Haleon plc(HLN) - 2023 Q2 - Quarterly Report

Financial Highlights and Outlook H1 2023 Performance Summary Haleon reported strong growth in H1 2023, with a 10.6% increase in reported revenue to £5,738m and 10.4% organic growth, primarily driven by price increases. Operating profit saw a significant rise of 26.8% to £1,141m. The company also made strong progress on its deleveraging commitment, reducing net debt to 3.4x last 12 months adjusted EBITDA H1 2023 Financial Results Summary | Reported results | | | Adjusted results | | | | --- | --- | --- | --- | --- | --- | | Six months ended 30 June | 2023 | vs 2022 | | 2023 | vs 2022 | | Revenue | £5,738m | 10.6% | Organic revenue growth | | 10.4% | | Operating profit | £1,141m | 26.8% | Adjusted operating profit | £1,271m | 8.9%⁵ | | Operating profit margin | 19.9% | 260 bps | Adjusted operating profit margin | 22.2% | (40)bps⁵ | | Diluted earnings per share | 7.4p | 32.1% | Adjusted diluted earnings per share | 8.5p | (8.3)%⁵ | | Net cash flow from operating activities | £749m | £69m | Free cash flow | £369m | £(184)m | - H1 organic revenue growth of 10.4% was composed of a 7.5% increase from price and a 2.9% increase from volume/mix[3] - The company is executing on its deleveraging commitment, with net debt at 30 June 2023 representing 3.4x last 12 months net debt/adjusted EBITDA[3] - Haleon agreed to dispose of Lamisil for an aggregate consideration of £235m, with total expected cash realization of around £250m. Completion is expected in Q4[3] FY2023 Outlook and Dividend The company has raised its full-year 2023 guidance, now expecting 7-8% organic revenue growth and 9-11% constant currency adjusted operating profit growth. An interim dividend of 1.8 pence per ordinary share has been declared. A negative impact from foreign exchange is anticipated for the full year based on spot rates at June 30, 2023 Updated FY2023 Guidance | Metric | FY 2023 Expected | Previous Guidance (Q1 2023) | | :--- | :--- | :--- | | Organic revenue growth | 7-8% | Towards the upper end of 4-6% | | Adjusted operating profit growth | 9-11% constant currency | Not specified in this text | | Net interest expense | c.£350m | Not specified in this text | | Adjusted effective tax rate | 23-24% | Not specified in this text | - The Board has declared an H1 2023 interim dividend of 1.8 pence per ordinary share, expected to be paid on October 5, 2023[5][6] - Based on spot rates at June 30, 2023, translational foreign exchange is expected to have a negative impact of c.4% on revenue and c.6.5% on Adjusted operating profit for the full year[7] Business and Operational Review Guiding Strategy and Strategic Pillars Haleon's strategy focuses on outperformance through its portfolio of category-leading brands, aiming for 4-6% annual organic sales growth and sustainable moderate adjusted operating margin expansion in the medium term. The strategy delivered strong performance in H1 2023, with 10.4% organic growth and 55% of the business gaining or maintaining market share - The company's medium-term goal is to drive 4-6% annual organic sales growth and sustainable moderate adjusted operating margin expansion at constant currency[15] - In H1 2023, Haleon's strategy resulted in 10.6% reported revenue growth and 10.4% organic growth[16] - Year-to-date (May 2023), 55% of Haleon's business gained or maintained market share, with improved momentum in recent months[17] Performance by Product Category (Business Review) Growth was broad-based across most categories, driven by innovation and brand building. Oral Health grew 10.8% organically, led by Sensodyne and parodontax. Pain Relief was up 12.9%, boosted by Fenbid in China. Respiratory Health surged 22.0% due to a strong cold and flu season. VMS was the exception, with a slight organic decline of 0.5% due to tough prior-year comparatives and changing consumer behavior post-COVID - Oral Health: Revenue grew 10.8% organically, driven by strong performance and share gains from Power Brands Sensodyne, parodontax, and Polident. Innovation, such as Sensodyne Pronamel Active Shield, contributed to growth[18] - Vitamins, Minerals and Supplements (VMS): Revenue declined 0.5% organically due to tough comparatives and reduced consumer concern about COVID-19, particularly impacting the immunity subcategory