Haleon - H1 2024 (Q&A)

Transcript

Operator (participant)

Good morning, all. Thank you for joining us for the Haleon 2024 half year results Q&A. My name is Carly, and I'll be coordinating the call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad, and to remove yourself from that line of questioning, it's star followed by two. I'll now hand over to our host, Sonya Ghobrial, to begin. Please go ahead.

Sonya Ghobrial (Head of Investor Relations)

Thanks very much. Good morning, everyone, and welcome to Haleon's half year 2024 Q&A conference call. I'm Sonya Ghobrial, Head of Investor Relations, and I'm joined this morning by Brian McNamara, our Chief Executive Officer, and Tobias Hestler, our Chief Financial Officer. Just to remind listeners on the call that in the discussions today, the company may make certain forward-looking statements, including those that refer to our estimates, plans, and expectations. Please refer to this morning's announcement and the company's UK and SEC filings for more details, including factors that could lead actual results to differ materially from those expressed in or implied by such forward-looking statements. We've posted today's presentation on the website this morning, with prepared remarks in a video running through the results in detail. So hopefully, you've all had the chance to see that ahead of this call.

With that, we'll go straight to opening the call with Q&A for my last time. Thank you. Operator, if you want to give us the first question, please.

Operator (participant)

Of course. First question comes from Guillaume Delmas of UBS.

Guillaume Delmas (Executive Director and Equity Research Analyst)

Thank you very much. Thank you. Morning, Brian, Tobias, and Sonya. I've got two questions, please. The first one is on North America. Wondering if you could talk a bit about the trading conditions there, because it seems your pricing is very quickly normalizing between the first and the second quarter. And we've also heard some of your large competitors clearly not shying away from raising the promotional intensity. And on top of that, I mean, it's been several quarters now in the US that we've seen a significant gap between your sell-in and your sell-out. So wondering if with the PE reversal, the end of retailers destocking, this discrepancy between sell-in and sell-out should correct from Q3. And therefore, what I'm getting to is some meaningful acceleration for North America from a sales growth standpoint.

And then my second question, it's on your organic sales growth outlook for the second half. Because here, when I exclude Pain Relief and Respiratory from your Q2 or first half organic sales growth, I basically get 60% of your turnover growing in excess of 8% in the first six months of the year. My question here is: you've got a more favorable basis of comparison for both Pain Relief and Respiratory in the second half. So, A, do you expect both units to be back into positive organic sales growth territory from Q3? And assuming continued momentum for the remaining 60%, I mean, would it be fair to assume an organic sales growth in the second half towards the top end of your 4%-6% range? Any help on that would be great. Thank you.

Brian McNamara (CEO)

Thanks for the question, Guillaume. Listen, I'll take the first question, and then I'll pass it to Tobias for the second question. So in North America, just to get us grounded, we are down a little over 1% in the first half, but 1% growth in Q2. You know, we saw the inventory reductions in Q1 that we had shared with everybody, and then obviously in Q2, we made the decision to proactively take down inventory of our phenylephrine products ahead of the FDA decision. And just as a reminder, that is about efficacy, not safety for phenylephrine, but we took that proactive approach, so that's impacting obviously the volume and the growth in the U.S.

You're right, consumption has continued to be strong at mid-single digits ahead of the market, so we feel good about the underlying business and the fact that we're growing market share. So I would fully expect that in the back half, we'll see some of that net sales growth now coming through on the business as we have a lot of those changes kind of in the base with the inventory reductions and things like that. So overall, I think I'd leave it there. Tobias, on the second question?

Tobias Hestler (CFO)

Yeah. So, so look, for, for half two, organic sales growth, I mean, first of all, I mean, if you just look at the 4-6 guidance, I mean, it really implies 5-9 in the second half. So I think, yes, it's clearly at the upper end of the range as a minimum. And I think, look, we're not gonna guide to individual categories for the second half of the year, but, I mean, we would expect that, you know, oral health and VMS continue to go strong. And of course, in oral care, we're still in a situation that all brands have been doing extremely well. That is, you know, not something you usually have in the very long run.

