Business Review
2007 business highlights: Net revenues grew by 10% (constant) to £5,269m. Adjusted operating profit up 15% (constant) to £1,190m. Over £650m returned to shareholders
This review is extracted from the Business Review which is included in full in the Annual Report and Financial Statements 2007.
Performance of the business in 2007
Net revenues grew by 7% (10% constant) to £5,269m. The extra month of Boots Healthcare International (BHI) in 2007 contributed 1% to this growth rate.
Reported operating profit for the year rose 35% (39% constant) to £1,233m. Reported net income was 39% (43% constant) higher at £938m. Basic EPS was 131.2p; diluted EPS was 127.9p, an increase of 39% on 2006.
Adjusted operating profit increased 12% (15% constant) to £1,190m. Gross margin was 160bps ahead of last year at 58.3% due to the benefit of price increases early in the year, favourable mix and cost optimisation. Marketing investment was substantially higher, with media investment increased by 14% constant to 12.4% of net revenues, 50 bps ahead of 2006. Adjusted operating margins increased by 110bps to 22.6% due to the gross margin expansion somewhat offset by higher marketing investment, and to the BHI synergies which have been achieved ahead of schedule.
The exceptional profit (net, pre-tax) in 2007 was £43m compared to charges in 2006 of £149m. Cumulative synergies from the BHI acquisition of £87m exceeded the increased target of £80m.
Net interest charges were £24m (2006 £36m) reflecting the reduction in debt during the year. The tax rate is 22%, benefiting from the £20m of one-off tax releases in the second quarter of 2007.
Adjusted net income growth was 15% (18% constant). Adjusted, diluted EPS increased by 15% to 123.4p.
With these results, the Company achieved the profit forecast set out on page 32 of the Prospectus issued by Reckitt Benckiser Group plc dated 11 September 2007.
Geographic analysis at constant exchange excluding exceptional items
Europe 54% of net revenues. 2007 net revenues grew by 7% to £2,813m. The extra month of BHI in 2007 contributed 1% to this growth rate while business disposals deducted 1%.
Growth was broad based across all five core categories. Fabric Care grew due to the success of Vanish Oxi Action Multi and Vanish Oxi Action Crystal White, and Calgon Water Softener following increased investment. Surface Care growth benefited from the launch of Cillit Bang Grease & Floor and from growth for Harpic Power Plus and Harpic Max In Toilet Bowl device (ITB) in Lavatory Care. In Automatic Dishwashing, the key drivers were Finish Quantum, Finish All in1 and Finish Turbo Dry. In Home Care, Air Care growth was driven by continuing success for Air Wick Freshmatic. In Health & Personal Care, growth came from the former BHI brands: Nurofen, Strepsils and Clearasil, with all three brands responding to increased marketing investment, and from Depilatories.
Full year operating margins were 60bps ahead of last year at 24.2% due to higher gross margins and BHI synergies, partially offset by higher marketing investment to support new products. This resulted in an 11% increase in adjusted operating profits to £681m.
North America & Australia 28% of net revenues. 2007 net revenues increased 11% to £1,488m. Within this, NAA Household grew 7%, NA Food grew 7% and NAA Pharmaceuticals grew 60%.
Full year growth in Household came particularly from Surface Care, Automatic Dishwashing and Home Care. Surface Care growth was driven by Lysol in NA and by Harpic in ANZ. Automatic Dishwashing increased as a result of the continuing success of Electrasol 3in1 monodose tablets. In Home Care, Air Care growth came from both Air Wick Freshmatic and Air Wick Electrical Oils. In Health & Personal Care, increased net revenues came mainly from strong growth for Nurofen in ANZ behind higher investment.
Pharmaceuticals grew sales of Suboxone very strongly in the USA where the sales organisation has been substantially increased and helped by a regulatory change which allows doctors to take on more patients for this treatment.
Food grew strongly due to the consumer brands of French’s Yellow Mustard, Frank’s Red Hot Sauce and French’s Fried Onions.
Full year operating margins were 130bps higher at 25.5%, mainly due to mix benefit from the high growth of Suboxone plus gross margin expansion and BHI synergies resulting in profits increasing 16% to £379m.
Excluding NAA Pharmaceuticals, operating margins were 20 bps lower at 21.2%.
