Haleon plc(HLN) - 2024 Q2 - Quarterly Report

2024 Half Year Results Highlights Haleon's first half of 2024 saw organic revenue growth and improved profitability, leading to an upgraded full-year outlook and strong cash generation H1 2024 Performance Summary Haleon's H1 2024 saw 3.5% organic revenue growth, 1.7% adjusted operating profit increase, and doubled free cash flow H1 2024 Key Financial Metrics | Metric | H1 2024 | H1 2023 | Change | Organic Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | £5,694m | £5,738m | (0.8)% | +3.5% | | Operating Profit | £1,151m | £1,141m | +0.9% | N/A | | Adjusted Operating Profit | £1,293m | £1,271m | +1.7% | +11.0% | | Adjusted Operating Profit Margin | 22.7% | 22.2% | +50bps | +160bps | | Diluted EPS | 7.9p | 7.4p | +6.8% | N/A | | Adjusted Diluted EPS | 9.0p | 8.5p | +5.9% | N/A | | Free Cash Flow | £831m | £369m | +£462m | N/A | - Market share performance was strong, with 69% of the business gaining or maintaining market share during the period[2] - Net debt was reduced to £8,415m, resulting in a net debt to adjusted EBITDA ratio of 2.9x, down from 3.0x at the end of FY 2023[2][15] FY2024 Outlook and Medium-Term Guidance Haleon upgraded FY2024 organic operating profit growth to High-single digit, reaffirming 4-6% organic revenue growth Updated FY2024 Guidance | Metric | FY2024 Expectation | | :--- | :--- | | Organic Revenue Growth | 4-6% | | Organic Operating Profit Growth | High-single digit | | Net Interest Expense | c.£320m | | Adjusted Effective Tax Rate | 24-25% | - The net impact of M&A (including disposals of Lamisil, ChapStick, and the NRT business outside the US) is expected to dilute FY 2024 revenue by approximately 1.5% and adjusted operating profit by about 4%[9] - The company remains confident in its medium-term guidance of 4-6% annual organic revenue growth, with organic operating profit growing ahead of revenue[9] Strategic and Corporate Developments Haleon is transforming into an agile organization through productivity programs and strategic portfolio management, while maintaining disciplined capital allocation and managing foreign exchange impacts Evolution into an Agile Organisation Haleon is transforming into an agile organization through a £300m productivity program and strategic portfolio management - The 3-year, £300m productivity program is on track to deliver annualized gross cost savings, with about one-third expected in FY 2024[13] - Announced the sale of its NRT portfolio outside the US to Dr. Reddy's for approximately £500m in cash proceeds, a business which generated £217m in net revenue in FY 2023[11] - The joint venture agreement for the 'Tianjin SmithKline and French' (TSKF) OTC business in China has been extended to June 2025, providing operational continuity while discussions continue[12] Capital Allocation and Shareholder Returns Haleon maintained disciplined capital allocation, reducing debt, repurchasing shares, and increasing its interim dividend by 11% - A £500m share buyback program for 2024 is underway, with c.£315m completed in Q1 and a further c.£185m remaining[14][16] - The Board declared an interim dividend of 2.0 pence per ordinary share, an 11% increase compared to the 2023 interim dividend[17] - The company repaid its $700m bond due in March 2024 and is progressing towards its medium-term leverage target of around 2.5x net debt/adjusted EBITDA[14][15] Foreign Exchange Haleon anticipates a negative foreign exchange impact for FY2024, estimated at 2.5% on revenue and 3.0% on adjusted operating profit Estimated FY2024 Foreign Exchange Impact | Metric | Estimated Unfavourable Impact | | :--- | :--- | | Revenue | c. (2.5)% | | Adjusted Operating Profit | c. (3.0)% | Business Review The business review highlights strong category performance, increased marketing investment, ongoing productivity initiatives, and advancements in responsible business practices Performance by Product Category H1 2024 saw strong organic growth in Oral Health and VMS, offsetting declines in Pain Relief and Respiratory Health H1 2024 Revenue by Product Category | Category | Revenue (£m) | Reported Change (%) | Organic Change (%) | | :--- | :--- | :--- | :--- | | Oral Health | 1,683 | 5.9% | 9.9% | | VMS | 857 | 5.0% | 9.2% | | Pain Relief | 1,303 | (7.3)% | (4.4)% | | Respiratory Health | 788 | (6.1)% | (2.3)% | | Digestive Health and Other | 1,063 | (2.4)% | 4.9% | | Group Revenue | 5,694 | (0.8)% | 3.5% | Oral