Also, denture care has done very, very well in half one. So and also VMS has come back strongly, but they're also, we're hitting a bit of base effect from last year as well. And yes, absolutely, the big, the big drainers on pain relief and on mainly on pain relief are behind us, plus a bit of the destocking as well that has happened in half one, yeah.

Guillaume Delmas (Executive Director and Equity Research Analyst)

Thank you. And just to follow up on North America, Brian, on the competitors' environment and promotional intensity-

Brian McNamara (CEO)

Yeah.

Guillaume Delmas (Executive Director and Equity Research Analyst)

and how you're reacting to this?

Brian McNamara (CEO)

... Yeah, no, thanks, Guillaume. I did not answer your question on promotional intensity, so I apologize. Listen, we're in a bit of a less promotionally sensitive business in OTC, and in oral health, our strategy has always been lower promotion on our brands, where we invest heavily in A&P and heavily in the dental detailing piece. So we're not seeing anything in the categories we compete with that is radically different. Of course, every year there's ups and downs in promotional intensity and stuff, but there's nothing systemic happening in our categories worth noting.

Guillaume Delmas (Executive Director and Equity Research Analyst)

Thank you very much.

Operator (participant)

Next question comes from Iain Simpson of Barclays. Iain, your line is now open.

Ian Simpson (Managing Director and Staples Research)

Thank you. Thank you very much. Couple of questions from me, if I can. Firstly, just to make sure we've got the magnitude of that phenylephrine swing right. Am I right in thinking that was a 40 bips volume destock at group level in your Q2, and that, that all should reverse into Q3, so that sequentially you were down 40 Q2, you're up 40 Q3, so it's a sequential 80 bips volume swing at group? Just wanna make sure I've got the moving part on that right. And then secondly, your sort of marginal profit guidance, given the strong H1 and given that you'll have, I presume, a ton more volume leverage in the second half, implies, I guess, that A&P spending is going up quite a lot in the second half.

I guess part of that is probably the Eroxon launch, but anything else that we should kinda have an eye on in terms of where you might be spending money in the H2? Thanks very much.

Tobias Hestler (CFO)

Thanks, Iain. So, I'll take both, both of those. So yes, on PE, you're got it right. So we said it's about 0.5 point impact for the, for the group. It's about a 2-point impact on, on PE, and that is a, that is a swing. So I think, that is, you, you, you got that, you got that correct. And then on half one and half two, so I mean, absolutely. I mean, first of all, Rook, I wanna say, really pleased with the performance, really positive that the model is delivering. And then also, I mean, as a result, we're really confident on our full year guidance. And I mean, ultimately, the profit guidance we've upgraded is, is, is almost 2 times the midpoint of the organic revenue guidance, that we have given. Yeah.

So now why is it lower in half two? Which is correct. So, maybe one step back. So when you look at last year, last year, half one was 9, and half two was 12. So, we're cycling over a much stronger half two from prior year. And then there's really 4 reasons why organic profit growth is gonna be lower than the 11% we've seen in half one, and I think you already mentioned two of them or one of them in your question, Iain. So I think the biggest one, really, and I'm gonna do them in order of sort of sizing and magnitude. The first reason it's gonna be lower is the phasing of the cost inflation.

Cost inflation was really at its highest point in half one of last year, and then we saw costs starting to come down in half two of last year. And you saw that come through in our Q4 margin last year, when gross margin started to grow then ahead of the rate of sales growth. So half one was really a low prior gross profit comparator. So as we get into half two this year, we're gonna start lapping the benefit of those lower, lower costs. And usually, you have this normal time lag when the costs come in until they run through inventory to come out. So that won't repeat in half two of this year. Then the second reason is the one you mentioned, Iain.

So yes, A&P growth will be higher in half two than it was in half one. And also here, a reminder, last year, A&P in half two was only up 1%. And then in addition, we're gonna fully support the launch of Eroxon, in addition to continue investing in the brands that deliver the growth or continued high and strong investment into the launches we made, especially Clinical White on Sensodyne, and on the high growth drivers like Centrum, plus all the geographic expansion that that is running. The third is a bit of phasing, mainly in R&D. You've seen R&D spend was only up low single digits in half one.