Developing Markets 18% of net revenues. Net revenues for 2007 grew 15% to £968m with strong growth across all regions of Asia, Latin America and Africa Middle East. The major contributors to growth were Fabric Care, Surface Care, Home Care and Health & Personal Care. In Fabric Care, the growth came from Fabric Treatment, mainly driven by initiatives on Vanish to increase category penetration. In Surface Care, the main drivers were Harpic Power Plus lavatory cleaner, supported by higher investment, and Veja in Brazil. In Home Care, the increase was in both Pest Control and Air Care. Mortein growth came from a number of new initiatives such as Mortein with Dettol, while in Air Care, the key driver was Air Wick Freshmatic. In Health & Personal Care, the Dettol personal care range grew strongly, benefiting from the Herbal range extension and additional investment, while in Healthcare both Strepsils, due to higher investment, and Gaviscon, due to geographical expansion, grew strongly.
Full year operating margins expanded 230bps to 13.4% as adjusted operating profits increased by 43% to £130m.
Category review at constant exchange rates
Fabric Care 2007 net revenues increased 5% to £1,241m. The major drivers were strong continuing growth for Vanish Oxi Action Multi and Vanish Oxi Action Crystal White. Calgon Water Softeners grew as a result of higher marketing investment. Woolite Garment Care benefited from the roll-out of Woolite Colour and from higher investment. Excluding the private label business, where the level of activity was reduced in the year, the branded business grew 8%.
Surface Care Net revenues grew 8% to £951m principally due to the launch of Cillit Bang Grease & Floor, and to strong growth for Lysol in North America and Veja in Brazil. Harpic Lavatory Care net revenues were also stronger due to the success of Harpic Power Plus and Harpic Max.
Dishwashing Net revenues increased 5% to £616m due to the success of Finish Quantum and Finish All in1 in Europe and Electrasol 3in1 tablets in North America.
Home Care Net revenues improved by 16% to £779m. Air Care grew strongly due to the continuing success of Air Wick Freshmatic globally and strong growth for Air Wick Electrical Oils in North America. Pest Control growth benefited from a number of initiatives such as Mortein Lantern, Mortein with Dettol and Mortein Professional Indoor Spray.
Health & Personal Care Net revenues increased 13% to £1,199m. The extra month of BHI in 2007 contributed 5% to this growth rate while business disposals deducted 2%.
Dettol was significantly ahead in Developing Markets due to new personal care products like Dettol Herbal soap and shower gel, and significantly increased marketing investment. Veet benefited from the launch of the new Veet Pump Pack.
Healthcare, including the former business of BHI, contributed strongly to the growth in the year. Net revenues from the former BHI business, led by Nurofen, Strepsils and Clearasil, were £560m compared to £494m in the eleven months of ownership in 2006. Like-for-like growth in the former BHI business was 10%, mainly due to substantial growth for Strepsils, Nurofen and Clearasil.
Pharmaceuticals Full year net revenues were £211m, 42% ahead of 2006, driven by the growth of Suboxone in the USA following a substantial increase in the sales organisation and helped by a regulatory change that allows doctors to take on more patients for this treatment. Operating profit for 2007 was £118m, up 44%.
Food Net revenues grew 7% to £191m with good performance across the consumer portfolio, in particular further growth for French’s Yellow Mustard, French’s Fried Onions and Frank’s Red Hot Sauce. Operating profits increased 10% to £51m, with operating margins improving 140bps to 26.7%.
Financial review
Constant exchange Movements of exchange rates relative to sterling affect actual results as reported. The constant exchange rate basis adjusts comparatives to exclude such movements and shows the underlying growth.
Exceptional items Where appropriate, the term ‘adjusted’ excludes the impact of exceptional items. Exceptional items in 2007 consist of a net gain in respect of business disposals and impairments of £73m and restructuring charges of £30m. Reported results for 2007 therefore include a net exceptional gain of £43m pre-tax compared to a pre-tax charge of £149m in full year 2006.
Net interest Net interest payable was £24m, a 33% decrease on 2006 (£36m) due to strong cash inflow in the period and a reduction in the level of net debt during the year.
Tax The tax rate is 22% (2006 23%), benefiting from a £20m one-off tax release in Q2 (2006 £19m release in Q4).
