Haleon plc (HLN) Q2 2022 Earnings Report, Transcript and Summary

Good morning, good afternoon, everyone. Thank you for joining the Haleon Half Year Results Q&A call this morning. Hopefully, by now, you've all seen the presentation and the video of this on the Investors section of the website. I'm joined today by Brian McNamara, CEO; and Tobias Hestler, CFO for Haleon, for today's session. Before handing back to the operator for the Q&A moderation, I just wanted to draw attention to the disclaimer at the front of the presentation listed on our website. With that, I'd like to hand back to the operator for Q&A. Thank you.

[Operator Instructions] And our first question today comes from Guillaume Delmas of UBS.

So 2 questions for me, please, both on top line. Firstly, on the current consumer environment, I mean, you mentioned, Brian, in your presentation a bit of down-trading. So maybe could you provide more color on this? And whether you would expect this trend to accelerate or maybe to become more broad-based across categories and geographies going forward? And along these lines, I mean any category it is where you've seen private-label gaining shares. Or are you still getting as much traction on your most premium innovations? And then my second question is on your comment about slower growth expected for the second half of this year. My question here is, to what extent -- is it just down to a higher basis of comparison in the second half? Or do you also include a healthy level of cushion given the many uncertainties with the upcoming called in flu season, the lockdowns in China? So many uncertainties currently prevailing in most of your markets. And I guess what I'm trying to get to is, could the bottom end of your 6% to 8% guidance range could prove quite conservative?

Thanks for the question, Guillaume. Let me start on the consumer behavior. So first of all, just taking a step back, I think the dynamics that we're seeing is different across markets and regions. For instance, U.S. and Europe, we're seeing quite high inflation, as we know where we're still seeing relatively low inflation in Asia Pacific region, more in the 2% to 3% range. Overall, as that we're seeing elasticities really hold up very well. And what I did comment is you look across categories and markets, there are potentially places where we see a little bit of down-trading or move to a private label. But to be honest with you, it's not something that's impacting our business, and it's not significant. So for instance, we see a little bit of that happening in the allergy category in the U.S. but hasn't really had an impact on us. Our categories tend to hold up really well in tough economic times, and we're in healthcare, we meet therapeutic needs. Brands really matter. We have a lot of trust and loyalty. And also in the context of what consumers are experiencing, relatively low dollar outlay. And then for us specifically, we have very strong brands and strong equity. So we feel good about the outlook and how the business is holding up. We haven't seen really in the current trading, any impact to speak of. And we're continuing to see good growth in our power brands and good growth in our brands across different categories. But holistically, the dynamic is a little bit different market-to-market and region-to-region, and a little bit across categories. But overall, I would say nothing on our part that we've seen that worries us. On the comment on slower growth, it's very much, Guillaume, again, just flagging, we grew 11.6% organically in the first half. If you remember, the first half of 2021 had almost no cold and flu season. So we saw a real bounce back of that in the first half. And I think we flagged that. Respiratory itself contributed 4 percentage of growth to our first half results. In the second half of 2021, we saw the rebound in that cold and flu already happening. So if you remember, last year, in Q3 and Q4, we grew double digits. We grew 10% across through Q3 and Q4. So there is basically a base issue there, and that's really what we were just flagging for people as you think about the outlook for the balance of the year, but we feel good about our current trading, and how the brands are performing and holding up in this environment.

Our next question goes to Chris Pitcher of Redburn.

Firstly, could you talk in a bit more detail about the competitive environment in therapeutic Oral Health, specifically sensitivity and gum health. Have you seen any more aggressive competitor activity recently? And in terms of the marketing behind parodontax, is that not all incremental? You're not seeing people switching from other of your brands? And then secondly, on the litigation, obviously, you've given us the comment on Zantac. Can we assume therefore there's no change to the PPI litigation? Certainly, our reading is that there are mixed positions across the indemnifications between Prevacid and Nexium. Any clarity or update you can give on that would be most helpful.