Health Oral Health delivered strong 9.9% organic growth, driven by market share gains and successful innovations like Sensodyne Clinical White - The launch of Sensodyne Clinical White, scientifically proven to whiten teeth by two shades, has seen strong consumer uptake in markets including the US and UK[31] Vitamins, Minerals and Supplements (VMS) VMS grew 9.2% organically, led by double-digit growth in Centrum and Caltrate, supported by marketing and new product launches - Centrum grew double-digit, benefiting from a global Masterbrand campaign and activation of cognitive health claims from a clinical study[33] Pain Relief and Respiratory Health Pain Relief and Respiratory Health organic revenues declined due to challenging prior-year comparisons from strong H1 2023 demand - Pain Relief performance reflected tough comparatives for Fenbid in China and Advil in Canada from H1 2023[37] - Respiratory Health was impacted by lapping strong cold and flu comparatives and significantly elevated Contac demand in China in Q1 2023[40] Marketing and Channel Penetration Haleon increased A&P spend to 19.5% of revenues, supporting market share gains and driving 21% e-commerce growth - A&P spend increased to 19.5% of revenues (H1 2023: 18.4%), focusing on key growth areas like Oral Health and VMS[44] - E-commerce revenue grew 21% to 11% of total sales, with the US and China markets growing 19% and 25% respectively[46] Execution and Financial Discipline Haleon is executing a c.£300m productivity program, expanding gross profit margin, and actively managing its portfolio - The productivity program is expected to deliver c.£300m in annualized gross cost savings, with approximately one-third realized in FY 2024[48] - Adjusted gross profit margin increased 170bps at constant currency to 63.8%, driven by pricing, lower cost inflation, and efficiency initiatives[50] - Progress continues on commercializing the first FDA-approved topical erectile dysfunction (ED) treatment for OTC use in the US, with an expected market launch before the end of 2024[54] Responsible Business Haleon advances its responsible business strategy, focusing on health inclusivity and environmental impact reduction - The company aims to reduce Scope 3 carbon emissions by 42% by 2030 and is engaging suppliers through its Sustainability Supply Chain Programme Pledge[56] - On track to make all product packaging recycle-ready by 2025 and reduce virgin petroleum-based plastic use by a one-third by 2030[57][58] - The company aims to empower 50 million people a year to be included in opportunities for better everyday health by 2025 through various brand and community initiatives[60] Geographical Segment Performance Geographical performance shows strong growth in EMEA and LatAm, with APAC overcoming tough comparatives, while North America faced declines due to specific market factors Geographical Performance Overview EMEA and LatAm led with 7.9% organic growth, APAC grew 3.5%, while North America saw a 1.3% organic decline H1 2024 Revenue Performance by Geography | Region | Revenue (£m) | Reported Change (%) | Organic Change (%) | Price (%) | Vol/Mix (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | North America | 1,956 | (4.4)% | (1.3)% | 3.2% | (4.5)% | | EMEA and LatAm | 2,417 | 4.0% | 7.9% | 6.4% | 1.5% | | APAC | 1,321 | (3.5)% | 3.5% | 2.2% | 1.3% | | Group | 5,694 | (0.8)% | 3.5% | 4.3% | (0.8)% | H1 2024 Adjusted Operating Profit by Geography | Region | Adjusted OP (£m) | YoY Change (%) | YoY Organic Change (%) | | :--- | :--- | :--- | :--- | | North America | 416 | (11.7)% | (7.6)% | | EMEA and LatAm | 627 | 15.7% | 24.1% | | APAC | 306 | (3.8)% | 9.0% | North America North America revenue declined 1.3% organically due to tough comparatives and reduced shipments, despite strong consumer consumption - Volume/mix decline was partly driven by reduced shipments of Respiratory Health products containing Phenylephrine ahead of product reformulations, which is expected to reverse in H2[70] - Despite shipment declines, underlying consumption of Haleon products in the US was strong, up mid-single-digit, indicating continued market share gains[70] EMEA and LatAm EMEA and LatAm delivered robust 7.9% organic revenue growth, with broad-based performance and 24.1% organic operating profit growth - Oral Health saw double-digit organic growth, with Sensodyne, parodontax, and Polident all growing at a double-digit pace[70] - Adjusted operating