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Reckitt Benckiser CFO says pricing pressures will extend into 2019

Reckitt Benckiser Group PLC, maker of Finish dishwashing tablets and Lysol disinfectant, will face pricing pressures into 2019, its CFO said on Feb. 19, as the the health and hygiene company's shares tumbled following its fourth-quarter report.

In a conference call with analysts following the announcement of full-year 2017 earnings, Adrian Hennah said big players like Reckitt Benckiser were under "huge pressure" due to rising commodity prices and from structural changes in the retail industry as consumers make more purchases online.

Consumer goods giant Procter & Gamble Co. on Jan. 23 reported that prices for its products fell during the October to December quarter in 2017.

"I don't see this [pricing pressure] as a long-term dynamic," Hennah said, although he predicted it would extend into 2019.

The biggest impact for Reckitt Benckiser was at the "household end of the spectrum," he added. Reckitt Benckiser, whose portfolio includes Cillit Bang surface cleaners and Vanish stain removers, reported that like-for-like growth in home products declined 3% in the fourth quarter of 2017 and for the full year.

Hennah said that volume had been consistent. "When you take that long-term view, it does seem like a fairly intense but short-term adjustment," he said.

Reckitt Benckiser, in its earnings statement, said it was targeting total revenue growth of 13% to 14% in 2018, implying like-for-like growth of 2% to 3%. In lunchtime trading in London, the company's shares were down 358.20 pence, or 5.5%, at 6,209.80 pence.

Rivals have articulated similar headwinds. Kimberly-Clark Corp., the maker of Huggies diapers and Kleenex facial tissue, on Jan. 23 forecast 2018 net sales growth of 1% to 2%, with organic sales increase of about 1%.

Rakesh Kapoor, CEO of Reckitt Benckiser, said the markets in which the company competed were growing at about 2% annually. "We expect to grow more or less in line with that market," he said.

The company, based in Slough, England, announced Oct. 18, 2017, a plan to create two focused units, RB Health and RB Hygiene Home, to provide a "platform for growth." RB Health comprises the infant formula and child nutrition businesses and brands such as Strepsils formulated throat lozenges and over-the-counter heartburn and indigestion medicine Gaviscon. RB Hygiene Health contains brands such as Harpic toilet care products and Air Wick air fresheners. The new structure came into effect Jan. 1, 2018.

Reckitt Benckiser said in its statement that revenue returned to growth in the fourth quarter of 2017, albeit at a slower rate than expected.

In the fourth quarter ended Dec. 31, 2017, revenue increased 2% year over year on a like-for-like basis at constant exchange rates to £3.29 billion. The S&P Capital IQ mean consensus estimates had forecast fourth-quarter revenue of £3.36 billion and like-for-like growth of 2.5%, with three analysts reporting.

For the year ended Dec. 31, 2017, Reckitt Benckiser posted flat growth in like-for-like net revenue of £11.51 billion.

Adjusted diluted earnings per share for 2017 increased to 324.6 pence from 302 pence in 2016. A mean consensus of analysts' estimates compiled by S&P Capital IQ had forecast adjusted diluted EPS at 325 pence.

Net income for 2017 ballooned to £6.17 billion from £1.83 billion in 2016, swelled by £3.02 billion from the sale of the food business and a £1.42 billion credit from U.S. tax reform. These gains were partially offset by a charge of £296 million related to an ongoing investigation by the U.S. Department of Justice into matters concerning its pharmaceuticals business prior to its demerger in 2014.

Adjusted net income rose 7%, or 1% at constant exchange rates, to £2.31 billion.

Reckitt Benckiser raised its target for synergies from the $17.9 billion acquisition in June 2017 of Mead Johnson Nutrition to about $300 million over three years from a previous forecast of $250 million. It said it expected Mead Johnson to help arrest its decline in adjusted operating margin, which shrank by 70 basis points to 27.1% in 2017.

"In aggregate, 2017 was an 'annus horribilis' for RB," analysts at Bernstein Research wrote in a Feb. 19 research note.