With brands like Dettol, Lysol, Lemsip and Strepsils, the household products giant Reckitt Benckiser was always going to be a winner from the pandemic as demand for cleaning products and cold cure remedies boomed.
Now, though, it appears to be facing tougher trading conditions – with the cost inflation highlighted by the likes of Unilever recently starting to bite.
Shares of Reckitt, the 11th largest company in the FTSE 100, fell by as much as 9% this morning following a warning that operating margins during 2021 will be lower than during 2020.
As Laxman Narasimhan, the chief executive, put it: “Cost inflation accelerated in the second quarter and it will take time to offset this headwind with productivity and pricing actions being implemented in the back half of the year and early next year.”
Jeff Carr, the chief financial officer, said Reckitt had seen “significant increases on key commodity groups” with inflationary pressures continuing to rise over the last three months.
He told analysts and shareholders: “We’re now looking at 8-9% inflation on cost of goods over the full year for 2021, clearly putting pressure on the second half of the year… many key commodity groups such as plastics, surfactants and soap noodles [are] up in the range of 50% to 100%.
“We had hedging and inventory in place to help protect the first half but we will see more impact in the second half and it’s simply not possible to address this through pricing in the short term.”
There was little hard detail on when, precisely, cost increases will be passed on to consumers or the extent to which prices may rise.
That was not the only piece of news with which Reckitt disappointed investors today.
Sales on a like-for-like basis, which in the three months to the end of March were up 1.5% on the same period last year, were actually down by 1% in the three months to the end of June on the same three months last year.
Much of this was due to unflattering comparisons with a year ago.
Reckitt is organised into three business units – Hygiene, Health and Nutrition – with Lysol and Dettol together making up a quarter of its total sales.
Hygiene, which as well as Lysol takes in brands such as Airwick, Cillit Bang, Calgon and Finish, actually grew sales by 18% during the first six months of the year but that slowed during the most recent three months.
Mr Carr admitted that sales growth for Lysol had probably peaked during the first three months of the year but insisted that, on a two-year basis, its sales had doubled.
He went on: “We are confident Lysol will be a significantly bigger brand once the COVID pandemic normalises than it was in 2019.”
It was a less pretty picture in Health which, apart from Dettol, includes brands such as Gaviscon, Mucinex, Durex and Nurofen.
Sales there were down 10.2% during the half year with sales of Dettol falling as demand returned to normal – but they remain 40% higher than two years ago.
Mr Carr stressed the key factors at play in the division were weaker sales of cold and flu products in the early months of 2021 and tough comparisons with the start of the pandemic, when Reckitt saw “significant pantry loading”, the industry jargon for stockpiling.
The third division, Nutrition, saw sales fall by 0.9% during the first half of the year once its baby formula business in China, sold in June for $2.2bn, was stripped out.
That business was acquired in a deal that continues to influence how many investors look at Reckitt.
Rakesh Kapoor, Mr Narasimhan’s predecessor, splurged £13bn in 2017 on the US baby milk group Mead Johnson, owner of brands such as Enfamil, in the hope of boosting corporate margins.
The deal proved little short of disastrous and Reckitt has written down the value of Mead Johnson by more than a third.
The sale of the Chinese part of the business removed most of the blight but still meant red ink was spilled liberally over the results announced today.
A pre-tax loss of £1.9bn for the first six months of 2021, compared with a profit in the same period last year of £1.4bn, reflected £3.1bn worth of one-offs largely related to a loss on the sale.
It has fallen to Mr Narasimhan – who joined in September 2019 and who spent the first lockdown with his mother in a small London flat while his wife and two children were stranded in New York – to lead a process he describes as “building Reckitt into a better house”.
He argued today Reckitt was investing heavily in innovation, research and development, where it has created 450 jobs, particularly in areas such as better tackling infection and improving air disinfection and protection against germs.
As an example, he highlighted Queen V, a feminine hygiene brand focused on vaginal health that Reckitt bought earlier this year.
It will be relaunched in its home US market later this year after improving the science behind the product.
The company is also trying to build up its e-commerce arm by developing digital brands that can be sold directly to the customer.
Mr Narasimhan also highlighted investments in Reckitt’s supply chain, giving as an example production of Gaviscon, which is up 50% following a £20m investment.
Most of this investment is being funded by productivity improvements. By the end of this year, some £1bn worth of cost will have been taken out of the business since the beginning of last year.
Meanwhile, Mr Narasimhan sees signs of life in infant nutrition, a business in which he admitted it “has taken a while for us to fully put the building blocks in place”.
He pointed out this part of the business had just become market leader in the US and said he was optimistic it could be grown by close to 10% worldwide.
A lot of this work is tough and depends on incremental progress over a number of years – much less headline-grabbing than big acquisitions of the kind Reckitt has either carried out or considered in the recent past.
Some investors would still like to see Reckitt break itself up as drugmaker GlaxoSmithkline is doing although, for now, that seems unlikely.
The bigger picture is that this is a business that has not enjoyed as much investment as it should have in the past.
That is now being addressed – but may take time to show up in the results.