Reckitt Benckiser Group plc (OTCPK:RBGPF) Q2 2024 Results Conference Call July 24, 2024 3:30 AM ET
Company Participants
Richard Joyce - Head of Investor Relations
Kristoffer Licht - CEO & Executive Director
Shannon Eisenhardt - CFO & Executive Director
Conference Call Participants
Guillaume Delmas - UBS
Chris Pitcher - Redbur
Jeremy Fialko - HSBC
James Edwardes Jones - RBC
Iain Simpson - Barclays
Fulvio Joh - Berenberg
Thomas Sykes - Deutsche Bank
Richard Joyce
Good morning, everyone. Welcome to Reckitt's Half Year 2024 Results Presentation and our Strategic Update. Before we start, I'd like to draw your attention to the usual disclaimer in respect to forward-looking statements. Now presenting today is Kris Licht, our CEO; and Shannon Eisenhardt, our CFO. Following the presentation will be the normal Q&A session.
So without further ado, I'd like to introduce Kris to kick things off.
Kristoffer Licht
Good morning, everyone, and thank you for joining us. Shannon and I will kick off today's presentation with some key messages around our half 1 performance, followed by a deeper dive into our numbers and outlook for the year. I will then take you through an update on our strategic agenda, in particular the actions we are taking to reshape Reckitt through a sharper portfolio and a simpler organization. We will finish with the usual Q&A session.
I'm keen to talk to you about the actions we announced this morning to reshape Reckitt as a world-class consumer health and hygiene company, with one of the strongest growth and margin profiles in our peer group. But first, let's talk about our H1 trading.
In February, we said that our revenue and profit growth would be back half-weighted given the seasonal factors impacting our health business and the continued rebasing of U.S. Nutrition. We delivered the first half broadly in line with these expectations, and Shannon will provide further details by global business unit shortly. We are revising our group outlook for the year from 2% to 4% like-for-like net revenue to 1% to 3% growth because of the tornado that hit our Mount Vernon warehouse on July 9. This is not a structural issue, nor a long-term issue for our Mead Johnson Nutrition business.
While the event will affect our revenue results this year, we do not expect a material impact on our earnings as we hold comprehensive property damage and business interruption insurance. We see positive underlying momentum in our business as we leave the inflationary cycle of the last few years behind and move towards a more normal and balanced trading environment. Many of our brands and markets are showing good volume growth, which is very encouraging. Our markets remain competitive, particularly in the U.S. and in Europe, where we are seeing a return to a more normal promotional environment.
Our innovation platforms are driving premiumization, penetration and category creation. We saw good gross margin expansion in the first half. We increased investment behind our brands, and we are starting to see some good benefits from our cost optimization program. We also delivered strong free cash flow, which increased by 8% in the half. As we look to half 2, I expect to see an improvement in the growth rate of Health, continued broad-based growth in Hygiene and the final rebasing of our U.S. Nutrition business, which we expect to end in Q4.
The positive momentum of the business, our strong free cash flow generation and our confidence in our future have driven the Board's decision to both increase our interim dividend and announce the next tranche of our share buyback program of £1 billion over the next 12 months. Together, these actions show our commitment to increase cash returns to our shareholders.
I will now hand over to Shannon to talk in more detail about the half 1 trading and our outlook for the year.
Shannon Eisenhardt
Thanks, Kris, and good morning, everyone. Today, I'm going to start by taking you through our results for the first half. Group like-for-like net revenue growth in the half was 0.8%, with a flat performance in Q2. As Kris said, we delivered half 1 broadly in line with our expectations.
Absolute net revenue was £7.2 billion, a decline on an IFRS basis of 3.7%, primarily due to the negative FX from the relative strength of sterling. However, it's important to note that our Health and Hygiene portfolio returned to growth, with volumes up 0.4% for the half.
Our gross margin continued to be above 60% and funded increased BEI, driving our adjusted operating margin delivery of 23.5% in the half. Free cash flow grew 8%, and we delivered earnings per share of 161.3p. I'll now provide more detail on the volume results for half 1.
In Hygiene, the improving trends we saw throughout the 2023 continued, and we returned to volume growth in half 1, as expected. Growth was led by Lysol and was broad-based across North America, Europe and our Developing Markets. Health delivered a relatively flat performance in the half. We saw broad volume growth across our brands, including Dettol, Durex, VMS and Gaviscon. This growth was offset by a high single-digit decline in our seasonal OTC brands, and we don't expect this headwind in half 2.
Nutrition's volume decline primarily reflects the continued rebasing we're seeing in the United States. As previously communicated, we're returning to a more balanced growth algorithm driven by price, mix and volume in our Health and Hygiene businesses.
Moving to our market shares. As a group, the percentage of top CMUs holding or gaining share has declined to 38%, and Nutrition is the key driver of this change. Hygiene CMU results are slightly down versus 2023 as we see strong competitive challenges in the U.S. and a return to a more promotional environment in Europe. We have taken actions to improve our market positioning. However, we expect the competitiveness in these markets will continue.
Health CMU results are slightly down at 43%. Intimate Wellness is seeing good share gains, and we see improving trends across OTC, germ protection and VMS. Specifically within OTC, Mucinex is a large CMU for us and has returned to share growth over the last quarter, but not yet flipped to positive on a year-to-date basis.
It's important to remember that CMU market share reporting is a binary metric, and it's also useful to look at total value market share alongside. We are holding total value market share in both Health and Hygiene on a year-to-date basis.
We're pleased to share that we were able to fuel strong brand investment through our gross margin expansion while delivering a 23.5% adjusted operating margin. Gross margin increased 120 bps, aided by the benefit of carryover pricing actions and a more benign commodity environment. Fixed costs represent around 22% of our net revenue and increased by 50 bps in half 1.
Looking deeper into our fixed costs for the half. Our cost base increased 50 bps, reflecting inflation impacts, negative FX and costs associated with our fixed cost optimization initiatives, which we took above the line. These increases were mitigated by the benefits of our cost optimization initiatives.
