Reckitt Benckiser

Reckitt Benckiser

Developing markets 25% of revenue

Whilst 2011 has been a dire year for emerging markets, Reckitt Benckiser’s (LSE, RB) third quarter results saw a marked increase in revenue generated from developing markets.  However with Europe the biggest market for Reckitt it is no surprise that recently sentiment towards the stock has been anything but robust.  

Companies exposed to Europe – from where Reckitt has generated 43% of revenue - have experienced a trying time in the second half of 2011 as the sovereign debt crisis knocked consumer confidence. However Reckitt is a geographically diversified business and when price stability returns to European markets – as it will inevitably do at some point – this will boost margins and profits. 

Looking at the other geographies the group operates in and the two regional blocks outside Europe and defined as: 1) North America & Australia (NAA) and 2) Developing markets.  In NAA the improving US unemployment picture is encouraging and year to date (nine months to the end of September) like-for-like revenue growth came in at 2%.

Developing markets saw another robust performance with like-for-like sales coming in at an impressive 12% year to date.  Putting these together and Reckitt year to date like-for-like sales excluding pharmaceuticals was 3% which is a solid performance.

An important feature of the quarter was that developing markets overtook NAA as Reckitt’s second biggest geographic segment after Europe.  Developing markets made up 25% of revenue year to date while NAA came in at 24%.

The pharmaceutical business saw strong growth with an 18% like-for-like performance and made up the remaining 8% of revenue year to date.  Overall like-for-like for Reckitt was 4% after the boost from pharmaceuticals.

Turning to total revenue and growth here was strong on account of the acquisition of SSL (the business behind Durex and Scholl) at the end of 2010 and Paras in April 11 – like-for-like’s figures ignore this boost.  Total sales growth for the period came in at 15% (the base business) which fell slightly to 14% when pharmaceuticals are included.

Guidance for the full year is for 12% net revenue growth and 10% income growth at constant exchange rates.  However, the caveat is that this depends on a “normal flu season” and no generic competition for Suboxone.  In the pharmaceutical division Suboxone is a key profits generator but is going off-patent.

The bottom line is that Reckitt continues to see underlying sales growth despite tough market conditions.  The outlook for the fourth quarter however is more subdued although Reckitt states that it is targeting “further strong LFL growth”.  This is as the SSL acquisition (the business behind Durex and Scholl) starts to see some overlap, the group expects to see a one-off decline in profits and revenue for pharmaceuticals and it looks as though the “flu season” may not have been as strong as usual on mild weather.

The fourth quarter is likely to prove to be tough but underlying growth should remain positive although slower than in the past.  The third quarter was the first time the new CEO, Rakesh Kapoor, addressed investors and the message looks to be: expect much the same strategy as long-serving predecessor Bart Becht.

This report was produced by Senior Research Analyst, Andrew Latto

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