in the US. Centrum saw low single-digit growth overall[19] - Pain Relief: Revenue increased 12.9% organically, with standout performance from Fenbid in China following the end of COVID-19 lockdowns. Panadol also delivered high single-digit growth[22][23] - Respiratory Health: Revenue grew 22.0% organically, largely driven by a strong cold and flu season in Q1 and significant growth of Contac in China after lockdowns ended[27] - Digestive Health and Other: Revenue increased 7.7% organically, with broad-based growth across Digestive Health, Skin Health, and Smoking Cessation subcategories[30] Execution and Financial Discipline The company managed to largely offset inflationary cost pressures through pricing and other initiatives, though adjusted gross profit margin declined by 70bps at constant currency. A cost-saving program is underway, expected to deliver c.£300 million in gross savings over three years. The disposal of Lamisil for £235 million will support deleveraging efforts, with the company confident of reaching below 3x net debt/Adjusted EBITDA during 2024 - E-commerce represented 9% of Haleon's sales year to date, with double-digit growth in China[37] - Adjusted gross profit margin declined 70bps at constant currency, as pricing and other initiatives were not enough to fully offset cost inflation and transactional foreign exchange losses[39] - A program to increase agility and productivity is expected to result in annualised gross cost savings of c. £300 million over the next three years, with benefits largely expected in FY 2024 and FY 2025[42] - The disposal of Lamisil is expected to generate around £250 million in cash, which will be used to pay down debt, underpinning confidence to de-lever to below 3x net debt/Adjusted EBITDA during 2024[43] Responsible Business Initiatives Haleon is advancing its responsible business strategy, focusing on environmental sustainability and health inclusivity. Key environmental goals include reducing Scope 3 carbon emissions by 42% by 2030 and making all product packaging recycle-ready by 2025. The company is ahead of schedule on its rollout of recycle-ready toothpaste tubes. Health inclusivity initiatives, such as the Panadol Pain Phone in Indonesia, aim to empower 50 million people a year by 2025 - The company aims to reduce Scope 3 carbon emissions by 42% by 2030 (from a 2020 baseline) and make all product packaging recycle-ready by 2025[48][50] - Haleon expects to have launched around 1 billion recycle-ready toothpaste tubes by the end of 2023, two years ahead of its 2025 plan[50] - The company has a goal to empower 50 million people a year to be more included in opportunities for better everyday health by 2025[51] Detailed Operational and Financial Performance Operational Review by Product Category This section provides a detailed revenue breakdown by product category for H1 2023. Oral Health revenue reached £1,589m (+10.8% organic), Pain Relief was £1,405m (+12.9% organic), and Respiratory Health was £839m (+22.0% organic). VMS revenue was flat at £816m (-0.5% organic), while Digestive Health and Other grew to £1,089m (+7.7% organic) Revenue by Product Category (H1 2023 vs H1 2022) | | Revenue (£m) | | Revenue change (%) | | | :--- | :--- | :--- | :--- | :--- | | | 2023 | 2022 | Reported | Organic | | Oral Health | 1,589 | 1,438 | 10.5 % | 10.8 % | | VMS | 816 | 816 | — | (0.5)% | | Pain Relief | 1,405 | 1,248 | 12.6 % | 12.9 % | | Respiratory Health | 839 | 683 | 22.8 % | 22.0 % | | Digestive Health and Other | 1,089 | 1,003 | 8.6 % | 7.7 % | | Group revenue | 5,738 | 5,188 | 10.6 % | 10.4 % | - Oral Health's 10.8% organic growth was driven by double-digit growth in all three Power Brands: Sensodyne, Parodontax, and Denture Care (Polident)[57] - Pain Relief's 12.9% organic growth was largely driven by very strong growth from Fenbid in China following the end of lockdowns[59] - Respiratory Health's 22.0% organic growth was due to a strong cold and flu season in Q1 and Contac sales in China almost doubling[60] Operational Review by Geographical Segment EMEA and LatAm was the fastest-growing region with 14.9% organic growth, driven by strong pricing (13.3%). APAC grew 11.6% organically, fueled by strong volume/mix (9.3%), particularly in China. North America saw more modest organic growth