. But when we look at the earnings progress, that's been quite limited. If you look at this year's EPS, it's only marginally ahead of 2018. And based on your guidance, it looks like '23 will not substantially change this conclusion.

So can you please talk about what kind of actions you're taking to make Reckitt a reliable earnings compounder it once was? And how long this journey might take?

[Jeffrey Carr, Chief Financial Officer]

Okay, let me start. Look, the strength of the free cash flows significantly improving from last year, which I think is something which I wouldn't say is unique to us, but it's a great indication of the overall strength of the business, means that the net debt-to-EBITDA has come right down to 2.1. And clearly, that's starting to enter into the territory that we talk about as looking to have surplus cash. What we've decided this year is to significantly 5% increase in the dividend. Of course, as we go forward, we're very clear, we're not going to manage a lazy balance sheet.

And as we go forward, opportunities for areas like buybacks will come on the table, because we are certainly entering into that territory. But it wasn't something we thought was appropriate this year. Having held the dividend for some time, we thought that was the right step to take this year.

[Volker Kuhn, Chief Transformation Officer]

Yes. So to your question about competition intensifying, I think the whole thing of our strategy is all about category growth, okay? And as long as we deliver, and we will, better products and packaging solutions for the consumer that get the job done better as well as fueling the brands with, again, premiumized innovation as well as driving penetration of the category, the whole pie is growing. So our focus is really not on stealing share, our focus is on growing the pie. That's what we are successfully doing.

I talked about our -- out of this category, we are holding share, but we're growing double digits. That's a nice category to be in. And I like competition on making that category grow.

So that's really what we do. You have that across pretty much all of our categories. As I mentioned, our categories are pretty well underpenetrated and have massive upside there, too. So this game can actually work very nicely for us, and that's why we are confident that we get that expansion which we are talking about.

[Nicandro Durante, Chief Executive Officer]

Question of earnings. I don't see that I need to go back in the last three years to explain what we have done in the Company in order to strengthen our position in the market in terms of reinvesting in several areas, areas like supply chain, R&D and some others. In the case of supply chain, I have to say that we have done that. If we had not, we wouldn't be where we are today, because the level of disruption that we experienced in the business in the last three years has been phenomenal.

So I think that we have all the right moves in order to be where we are. Going forward next year, you know that interest cost is going up a little bit, not for us, but for the whole world, unfortunately. You see tax rates going up a little bit, but I see no reason, going forward -- earnings is going to be a nice steady growth. I see no reason for that. We are planning for that.

If you look at my three, five years plan, we see steady growth in terms of earnings. We are working very hard on that.

But listen, everything that has been put in the business in the last three years, I think that if we look at the numbers in 2022 and if you look at what we expect in 2023, it shows that it's working quite well for shareholders and for us as a whole. So I'm very happy where we are and expect earnings to represent this going forward.

We have a question here?

[John Ennis, Goldman]

John Ennis from Goldman. I've got two follow-ups. The first is on the brand investments. What classifies as significant? Is that greater than 10% year-on-year, should we say, to classify as significant?

And then the second is on a comment you made, Jeff, around working capital. You said minus 11% is the sustainable level you'd expect. Why is that the right level?

[Nicandro Durante, Chief Executive Officer]

Let me take the first question. Jeff is going to take the second one. When I'm saying brand investments, we are going to invest more because of the innovations that we are deploying in the market. I cannot be precise how much it's going to be. Of course, we don't disclose this kind of data, but it's going to be enough for us to land these innovations in the right way, because if you don't land it is in the right way, it's just a waste of money and we don't want to do it.

But you see, by our margins guidelines and everything else, that it's not going to have a huge setback in terms of to expect the business to deliver. So there will be consequences. There will be more brand investment. There will be less fixed cost in the Company, because we are working very hard in our productivity programs. We have a very strong productivity program coming in '23, and it is going to find us the increase in BEI, to be honest with you.

But I'm just saying that you want to lend those innovations in the right way. Unfortunately, we cannot disclose this exactly what's going to be the size of BEI increase, but most of them will be self-financed.

[Jeffrey Carr, Chief Financial Officer]

I think on working capital, we've had a pattern. Reckitt has always been best-in-class in terms of working capital. And I could bore you with the history of it. But I think we've always had an incredible track record in delivering working capital. By the time we got to about 2019, our working capital was stable at a certain level, and we didn't feel improvements in working capital were really where we were driving.

We're at the right level of inventory, payables and such forth.

2020 saw a massive working capital inflow as we went through the pandemic. And we've given that back, if you look at the numbers, around about £800 million, and we've given that back in '21 and '22. We now feel we're stable. So you should see roughly a neutral working capital number by the end of 2023. That's what I'm targeting at least, and that's what I'd like to deliver.

You can judge that at the end of the year, which obviously means, from a free cash flow perspective, it was roughly minus £400 million this year, and that gives us a benefit from a free cash flow perspective next year.

So -- and we think that level of around minus 11% is the right level in terms of having the right levels of inventory, the right level of safety stock, the right service levels into the trade, having the right terms with our suppliers and not extending small suppliers too far. I'm happy to extend the large suppliers, but we have a responsibility towards the small suppliers and obviously collecting our cash in a timely manner. So we think that's a good position to be in.

[Nicandro Durante, Chief Executive Officer]

Any other questions in the room? No? In which case, okay, nice. Thank you very much for coming over. It is a great pleasure to see many of you -- many of them that I know from my past.

Thank you very much for coming.