ii view: Haleon sales underwhelm but guidance maintained

First-quarter trading update to 31 March  

• Organic sales up 3% (Volumes down 2% - Product prices up 5%)
• Revenue down 2.2% to £2.92 billion
• Operating profit up 4.5% to £655 million

Guidance:

• Continues to expect full-year 2024 organic revenue growth of between 4% and 6% 

Chief executive Brian McNamara said:

“First quarter trading was solid and in line with guidance shared when we reported FY 2023 results. Strong innovation combined with successful execution of our go-to-market strategy underpinned performance in our Power Brands which grew 5.2% with particularly strong performance in our Oral Health and VMS portfolio.

“Looking ahead, we continue to expect the operating environment to remain challenging. However, we are confident that we are well positioned to deliver on both guidance for 2024 and over the medium term.”

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ii round-up:

Healthcare goods maker Haleon (LSE:HLN) today detailed a decline in quarterly product volume but maintained its forecast for annual profit growth ahead of organic revenue growth.

It blamed tough comparatives given a shortage of pain relief drugs in early 2023 and retailer destocking for its major North American market, which accounts for around a third of sales. This dragged overall volumes down by 2%, exceeding City forecasts for a 1% fall. Product price increases of 5% helped group-wide organic revenue rise 3% in the first quarter, with the maker of items including Sensodyne toothpaste and Panadol pain relief reiterating its 2024 target for organic sales growth of between 4% and 6%. 

Shares in the FTSE 100 company fell 3% in UK trading having come into this latest news up by around 6% year-to-date. That’s less than a 15% gain for former owner GSK (LSE:GSK) and broadly in line with the rise in the FTSE 100 index so far in 2024. 

Haleon's product portfolio spans the five categories of Oral Health, Pain Relief, Respiratory Health, Digestive Health and Other, along with Vitamins, Minerals and Supplements (VMS).

An 8% fall in product demand volumes in North America left revenues for the region down 7%, pushing a 2.2% fall in group wide revenues year-over-year to £2.92 billion.

However, management’s continued focus on costs fuelled a 2.2% increase in the profit margin to 24.2%, aiding a 4.5% increase in operating profits to £655 million. 

This latest update followed news that Haleon is closing its Berkshire factory that makes Sensodyne toothpaste, with production moving to Slovakia. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, flagging Haleon as a ‘top pick.’ 

ii view:

Headquartered in Weybridge, Surrey, Haleon operates in more than 170 markets. Its many brands include Biotene mouthwash, Advil pain relief, Tums antiacids and Centrum vitamins. Sales of Oral Health products generated its biggest slug of sales in 2023 at 28%, followed by Pain Relief at 24%, Digestive Health and other at 19%, Respiratory Health at 15% and VMS the balance of 14%. Apart from North America, other major markets include China at 8.6% of 2023 sales and the UK at 3.4%. 

For investors, variations in the cold and flu season can impact customer demand. Costs broadly for businesses remain elevated, own-brand competition from the supermarkets persists, while currency moves can affect results in sterling terms. 

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More favourably, a diversity of product categories and geographical regions allows positives in one area to counter challenges in another. A three-year £300 million productivity programme continues to be pursued, while strong cashflows give it financial flexibility, with net debt being reduced by 14% over its last fiscal year to £8.5 billion. 

Falling revenues offer some room for caution, but Haleon has a defensive product offering and progressive, if modest, dividend. That might keep existing shareholders happy, but potential new investors might demand something extra before committing funds to a share that's been rangebound for the past year between 310p and 340p. 

Positives: 

• Diversity of product and geographical region
• Targeting cost savings of up to £300 million over the next three years

Negatives:

• Uncertain economic outlook
• Exposure to currency movements

The average rating of stock market analysts:

Buy