I'll now get into GBU specific results. Hygiene delivered 4.5% like-for-like net revenue growth in half 1, which is in line with our mid-single-digit growth expectations for the full year. All of our power brands were in growth, led by Finish and Lysol; and our Hygiene GBU delivered 0.9% volume growth for the half. Hygiene delivered 1.9% like-for-like growth in Q2, with both volumes and net revenue impacted by the reversal of a 2% sell-in benefit ahead of an SAP implementation in Brazil at the end of Q1, which we discussed in April.
Excluding this headwind, Hygiene's like-for-like growth in the quarter was closer to 4% with volume growth of around 1%. Hygiene delivered an improvement in adjusted operating margin, up 230 bps, driven primarily by gross margin expansion. Health delivered 1.3% like-for-like growth in half 1, with sequential improvement across the quarters.
Growth in the half was broad-based across Intimate Wellness, nonseasonal OTC and our VMS portfolio. This growth was reduced by softness in our seasonal OTC brands, given the weak end to the cold and flu season and the impact of retailer inventory movements. Health delivered an adjusted operating margin of 27.8% in the half, with gross margin expansion more than offset by increased marketing investment behind our brands.
For Nutrition, I'll start with our half 1 performance and then share an assessment of the full year impacts we expect to see because of the tornado in the U.S. In half 1, we saw a 9% decline in like-for-like net revenue, which is moderately better than the guidance we shared in February.
North America declined mid-teens, as the business rebases from elevated shares in the prior year, and we saw a low single-digit decline in our Developing Markets business. Nutrition's adjusted operating margin was 18%, which was impacted by deleverage on the top line and a more normalized trade and marketing environment in the U.S.
Moving to our EPS bridge. Excluding the impacts of FX, our earnings per share is broadly flat as interest and tax expense are partially offset by growth in adjusted operating profit and the benefits of our share buyback program. We faced a negative 9.9p impact from FX due to the strength of our reporting currency.
Our free cash flow generation was strong in half 1. Our leverage of 2.2x remains consistent with our capital allocation framework. And we're pleased to announce a 5% increase in our dividend, along with the next tranche of our share buyback program of £1 billion over the next 12 months.
We informed the market last week that on July 9, a third-party warehouse in Mount Vernon, Indiana, was struck by a tornado and sustained damage. As things stand today, we believe we will experience a short-term impact to our sales of nutrition products this year. Taking this into account, our full year net revenue outlook for Nutrition will be a low double-digit decline. This is a reduction from our previous outlook of a mid- to high single-digit decline. We expect the majority of this impact to happen in Q3.
Reckitt holds comprehensive property damage and business interruption insurance, and we believe insurance proceeds will largely offset the impact on both the inventory write-off and our lost earnings. We're confident that insurance proceeds covering the write-offs will be recognized within this calendar year. However, we may not be in a position to fully recognize the recovery of lost earnings within fiscal '24. The change to our outlook for Nutrition has impacted our group outlook, which I'll discuss now.
This Nutrition adjustment negatively impacts our group outlook by about 1%. For this reason, we are reducing our group like-for-like growth outlook from 2% to 4% to 1% to 3%, and we reiterate our full year expectation of mid-single-digit growth for our combined Health and Hygiene portfolios. This is likely to materialize at the low end of our range as our Hygiene business faces a more competitive environment in developed markets. As a group, we expect Nutrition's shortfall to materialize in Q3.
For Health, we expect a modest sequential improvement in Q3, with a very strong Q4, as we lap a weak comparative in Q4 of '23. We expect Hygiene growth in the back half to be more weighted towards Q4. Despite the lowering of our full year net revenue target, we continue to expect adjusted operating profit to grow ahead of net revenue growth this year. We reiterate our expectations for net finance expense, for our adjusted tax rate and for CapEx.
That concludes our financial summary and 2024 outlook. I'll now hand back over to Kris to take you through the actions we announced this morning around our portfolio and our organization.
Kristoffer Licht
Thank you, Shannon. Let me now turn to the future of Reckitt. In Reckitt, we have all the makings of a world-class health and hygiene company. We operate in the right categories, we grow the right power brands, we have the right team and we're putting in place the right structure. I have the greatest confidence in what this company will do.
Last October, I set out the strategic priorities and principles that would guide our path forward. These included reviewing our portfolio for value creation, driving product superiority throughout our portfolio, winning in our markets by more consistently executing with excellence and optimizing our cost base by simplifying our organization and finding scale opportunities wherever they exist.
After a thorough review, we announced today a set of actions to reshape Reckitt as a world-class consumer health and hygiene company, with one of the strongest growth and margin profiles in the industry. We continue to progress on product superiority and in-market execution, and we will provide an update on these at our full year results. But today, I'm going to focus on the actions we're taking on portfolio value creation and organization. Of course, all proposals are subject to relevant employee representative and works council information and consultation where applicable.
Last October, I set out the driving logic behind the Reckitt portfolio and how it creates value. I said that we have an excellent portfolio of brands, but I was clear that every brand and business will need to earn its place in our portfolio by satisfying the following three principles.
Number one, a brand or a business must enjoy a clear and credible long-term runway for growth. Number two, it must have an attractive earnings model. I primarily look at the strength of the gross margin, it needs to be high and at the high end of the category in which it operates. This enables continuous investment in growth and premiumization, as well as operating margins that are consistent with our earnings model. And number three, it must have a source of enduring competitive advantage, for instance, a #1 or 2 equity position.
We have concluded our portfolio assessment. Reckitt has an excellent portfolio of brands, but it can be sharpened. We have a stable and resilient portfolio of strong brands in the home care category that do not fully meet our three principles. We, therefore, consider them noncore, and will seek to exit this essential home portfolio by the end of 2025. Mead Johnson Nutrition is also considered noncore, and we will consider all options to maximize shareholder value. We will take the time it requires to achieve the right solution.
The core Reckitt business is truly special, with a portfolio of market-leading premium power brands that will deliver accelerated growth and enhanced shareholder value creation. Let's now move to our sharpened core portfolio, starting with Selfcare. In this category, we have four power brands, Mucinex, Strepsils, Gaviscon, and Nurofen. We also have future power brands like Move Free and Biofreeze, as well as some important local hero brands across our markets.
