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Reckitt PLC shares dive as it warns of lower margins

“We expect to exit 2022 with a revenue growth run rate in the mid-single digits as we make our way towards our medium-term adjusted operating profit margin target in the mid-20s by the mid-20s.”

Reckitt PLC shares fell out of bed on Tuesday as the company tumbled into the red and warned of rising costs.

Net revenue in the first half of 2021 dipped to £6.60bn from £6.91bn in the corresponding period of 2020. The second quarter saw like-for-like (LFL) sales on a constant currency (CC) basis fall 1.0% from the year before, slowing LFL CC growth for the first half of the year to 1.5%.

The household products maker had already warned the market it would book a £2.5bn loss on the sale of its infant formula milk division in China and it was this that formed the bulk of £3.03bn of exceptional charges that led to the group posting a loss of £1.94bn, compared to a profit the year before of £1.44bn.

The operating profit margin in the first half of 2021 fell by 2.4 percentage points (240 basis points) to 22.7%, excluding the disposed of the Chinese formula milk business (IFCN China).

The company issued guidance on margin for the full year; adjusted operating margin is expected to be between 22.7% to 23.2%, which is 40 to 90 basis points lower than the 23.6% reported for the full year 2020.

The interim dividend was maintained at 73p.

“Against a challenging environment, I am encouraged by the progress we have made in the first half of the year,” said Laxman Narasimhan, the chief executive officer of Reckitt.

The market was less sanguine with the shares diving 9.2% to 5,652p in the first half-hour of trading.

“Around 70% of our revenue, excluding IFCN China, is from brands growing by mid-single digits in the period, in line with our strategic vision. The remaining 30% includes our disinfection brands, which are structurally rebasing, as well as our cold and flu brands, which are now starting to show positive momentum,” Narasimhan said.

“Overall demand in the disinfectant category remains significantly higher than pre-COVID levels and the two-year stacked growth of our hygiene portfolio is up 34.1%, compared to a normal growth rate, pre-COVID, of around 4%,” he added.

“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. This will largely offset the margin accretion in 2021 from the disposal of IFCN China.,” the Reckitt CEO declared.

Richard Hunter, the head of markets at interactive investors, said that the spectre of the IFCN business loss and the possibility that management will bodge the business transformation has weighed heavily on the shares over the last year.

“In terms of the immediate outlook, the company is also anticipating a difficult third quarter against tough comparatives, with some improvement in the final quarter.

“More positively, the Hygiene business, which now accounts for 46% of revenues, is showing strong growth, especially in North America. The Dettol and Lysol brands alone are now responsible for a quarter of revenues (from 16% pre-pandemic), with two-year growth at 34.1%,” Hunter noted.

“Of course, general attitudes to hygiene have now altered globally and the likelihood is that this new awareness is now here to stay. This will benefit Reckitts in achieving its longer-term objectives, with the bonus of increased sales of minerals, vitamins and supplements also providing a shorter-term boost. In addition, the company has a strong innovation pipeline given the levels of its Research and Development investment, and its very size and reach into many markets gives it something of an edge in volume and pricing,” Hunter asserted.

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