City snapshot: Reckitt’s first half sales slip amid portfolio transformation

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First half like for like sales fell 1% at FTSE 100 consumer goods firm Reckitt Benckiser (RB) despite its “significant progress on portfolio transformation” during the period.

Net revenues in the six months to 30 June were up 14% at actual exchange rates, but slid 1% on a like for like basis as the weakening of the pound added 12% to growth.

Global infant nutrition company Mead Johnson Nutrition was acquired just before year-end on 15 June and the half month of trading under RB – along with last year’s Hypermarcas acquisition added £140m of sakes during the period taking overall constant currency growth up 2%.

Further to its portfolio transformation, after year-end Reckitt also disposed of its global food business, largely consisting of French’s Mustard, to McCormick for $4.2bn.

Reported operating profits were up 27% to £1bn, but adjusted operating profit

Reported operating profits were up 50% to £1.1bn, representing growth of 27% on a constant currency basis. Profits benefitted from a reduction in one-off charges, which fell from £192m to £127m and were this year mainly related to the Mead Johnson acquisition compared to the charges relating to its South Korean health scandal last year.

On an adjusted basis, operating profits were up 16%, but up just 1% at constant currency.

Adjusted operating margin increased by 30bps to 23.7%

On a regional basis, Europe & North America saw sales decline by 3% on a like-for-like basis, with weakness primarily driven by the underperforming Scholl/Amopé Wet & Dry Express Pedi launch in 2016.

Developing markets grew at 3% on a like for like basis against a backdrop of continued mixed market conditions, with volatility in India though China remained strong, as did parts of Africa.

In the second quarter total net revenues were £2.5bn – a decrease of 2% on a like for like basis.

CEO Rakesh Kapoor said: “In the first half of the year, we have made significant progress on portfolio transformation and becoming a more focused consumer health and hygiene business, with both the acquisition of Mead Johnson Nutrition, and the agreed sale of our food business.

We completed the acquisition of Mead Johnson Nutrition a quarter earlier than expected. Our integration team have done an excellent job in anticipating an earlier close such that we are now targeting accelerated phasing of our cost synergies. The strategic review of our Food division has been completed, culminating in the agreed sale of this high quality business.

From an operational perspective, as expected we had a tough first half, with challenging conditions exacerbated by a sophisticated cyber-attack. Notwithstanding this, the business remains strong and our earnings model intact. We saw broad-based growth across the majority of our consumer health brands.

I expect the RB business to return to growth progressively over the second half of the year. As set out in our statement of 6 July, we are targeting full year net revenue +2% LFL growth for the RB base business. I see this as a challenging target. We are experiencing tough market conditions, and we still have work to do on addressing the full implications of the recent cyber-attack. Operating margin continues to make satisfactory progress and we reiterate our medium-term target of moderate expansion.”

“There is no doubt that despite the operational issues RB is becoming a better, stronger company. The strategic transformation enabled by the recent acquisition of Mead Johnson Nutrition and disposal of Food will position RB well to deliver superior shareholder returns for years to come.”

Morning update

McColl’s Retail Group claims to be “gaining momentum” during the six months to 28 May, with the integration of 298 Co-op convenience stores and strong sales growth.

Total sales jumped 7.6% during the period to £504.8m as the group benefitted from the integration of stores acquired from The Co-op, around two thirds of which were trading at the half-year and all by the end of July.

Like-for-like sales for the year edged up 0.2% in the first half, with like for like sales up 1.4% in the second quarter after being boosted by favourable weather and its evolving mix of growth products.

Like for like sales in recently acquired and newly converted stores were up 2.8% in the half-year period and 3.8% in the second quarter.

Gross margin improved by 90bp to 25.4%, while adjusted EBITDA increased to £16.5m from £16m last year, despite being impacted by £1.3m pre-opening costs relating to the acquisition

Profit before tax dropped from £8.2m to £4.5m after being hit by £2.3m of exceptional costs and £1.3m of pre-opening costs.

Net debt more than doubled to £110.8m from £42.3m, but McColl’s remains “comfortable that this debt profile is in line with previously described expectations”.

CEO Jonathan Miller said: “I am encouraged by the performance we have delivered over the first half of the year as our business has continued to gain momentum. We have traded well in a challenging environment and also benefited from the recent hot weather, which has helped to drive sales in key growth categories including grocery and alcohol.

“We are delighted to have completed the integration of the acquired stores, on time and on budget. We have welcomed over 3,500 new colleagues who have done a great job in supporting customers through the transition, and early trading is in line with our expectations. With all 298 stores now on board, they are expected to make a material contribution to sales and profit in the second half of the year and beyond.