As I set out in October, this category has a long-term runway for growth, fueled by heightened consumer interest, increased disposable incomes and the need to migrate to greater self-care as populations age. And in emerging markets, Selfcare is still a nascent category with significant and long-term growth potential.
Our market-leading Selfcare brands are trusted by consumers and known for their efficacious medicated solutions they provide. They have delivered a very strong revenue growth CAGR over the last 5 years at 7% and have an excellent gross margin and earnings model that allows for continued high levels of investment in brand building and innovation.
Our germ protection power brands, Lysol, Dettol and Harpic, enable the highest standards of hygiene in the home and on the go, and protect against the spread of germs, viruses and bacteria. As we saw during the pandemic, these brands and products are of the greatest importance as we seek to keep ourselves, our families and our communities safe. And in the post-pandemic world, this remains as true as ever. Good and effective hygiene is foundational to good health.
We enjoy strong category and brand growth tailwinds, particularly given the penetration and category creation opportunities that exist. We have already made great progress on category creation in recent years through our successful and highly incremental laundry sanitizer and air sanitizer platforms. Category creation will remain a key element of growth going forward.
We will manage the Dettol and Lysol brands, which share R&D and science platforms, together in a unified global category team. Dettol and Lysol saw significant growth during the pandemic, and after a period of normalization, both have now returned to growth from a higher base. And I'm particularly pleased to see that both brands are delivering good volume growth again in the first half of 2024. We do expect that to continue.
Our next category is household care, which contains our two power brands, Finish and Vanish, both global leaders in their respective domains. These brands have delivered very good growth over the past 5 years with a CAGR of 8%. These are strong growth tailwinds for the category and for our brands, with penetration and premiumization opportunities throughout both developed and emerging markets. And given the premium nature of the category, the margin profile and the earnings model are also very attractive, creating room for continued investment.
Finish will play a very important role for us as we move forward given the household penetration opportunity that exists in large developing markets, where the category is, today, not fully developed. This provides us with a clear and decade long runway for growth, and our new organization structure will provide even greater focus on that opportunity. More on that in a bit.
And our fourth category is Intimate Wellness led by Durex and Veet, both global leaders in their respective categories. Intimate Wellness remains a high-growth attractive category fueled by increasing consumer interest, normalization and engagement. Significant innovation and product premiumization give us confidence that this category will also enjoy attractive long-term growth. And we see the opportunity for very rapid growth in large emerging markets, such as India, Africa and Latin America.
These products also generate strong gross margins. They have a very attractive earnings model. and they have grown net revenue at 7% CAGR over the last 3 years. We have used that to enable investment in new differentiated and superior materials and new production techniques. This will be a major focus in the coming years as we bring more of these innovation launches to the market.
So in summary, Reckitt will become a more focused business, driven by our power brands, which are beloved by consumers and hold leading market positions in categories with significant headroom for long-term growth. The portfolio generates gross margins of around 61% collectively, which provides significant fuel for investment behind our brands and behind innovation, and a very attractive earnings and cash generation model. It is a cohesive portfolio.
Our proven playbook for how to grow and expand power brands applies across. There is common science behind our innovation platforms. We enjoy scale across our value chain, including procurement, manufacturing and logistics. We also have commonality in our go-to-market approach with the same customer base in many markets. Marketing activation and consumer education programs are similar. And importantly, our brands face similar exposure to consumer megatrends.
The structural economics of our portfolio are strong, but the benefits of this power brand-led approach are more wide-reaching. The successful Reckitt playbook honed over many years of successful growth and learning starts with our obsession over the consumer, a deep understanding of consumer demand spaces, unmet consumer needs and category drivers.
Our people know how to create, build and broaden iconic brands. Many of our brands are synonymous with the categories they lead, backed by the efficacious solutions they provide and our wide-reaching consumer education and marketing programs. Our deep understanding of consumer demand spaces, combined with our strong science platforms, enable us to create bigger, better innovation with breakthrough propositions. And at times, we do create new categories, such as laundry sanitizers and air disinfection.
And we have the people, the scale and the brands to deliver excellence in execution within our markets, both at shelf and on screen through our proprietary global and local success models. It is from this Reckitt playbook that we can drive growth above our underlying categories through household penetration, premiumization and category creation. I just walked you through the growth we've delivered in these core power brands over the past 5 years, which demonstrates the power of this playbook.
The core Reckitt portfolio will continue to benefit from a scaled global footprint with a balanced portfolio across North America, Europe and emerging markets. We will still have scale in every market that matters for future growth. And in many European markets, we will enjoy greater operational scale as we unify our go-to-market organizations without the GBU model. Importantly, our geographic mix will be further shifted towards faster-growing emerging markets such as India, China and Africa, where we have thriving businesses today.
Maximizing our growth potential in these and other high-growth markets will be a major focus and priority, which has also informed how we organize our core going forward. This scale in our manufacturing and go-to-market networks enable us to partner effectively with our customers and continuously grow the distribution of our brands. When coupled with our excellent brand portfolio, this creates the opportunity to rapidly scale and execute consumer-preferred propositions around the world.
Now such an excellent portfolio of power brands deserves the right organization structure to unlock its full potential. Reckitt will move to a simpler and more effective organization, with fewer management layers and reduced duplication to accelerate speed of decision-making and improve efficiency. We will remove the global business unit structure and create fewer but bigger leadership roles within our markets. And we will continue our journey to create at scale, cross-functional, end-to-end shared services.
We will move to a unified category structure operated through three geographies, namely North America, Europe and Emerging Markets. The global category organization will deliver consumer insight, category expertise and innovation, with the geographic areas focusing on executional excellence for our consumers and customers. This will deliver a step change in organizational effectiveness. And it will allow us to enable the Reckitt speed and harness the entrepreneurial energy that remains core to our culture and people today.
I'm very pleased to announce the appointment of a number of talented long-term Reckitt leaders to the Group Executive Committee, with an average tenure of 22 years at the company. Ryan, Jerome, Eric and Nitish, all have proven track records at Reckitt and a deep understanding of our businesses. They live and breathe our values every day. I look forward to working closely with them and the rest of our Group Executive Committee to deliver this exciting growth and value creation opportunity.