of 4.7%, derived entirely from price increases, with flat volume/mix Revenue by Geographical Segment (H1 2023 vs H1 2022) | | Revenue (£m) | | Revenue change (%) | | | | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | | 2023 | 2022 | Reported | Organic | Price | Vol/Mix | | North America | 2,046 | 1,873 | 9.2 % | 4.7 % | 4.7 % | — % | | EMEA and LatAm | 2,323 | 2,069 | 12.3 % | 14.9 % | 13.3 % | 1.6 % | | APAC | 1,369 | 1,246 | 9.9 % | 11.6 % | 2.3 % | 9.3 % | | Group | 5,738 | 5,188 | 10.6 % | 10.4 % | 7.5 % | 2.9 % | Adjusted Operating Profit by Geographical Segment (H1 2023 vs H1 2022) | | Adjusted operating profit (£m) | | YoY change | YoY constant currency | | :--- | :--- | :--- | :--- | :--- | | | 2023 | 2022 | 2023 | 2023 | | North America | 471 | 454 | 3.7 % | (2.0)% | | EMEA and LatAm | 542 | 467 | 16.1 % | 17.6 % | | APAC | 318 | 300 | 6.0 % | 9.7 % | | Corporate and other unallocated | (60) | (30) | 100.0 % | (13.3) % | | Group Adjusted operating profit | 1,271 | 1,191 | 6.7 % | 8.9 % | - North America's adjusted operating profit margin declined by 150bps at constant currency, driven by cost inflation and costs to meet demand volatility, partially offset by pricing[70] - APAC performance was particularly strong in China, with double-digit growth reflecting strong demand for Pain Relief and Respiratory Health products following the easing of COVID-19 restrictions[72] Summary of Financial Performance For H1 2023, total revenue grew 10.6% to £5,738m and operating profit increased significantly by 26.8% to £1,141m. However, due to higher net finance costs from annualized interest and a higher adjusted tax rate, adjusted profit after tax declined by 10.4% to £791m. This resulted in an adjusted diluted EPS of 8.5p, down 11.5% from the prior year Income Statement Summary (H1 2023 vs H1 2022) | Six months ended 30 June | 2023 (£m) | 2022 (£m) | % change | | :--- | :--- | :--- | :--- | | Total revenue | 5,738 | 5,188 | 10.6 | | Operating profit | 1,141 | 900 | 26.8 | | Adjusted operating profit | 1,271 | 1,191 | 6.7 | | Profit after tax attributed to shareholders | 687 | 517 | 32.9 | | Adjusted profit after tax attributed to shareholders | 791 | 883 | (10.4) | | Diluted earnings per share (p) | 7.4 | 5.6 | 32.1 | | Adjusted diluted earnings per share (p) | 8.5 | 9.6 | (11.5) | - Adjusted gross margin declined, largely driven by transactional foreign exchange losses, which offset benefits from pricing and manufacturing efficiencies[76] - Adjusting items within operating profit totaled £130m, primarily consisting of Separation and Admission Costs (£60m), restructuring costs (£30m), and amortization (£23m)[78] - The decline in Adjusted profit after tax was largely driven by the annualisation of interest costs and a higher adjusted effective tax rate (23% vs 21% in H1 2022), which more than offset growth in Adjusted operating profit[82][83] Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Income Statement For the six months ended June 30, 2023, the Group's revenue was £5,738m, an increase from £5,188m in the prior-year period. Operating profit rose to £1,141m from £900m. After accounting for net finance costs and income tax, the profit after tax for the period was £730m, resulting in a diluted EPS of 7.4p Condensed Consolidated Income Statement | For the six months ended 30 June | 2023 (£m) | 2022 (£m) | | :--- | :--- | :--- | | Revenue | 5,738 | 5,188 | | Gross profit | 3,550 | 3,211 | | Operating profit | 1,141 | 900 | | Profit before tax | 960 | 864 | | Profit after tax for the period | 730 | 544 | | Profit attributable to shareholders of the Group | 687 | 517 | | Diluted earnings per share (pence) | 7.4 | 5.6 | Condensed Consolidated Statement of Comprehensive Income Total comprehensive income for H1 2023 was £338m, a significant decrease from £1,483m in H1 2022. This was primarily due to a large negative exchange movement on overseas net assets of £(385)m, which contrasted with a positive £690m movement in the prior-year period Condensed Consolidated Statement of Comprehensive Income | For the six months ended 30 June | 2023 (£m) | 2022 (£m) | | :--- | :--- | :--- | | Profit after tax for the period | 730 | 544 | | Other comprehensive (expenses)/income net of tax | (392) | 939 | | Total comprehensive income net of tax for the period | 338 | 1,483 | Condensed Consolidated Balance Sheet As of June 30, 2023, total assets were £34,164m, slightly down from £34,815m at year-end 2022. Total liabilities decreased to £17,597m from £18,358m, driven by a reduction in long-term borrowings. Net assets stood at £16,567m Condensed Consolidated Balance Sheet | As at | 30 June 2023 (£m) | 31 December 2022 (£m) | | :--- | :--- | :--- | | Total non-current assets | 29,962 | 30,756 | | Total current assets | 4,202 | 4,059 | | Total assets | 34,164 | 34,815 | | Total current liabilities | (4,987) | (4,370) | | Total non-current liabilities | (12,610) | (13,988) | | Total liabilities | (17,597) | (18,358) | | Net assets | 16,567 | 16,457 | | Total equity | 16,567 | 16,457 | Condensed Consolidated Statement of Changes in Equity Total equity increased slightly to £16,567m at June 30, 2023, from £16,457m at the start of the year. The increase was primarily driven by profit for the period (£730m), which was partially offset by other comprehensive expenses (£392m) and dividends paid to equity shareholders (£222m) Movement in Total Equity (H1 2023) | | £m | | :--- | :--- | | At 1 January 2023 | 16,457 | | Profit after tax | 730 | | Other comprehensive (expenses)/income | (392) | | Dividends to equity shareholders | (222) | | Other movements | (6) | | At 30 June 2023 | 16,567 | Condensed Consolidated Cash Flow Statement Net cash inflow from operating activities was strong at £749m for H1 2023, an increase from £680m in H1 2022. Net cash outflow from investing activities was £188m. Financing activities resulted in a net outflow of £678m, largely due to dividend payments (£222m), interest paid (£220m), and net repayment of borrowings. Overall, cash and cash equivalents decreased by £117m during the period Condensed Consolidated Cash Flow Statement Summary | For the six months ended 30 June | 2023 (£m) | 2022 (£m) | | :--- | :--- | :--- | | Net cash inflow from operating activities | 749 | 680 | | Net cash outflow from investing activities | (188) | (8,587) | | Net cash (outflow)/inflow from financing activities | (678) | 8,546 | | (Decrease)/increase in cash and cash equivalents | (117) | 639 | Notes to the Financial Statements Basis of Preparation and Significant Policies The unaudited interim financial statements for the six months to June 30, 2023, were prepared in accordance with IAS 34 Interim Financial Reporting and UK-adopted IFRS. The accounting policies are consistent with the 2022 annual financial statements. The directors have reviewed forecasts and have adopted the going concern basis of accounting - The interim financial statements are prepared in accordance with IAS 34 and UK IFRS, and should be read in conjunction with the 2022 annual financial statements[94] - The Directors have adopted the going concern basis of accounting, believing the Group will generate sufficient cash for at least 12 months, supported by £461m in cash and undrawn credit facilities of $1.4bn and £1bn[101] - The Group is evaluating the future impact of the OECD Pillar Two income tax legislation, which was substantively enacted in the UK in June 2023[104] Revenue and Segment Information The Group is organized into three geographical reportable segments: North America, EMEA and LatAm, and Asia Pacific (APAC). The Chief Operating Decision Maker (CODM) assesses performance using Adjusted Operating Profit. For H1 2023, EMEA and LatAm was the largest segment by revenue (£2,323m) and adjusted operating profit (£542m) H1 2023 Revenue and Adjusted Operating Profit by Segment | Segment | Revenue (£m) | Adjusted Operating Profit (£m) | | :--- | :--- | :--- | | North America | 2,046 | 471 | | EMEA and LatAm | 2,323 | 542 | | APAC | 1,369 | 318 | | Corporate and other unallocated | - | (60) | | Total | 5,738 | 1,271 | - The reconciling items between IFRS operating profit (£1,141m) and Adjusted operating profit (£1,271m) total £130m, primarily consisting of separation costs (£60m), restructuring costs (£30m), and net amortization/impairment (£23m)[109][110] Dividends and Earnings Per Share A final dividend for the year ended Dec 31, 2022, of 2.4 pence per share (totaling £222m) was paid in H1 2023. An interim dividend for H1 2023 of 1.8p per share has been declared for payment in October 2023. Basic and diluted EPS for H1 