Reckitt Benckiser interims

Reckitt Benckiser Group is a manufacturer and marketer of branded products in household, health and personal care products, sold into nearly 200 countries from operations in over 60 countries.  I have a holding in my income portfolio (epic code: RB.) 

Reckitt Benckiser announced their interim results to 30 June 2013 today.  Total Net revenue grew by 6% to £4,994m, with like for like growth of 5% and 6% if we exclude the pharmaceutical business (RBP). 

Operating profit was £914m down 15%, if we exclude exceptional costs relating to historical regulatory issues of £225m and restructuring costs of £24m, then adjusted operating profit of £1163m was up 3%.  They achieved a strong gross margin improvement of 230bps to 58.7% and adjusted operating margin (ex RBP) was up 10bps to 20.4%.

EPS was 90.4p down 14%, but excluding the exceptional costs mentioned in the above paragraph adjusted EPS was 118.3p up 7% on last year.

Free cash flow (FCF) was once again strong at £893m compared to £788m last year, although net debt increased from £2,387m at the year-end to £2,810m at 30 June.  The increase in net debt was mainly due to payments for share repurchases of £279m, payments for acquisitions in China & Latin America of £413m and payment of last year's final dividend of £561m from the FCF.  Gearing at the period end is 46.6% compared to 34.6% last year and 40.3% at 31 December 2012.

The company has increased the interim dividend by 7% to 60p.  This may be a marker that the final dividend may see a similar increase, which would place the full year at say 143p delivering a 3.1% yield on the current share price.

There has been some concern over the sales of Suboxone film, after CVS Caremark dropped the product in favour of the generic tablet form (RB. stopped marketing the tablet form of Suboxone in March of this year).  CVS Caremark were not contracted to RB., so were a rather special case and RB.'s market share of buprenorphine prescriptions in the USA has been maintained at about 64%, although they do expect erosion of their share over time.  I would expect a sale of the pharmaceutical business to a more appropriate parent over the next 2-3 years, once the market has stabilised between RB.'s film and the generic tablet form. 

RB. stated that they have medium term targets to have emerging market sales representing 50% of the core group sales by 2015 and Health & Hygene to represent 72% of core group sales by 2015.  At the half year, emerging markets were 45% and Health & Hygene 72% of the core.  

Management are confident that they can achieve full year total revenue growth at the upper end of the previous guidance of growth in a 5-6% range (ex RBP), while maintaining adjusted operating margins.

These are good results from a well managed business and some initial concerns when Rakesh Kapoor  took over the CEO role from Bart Becht in 2011 have been proved to be unfounded.  Kapoor has instigated some major changes, so that it is a more decentralised organisation with a higher emphasis on emerging markets.