Reckitt Benckiser Gives Consumer Health Portfolio Its Own Home – What's Next?

UK manufacturer in January begins operating with a separate health care division, representing 60% of sales with products including Mucinex and Mead Johnson infant and adult formulas, and a home care/hygiene division led by Lysol disinfectants. The plan piques analysts' expectations that operating the divisions separately will lead to divesting one.

Reckitt Benckiser Group PLC has added enough products to its consumer health portfolio to form a separate operating division, a move that also potentially positions the unit to be sold or become the firm's only business.

The UK manufacturer and marketer will begin operating in January with a separate health care division, representing 60% of company sales with products including the Mucinex expectorant OTC drug line, Schiff vitamin and dietary supplement brands and the Mead Johnson Nutrition Co. infant and adult nutritionals business, and a home care and hygiene division, with brands including Lysol disinfectants and Vanish fabric stain remover.

CEO Rakesh Kapoor: "We are creating under one RB, two fully accountable, focused business units."

Announced Oct. 18 together with its third-quarter results, RB's plan has analysts' backing and piques expectations that short- or long-term, operating the divisions separately will lead to divesting one.

The "most likely" reason for the restructuring, says Morningstar Equity Research analyst Philip Gorham, is an indication that CEO Rakesh Kapoor's "long-term vision for RB lies in the consumer health business." The change "may be a precursor to the disposal of the home and hygiene assets in the future," Gorham said in a same-day research note.

Credit Suisse analysts as yet don't see one or the other divisions as more likely to be sold, but the restructuring "surely opens the door to separate [stock] listings in the fullness of time," according to their research note.

Petya Left Its Cyber Mark

A June cyberattack that disrupted RB's manufacturing and distribution turned its third-quarter into "a period of misalignment with our sales and operating planning processes," Kapoor said.

The firm estimates the Petya malware-based cyberattack slowed its sales by around 2% in the July-September period. (Also see "RB Says Petya Cyberattack Froze Shipments, Could Cost £100M" - Pink Sheet, 9 Jul, 2017.)

After cutting its full-year guidance from 3% growth to 2% when it disclosed the attack, RB cut it again to flat after reporting total net revenue down 1% to $3.2bn for the quarter.

Consumer health sales were down 2% to £1.6bn ($2.1bn) and home care product sales were off 4% at £482m ($632.4m), while 1% growth in hygiene product revenues to £1.1bn ($1.4bn) slightly offset those slumps RB largely attributed to the Petya cyberattack.

"Restoring some of the manufacturing support systems, especially in the health factories, led to a backlog in a finely balanced supply chain which we have still not fully caught up with," the CEO said.

Another still-unresolved Petya-caused problem is updating its India distributors' core operating systems to include a change in the country's goods and services tax. Without the change, RB products were not reaching India's store shelves in July, "a peak period of restocking" Kapoor said.

"All these, of course, give rise to a loss of shelf space and promotional slots and consequent loss of sales," he added.

Mead Johnson infant and adult nutritionals' sales in China and other Asian countries grew 4% to $477m and Latin American market sales were up 1% to $163m, offsetting a 3% dip in North America and Europe sales to $308m for 1% overall growth to $948m.

At Deutsch Bank Markets Research, analyst Eva Quiroga-Thiele says the time is right for RB to operate the two businesses as separate divisions of the same company, though she didn't offer a prediction on whether one will be sold.

Adding Mead Johnson in a deal that closed during the third quarter "further bolstered RB's position in consumer health" and was "the right trigger" to also move some brands the firm had categorized as hygiene products to the health division, Clearasil acne treatments, Dettol antiseptic washes and Veet hair removal products, Quiroga-Thiele wrote. (Also see "Reckitt Expands 'OTC' Business, China Presence With Mead Johnson" - Pink Sheet, 13 Feb, 2017.)

And the home/hygiene division is made stronger by the hygiene brands that remain there, she said. "Given its more attractive mix … and its stronger [brands] base, we see the Hygiene Home business as a much more attractive asset."