That was an overview of our new core business. I want to quickly talk a bit about our two noncore businesses and our plans for them. Let me underscore, these are good businesses with strong brands.
Essential Home is a portfolio focused on North America, Europe and Latin America with full year 2023 net revenue of £1.9 billion, containing iconic brands with market-leading positions, consumer recognition and loyalty, including Air Wick, the #1 air care brand in Europe, #2 brand in Latin America and #3 brand in the U.S.; SBP, the #1 pest control brand in Brazil; Calgon, the #1 European brand in water softeners; and Cillit Bang, the #4 brand in surface cleaning in Europe.
It is a stable and resilient business with high margins and strong cash generation. Essential Home will be led by one of our most experienced commercial leaders, Paolo D'Orso, who is currently Executive Vice President for Europe Hygiene.
Mead Johnson is a leading nutrition business with a portfolio of strong global and local brands, including Enfamil, the #1 global infant formula brand and the #1 infant formula brand recommended by pediatricians in the U.S.; Nutramigen, the #1 allergy brand in the U.S. This business will continue to be run by the same world-class management team and led by Susan Sholtis, who has significant experience in caring for the needs of our most precious consumers.
I will now hand over to Shannon to run through a number of topics, including our Fuel for Growth program.
Shannon Eisenhardt
Thanks, Kris. As Kris mentioned, we will expand and accelerate our existing fixed cost optimization program to drive improved effectiveness and efficiency of our organization. This program will deliver a step change in organizational effectiveness with fewer management layers and greater proximity to the consumer.
These changes will unlock cost efficiencies, delivering at least 300 bps of reduction in total fixed costs as a percentage of net revenue as we exit 2027. This equates to an annualized reduction in fixed costs of £450 million, which means that we'll land at an ongoing fixed cost base of around 19% compared to 22% today.
One driver of these savings will be the organizational simplification Kris talked you through. Additionally, a greater adoption of shared services, rightsizing of historical investments, leveraging automation and benefits from digital and generative AI opportunities will all help us to achieve this goal.
We've already made progress in some of these areas, and this will be accelerated as we implement our new structure early next year. We do expect to incur estimated one-off cash costs of around £1 billion through the end of 2027. This includes restructuring and transformation costs, but does not include any potential tax or deal costs.
Our capital allocation framework remains unchanged. The actions we've announced today allow the company to focus our capital against the brands that offer the best long-term opportunity for growth and value creation. Our leverage expectations remain the same, and we will continue to pay a progressive dividend and return surplus cash to shareholders, including any excess proceeds from future transactions.
We are not providing guidance for the new Reckitt earnings model today. We will do this with our year-end results. However, the actions we're taking to sharpen the portfolio and simplify our organization will certainly deliver a stronger long-term earnings model for Reckitt. These actions will drive enhanced net revenue growth. The market's current medium-term growth expectation for Reckitt is around 4%. Our sharpened portfolio should deliver around 100 bps higher growth within a mid-single-digit range.
Our gross margin profile will be around 61% based on the improved mix of our portfolio. We will drive significant progress in our fixed cost base through our Fuel for Growth program, taking out 300 bps or £450 million as we exit 2027. The strong gross margins and fixed cost savings will fuel incremental investments in support of our brands. We will continue to drive adjusted operating profit growth ahead of a higher net revenue growth base.
Before I hand back to Kris, I'd like to set out how Reckitt Group will report in 2025. We will have three reporting segments: Reckitt, Essential Home and Mead Johnson Nutrition. Within Reckitt, we will report our three geographies: North America, Europe and Developing Markets. We will provide you with pro forma data in due course.
Now back to you, Kris.
Kristoffer Licht
Thanks, Shannon. To summarize the actions we're announcing today. We are reshaping Reckitt as a world-class consumer health and hygiene company with one of the strongest growth and margin profiles among our peers. This involves significant sharpening of our brand portfolio to focus on our market-leading power brands. These high-growth, high-margin power brands are beloved by consumers and hold leading market shares in categories with significant headroom for long-term growth.
We will seek to exit our noncore Essential Home business. We will consider all strategic options for Mead Johnson Nutrition. This sharpened portfolio creates the opportunity to move to a simpler, faster and more efficient organization, and we will expand and accelerate our fixed cost optimization initiative to drive improved effectiveness and efficiency in the organization.
And our capital allocation framework is enduring. The actions we announced today will, however, allow the company to focus capital against brands that offer the best long-term opportunity for growth. We will continue to pay a progressive dividend and return surplus cash to shareholders, including excess proceeds from future transactions.
Finally, I want to set out our next steps. Our priority remains to deliver 2024. Our plan will generate significant value, but it will take time to execute in full. We will provide a further update on the progress of our actions with our Q3 results. When we share our full year results, we will include guidance for 2025, progress on our actions to reshape the company and an update on our other strategic priorities.
Thank you for listening. And now Shannon and I will be happy to take your questions.
Question-and-Answer Session
A - Richard Joyce
Okay, you want to kick off, Guillaume?
Guillaume Delmas
It's Guillaume Delmas from UBS. First, two very quick housekeeping questions. Destocking in the U.S. for Health, is it now over, so we start from a clean base in the third quarter? And anything you could say on the phasing of this fixed cost optimization and restructuring, so is it evenly spread across the next 3.5 years or more back-end or front-end loaded?
And then my two questions. The first one on competitiveness because when I look at the market share data, you're getting further away in both Hygiene and Health from your 60% target. And this is almost 5 years into Reckitt's new strategy which entailed a significant margin reset, step-up in investments, strengthening the innovation pipeline. So bit of a candid question, but are you happy with the results you are getting under this strategy? Why are you not getting more traction? Is it an execution issue still or the categories are not as structurally attractive as you once thought? So any color on that would be helpful.
And then the second question on reshaping the portfolio. You mentioned you would return surplus cash to shareholders, including excess proceeds from future transactions. Should we interpret this as a signal that you'd be looking at stepping up your buyback effort, not rolling out a special dividend? Does it also mean you're not very much interested in medium or large-sized acquisitions, so you're happy with the size of new Reckitt £10 billion revenue?
