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Reckitt (RKTLN; A3 Pos/ A-) 1H (to June) Results

CONSUMER STAPLES
Credit BulletsBulletHomepagemarkets-real-timeCredit

We would be careful in looking at equity px action - co is marching ahead with £1b/yr in buybacks after paying out £1.6b in 1H (£0.8b in dividends, £0.8b in buybacks) from FCF of only £0.8b. It's also coming out of low levels (-25% since audit issues in Feb) while cash credit (as we have often flagged) had a tendency to mean revert after any negative headlines (helped by rating agencies supporting it). Bar anyone seeing protection in docs from asset sales (we don't) today's releases we see as credit negative...how much so will depend on co's BS policy as it trims down business. It is long time A- rated and still has headroom for ratings (at Moody's).

  • Group sales at £7.2b (LFL +0.8%, reported -3.7%) with Hygiene (43% of sales) +4.5% (LFL), Health (41%) +1.3% and Nutrition (16%) -9%.
  • It is not blaming NEC litigation overhang for Nutrition - instead noting the volume driven (-9%) decline was "lapping peak market shares in US from competitor supply shortage in prior year" (i.e. it was structural) - given consensus was there, believable.
  • Hygiene had +0.9% volume growth with price/mix of +3.6%. Health volume declined -0.2% with price/mix up +1.5%.
  • Gross margin was 60.6% (+120bps) driven by lower freight and commodity prices. Adj. EBIT was £1.7b at a 23.5% margin (-30bp) on "brand equity investment sand inflation-led cost base increases".
  • Net debt (incl. leases) increased by €0.7b to €8.1b due to the equity payouts. On current FY24 EBITDA consensus (-0.5% to £3.8b) it would leave it net/gross 2.1x/2.4x; nothing of concern but we are not sure if a Moody's upgrade is coming - it was eyeing deleveraging below its A3 rating band of (its) adj. gross 2.5-3x.
  • It continues to not provision for NEC claims with normal line; "Any potential costs relating to the product liability actions are not considered probable and cannot be reliably estimated at the current time".
  • FY guidance has been trimmed from +2-4% LFL to +1-3% (c+2.5%). It says it's on the supply disruptions from tornado in Indiana (it flagged this last week). Still sees EBIT margin expansion (23.1% last year).

Equity takes here.
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We would be careful in looking at equity px action - co is marching ahead with £1b/yr in buybacks after paying out £1.6b in 1H (£0.8b in dividends, £0.8b in buybacks) from FCF of only £0.8b. It's also coming out of low levels (-25% since audit issues in Feb) while cash credit (as we have often flagged) had a tendency to mean revert after any negative headlines (helped by rating agencies supporting it). Bar anyone seeing protection in docs from asset sales (we don't) today's releases we see as credit negative...how much so will depend on co's BS policy as it trims down business. It is long time A- rated and still has headroom for ratings (at Moody's).

  • Group sales at £7.2b (LFL +0.8%, reported -3.7%) with Hygiene (43% of sales) +4.5% (LFL), Health (41%) +1.3% and Nutrition (16%) -9%.
  • It is not blaming NEC litigation overhang for Nutrition - instead noting the volume driven (-9%) decline was "lapping peak market shares in US from competitor supply shortage in prior year" (i.e. it was structural) - given consensus was there, believable.
  • Hygiene had +0.9% volume growth with price/mix of +3.6%. Health volume declined -0.2% with price/mix up +1.5%.
  • Gross margin was 60.6% (+120bps) driven by lower freight and commodity prices. Adj. EBIT was £1.7b at a 23.5% margin (-30bp) on "brand equity investment sand inflation-led cost base increases".
  • Net debt (incl. leases) increased by €0.7b to €8.1b due to the equity payouts. On current FY24 EBITDA consensus (-0.5% to £3.8b) it would leave it net/gross 2.1x/2.4x; nothing of concern but we are not sure if a Moody's upgrade is coming - it was eyeing deleveraging below its A3 rating band of (its) adj. gross 2.5-3x.
  • It continues to not provision for NEC claims with normal line; "Any potential costs relating to the product liability actions are not considered probable and cannot be reliably estimated at the current time".
  • FY guidance has been trimmed from +2-4% LFL to +1-3% (c+2.5%). It says it's on the supply disruptions from tornado in Indiana (it flagged this last week). Still sees EBIT margin expansion (23.1% last year).

Equity takes here.