Morning Note: Market news and an update from Reckitt.

Market News

US equity markets ticked higher last night – S&P 500 (+0.2%), Nasdaq (+0.4%). This morning in Asia, markets reversed: Nikkei 225 (-0.1%); Hang Seng (-1.5%); Shanghai Composite (-1.9%). The FTSE 100 is currently trading 0.3% lower at 7,660. Sterling trades at $1.2638 and €1.1683.

US Consumer Confidence fell back in February to 106.7, well below the 115.0 expected. Benchmark Treasuries steadied as traders awaited a parade of Fed speakers – the 10-year currently yields 4.29%. Gold slipped to $2,030 an ounce. Bond traders no longer expect the Fed to lower rates by more than 75 bps this year, bringing their view in line with the central bank’s outlook. But the scope for reductions is still uncertain, with some investors contemplating the possibility of additional increases.

US crude inventories increased by 8.4m barrels last week, the API is said to have reported. Supplies at Cushing climbed 1.8m to more than 31m barrels, which would be the highest in six weeks if confirmed by the EIA. Brent Crude is currently $81.90 a barrel. OPEC+ will consider extending voluntary oil output cuts into the second quarter to provide additional market support, Reuters reported.

Elizabeth Warren called for new limits on cloud providers Microsoft, Amazon, and Alphabet, barring them from developing some of the most promising AI technologies.

Source: Bloomberg

Company News

Reckitt has today released its full-year 2023 results, which were below market expectations due to a weak final quarter. The group also disclosed an understatement of trade spend in the Middle East. On a positive note, free cash flow generation was better than expected and shareholder returns are being increased. The guidance for 2024 is also slightly better than market expectations.  In response, the shares are down 8% in early trading, leaving it on a valuation multiple close to its 10-year low.

Reckitt is a global leader in health, nutrition, and hygiene. Trusted brands, such as Dettol and Lysol, are well placed to benefit from the shift to healthier and more hygienic lifestyles, particularly in emerging markets. To help ease the pressure on state-funded healthcare systems, we expect to see a transition to self-care and growth of over the counter (OTC) brands such as Mucinex, Nurofen, and Gaviscon, all of which are owned by Reckitt. A greater focus on immunity, mental health, and overall well-being is expected to drive growth of the group’s preventative treatments, such as vitamins, minerals, and supplements (VMS).

New CEO Kris Licht was an experienced internal appointment who took up his position on 1 October 2023. He believes the company operates in ‘attractive growth categories’ which should deliver sustainable mid-single digit like-for-like (LFL) net revenue growth over the medium term (i.e. 4%-6%). The group is investing in product superiority and extending its productivity programme to focus on reducing fixed costs. As a result, adjusted operating profit is expected to grow ahead of net revenue in the medium term. Strong free cashflow generation and a healthy balance sheet should finance sustainable dividend growth and a share buyback. This should help generate EPS growth in the high single digits.

With today’s results, the group has disclosed that late in its year-end close process management identified, through its ongoing compliance procedures, an understatement of trade spend in two Middle Eastern markets related to the fourth quarter and prior quarters of 2023. As a result, the group’s full-year net revenue performance was £55m lower than previously expected which is fully reflected in the Q4 results (adjusted operating profit impact of £35m). Following investigation, the company concluded a small group of employees had acted inappropriately and we are taking necessary disciplinary action. The company is confident this is an isolated incident specific to these two markets and does not impact the 2024 outlook and medium-term goals.

In 2023, reported revenue grew 1.1% to £14.6bn, including a currency headwind (-2.1%) and disposals (-0.3%). Stripping out these impacts, LFL growth was 3.5%, at the low end of the 3%-5% company guidance, and slightly below market expectations. Growth was driven by price/mix (+7.8%) as the group benefitted from strong carry-over pricing from H2 2022 as Reckitt sought to pass on higher input costs. Pushing price increases through was made easier by strong product innovation. Volume fell by 4.3%. By division, Hygiene grew by 5.1% in LFL terms in the year to £6,135m, Health was up 5.0% to £6,062m, and Nutrition fell by 4.0% to £2,410m.

In the final quarter, sales fell by 1.2% in LFL terms, below the market expectation of +1.5%, driven mainly by a 14.8% decline in Nutrition as the North America business continued to rebase due to lapping of the prior year competitor supply issue, in addition to the voluntary recall of Nutramigen.

The adjusted gross margin rose by 220 basis points to 60.0%, driven by pricing and productivity efficiencies which more than offset inflation of mid-single digits in the year. Adjusted operating margin fell from 23.8% to 23.1%. In underlying terms, the margin rose by 10bps, in line with company guidance to be slightly above 2022 levels. Adjusted EPS fell by 5.4% to 323.4p.

Free cash flow generation grew by 11% to £2,258bn, well above the £2bn company guidance, driven by an improvement in net working capital. As a result, financial gearing fell from 2.1x net debt to adjusted EBITDA to 1.9x, in line with the guidance ‘below 2x’. The dividend has been lifted by 5% to 192.5p (3.6% yield), with the aim to deliver sustainable growth in future years. The company is currently undertaking a £1bn share buyback programme. In 2024, the group is looking to further increase cash returns to shareholders, aiming to double what it returned in 2019 (i.e. pre-pandemic),

The group has provided guidance for 2024. LFL revenue growth is expected to be 2%-4%, slightly better than the current market consensus, albeit below the group’s medium-term aspiration. Health and Hygiene portfolios are both expected to generate mid-single-digit growth. The Nutrition business is expected to suffer a mid- to high-single-digit decline as it continues to rebase in the first half of the year and returns to growth late in the year. Adjusted operating profit is expected to grow ahead of net revenue growth (i.e. a slight margin increase). Revenue and profit growth will be second half weighted as the group laps high OTC comparatives from Q1 last year and most of the rebasing of the US Nutrition business is seen in H1.

Source: Bloomberg