Yahoo Finance Haleon plc (NYSE:HLN) Q1 2024 Earnings Call Transcript
Haleon plc (NYSE:HLN) Q1 2024 Earnings Call Transcript May 2, 2024
Haleon plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, welcome to the Haleon Q1 2024 Trading Update Conference Call. I am Davin, the chorus call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over the conference to Sonya Ghobrial, Head of Investor Relations. Please go ahead, madam.
Sonya Ghobrial: Thanks very much. Good morning, everyone, and welcome to Haleon’s First Quarter Trading Statement Conference Call. I’m Sonya Ghobrial, Head of Investor Relations. I’m joined this morning by Tobias Hestler, our Chief Financial Officer. Just to remind listeners on the call that in the discussions today, the company may make certain forward-looking statements including those that refer to our estimates, plans and expectations. Please refer to this morning’s announcement and the company’s UK and SEC filings for more details, including factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. As usual, we will take you through some prepared remarks before opening the call to Q&A.
For those listening to our webcast, who’d like to ask a question, please use the dial-in details on Page 3 of today’s release. Also, while the focus today is on revenue performance, we’ve also provided group profit and margin detail on both a reported and an adjusted basis, with a full reconciliation, including one for organic revenue growth in the appendix. As a reminder and for information, we do not intend to provide quarterly profit data on an ongoing basis, and we’ll only do this for as long as reports our results as part of its financial statements and until our registration rights agreement. With that, I’d like to hand the call over to Tobias.
Tobias Hestler: Thank you, Sonya, and good morning, everyone. Let me first start with our highlights for the quarter. We had a solid start to the year with 3% organic revenue growth, driven by 5% price and volume/mix down 2%. Positive volume/mix in EMEA LATAM and APAC was offset by a decline in North America. However, growth was held back in the U.S. from inventory adjustments by some retailers, Haleon’s consumption in the U.S. was up mid-single digit and ahead of the market. . Adjusted operating profit of £707 million was up 12.8% on an organic basis, with gross profit up 5% organically, funding strong growth in A&P. As pricing is normalizing and cost inflation easing, combined with our productivity program, you can see that our growth algorithm is delivering even in a low growth quarter, enabling increased reinvestment.
We have made continued process in the evolution of Haleon to become more agile and competitive and we are now seeing the results of the productivity program announced last year. We also should in today’s release the proposed closure of our manufacturing facility, transferring our Levicesite in Slovakia over the next 2 years, an important step in Haleon building a more efficient global supply chain. As a reminder, with our full year results in February, we announced that we expect to allocate £500 million to share buybacks in 2024. To date, we have purchased 102 million ordinary shares or approximately £350 million. The solid start to the year gives us confidence in delivering our full year 2024 guidance after in our release this morning.
So let’s look in more detail at our Q1 results. Revenue of £2.9 billion reflected 3% organic revenue growth. Our strong operating organic profit growth resulted in a 24.2% margin, up 110 basis points on a reported basis and up to 120 basis points organically. Turning to Slide 6. Coming back to organic revenue, we had guided that Q1 revenue would be just below the lower end on our 4% to 6% full year organic growth guidance range. However, in this quarter, we also saw some inventory adjustments in the U.S. resulting in volume/mix, a little weaker than expected. Overall, volume/mix declined 2%, with EMEA and LATAM returning to volume growth after two quarters of volume decline. Asia-Pacific also saw a positive volume/mix despite lapping tough prior year comparatives in China following the end of COVID-19 knockdown.
And although North America volume/mix was down, consumption was good, reiterating healthy demand for our brands. Price was up 5% and included both carry forward price from last year as well as incremental pricing taken during the quarter. Going forward, we expect the carry-forward benefit to reduce a level through the year. Organic revenue growth was more than offset by a 460 basis point adverse impact from translational foreign exchange. Year-on-year sterling strength relative to the dollar and Chinese renminbi were the main drivers. Given how FX rates evolved through 2023, we always expect that the impact of foreign exchange to be most pronounced in the first quarter. Therefore, no change to our full year outlook. Net M&A was minimal and reduced revenue by 0.6%.
Looking now at performance across our categories, I was particularly pleased that our Health revenues grew 10.6% and with Sensodyne, Paradontax and Polident all up double digit, further building on last year’s strong performance. This was underpinned by a number of successful innovations such as Sensodyne clinical wide, scientifically proven to whiten teeth by 2 shades without worsening or causing sensitivity. VMS revenue grew 9.9%, continuing momentum from Q4 2023 and demonstrating our brands remain well positioned and continue to outperform. Health rates was up double digit with strong growth in China. Strong Centrum growth was underpinned by performance in North America and continued activation of cognitive function claims for Centrum Silver.
Emergen-C grew mid single digit, gaining share and outperforming the immunity category in the U.S. Pain relief revenue declined 4.8%, mainly reflecting tough comparatives from Q1 2023 with Fenbid in China, and also Advil declined double digits, partly due to elevated demand in Canada last year as well as inventory adjustments by some retailers. Panadol declined low single digit, driven by a softer performance in Asia-Pacific, given the decline in Australia, grew mid-single digits with strength in Europe. As we expected, respiratory revenues were down, lapping the strong prior year comparatives. In Q1 2023 from Contact in China as well as the prior year rebuild of inventories, mainly in the U.S., given low levels at the end of 2022 and cold and flu incidents spiked late in the year.