Okay. Thanks for the question, Chris. And I'll answer the first on the competitive environment. And Tobias, I'll throw it to you on the PPI question. So listen, first of all, Chris, I would say that there's no question that therapeutic Oral Health is a competitive place. It's a category. GSK -- we now Haleon, have created over 10 years ago -- 10, 15 years ago, and it's done extremely well, and we've done extremely well. So we see interest from our other competitors in this space. That's not new. [ Pressed in ] Colgate have launched products against those areas over the years, Gum Detoxify in the U.S. 4 years ago, and things like that. So we are seeing the continued competitor activity. What I do is -- I feel good about where we are overall in Oral Health, and you would have seen it in the presentation, but 3/4 of our business gained or maintained share in Oral Health. We globally grew share in denture parodontax and Sensodyne. We've been successful in launching good innovations in those products. And I think specifically to Sensodyne, we've seen share growth in 8 of our top 10 markets, and that includes U.S. and China, our top 2. And we've seen record shares in India and Japan. So as I said before, I'm never complacent with this business. We have very -- competitors that are obviously focused on this space, too. But overall, I feel good about our performance, and we continue to have good plans as we look forward. Now on parodontax specifically, we do see the opportunity in gum health and not much cannibalization between Sensodyne and parodontax. Same thing happened when we launched Sensodyne Sensitivity & Gum a couple of years ago, which was extremely successful and continues to drive growth. But the brands kind of have been limited cannibalization between the 2. And we think both brands have tremendous opportunities going forward. And we -- both gum health and sensitivity are spaces that continue to have headroom. Based on that household penetration, I've talked about quite a bit with 1/3 of consumers suffering some sensitivity and 1/3 treating with a sensitivity toothpaste. Tobias?

Yes. Thanks, Chris. So on the proton pump inhibitors and Nexium, let me maybe just go back and sort of give a bit of the background, right? I mean I think this litigation is brought against all manufacturers of prescriptions and over-the-counter products in this space. So for example, AstraZeneca, Takeda, [ GSK ], Pfizer and all named co-defendants in connection with those products. Now clear to say Haleon does not believe that the body of the scientific literature constitutes any evidence that there is an association between PPI usage and injuries that were alleged by the plaintiffs. And then secondly, also, the FDA continues to approve Nexium and Prevacid as safe and effective and has not mandated any changes to the labeling of those over-the-counter products. So -- but that's maybe the background. Secondly, the litigation is predominantly focused on prescription medicines, and the products we have involved in the litigation are both over-the-counter medicines. We filed motions to dismiss several hundred cases. Those remain pending before the court. So I think you asked about sort of the liability. So for Nexium, the liabilities are with us because we have marketed that, and so since it was launched OTC. For Prevacid, it's a bit different. Here, the liabilities are with us for the duration of the Novartis joint venture. Any pre-Novartis joint venture liabilities would be -- go back to Novartis because it was under their watch if it's above a certain minimum or de minimis threshold. So here, we, of course, would be working with Novartis if there would be any liabilities coming to us. So I mean overall, no change. The cases have been around for a while, so nothing new on that either and in the recent history.

Our next question goes to Olivier Nicolai of Goldman Sachs.

Just a quick question, actually, on Sensodyne, just more follow-up from previous questions. But in Q2, you flagged a bit of a slowdown in the brand. I think you mentioned China at the time. I was just wondering if you could give us a bit of an update on the current trading on the brand. And if we can assume that Sensodyne can go back towards its double-digit growth rate, which it has enjoyed for the last few years.

Thanks for the question. Yes, a couple of things about Sensodyne if I look at -- first to look at the first half. So we grew 8% in -- well, on Oral Care, and obviously, Sensodyne being a big piece of that. We grew 8% in Q1, 2% in Q2. Now as you may recall, in Q1, we had a pull-up from Q2 of 2% on the overall business, and that was driven by the systems cutover we did. That did disproportionately impact the Oral Care business because the Oral Care business leans much towards mass market than, let's say, the balance of our business, which is quite a pharmacy-driven business in places like Europe. So I'd say that's one thing. So it's probably more important to look at the first half numbers than it would be to look at Q1 versus Q2. Separately, on China. Absolutely, China is an important business for us and a good business for us on Sensodyne. And during the lockdowns in Q2, we definitely saw the market begin to contract a little bit, overall market. We did grow share in the context of a detracting market, but that had an impact on our growth rates in Q2. As far as current trading, I feel good about Sensodyne in the back half, no question. There are some dynamics just to be aware of between Q3 and Q4. If you remember last year, we flagged that we took pricing in October of last year in the U.S., and we saw some forward buying into Q3 of last year. But if I look at the back half of the year, I feel good about how the business is trading and the outlook and it's a big focus for us. This is a great brand and great category.

Yes. And Olivier, maybe just from my side, sort of on the medium-term outlook, right, we had said in the Capital Markets Day that between Oral Health and VMS, we believe those categories together to grow mid- to high single digits. So I think that's for us sort of the guidance we've been giving on that.