That is largely driven by project phasing, which is different, so that's gonna reverse out and significantly accelerate in the second half of the year. And then, look, much more, much smaller, but some other factors in half two that won't repeat. For example, we had an employee tax credit in the U.S. in Q3 last year, so that won't repeat. So those are the drivers, but look, overall, very pleased with the high single-digit guidance for the year and very confident in that one.

Ian Simpson (Managing Director and Staples Research)

Brilliant. Thanks very much.

Operator (participant)

Our next question comes from Bruno Monteyne of Bernstein. Bruno, your line is now open.

Bruno Monteyne (Managing Director and Senior Analyst)

Thank you. So the first question is coming back on the organic growth. If I understood you correctly, Tobias, I think you just said on the first question, that organic growth should be at least at a minimum, at the upper end of the 4-6 range. Just making sure I understood that correctly. But then my real question is about the launch of the erectile dysfunction cream at the end of this year. I remember from when you sort of IPO'd, you always said, sort of launches, which is, are above and beyond organic growth. But this launch should be actually the, in launching quarter four, you'll be filling the channel with that. Am I right that the kind of growth from that launch will therefore be above and beyond the usual guidance?

Wouldn't that flip you at the top end, or actually over the 4%-6% range? The second one is just a question on behalf of Tom Sykes. On the China JV, I did notice that you are delaying it. You're sort of getting one year of extension before you do the new agreement.

... is that because you can't really agree? Is that—should we see that as bad news, that this sort of is a bit of an issue, and you weren't able to finish the discussions in time? Thank you.

Brian McNamara (CEO)

Great, thanks, Bruno. Listen, I'll take the eroxon question and pass it to Tobias on the China JV. So first of all, we are excited about the first erectile dysfunction OTC launch in the U.S. So we're excited about the opportunity there. We said we would launch at some point before the end of this year, so I wouldn't expect it to have a big impact potentially on this year's results. And we'll give guidance for next year when we get to next year. But if we think about that category, we think it has very strong potential. But it is a new to OTC category.

It is a topical product versus systemic product, and obviously it's a direct to OTC, not an OTC switch, so Eroxon doesn't have any brand awareness. So I think it's got great potential. It'll be a bit of a slower burn, potentially, because of some of those factors. But we're really happy to be at a point where we can announce it will launch before the end of the year and excited about the future potential. Tobias, you want to touch on China?

Tobias Hestler (CFO)

Yeah. So on your first question, Bruno, on the second half growth. Yes, I mean, the full year guidance of 4-6 for full year implies 5-9 in half two. So I think the 5-9 puts you really squarely into the upper half of that at the lower end in the upper half of our full year range. And then, of course, above that, depending on where you put us in this 5-9 for the second half of the year with our full year guidance. Then on the China JV, so we've extended it by 9 months. So it was supposed to expire in September of this year, so we extended it to June.

So that's a 9-month extension. I would call this more of a technical extension. Let me maybe give you the background, as well. So the joint venture is really the over-the-counter medicines part of the business in China, which is about 40% of our Chinese business. And as a result of our health and VMS, it's fully outside that joint venture. It's a complex joint venture with a number of partners. I mean, we own 55% in it. Twenty-five percent are owned by a publicly listed entity, 20% are owned by an entity that is owned by a private shareholder, and two of the provincial governments. The listed entity, the other entity is a majority shareholder of.

So, as a result, we have a number of parties involved in that, and on top of that, in the Chinese environment, including, of course, government partners, as well. So it just takes a bit of time. The relationship is really good, and we mentioned in the release, we're in active discussions with the partners on how to continue and run this business going forward. To enable the conclusion of those, we've just agreed now to extend it, so we're not up against a very hard deadline. The discussions are really positive. I think all the parties are aligned on the value of the joint venture and on the collaboration, so they're all pulling in one direction.

You know, as you would expect, we would update you then, as soon as we have news on what the future, what the future is, yeah.

Bruno Monteyne (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

Our next question comes from Chris Pitcher of Redburn Atlantic. Chris, your line is now open.