Kristoffer Licht
You want to take the first two, I'll take the second?
Shannon Eisenhardt
Sure. Yes, we'll split half-half. Okay. So first off, as far as the U.S. destocking, yes, we believe that's behind us. As we look at what retailer inventory levels in the U.S. look like across OTC, it's very similar to what it looked like a year ago, and so I think that's a headwind that's behind us as we head into the second half.
Around the phasing of the restructuring and transformation costs. So that will occur over a 3.5-year period as we discussed. I don't have specific guidance to share right now year by year, but I would say I would expect to see it more front half-weighted versus back half across that time period. So that's how we're currently thinking about how that will transpire.
Kristoffer Licht
We know we need to get to...
Guillaume Delmas
And for the restructuring, will it be taken at above the line?
Shannon Eisenhardt
No, the intention is that, that will be, given the magnitude of the program we're undertaking, that, that restructuring will fall below the line.
Kristoffer Licht
And we know we have to give you more details on that, and we will be back with you when we can do that. On competitiveness, look, I'm not going to be happy until all our businesses are above 60%. So no, I'm not satisfied with what we have. I do think that there's context and reasons, as Shannon talked about, actually Health and Hygiene are holding value share year-to-date. So we have some good trends.
In particular, in Health, I mean outside of the -- some of the impacts in OTC, the majority of our Health businesses are gaining share in the last quarter, and I expect that to continue through the year. So Health I feel quite comfortable that we're headed where we need to be.
Hygiene is very competitive, and we have to make choices. We want to stay competitive, but we're not going to stay competitive at all cost. We also want to deliver our financial performance. And so if we see some overly aggressive promotional behavior in the market, we're not necessarily always going to be matching that. We're going to make smart choices and we're going to deliver our results and our guidance.
What I will say about Nutrition is that's going to flip eventually, right? So obviously, we're in a period of normalization. So I think the Nutrition share number is not so important right now, to be honest. What's more important is that we have a higher market share in the market that we did pre the infant formula crisis. That's actually more important, and that makes our business better.
Now I will just say one thing. You said that it's been 5 years. It actually hasn't been 5 years because during that time frame, our businesses were above the 60% threshold at various times. It's just that when we went through the inflationary cycle and we had to price and we are market leaders, as you saw in most of our categories. So we have to lead the pricing, and that has an inevitable short-term drag on share.
So we knew that we weren't going to hit all KPIs as we went through this inflationary historical spike. But now we need to get back above 60%. So to answer your question, no, we're not happy until we get above 60%.
And your fourth question, excess proceeds and so forth. We're fully committed to what we said today. So when we say excess cash return to shareholders, we mean it, including proceeds from any transactions that might happen. In terms of the method of that, the quantum of that, that is all for later. We don't know that today. But we will, of course, communicate that clearly and transparently when we can.
Large acquisitions. No, I don't think that's in the cards for us right now. You can see that we don't need it to create shareholder value. You saw this core portfolio that I showed you today, it's spectacular. It's one of the best portfolios you can find. So we should invest organically in driving that portfolio and driving the growth. And that will create a lot of shareholder value, I'm certain of that.
Now if we see the opportunity to do a tuck-in acquisition, which historically we've been successful with, tuck-in acquisitions that's how this excellent portfolio was built over time, we will look at that, but we will stay disciplined.
We have our three principles for our portfolio and for capital allocation, and they are enduring. We will not deviate from that. So -- but if we can find good assets at a reasonable value that meet those criteria, we're always going to be interested. But I don't think anything big is on the horizon right now.
Richard Joyce
Thanks, Guillaume. I think Chris, you had your hand up first. I want to go for you.
Chris Pitcher
Chris Pitcher from Redburn Atlantic. Can I just understand this whole fixed cost optimization story? You've effectively declared roughly 30% of your revenue as noncore today. Under the new reporting structure, how much of those fixed costs are shared across the three different new operating units?
And is this 3-point reduction in fixed costs going to come close to offset the implied earnings dilution from selling these assets? How much of Nutrition is now stand-alone in terms of shared costs and how much of it is between Health and Hygiene? And then forgive me for going on to the Nutrition strategic options, but can you lay out what all strategic options mean? Is a carve-out feasible?
Shannon Eisenhardt
Sure. So I'll start, then you pick up.
Kristoffer Licht
Yes, let's go.
Shannon Eisenhardt
Okay. So the way to think about the fixed cost ambition is that as we look across the full portfolio we have today, we expect to pull 300 bps of savings out of that entire portfolio. And so that's the £450 million that I referenced. That doesn't come to full fruition until the end of 2027, as I said.
Those savings are not reliant on the successful execution of the transactions that we've talked about today. Should those transactions occur, then we have stranded costs that we will deal with and that we're committed to tackling.
The way I would think about -- so I guess the other piece I would add on is that then as you look at what Reckitt looks like going forward, as we've discussed, our expectation is that we'll be down to 19% off of whatever the new revenue base is when we get to completion of these transactions, which we feel puts us very competitively set within our peer set from a fixed cost endpoint.
To your Nutrition question, Nutrition is relatively stand-alone today. There are, of course, some functions and support that is shared. And so we will have to deal with that as we see what the future of Nutrition looks like. But it is already relatively managed on a stand-alone basis.
Kristoffer Licht
The only other thing I would add to that is the core portfolio is a fairly high-growth portfolio. So as you do the work and sort of look at that financial profile, as we give you also the information to do that, I think you'll see that while on paper right now it's a 30% reduction in revenue, core Reckitt will actually grow at a reasonable pace, and we'll get back to a scale that's similar to today fairly quickly.
On Nutrition all options, what we mean is all options. So you know we're in a complex litigation, and litigation always creates uncertainty. But fundamentally, this is a very good business. It's a very stable business. It's stronger than it was pre infant formula crisis. We have the best brands, I think, in the industry. So this is a good business, and I think there will be options for this business.