profit margin expanded by 340bps on an organic basis, reflecting strong pricing, operational efficiencies, and lower freight costs[70] APAC The APAC region achieved 3.5% organic revenue growth, overcoming tough prior-year comparatives, with strong performance in India - Revenue was impacted by high comparatives from Fenbid (Pain Relief) and Contac (Respiratory) in China during H1 2023 following the lifting of COVID-19 restrictions[71] - Geographically, India was a standout performer with double-digit growth, underpinned by strength in Sensodyne[71] Financial Performance Review Financial performance review indicates stable revenue with improved profitability, supported by disciplined debt management and a strong capital structure Income Statement Analysis Haleon's H1 2024 income statement shows stable revenue, expanded gross margin, and 1.7% adjusted operating profit growth H1 2024 Income Statement Summary | Metric | H1 2024 (£m) | H1 2023 (£m) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 5,694 | 5,738 | (0.8) | | Gross Profit | 3,548 | 3,550 | (0.1) | | Operating Profit | 1,151 | 1,141 | 0.9 | | Adjusted Operating Profit | 1,293 | 1,271 | 1.7 | | Profit After Tax (Shareholders) | 726 | 687 | 5.7 | - Adjusted gross margin improved by 150bps to 63.8%, driven by pricing, supply chain efficiencies, and lower freight and commodity costs[75][76] - Adjusting items within operating profit totaled £142m, primarily related to £132m in restructuring costs from the company's productivity program[79] Net Debt and Capital Structure Haleon's net debt reduced to £8,415m as of June 30, 2024, maintaining investment-grade credit ratings Net Debt Composition | Component (£m) | 30 June 2024 | 31 December 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | 531 | 1,044 | | Total Borrowings | (8,858) | (9,456) | | Derivative financial instruments (net) | (88) | (102) | | Net Debt | (8,415) | (8,514) | - The next major debt maturity is a $1,750m bond due in March 2025[84] Condensed Consolidated Financial Statements (Unaudited) The unaudited condensed financial statements provide a detailed overview of the Group's financial position, performance, and cash flows, supplemented by comprehensive explanatory notes Financial Statements Overview The unaudited condensed financial statements for H1 2024 show £754m profit after tax and increased operating cash flow - The Condensed Consolidated Income Statement shows revenue of £5,694m and profit after tax for the period of £754m[100] - The Condensed Consolidated Balance Sheet reports total assets of £33,396m and total equity of £16,707m as of June 30, 2024[103] - The Condensed Consolidated Cash Flow Statement indicates a net cash inflow from operating activities of £842m, a notable increase from £749m in the prior year period[105] Notes to the Financial Statements The notes provide context to the financial statements, detailing accounting policies and significant divestments - Effective January 1, 2024, the Group applied IAS 29 'Financial Reporting in Hyperinflationary Economies' to its entities in Argentina and Turkey[113] - The disposal of the ChapStick brand was completed on May 31, 2024, for cash consideration of £324m ($410m) and a passive minority interest valued at £81m[147] - On June 26, 2024, the Group entered a binding agreement to sell its nicotine replacement therapy business outside the US for a total consideration of £500m[148] Appendix The appendix clarifies the definitions and reconciliations of non-IFRS financial measures used to provide a clearer understanding of the Group's underlying performance Use of Non-IFRS Measures This section defines non-IFRS measures like Adjusted Results and Organic Growth, providing complementary information and transparency - Adjusted Results exclude items like net amortization and impairment of intangible assets, restructuring costs, transaction-related costs, and separation costs to better reflect underlying business performance[158] - Organic growth measures further exclude the impact of divestments, acquisitions, and foreign currency exchange movements to provide a consistent year-on-year comparison of revenue and operating profit[170] - Free cash flow is defined as net cash from operating activities adjusted for capital expenditures, asset sales, interest, and distributions to non-controlling interests, representing funds available for dividends, debt repayment, or strategic initiatives[181][182]