Reckitt Benckiser Group Plc expects at most a modest improvement in profitability this year as cost growth starts to recede and it keeps raising prices on products like Strepsils cold medicine and Durex condoms.
(Bloomberg) — Reckitt Benckiser Group Plc expects at most a modest improvement in profitability this year as cost growth starts to recede and it keeps raising prices on products like Strepsils cold medicine and Durex condoms.
The British consumer goods company said Wednesday its adjusted operating margin is only likely to be in line or slightly above the 23.8% level achieved in 2022, which was just ahead of analysts’ estimates.
2023 could be a challenging year for Reckitt. Even though it expects commodity cost inflation to ease, its ability to push through price increases appears to be reaching its limit, as consumers start to push back and volumes decline. The company also has yet to find a permanent replacement for former Chief Executive Officer Laxman Narasimhan, who abruptly resigned last year to become the boss of Starbucks Corp.
Reckitt benefited last year from being able to step in to make up for a shortage of infant formula in the US after Abbott Laboratories issued a recall for powdered formula made at one of its facilities.
The stock swung between gains and declines in morning trading in London. RBC analyst James Edwardes Jones wrote the guidance was “underwhelming.” The margin forecast excludes the boost from the US infant formula business last year.
Reckitt’s like-for-like sales were 28% higher in 2022 compared to 2019, interim CEO Nicandro Durante said. Since then Reckitt has enjoyed a boost from pandemic-driven sales of its disinfectant and cleaning products, which has been tapering off, as well as the US formula shortage. Yet its shares are trading more than 4% lower than at the end of 2019.
The Enfamil maker is targeting revenue growth of mid-single digits for this year, excluding the impact in 2022 of formula supply disruption. It might become more challenging for the formula and over-the-counter medicine producer to reach its goal of adjusted operating margins in the mid-20s by the middle of this decade.
Peak Inflation
Cost inflation probably peaked in the second half, Chief Financial Officer Jeff Carr said. He predicted a single-digit increase in cost inflation in 2023 after last year’s 17% increase.
The company’s price-mix — a figure which includes an assessment of what proportion of higher value goods are sold — increased by 12% in the fourth quarter. But volume dropped 5.8%, accelerating a decline, partly hurt by lockdowns in China. The company’s health portfolio of products outperformed, showing that business is more resilient.
Some uncertainty is hanging over the company because an external CEO hire could alter the group’s strategy and goals. Reckitt plans to give an update on its search for a new CEO in the first half, Durante said on a call with reporters.
“It looks like Reckitt may have delivered enough,” Tineke Frikkee, head of UK equity research at Waverton Investment Management said. “The fourth quarter was ahead of expectations on a strong US cold and flu season and infant nutrition benefiting from competitor issues. But disappointingly no news on the CEO.”
(Adds additional information from analyst call from paragraph 6)
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