What we're trying to also communicate today is we're not going to rush. We're going to do this properly, thoughtfully. We're not going to rush and do something that would cause us to regret what we did 6 to 12 months later. We want to do what's right for shareholders, and we'll look at all options to do that, and that includes all options.
Richard Joyce
Thanks. Okay. Jeremy, we'll go to you, and then we'll go to you, James.
Jeremy Fialko
Jeremy Fialko, HSBC. So a couple for me. First of all, maybe a bit more detail on some of the promotional environment that you've mentioned, any particular areas where you have seen a notable increase from a kind of geographic or category perspective?
Secondly, maybe Shannon can run through the H2 margin puts and takes, because I guess you did a bit better than people expected in the first half. And then just a very quick follow-up on the post-trial motions in the Watson case. I would have thought we had seen something by now, maybe I've missed it, but if there's any brief update on that as well, or maybe not.
Kristoffer Licht
So I'll do a promo and hand to you, and then I'll come back on NEC.
Shannon Eisenhardt
Yes. Sounds good.
Kristoffer Licht
So the promotional environment, it is more promotional. We expected that. We built our plan that way, and we communicated that we thought that would happen and it has. It's -- we see it significantly in North America and in Europe. And in particular, it's our Hygiene business that's most exposed to heightened promotional activity.
I want to be clear, though, this is what we expected. This is what should happen. And frankly, it provides a lot of good offers and good value and opportunities to grow volume. And it's a normal element of our business. Most often, our competitors are equally focused as us in ensuring that categories retain profitability and the margin levels that we have and that we're growing them. And so by and large, what we're seeing does not concern us.
Sometimes, we have a competitor here or there that will do something quite aggressive, and we're not really interested in following that. So that was the point I made before about trading off market share and making smart decisions that preserve the profitability of our business and our category, and we'll be disciplined on that. But we are investing more in promotions and we'll continue to do that in the back half to make sure that we're competitive.
The good news is most of our competitors are very focused on driving the category growth, which we are also very focused on. So we try not to play a zero-sum game. We try to make this about category growth, household penetration and being more and more relevant for consumers and that's, I think, by and large, what we're seeing. But we're watching this closely, and it's a key priority for us to make sure we thread that needle in the second half. Margins?
Shannon Eisenhardt
Yes. So from an outlook standpoint, just to try to be as clear as possible, what I shared was the fact that we do expect our half 2 and full year revenue to be impacted from Nutrition. So we talked about 1% of group, which if you do the math, that's about £150 million from a top line standpoint. Our half 1 margins, since your question was margin, did come in better than we had communicated and expected.
Our phasing of revenue across the year continues to be back half-weighted. And so as we think through full year margins, we're not looking to make any change in guidance versus where our full year margin rate consensus currently sits. We expect that, that will come in right in that range. And really, the over-delivery in the front half is primarily driven by just phasing and pacing of some investments between halves.
Richard Joyce
Okay.
Jeremy Fialko
And NEC, any indication?
Kristoffer Licht
I think the question was about any news. No, we don't have any specific news to share today on NEC. We will commit to sharing any news, and we are trying to be very timely with the news that we do share with you.
I do want to hit on a couple of points on NEC. One is what we've said before, which is some of these individual trials will not drive the outcome of this litigation, right? So it's just always important to remember that. And in particular, I think the Watson case is not going to be a driver of the ultimate outcome of this litigation.
The second thing I wanted to say is, it is encouraging for us that we're seeing more and more voices in society in the U.S., both in the industry and outside of the industry, people speaking about the public interest and the public health issue that this litigation can create, which is a severe issue that it could create, which none of us want.
And I was pleased to see, for instance, that The Wall Street Journal made -- thought some very thoughtful points about this in the last 24 hours. I don't know if you've seen it, but I would encourage you to see what they said. We agree with them.
Richard Joyce
Okay. Thanks, Kris. James?
James Edwardes Jones
James Edwardes Jones from RBC. One thing that has become clear from other companies is you need clarity in management. So is the category manager is going to be in charge or the country managers? Who is the boss apart from you, Kris?
Secondly, is it plausible to imagine, for us to imagine -- sorry to push you on this again, that Mead Johnson could be sold while the litigation is ongoing? Or is that just not really in your thinking at all?
Kristoffer Licht
You ask the hard questions, don't you? So clarity on who's in charge. So look, as you say, it's absolutely critical that we're clear about who's in charge. This organization model will reduce duplication, and we will have fewer executives running our business, and we will have more proximity, we'll have fewer layers. That all helps a lot in making quick decisions, being close to the market and driving accountability, which will help me.
Now I think in terms of who is in charge, any complex global organization that runs multiple categories in multiple geographies cannot give a binary answer to that, because the fact of the matter is, we have leaders that are in charge of different things. Our category organization is in charge of our long-term category strategy, innovation and our brands, the strategy for our brands. But the geographies is where our P&L sits, is where the daily operations occur, is the execution.
So if you want to ask me who is ultimately accountable for the delivery of the P&L every day, every week, every quarter, was the geographies. But they cannot do it alone, it requires teamwork. And so we need to drive a lot of teamwork in this organization, and we will do that. When you have fewer leaders in an organization and a simpler structure, it is much easier to drive great collaboration, and I'm confident that we can achieve that.
And what helps my confidence is the group of leaders that I shared, who know each other extremely well, they know the business really well, and they definitely have a collaborative spirit, a team spirit, they want to do the right thing for Reckitt. I know that. So that gives me confidence that we're going to sort this out. But it's a perennial topic in large global organizations, as I'm sure you appreciate.
On the MJN timing, I would not rule that out as a possibility. I would also not say that I think there's any certainty in that. And that's why we're deliberately saying we will explore all options and we will take the time it takes to find the right solution. If we can do it faster, that will be a welcome development. But I cannot promise that, and I don't want to promise something that I can't be sure about delivering. So that's all we can say today, but I would not rule it out as a possibility.
Richard Joyce
Thanks, Kris. Iain?
Iain Simpson
A couple of kind of quick housekeeping questions from me, and then a sort of wider strategic question. So I might do -- I'll do the quick housekeeping questions first. So are you going to disclose category growth going forward in your four new categories and will we see that quarter-to-quarter?
