Reckitt Benckiser’s volumes hit by lower disinfectant demand

Reckitt Benckiser’s (RKT) volumes felt the pain from lower post-pandemic disinfectant demand and the impact of Chinese lockdowns in 2022. But the consumer goods company, whose brands include Dettol, Lysol and Lemsip, offset this with big price increases and took full advantage of the misery of an infant nutrition competitor in the US to boost sales. 

Volumes fell by 2 per cent in the year, which worsened to a 6 per cent decline in the fourth quarter. Lysol disinfectant – unsurprisingly – particularly struggled against elevated pandemic comparatives. And over in China, President Xi’s zero-Covid approach meant bad news for intimate wellness product demand.

But price rises, which included a 12 per cent uplift in the last three months of the year, drove Reckitt’s revenues higher. While like-for-like (LFL) net revenues fell by 3 per cent at the hygiene division, they boomed at the health and nutrition segments by 15 per cent and 23 per cent, respectively. Going forwards, however, to what extent shoppers will happily pay inflated prices remains to be seen.  

The eye-catching nutrition revenue growth was helped by a strong, if out of the ordinary, infant formula performance in the US. Management’s comment in the results about a “competitor supply shortage” referred to the problems at Abbott Laboratories (US:ABT), which had to recall formula and other products from a plant in Michigan after customer complaints about bacterial infections. Reckitt plugged the supply gap, and attributed 18 percentage points of divisional growth to the issue. 

Further down the income statement, the earnings figure stood out against the loss in 2021. But the difference doesn’t look quite so striking after considering that pre-tax profits turned negative in the previous year due to a £3.5bn loss on disposal from the sale of low-margin and underperforming operations such as the infant formula business in China.

Excluding that business from the calculation, the adjusted operating margin rose by 90 basis points to 23.8 per cent. Gross margin was down by 70 basis points due to eye-watering 17 per cent inflation in the cost of goods base.  

Elsewhere, brand equity investment as a percentage of net revenue fell by 80 basis points, albeit management has guided that it will boost investment this year. 

RBC Capital Markets analysts said that “increased R&D spend, the absence of negative one-offs and market share momentum add conviction that underlying performance is improving at Reckitt”. But they also noted that margin guidance for 2023 suggests a 2-3 per cent downgrade to consensus operating profit expectations.

This was a resilient performance, but the infant formula boom will reverse. And volumes could contract further given the reaction of consumers to price rises. Hold.

Last IC view: Buy, 6,649p, 27 Jul 2022