Our next question goes to Iain Simpson of Barclays.

A couple for me, if I may. Firstly, on Panadol, that up in the mid-20s. You flagged the U.K. But I just wondered if you could give some color on what other geographies were driving that? And also how the supply chain is holding up given those kind of growth rates in Panadol? And then secondly, Caltrate. That was clearly a brand you had high hopes for. I was just wondering is there any drag from the China lockdown on that H1 growth number? And what would success look like over the next couple of years for Caltrate given that it's currently growing a little bit slower than wider VMS. And I kind of get a sense that perhaps longer term, you're expecting it to do a bit better.

Great. Thanks, Iain. I appreciate the question. So let me start with Panadol. So Panadol did grow in the mid-20s. We actually saw a pretty broad-based growth. It's a really strong brand for us in Asia and places like Malaysia and Philippines and others. In Australia, it's a big brand. And we flagged it in the presentation, but we did a campaign behind Panadol, the We Care campaign, which really educated consumers on the role that Panadol can play post vaccination. So we saw that really give quite a boost to the brand, and the growth was quite healthy. Share growth was really strong in Panadol. And again, we also flagged the U.K. as a market that did quite well on Panadol. As far as supply change -- supply challenges, listen, demand has been high. And like most supply chains, we're working to meet the demand. We've done a pretty good job, we've been able to support that demand. But there's no question that the supply chain is under some pressure in that area, and we're reacting appropriately and ensuring that we can meet the demand going forward. On Caltrate, listen, no question that in China, we saw an impact of the lockdown across a number of brands, across the portfolio. The lockdown dynamic was such that people were literally not able to go to stores and get their products. So I would say there was an impact broadly across China, and certainly in Q2 and for the quarter. What I didn't say on the Sensodyne comment, though, that I should have, honestly, was just we're seeing in current trading that China is bouncing back. So the market overall was in negative consumption growth in Q2. We're seeing that back to growth. We're seeing our growth ahead of that. We grew overall our share in China during the lockdown period and we continue to do that. Wouldn't kind of give you a growth estimate on what we expect Caltrate to do going forward, but we're still very bullish about the VMS category in China and the role that Caltrate can play in China. I also think we flagged in the presentation some stuff that we've been doing with consumers there around mobility and calcium and osteoarthritis and educating them. And as we said before, very in line with the China 2030 health initiative, where osteoporosis is one of the pillars for them.

Our next question goes to Faham Baig of Credit Suisse.

I'll stick with the motto of 2 as well. Firstly, on the Zantac litigation. What has provided you with the increased confidence to now reject GSK and Pfizer's request for indemnification compared to last month when you released the statement suggesting that you may be required to indemnify if certain conditions were met. And the second question is on pricing. Would you say the majority of your pricing is now in the market? Or should we expect a further acceleration in pricing year-on-year in the second half to offset any additional costs you may be facing?

Great. Thanks for the questions. And I'll answer the Zantac question and then pass it to Tobias on the pricing. Listen, I'll take an opportunity maybe to give the broader perspective on Zantac. And so obviously, it's important to remember that we're not a defendant in any of these lawsuits. As people know, it's other companies that are defendants. Haleon or the GSK-Pfizer joint venture never marketed Zantac in the U.S. or Canada. So we've been consistent in saying that the liability has not been determined, and we never said we accepted the liability. And it's our view that we don't have any liability, given the indemnity obligations relate to GSK and Pfizer businesses that existed at the time when the JV was formed, and that was in 2008. And at that time, the Zantac OTC business didn't exist in the U.S. or Canada. So we confirm that in a formal response to GSK and Pfizer. That's what we had shared today. We noted that in the announcement. We thought it was important that we clarified that stance, not only for GSK and Pfizer but for all our shareholders. And that's pretty -- a formal response that's pretty customary in a situation like this. So I know there's a lot of interest in Zantac. There's not a lot more that we can say today. It's a legal matter. It's our view, and we feel very strongly about our stance with that position that we don't have any liability.

Brian, you meant 2018 or 2008?

Yes. You know what, I [ applaud ] -- I just got a note that said 2018 on it, and now I know why. I apologize. Yes, the JV was formed in 2018, and it was at that time. So I apologize for the mistake. Tobias?