In the event of any disposal, could we assume no tax leakage? Given all the Mead Johnson write-down, does that give you a tax shield? Or am I wrong in assuming that and there are scenarios where a sale would result in a tax leakage?
And finally, I noticed we're talking about Mead Johnson again, it's been a few years. Should I read anything into the resurrection of that name and its repeated appearance during the way that you talk about that business?
And then just moving on to the strategic question. There's an awful lot going on within this business. So you've got carve-outs of Home Care, a bit of carve-out of Nutrition, you've got shifting your layering system, you've got slightly tweaking the geographies, you've got reworking your category matrix and the relative importance within that, and you've got a fixed cost reduction program.
Now the last time we saw this level of operational complexity, I think, was when you tried to simultaneously do RB 2.0 and Project Supercharge, and it was not a terribly happy experience for anyone, I don't think.
So how confident are you that this amount of structural change can be driven through the organization, while at the same time, whoever is in France whose job it is to sell dishwasher tablets, thinks, regardless as to what all this overhead changes and who my boss ends up being, that will sort itself out, I'm just going to get into the office each day and sell as many dishwasher tablets as I can?
Kristoffer Licht
You do the first two, I'll do the second two?
Shannon Eisenhardt
Sure. Iain, just to make sure I heard the first one, was your question, are we going to disclose category financial results?
Iain Simpson
Yes, are you going to disclose category growth rates, so will you show us how germ protection is doing versus this, versus that?
Shannon Eisenhardt
So I'd say we're still landing exactly what the level of disclosure would be, but I think providing category perspective will certainly be important. So I would assume that, yes, we will.
From a tax leakage, you love asking questions I can't answer. So from a tax leakage standpoint intel, we're super clear on the structure and timing of the deals. I don't have any numbers to share around what the tax impacts will be, and so that will obviously come in due time as we see how these deals and businesses will materialize.
I'll let you hit Mead Johnson...
Kristoffer Licht
Yes, and it's on purpose. It's not an accident. And I think it's important. I think Mead Johnson is a great company. It is -- it has faced many challenges. I think the resilience of the people at Mead Johnson and their pride in what they do is exceptional. And they are very good people in a crisis. They're among the best I've ever seen. They've dealt with a lot of crisis.
And I have no doubt that, that robustness and resilience will also help us now as we navigate the latest event with the tornado. They're very proud of where they work, and I think they know where they work. They work at Mead Johnson, a wholly owned entity under our group. But I want to recognize that, because there is a strong legacy there and that legacy will thrive, I think, in its future. So it's not an accident.
In terms of your bigger question on complexity and our capacity to execute these various moving pieces. I think it's an absolutely fair question. It's something we've spent a lot of time on. I can say that I joined the company in the aftermath of what was RB 2.0 and Supercharge, and I saw the relative instability and the damage that some of these programs had done, which was, I think, also exacerbated by a lack of leadership continuity.
Now leadership continuity in my experience is everything when you go through big change. And that's why we've appointed a team of core operators that know our company inside out. And while they may be in slightly new chairs, the scope of their responsibility is very related to the businesses they currently run.
I'll give you some examples. Ryan, who is going to be our Global Category Officer, is currently the category leader for all of Selfcare, a really important part of our portfolio and he knows many of the other categories. He knows the people that run those categories. Eric, who is going to run Europe has been in Europe for decades, has run businesses there. He knows every one of the GMs. In fact, he hired many of the people that are going to work for him. So we -- it will enjoy a lot of continuity.
In the markets where we will have change, I mentioned consolidating our go-to-market systems in Europe, we will aim to select candidates to the greatest extent possible that are incumbents. And that's because we want continuity. Now we can't always do this. There will be factors and reasons why we can't always do this. But 80% of the time, I'd like to see some continuity in the people that are leading various aspects of this program.
That being said, there's no question that this is an ambitious plan and that there's many moving parts, and we will, therefore, have to resource it accordingly. So the reason why we will incur certain costs is also to govern this, to performance manage this, to track it properly.
There are many organizations that have been through large transformations and programs like this, and many of them have done it well. And I am entirely convinced that we will take those learnings from them and that we will seek the advice and the expertise that we need and augment our team with other resources for -- on a temporary basis, such that we can run this with a lot of discipline.
I have no interest in repeating any of our more painful lessons from the past. I want this to go very well, and we're going to make sure that it does with the right resources and, like I said, a very seasoned team that really knows this company.
Richard Joyce
Thanks, Iain. Fulvio, do you have your hand up?
Fulvio Joh
Fulvio from Berenberg. The first one is on the strategy update and the review of these noncore assets. Are you concerned that, that might leave Reckitt lacking scale across some of the key markets? And also, it will leave it more exposed to OTC, which I know you like as a category and you showed the growth in the margin, but it also tends to be a highly volatile category given the cold and flu season being very variable from 1 year to the next.
So how do you think about that? And is there anything that you can do to reduce that volatility year-on-year for that business, which will become more important?
My second question is on the £150 million of lost revenues because of the tornado. How quickly do you think that you can claw those back? Will that be a 2025 thing? Or could it take a little bit longer for you to rectify presumably some of the soft market shares that you will suffer in Q3 because of that?
And then lastly, on the dissynergies, I know Shannon you mentioned them briefly that there could be some dissynergies from the separation of those two units if sold or spun off or whatever. So can you maybe just quantify how big those could be? I know you mentioned that Nutrition business is relatively stand-alone, but is there anything you can say also on the other business?
Kristoffer Licht
So let me do the first three maybe, and you take the last one?
Shannon Eisenhardt
Yes, fine.
Kristoffer Licht
So on scale, look, I showed you that we are at scale in our big geographies and we will remain at scale. Nutrition already operates as a fairly stand-alone business, okay? So that's not really giving us any scale benefits today. If you think about it operationally and commercially, it's quite a separate business. It runs quite differently.
In terms of scale, we're actually going to gain operational scale from this program in Europe because we're going to unify our go-to-market structures. You may recall that in Europe, we still run a Health business and a Hygiene business, and they are actually stand-alone in terms of their go-to-market systems and their management teams, and we're going to unify that as part of this program, just like we have unified those structures everywhere else in the world already.