Net working capital (Inventories, short-term receivables and short-term liabilities excluding borrowings and provisions) improved by £98m to minus £826m compared to the position at the end of 2006, mostly due to further significant reductions in the BHI net working capital.
Cash flow Operating cash flow was £975m (2006 £1,017m) and net cash flow from operations was £861m (2006 £953m). Net interest paid was £6m lower at £24m (2006 £30m) and tax payments increased by £51m to £232m (2006 £181m). Capital expenditure was higher than prior year at £134m (2006 £88m) due to one-off investment in healthcare manufacturing. Proceeds from the disposal of Hermal were £260m.
Net debt at the end of the year was £125m (December 2006 £660m), a reduction of £535m. This reflected net cash flow from operations of £861m, receipts on the disposal of Hermal of £260m, offset by payment of the two dividends (£358m) and share buy backs (£300m).
Balance sheet At the end of 2007, the Group had shareholders’ funds of £2,385m (2006 £1,866m), an increase of 28%. Net debt was £125m (2006 £660m) and total capital employed in the business was £2,510m (2006 £2,526m).
This finances non-current assets of £4,426m (2006 £4,421m) of which £479m (2006 £425m) is tangible fixed assets, the remainder being goodwill, other intangible assets, deferred tax and other receivables. The Company has negative net working capital of £826m (2006 £728m), current provisions of £36m (2006 £47m) and long-term liabilities other than borrowings of £1,054m (2006 £1,120m).
The Company’s financial ratios remain strong. Return on shareholders’ funds (net income divided by total shareholders’ funds) was 39.3% (2006 36.1%) on a reported basis or 37.9% (2006 42.1%) on an adjusted basis.
In October 2007 a Scheme of Arrangement was put in place to create additional distributable reserves whereby Reckitt Benckiser Group plc was introduced as a new parent Company. The consolidated financial statements of Reckitt Benckiser Group plc are presented as if both Reckitt Benckiser plc and Reckitt Benckiser Group plc had always been part of the same Group.
Dividends The Board of Directors recommends a final dividend of 30.0p (2006 25.0p), an increase of 20%, to give a full year dividend of 55.0p (2006 45.5p), an overall increase of 21%. The dividend, if approved by shareholders at the AGM on 1 May 2008, will be paid on 29 May to shareholders on the register at the record date of 29 February. The ex-div date is 27 February and the last date for election for the share alternative to the dividend is 7 May.
Share buy back During 2007, the Company purchased 11.1m shares at a cost of £300m as part of its ongoing share buy back programme. In Q4, the Company purchased 2.4m shares at a cost of £66m. The Company has announced the continuation of its buy back programme with a target spend of £300m in 2008.
Hermal disposal The Company announced on 16 July that it had agreed to dispose of the Hermal prescription skincare business to Laboratorios Almirall S.A. for a consideration of £260m in cash. The disposal was completed on 31 August 2007. Results for Hermal are included in full year as reported up to the date of disposal. The gain on disposal has been reported as an exceptional item in the 2007 income statement.
Adams acquisition The Company completed the acquisition of Adams Respiratory Therapeutics, Inc. on 30 January 2008 for a consideration of $60 per share or approximately $2.3bn (£1.1bn). Results for the Adams business will be included in the Company’s results from the date of acquisition. The Company announced an exceptional charge for 2008 of $60m, or approximately £30m, to cover the necessary reorganisation associated with the integration of Adams into Reckitt Benckiser, to be recorded post completion during 2008.
Company prospects
The Company is targeting for another strong year in 2008 with net revenue growth from continuing operations, excluding Adams, of around 6-7% (continuing operations base £5,220m) and for adjusted (ie. excluding exceptional items) net income growth of 10%, both at constant exchange.
Colin Day Chief Financial Officer
Cautionary note concerning forward-looking statements
This document contains statements with respect to the financial condition, results of operations and business of Reckitt Benckiser and certain of the plans and objectives of the Company with respect to these items. These forward-looking statements are made pursuant to the ‘Safe Harbor’ provisions of the United States Private Securities Litigation Reform Act of 1995. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Company, anticipated cost savings or synergies and the completion of strategic transactions are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors, discussed in this report, that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including many factors outside Reckitt Benckiser’s control. Past performance cannot be relied upon as a guide to future performance.