Good. So on pricing, I mean, first of all, I mean, we've done 3.7% pricing in half 1, and then you've seen this go up. So we did 2.7% in Q1, it went up to 4% in Q2. So you've seen the price increases come up and increase as the businesses have driven pricing actions to offset the impact from the inflationary headwinds. So I think we feel good about that. We would expect to see continued price increases. Now of course, it's geographically a little bit different. As Brian mentioned earlier, Asia Pacific, lower inflation environment. What's really key for us is that we are also driving volume/mix. And we've done in a 4% volume/mix. And in Q1, we did 13%. So I think for us, this is really a matter of moderating the price increases in order to enable sell -- sale volume growth. So I would expect pricing to continue to increase. Also don't forget in half 2, especially in Q4 last year, we took massive price increases in the U.S. between 5% and 10% of about half the portfolio. So there's also a base effect you're going to hit later in the year. But I mean, more broadly, our intent is to offset the impact of inflationary headwinds with the combination of price increases and efficiencies that we drive through the portfolio.

Our next question goes to James Edward Jones of RBC.

Two again, I'm afraid. So on Zantac, just to come back to it. You projected GSK's and Pfizer's request for indemnification. Now if they don't accept your rejection, what do you expect to happen next? And secondly, -- are you able to say if Hurricane Fiona is going to have any material impact on your supply to North America?

Okay. Thank you, James. Listen, I'm Zantac. I really don't want to speculate on what happens from here. What I can say is we're just -- we're very clear in our position. That's why we made that statement today, informed GSK and Pfizer and let our broader shareholder base know. So what happens from here, I don't really want to speculate.

Good. And then on your question on the hurricane in Puerto Rico. So as you right know, we have a significant factory there. So 1 of our sites that support North America, is there. Now I'm happy to report what we've heard back over the weekend, no impact to any of our employees. So they're all safe. Also, no damages to our factory. There's a little bit of flooding in the surrounding areas. And of course, I mean, as the whole island was out of power, we were too. So I think we're -- the team is working there to bring the site back up -- now we're -- I mean all of our people are safe. And I think from our perspective, I think we're used to that. You have a hurricane here and there, right? I think -- but I think -- so we don't think it has a major impact of our business, assuming that the overall power in the island is going to come up for sure in the next days.

And our next question goes Karel Zoete of Kepler Cheuvreux.

Right. I also have 2. The first one is on your performance in Germany. You mentioned it was back a bit. And more broadly, can you speak about Voltaren's performance in Europe? And the other question is on the cough and cold season and your flu products in APAC. What are the early signs of the upcoming flu season? Is there anything you can read into what you're seeing in Australia? And how are discussions going with the retailers in the Northern Hemisphere early in the season?

Great. First, the performance on Germany, we did flag that Germany was a bit softer for us. We are seeing a bit of a turnaround in Germany, and we're actually seeing our consumption growth now ahead of the market. The market isn't particularly growing -- particularly strong, to be clear, but we're ahead of the market growth. Now on Voltaren, the dynamic in Voltaren is interesting. If you think about the pain relief category, there's both topicals and systemics. We're the largest topical player in the world, and Voltaren is the #1 OTC topical pain reliever in the world. What happens in high cold and flu seasons is you tend to see systemics do quite well, systemic pain release pills, things like Katadol and Advil and topicals not do as well. So we've definitely seen higher growth in the overall pain category, but lower growth in the topical category, and that obviously impacts Voltaren. Now we've been able to benefit on Panadol and Advil on the systemic side of the tablet category. So our portfolio is kind of a natural hedge in a way to that dynamic. But absolutely, the slower growth in the topical category. Hence, you're seeing lower growth in Voltaren. Still a fantastic brand, and one we're very focused on and believe will be a key part of the portfolio for the -- for a time to come and it's an excellent brand. In cold and flu, listen, it's just hard to speculate now because the world has changed so much between the -- what happened in cold and flu a year ago and Omicron acting more like cold and flu. But absolutely, what we've seen is extremely high instances in Australia. In the past that does tend to link to higher instances in the Northern hemisphere. We're seeing customers interested in ensuring they have enough products for the cold and flu season. So no question about that. But also remember that last year was a relatively high incidence of cold and flu in the U.S., in Europe as it was already the beginning of the bounce back from the year before, when we saw very little due to social distancing and mask wearing and things.

We currently have no further questions. I will now hand over to Brian McNamara for any closing remarks.

Okay. Well, first of all, thanks, everyone. We appreciate the time to connect with you today. Hopefully, you see the first half reiterates that the business is doing well, and we're well on track to deliver on our guidance and our strategy is delivering good growth. So please contact the IR team with any follow-up questions, and hope you all have a good day. Thanks again.