So that will actually -- we will actually pick up some scale from that, which is exciting because we can reinvest some of those benefits in growing faster in Europe. In North America, like I said, Nutrition is already fairly separate. And the Essential Home portfolio makes up a relatively small portion of our North American business. So I don't anticipate having any real impact on the North American business.
And in Emerging Markets is, by and large, outside of the perimeter of Essential Home. It's only really Brazil that is significantly impacted by this. But Africa, India, Southeast Asia, China, the Middle East are not in the perimeter of Essential Home, and so there will be no change to our scale.
So maybe that's a fairly detailed answer but just to give you a sense that actually, the scale impact of these things will be fairly isolated to a specific couple of places, and we have that counteracting effect in Europe, where we're actually picking up scale. So that's on scale.
On OTC exposure, yes, we will be more exposed to OTC. I do think that's a good thing to be exposed to OTC. You're right, we have a seasonal business, and seasonal businesses always have some volatility, and being good at managing that is part of our job.
Now I think we have seen more volatility, obviously, in the past years. We had what we call the no season, not a low season, but a no season when everyone went into lockdown. And we've had record seasons and then we've had more normal seasons. I don't foresee us being in quite that volatile an environment going forward. So I think that we can hopefully have a more normal trading environment, and we can manage the seasonal swings as we normally would.
The other way that's going to compensate for this is that we're growing extremely fast in our nonseasonal OTC business. And actually, there's probably no part of our business that I'm more excited about in terms of its potential and runway for growth than that nonseasonal OTC business.
Strepsils, Gaviscon, a number of local heroes are growing extremely fast, and these are businesses that we really want to scale. So when I talk about growth in Emerging Markets, those are absolute powerhouse brands that we can use to build categories all across emerging markets. And that will help us not be as exposed.
But exposure is unavoidable. I used to work in a beverage company. That's a seasonal business. I think many other consumer goods categories have some seasonality to them. It's a question of how you manage it. But fundamentally, they're very attractive businesses. So it's worth doing that.
On lost revenue from Nutrition, yes, I think we will recover that. I don't think that this will take a long time. It is a significant short-term operational disruption because it's one of our three warehouses and it took a very substantive hit, it's a lot of damage to that warehouse. But it's not something we can structurally overcome.
I think Shannon already covered that we're looking at alternate locations. Our supply chain is functioning. We're shipping to customers. So I think this is a short-term issue, largely contained to Q3. And by '25, I definitely expect us to be fully recovered from that.
Shannon Eisenhardt
Yes. And then regarding your question on dissynergies. I mean, obviously, we're looking to minimize what the dissynergies would be as these transactions would occur. We're confident, as we've sized that up that, over time, it's something we can manage and fully deliver the cost savings we're looking for and get to right run rate for fixed cost for our business. Right now, not ready to disclose what we think the magnitude of those are. But over due course, as we understand how the transactions are shaping up, we'll be ready to share more.
Richard Joyce
Okay. Thanks, Fulvio. Maybe -- okay, one question from Tom, and then we'll wrap it up.
Thomas Sykes
Tom Sykes from Deutsche Bank. Sorry, just a follow-up on the last question. Can you maybe answer it a different -- I'll ask it a different way. Of the £1.9 billion of revenue in the Essential Home business, how much of that is on stand-alone manufacturing and how much of that is on shared manufacturing? And can I indeed buy a brand that has its own manufacturing infrastructure?
Then also -- sorry. Just on the -- to come back again on another question, the geography versus category. So ultimately, say, is the A&P budget and the person who decides when a product is launched, that is ultimately a geographic sign-off rather than a category sign-off, even if it's a collaborative approach?
Kristoffer Licht
You mean the product launch, like an innovation launch?
Thomas Sykes
Yes.
Kristoffer Licht
Yes. Okay...
Thomas Sykes
And there is one final question. Just the gross margin of 61% on the core business, where would that be versus history, please?
Kristoffer Licht
Okay. Do you want to take the last one? I'll do the first two.
Shannon Eisenhardt
Sure.
Kristoffer Licht
On manufacturing, look, it's something that we have assessed. There is a fairly significant stand-alone manufacturing network that would convey with Essential Home. I'm not going to give you any exact numbers because we're still assessing how we would do it. But to give you an idea, 2/3 or so is kind of dedicated already to that portfolio.
We do have some sites that are co-mingled, that's normal, and we can work in terms of transitional service agreements or we can shift things around, such that the footprint is more contained, but this is all work to come. But maybe that gives you a rough idea. So it breaks fairly cleanly. It gives us a good start.
On innovation, decision rights. Any large global innovation that's a platform innovation -- we like to think about platforms. I talked about air sanitizer or laundry sanitizer or things like that, that have a permanent new addition to our business.
We're going to make those decisions at the global level with consultation, of course, with the geographies. But these are strategic decisions. They require capital, they require long-term investments in the brands or brand new propositions. So those are big decisions that we will make in the group executive.
Now if we're talking about a specific smaller innovation, of which we do many all the time, maybe a refresh of a new flavor or a refresh of packaging or something, those types of things will be up to the market. They will have the right to decide. They have to, however, get the approvals from the people that run the brands if it's under a power brand, right?
So power brands is very important that we show up in a consistent way. We run the playbook that we know how to run. And so for power brands, there will be some oversight from the category. For local heroes, it's up to the local market. And that's how we run today as well. So that's not really going to be a big change, and I think that's the right way to do it.
Shannon Eisenhardt
Just to clarify, is your question on the 61% gross margin, whether that's in line with how that going forward portfolio has performed historically? That's your question?
Thomas Sykes
Yes.
Shannon Eisenhardt
Yes. So I mean it's obviously, when you look back at the past few years, a little bit bumpy because of the macro environment and commodities, et cetera. But I'd say it's broadly in line with historical performance. It's certainly not assuming that we take this portfolio and significantly step-change the gross margin performance of that portfolio. Okay.
Richard Joyce
Okay. We'll wrap it up there. Thank you very much for coming, and have a good morning.