2023 were both 7.4p, based on a profit of £687m attributable to shareholders - The final 2022 dividend of 2.4p per share (£222m) was paid during the period[119] - An interim dividend of 1.8 pence per share has been declared by the Board, to be paid on October 5, 2023[120] H1 2023 Earnings Per Share Calculation | | Six months ended 30 June 2023 | | :--- | :--- | | Profit after tax attributable to equity shareholders (£m) | 687 | | Basic weighted average number of shares (million) | 9,234 | | Dilutive weighted average number of shares (million) | 9,264 | | Basic earnings per share (pence) | 7.4 | | Diluted earnings per share (pence) | 7.4 | Financial Instruments and Borrowings As of June 30, 2023, the Group's total borrowings stood at £9,865m, a decrease from £10,440m at year-end 2022. This includes £9,191m in bonds. During the period, the Group redeemed $300m of notes. The company maintains undrawn committed credit facilities of £1,000m and $1,400m Composition of Borrowings as at 30 June 2023 | | Current (£m) | Non-current (£m) | Total (£m) | | :--- | :--- | :--- | :--- | | Commercial paper | (463) | — | (463) | | Loan and overdrafts | (40) | — | (40) | | Lease liabilities | (41) | (105) | (146) | | Non-voting preference shares | — | (25) | (25) | | Bonds | (553) | (8,638) | (9,191) | | Total | (1,097) | (8,768) | (9,865) | - On March 2, 2023, the Group exercised its option to redeem at par the $300m of Callable Floating Rate Senior Notes due 2024[131] - The Group has undrawn credit facilities of £1,000m (maturing Sept 2025) and $1,400m (maturing Sept 2023)[133] Contingent Liabilities, Acquisitions, and Post Balance Sheet Events There were no significant changes in legal proceedings during the period. The Group completed the acquisition of the Jacarepaguá (Brazil) manufacturing site from GSK for £69m. Subsequent to the balance sheet date, on July 13, 2023, the Group agreed to dispose of the rights to Lamisil for cash consideration of £235m, with completion expected in Q4 2023 - There have been no significant changes in respect of legal proceedings for the period ended 30 June 2023[140] - On April 28, 2023, the Group acquired a manufacturing site in Brazil from GSK for £69m[141] - Post balance sheet event: On July 13, 2023, the Group agreed to dispose of the rights in Lamisil for cash consideration of £235m, expected to complete in Q4 2023[143] Appendix Use of Non-IFRS Measures This section defines the non-IFRS measures used by management, such as Adjusted Results, Organic Revenue Growth, Adjusted EBITDA, and Free Cash Flow. It provides detailed reconciliations from IFRS-reported figures to these adjusted measures. Management believes these measures provide useful complementary information by excluding items like amortization, restructuring, and separation costs to enhance comparability of the Group's underlying financial performance from period to period Reconciliation of IFRS to Adjusted Results (H1 2023) | 2023 (£m) | IFRS Results | Adjusting Items | Adjusted Results | | :--- | :--- | :--- | :--- | | Gross profit | 3,550 | 27 | 3,577 | | Operating profit | 1,141 | 130 | 1,271 | | Profit before tax | 960 | 130 | 1,090 | | Income tax | (230) | (26) | (256) | | Profit after tax for the period | 730 | 104 | 834 | Reconciliation of Profit After Tax to Adjusted EBITDA (H1 2023) | £m | 2023 | | :--- | :--- | | Profit after tax | 730 | | Add Back: Income tax | 230 | | Less: Finance income | (38) | | Add Back: Finance expense | 219 | | Operating profit | 1,141 | | Adjusting items | 130 | | Adjusted operating profit | 1,271 | | Add Back: D&A and Impairment | 135 | | Adjusted EBITDA | 1,406 | Reconciliation to Free Cash Flow (H1 2023) | £m | 2023 | | :--- | :--- | | Net cash inflow from operating activities | 749 | | Less: Net capital expenditure | (133) | | Less: Distributions to non-controlling interests | (43) | | Less: Interest paid | (220) | | Add: Interest received | 16 | | Free cash flow | 369 | Net Debt Calculation | £m | As at 30 June 2023 | As at 31 December 2022 | | :--- | :--- | :--- | | Short-term borrowings | (1,097) | (437) | | Long-term borrowings | (8,768) | (10,003) | | Derivative financial liabilities | (214) | (206) | | Cash and cash equivalents | 490 | 684 | | Derivative financial assets | 64 | 94 | | Net debt | (9,525) | (9,868) |