“Our focus remains on enhancing our convenience proposition through growing market share, developing our product ranges and delivering excellent customer service.

“As the wider convenience and wholesale sector evolves and continues to grow, McColl’s is in a strong position to benefit. We remain confident that our standing as a leading neighbourhood retailer will allow us to continue to achieve further progress against our strategy and deliver sustainable returns for shareholders.”

Pork producer Cranswick has updated the market on its trading for the three months to 30 June, with sales 27% ahead of the same period last year.

Like-for-like revenues grew by 21% compared to the same period last year, underpinned by strong domestic volume growth, with all product categories making a positive contribution.

The group added that rising input costs were “partially mitigated” during the period.

During the period, further progress has also been made on its new, purpose-built continental products factory in Bury, Greater Manchester, which will consolidate current production from its two existing facilities and provide substantial additional capacity to support future growth.

Ongoing investment in our pork processing facilities both at Preston near Hull and at the recently acquired Ballymena site in Northern Ireland will also increase pig processing capacity and drive further operating efficiencies.

Net debt stood at £18m at 30 June 2017, some £4m than at the same point last year.

In terms of outlook, Cranswick said its expectations for the current financial year remain unchanged. Its interim results will be announced on 28 November 2017.

Elsewhere this morning, Quorn Foods has announced double-digit first half sales growth along with a £150m investment in its Billingham facility, creating hundreds of jobs in Teesside and North Yorkshire over the next 5 years.

The £150m investment will make the company’s Billingham production facility the largest of its kind in the world, Quorn said.

Quorn Foods achieved 15% growth in the UK market in first six months of this year, with an overall growth rate of 19% globally. It said its sustainable and healthy protein brand is exported globally and claimed it is expected to become a billion dollar brand by 2027.

“We are proud to be contributing to the UK’s export drive and to be investing in a British innovation that is vital to addressing the future need for protein across a growing global population,” said Quorn Foods CEO, Kevin Brennan.

On the markets this morning the FTSE 100 has dropped 0.5% to 7,418pts after the IMF downgraded its growth forecast for the UK and US due to lower than expected economic activity in the first quarter of 2017.

One notable exception to the downward trend is B&M European Value Retail (BME), which is up 4.6% to 356.7p on rumours Asda and its owner Walmart are considering a £4.4bn takeover bid.

Cranswick is also up 2.2% to 2,904p after this morning’s trading update, but Reckitt has dropped 2% to 7,722p. McColl’s has edged down 0.4% to 207.2p after its trading update.

Larger fallers include Premier Foods (PFD), down 3.7% to 39p, PayPoint (PAY), down 2.3% to 861.5p, Glanbia (GLB), down 1.4% to €17.39, Majestic WINE (WINE), down 1% to 326.8p and PZ Cussons (PZC), down 0.9% to 359.3p.

This week in the City

A busy week on the markets this week has already kicked off with a flurry of updates this morning and newsflow is set to remain strong throughout the week.

Next up tomorrow is Fever-Tree’s (FEVR) first half results, with the stellar growth of the drinks mixer brand showing few signs of slowing down.

Tomorrow also brings the monthly market share figures from both Kantar and Nieslen as the supermarkets look to continue the recent trend of multi-year sales growth highs as the industry is boosted by warmer weather and top-line sales are helped by mounting food inflation.

Wednesday brings a trading update from UK brewer and pub operator Marston’s (MARS), while PZ Cussons (PZC) is scheduled for full-year results, there is a trading statement from Compass Group (CPG) and GlaxoSmithKline (GSK) is scheduled to release its first quarter results and possible updates on its disposals of Horlicks and its sports nutrition businesses.

as well as second quarter results from Coca-Cola (KO) in the US.

It’s also a busy week on the other side of the Atlantic, with Wednesday also scheduled to bring trading updates from Coca-Cola (KO) and Amazon-bound grocery Whole Foods Market.

Thursday brings full-year results from grocery FTSE 100 heavyweights Diageo (DGE) and Associated British Food (ABF), while global food giants Nestle (NESN) and Danone (BN) will also issue second quarter earnings updates on Thursday morning.

A busy day also sees first half results from British American Tobacco (BATS), a trading update from TATE & Lyle (TATE), third quarter earnings numbers from Britvic (BVIC) and Greencore (GNC), and first half results from Just Eat (JE).

Internationally, Thursday also brings first half earnings from AB InBev (ABI) and L’Oréal.