Morning Note: Market news and an update from Reckitt Benckiser.

Market News

The fall-out from Germany’s spending plans continued to impact the bond market. The sell-off accelerated in Asia this morning, pushing Japanese benchmark yields to the highest in more than a decade. German 10-year Bund yields are trading at 2.9%, up 50 basis points in two days. The ECB will probably cut by a quarter-point to 2.5% today. The dollar continued to weaken, having moved from 1.08 against the euro to 1.04 this week. Gold drifted to $2,905 an ounce.

Automakers won a one-month delay from Donald Trump’s newly imposed tariffs on Mexico and Canada after pleas from industry leaders.  Justin Trudeau remained defiant, saying Canada won’t lift retaliatory measures if any US levies remain in place. US wants India to get rid of tariffs on car imports in a proposed trade deal, Reuters reported.

European leaders will meet in Brussels today for an emergency summit to discuss further support for Ukraine and defence matters.

Equities traded higher last night – S&P 500 (+1.1%); Nasdaq (+1.5%) – and were also firm in Asia this morning, buoyed by a delay to tariffs: Nikkei 225 (+0.8%); Hang Seng (+3.2%); Shanghai Composite (+1.2%). China’s leaders are pushing to overhaul the country’s investment-led growth model in favour of one centred on domestic consumption, spurred by Trump’s punitive tariffs. Alibaba surged after unveiling an AI model that it claims performs as well as DeepSeek with less data required.

The FTSE 100 is currently 0.3% lower at 8,737. Companies trading ex-dividend today include Berkeley Group (0.9%), HSBC (3.09%), and Rio Tinto (3.65%). Sterling trades at $1.2890 and €1.1940.

Source: Bloomberg

Company News

Reckitt Benckiser has today released its full-year 2024 results. Although sales growth was slightly below forecast, the performance on margin was better than expected. The group’s new organisational structure is now in place and new guidance for 2025 and the medium term has been published. In response, the shares are little changed in early trading.

Reckitt is a global leader in health, hygiene, and nutrition 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 an ongoing 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).

However, over the medium term the company (and the shares) have struggled due to a string of operational issues, compliance problems in the Middle East, and legal headwinds in the US. In March last year, the shares fell heavily when an Illinois jury found Reckitt’s Mead Johnson negligent in failing to warn that their cow’s milk-based formula could cause necrotizing enterocolitis (NEC) in premature infants. In July, the shares suffered a further heavy decline when another jury awarded higher-than-expected damages against industry peer Abbott. Reckitt continues to vigorously defend these claims and believes the lawsuit’s claims are not supported by scientific evidence and that their products are essential for premature babies. Encouragingly, last October three US federal public health agencies issued a supportive consensus statement on premature infants and NEC. In the latest trial, in October a St Louis jury fund in favour of the companies and the plaintiff is now seeking post-trial relief, including a new trial.

Last year, Reckitt announced plans to significantly sharpen its portfolio focus and simplify its organisation to drive accelerated growth and value creation. The new operating model and organisation structure went live on 1 January 2025.

·        Core Reckitt (71% of revenue) will focus on a portfolio of 11 market-leading, high margin Powerbrands across four categories including Mucinex, Strepsils, Gaviscon, Nurofen, Lysol, Dettol, Harpic, Finish, Vanish, Durex, and Veet. Over the last three years this portfolio has delivered a 5% net revenue CAGR and in 2024 generated a gross margin above 60%.

·        The company is on track to exit Essential Home (14% of revenue) by the end of 2025 and is considering all options to maximise shareholder value. The portfolio includes brands such as Air Wick, Mortein, Calgon, and Cillit Bang. It was recently reported the company has shortlisted three private equity firms for a potential buyout valuing the business at £4bn-£5bn.

·        The company is evaluating opportunities for the Mead Johnson Nutrition business (Enfamil and Nutramigen, 15% of revenue).

·        Reckitt has moved to a simpler and more effective organisation with fewer management layers operated through three geographies: North America, Europe, and Emerging Markets.

·        Finally, the company has expanded and accelerated its existing fixed cost optimisation initiative to unlock cost efficiencies and deliver at least a three percentage point reduction in fixed costs by the end of 2027 to achieve a fixed-cost base of 19%.

In 2024, reported revenue fell by 3.0% to £14.2bn, including a currency headwind (-4.1%) and disposals (-0.3%). Stripping out these impacts, LFL growth was 1.4%, versus the 1%-3% company guidance. Growth was driven by price/mix (+2.0%), while volume fell by 0.6%. In the final quarter, sales rose by 4.6% in LFL terms, below the market expectation of 5.3%.

The company enjoyed improved market share performance – 48% of the top Category Market Units held or gained share, with 55% for the core Hygiene and Health business.

By division, Hygiene grew by 4.2% in LFL terms in the year to £6.1bn, despite a more competitive market environment, helped by strong contributions from innovation platforms in Lysol and Finish. Health was up 2.1% to £5.9bn, driven by Durex, Dettol, Gaviscon, Nurofen, and VMS brands. Growth was partially offset by weakness in seasonal OTC brands due to weak cold and flu trends at the start and end of 2024. The smaller Nutrition unit fell by 7.3% to £2.1bn due in part to tough year-on-year comparisons.

The adjusted gross margin rose by 70 basis points to 60.7%, driven by pricing and productivity efficiencies against a more benign environment for cost input inflation. Adjusted operating margin rose from 23.1% to 24.5%, reflecting early delivery of cost efficiencies from Fuel for Growth programme, as well as +30bps of one-off items primarily driven by the benefit of the insurance proceeds from the Mount Vernon tornado. Adjusted EPS rose by 7.9% to 349p, boosted by the lower share count from ongoing share buyback (see below) and a lower tax rate.

Free cash flow generation was fairly stable at £2.2bn, while financial gearing fell from 1.9x net debt to adjusted EBITDA to 2.0x, versus the guidance of ‘below 2x’. The dividend has been lifted by 5% to 202.1p (3.8% yield), with the aim to deliver sustainable growth in future years. In response to the weak share price and to reflect the board’s confidence in the continued strong free cashflow generation of the business, Reckitt is currently buying back its shares, with £1.3bn completed so far. Total cash returns rose by 75% in the year to £2.7bn.

Guidance for 2025 has been initiated. Net revenue growth is expected to be 2%-4%, with Essential Home and Mead Johnson Nutrition making this a little more second-half weighted. The group is targeting LFL net revenue growth of 3%-4% in Core Reckitt, with a balanced delivery across H1 and H2. The Fuel for Growth programme is expected to help drive adjusted operating profit ahead of net revenue growth. The group expects to deliver another year of adjusted diluted EPS growth, albeit held back by a higher tax rate.

The company has also published medium term guidance – from 2026, management believes it has the portfolio, the geographic footprint, and the execution capabilities, for Core Reckitt to consistently deliver 4% to 5% LFL net revenue growth, while consistently delivering annual EPS growth and creating value for shareholders.

Source: Bloomberg