Finally, as and other revenue increased 2.4%, with Health and Skin Health up low single digits, smokers health declined low single digits. Turning to regional performance. Emerging markets, which are 36% of revenue, saw 7.7% organic revenue growth. With the benefit from pricing and hyperinflation economies now capped. And we spotted China being down low single digits. Developed markets grew 0.5% organically. Looking at each region in more detail, starting with North America. Organic revenue declined 3.3% with a positive price, up 4.5% and volume/mix down 7.8%. Our health mid-single digit, driven by Sensodyne, VMS was up double-digits and pain relief and respiratory health, both was declined due to challenging comparatives and inventory management by some U.S. retailers.
Let me take you through this in a bit more detail. While some inventory management is expected through the quarter, this quarter was a little unusual. You will remember that the cold and flu season had an early and strong spike in Q4 2022, very much towards the end of the year. And this resulted in restocking of depleted inventories in Q1 of 2023. Normally, what we would expect and what we saw in Q1 this year was destocking in the quarter. As retailers sell out stock and reduce inventories towards the end of the season. As a result of this and given the comparatives, there was a much higher-than-usual year-on-year change in sale, resulting in the majority of the volume decline seen in the region. Additionally, and to a lesser extent, we saw some inventory adjustments by some U.S. retailers on other categories, which also impacted.
However, looking at consumption data on the market, our consumption increased mid-single digits, and both the market and Haleon performance improved in Q1 compared to the last 12 months. More importantly, Haleon outperformed the market, both in value and volume, demonstrating consumer demand for our brands remains healthy. Turning to Europe, Middle East, Africa and Latin America, organic revenue increased 8.6%, with 7.5% price and 1.1% growth in volume/mix. Pricing partly benefited from carry forward from 2023 and also the benefit of incremental pricing taken in the first quarter. Volume/mix was positive despite some offset from a decline in Middle East and Africa. Across the categories our health of double-digit growth was driven by all three power brands.
VMS increased mid-single digits with good growth in both Centrum as well as local brands. Pain relief in the region saw mid-single-digit growth, reflecting good growth from Voltaren and respiratory sales increased mid-single digits despite lapping a challenging prior year comparator. Finally, turning to Asia-Pacific. Organic revenue increased 3.3%, evenly balanced between price up 1.7% and volume/mix up 1.6%. A really good performance, particularly given the expected decline in China in Q1. Within the categories, Oral Health saw double-digit growth, underpinned by strong growth across key markets, including China and India. In VMS, we saw high single-digit growth underpinned by Caltrate. Respiratory Health grew high single-digits despite the challenging comparative and pain relief declined.
Turning now to our operating performance. We delivered £707 million of adjusted operating profit, an increase of £16 million. Solid revenue growth with pricing, easing of inflationary cost pressure and efficiencies from the productivity program allowed us to strongly invest into the business and into A&P. Net M&A had a negative impact of £12 million and was a 30 basis point drag on adjusted operating margin. Finally, there was a £59 million or 80 basis point adverse impacts from translational foreign exchange. This mainly reflected movements against the U.S. dollar and Chinese renminbi. Taken together, this resulted in a 2.3% increase in adjusted operating profit and a 24.2% margin. Remember, as you’ve seen in prior years, the quarters are very volatile, and as such, neither the Q1 absolute margin nor the organic profit growth should be extrapolated for the full year.
We continue to evolve and implement change across the business to become a more agile and competitive organization. The productivity program is delivering the expected savings and is funding increased investment in the business and driving growth. In addition, we announced plans for the proposed to closure of our manufacturing facility in Maidenhead, which is expected to result in a total restructuring cost of around £90 million over the next 2 years the majority of which is non-cash. There is no change to Lamisil and ChapStick impact, which I guided at with the full year results. And I can confirm that we expect ChapStick to close in May 2024. Also in the quarter, we completed a share buyback of £315 million for £102 million ordinary shares, all of which were subsequently canceled, reducing the number of shares in issue by circa 1.1%.
This was part of the £500 million share buyback. We expect to complete in 2024 announced with our full year results. The expected impact of translational effects remained unchanged with an adverse impact of 2% on full year 2024 revenue and 3% on adjusted operating profit. This assumes rates as at the 31st of March ‘24, hold for the rest of the year. All other full year 2024 guidance remains unchanged. So to sum it up, Haleon delivered a solid first quarter performance despite lapping challenging comparatives. We delivered organic profit growth ahead of organic revenue growth, benefiting from improved gross profit as well as efficiencies in the business. Our business is evolving as we implement change to improve agility in our competitiveness.
Finally, following Q1, I remain confident that we are all well placed to deliver up on our full year guidance. Before we move to Q&A, I wanted to briefly say a few words on my own personal news from last week. As you will have seen, I’ll be leaving Haleon at the end of the year. It wasn’t an easy decision to make, but I’m really proud of the strong foundations we’ve built and what we have achieved. It’s been an amazing period, both professionally and personally. I was very open about wanting a needing to create more balance in my life, not least because as you get older, managing type 1 diabetes becomes more and more important. So that’s been a driving factor in. I’ll be focusing on advisory and non-executive work from next year, which is an exciting new phase for me.
You also have seen we announced that Don Ellen, R&D, the CFO, [indiscernible] be joining at the end of October to succeed me. He is an exceptional leader and will bring deep consumer and international experience to the business. Haleon is in good hands. In the meantime, it’s very much business as usual. I will be leading us through Q3 and then working with Don for a couple of month’s handover before leaving at the end of the year. Anyway, with that, let’s now move to Q&A. And I will hand back to the operator to open up for questions.
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