Morningstar also anticipates that RB's consumer division will add more brands and that it's watching whether Pfizer Inc. acts on its consideration of a consumer health asset sale.

"This business would be a natural fit with RB, and we expect the company to be interested," Gorham said.

After increasing its debt to add Mead Johnson, RB probably would need to sell some of its assets to afford potentially acquiring Pfizer's consumer business, valued at around $15bn to $17bn, say Gorham and Societe Generale Cross Asset Research analysts. That asset likely would be the home/hygiene business, they say.

In a same-day note, Societe Generale analysts said "we think any deal would likely have to be part-funded by issuing equity or selling assets (most likely the Home division)."

"We think this restructuring makes it more likely than not that the assets to be jettisoned would be from the hygiene and home portfolios," Gorham wrote.

Plan Extends Only To Two Divisions

While analysts see some sort of business split ahead, Kapoor and other executives said during the earnings briefing that they see only two divisions within one company. Each division is charged with full accountability across its responsibilities for all its brands, from supply to manufacturing, to sales and to marketing.

"We are creating under one RB, two fully accountable, focused business units," said Kapoor in response to one of several queries about potential divestment plans during the briefing. "I think you should not read it in any other way," the CEO added.

RB looks for Nurofen and other OTC drug brands overshadowed by Mucinex in its consumer health portfolio will get a higher profile in a separate division.

The consumer health unit, though, holds not only greater promise as a growth driver, but also more of Kapoor's attention. Kapoor, who will head the consumer health business while remaining CEO, has championed RB's future in consumer health since taking the firm's helm in 2011; he previously detached health in 2012 from the home and hygiene businesses, with each its own category but not separate in operations. (Also see "Reckitt Reorganizes To Develop Health Care, Emerging Markets" - Pink Sheet, 13 Feb, 2012.)

While recognized as "a household cleaning company" until as recently as seven or eight years ago, " now we are not really a household cleaning company," he said.

RB is focused on becoming a global leader in consumer health, but "you could also argue that we have not fully realized our full opportunity there," Kapoor added.

E-Commerce, MJN Sizes On Radar

Making use of opportunities to expand in consumer health depends in part on taking large steps in e-commerce across its brands and in making Mead Johnson products more competitive, particularly in the US.

Kapoor acknowledged that like other large consumer packaged goods firms, RB is behind the curve in digital sales. "In this world, every company needs to think about how it's going to organize for innovating, for performing, for reaching, for delivering against many different channel and consumer segments," he said.

"Part of the mandate for the two business units … is to make sure that we can create innovations that are relevant for these new channels and consumer segments," he added.

RB's health care brands, though, should flourish online because consumers don't look for off-brand or niche products when their health is concerned, he said. "The new cool brand which came out in this new niche channel is not what you're thinking about. All you're thinking about is, 'I'm going to get better'."

Growing Mead Johnson sales might be a less complicated project for RB. Launching additional nutritional products in China and other international markets is one part of the plan.

Mead Johnson's "innovation has not been to the extent that we would have liked to see and we are used to. So we have put together a renewed effort on innovation," the CEO said. The Enfamil infant nutrition brand's Platinum version was launched in Hong Kong during the third quarter, a move "that will give us the confidence of maybe even creating it for China," he said.

Among RB's "very simple but very quick decisions and actions" for the Mead Johnson business is developing a larger product size. "When you look at the whole range of Mead Johnson, they're underrepresented in the large sizes, for reasons that I cannot fully understand, but that is the case," the CEO said.

And with Mead Johnson "materially behind the curve in terms of e-commerce," another quick move for RB is in digital sales. "I personally think this category is ripe for e-commerce. … you know the consumers want it week after week," Kapoor said.

Although growing e-commerce for its OTC drug and supplement brands also is on RB's radar, the firm is confident the products will continue competing for US market share. "We are doing the right thing in terms of how we go to market" in the OTC drug sector, and the supplement business "continues to perform well," Kapoor said.

From the editors of the Tan Sheet.