Chris Pitcher (Managing Director)

Thanks very much. And advance apologies, I have technical issues, so I haven't listened to the presentation. I've read through the pages, so apologies if I've covered stuff that's already been said. In terms of the general consumer environment, across your brands, are you seeing any evidence of some soft demand across perhaps some of your more discretionary brands? I mean, one brand performance that really stood out for me in this environment is the strong growth in Centrum, double-digit growth. Are you able to give us a bit more detail on where the Centrum growth is coming from? You've launched in a lot of new markets. How much of that is sort of new market-driven growth? How much is sort of like-for-like growth across your existing sales base? Thanks so much.

Brian McNamara (CEO)

Thanks for the question, Chris. Listen, on, so specifically on Centrum, we feel really good about the performance there, and it is it's a combination of two things. As you said, we announced we launched a few new markets, like India, Egypt and some other markets. At this point, it's still early in those markets. It's doing well, those launches, but probably not having a significant material impact on the overall growth of the business yet. We're quite optimistic it will down the road.

I think the big driver of the Centrum growth is something we've talked about, which is this COSMOS study that we completed, now have just had the third readout of the study in partnership with Harvard Business School, that showed that Centrum Silver, which, for instance, in the US, is about 50% of our business targeted towards older men and women, improves cognitive function by 50%-60% if Centrum Silver is taken daily. So as a result of that, we've really seen strong take-up behind that claim, and we think this is a big opportunity. It's a big opportunity for us to continue to drive those kind of scientific claims behind a category that tends to have less science. I'd say that's the big driver behind our VMS and Centrum growth.

Chris Pitcher (Managing Director)

Can I just clarify, did you say 5.0, the U.S. business is 5.0 or 1.5%?

Tobias Hestler (CFO)

I think it's 50.

Brian McNamara (CEO)

Oh, 5, 0. I'm sorry. I'm sorry, Chris. I didn't, I didn't hear you. You broke up. Yes, Centrum Silver-

Chris Pitcher (Managing Director)

Thank you.

Brian McNamara (CEO)

... 50% of our business. Yeah.

Chris Pitcher (Managing Director)

Great. Thank you very much.

Brian McNamara (CEO)

Bye. Thank you.

Operator (participant)

Our next question comes from David Hayes of Jefferies. David, your line is now open.

David Hayes (Managing Director and Equity Research)

Thank you. Good morning, also, two from me. Just on the oral care, obviously impressive growth continuing, but we assume some of that's driven by the rollout of the whitening range, the new whitening range. I just wonder whether there's any kind of way of quantifying that at all. I guess we're thinking more about thinking the comping effect next year, just to get a sense of the benefit in terms of channel pipe fill. And then secondly, on the share buyback shift to going into the market, just to kind of check that we assume is completely independent of any Pfizer plans. You're not kind of indicating that you don't think they're gonna sell down again this year.

But I guess if they did sell down again this year, is it still within the options that you would then participate in that rather than continuing to buy through the rest of the year? Thank you so much.

Tobias Hestler (CFO)

Thanks, David. Let me take the share buyback question, then Brian will come on the oral care one. So look, on the share buyback, it's not a shift, right? I think it's ultimately what you expect would expect the company to have, that has a share buyback program, is a program that buys it back on an open line. This is a muscle we still need to build. We have never done that, right? So I think we now put the machine in place, and we need to learn that muscle, how to operate and run that. And I think it's something that's totally normal, and that opens up just avenues to do it across all the three avenues that are available as to do share buybacks. One is on the open market.

Secondly, buying it back directly from Pfizer at a given discount. And then thirdly, of course, participating in a placing. And for us, it's just all the optionalities. And also, I think you saw in the stock exchange announcement, I think it says up to 185 million. So I don't think we don't have to buy 185 from the open market. It's just opening up all the three avenues. That's all, that's all, that is optionality for us in ensuring we can complete the 500 million share buyback by the end of this year.

Brian McNamara (CEO)

Yeah, super. David, on oral health, just to reaffirm, very, very happy with the performance we've seen there and the share growth across all three of our franchises, our denture care, Parodontax, and Sensodyne. You're right, Clinical White is doing quite well. Whitening is a really fast-growing category. As I've said in the past, whitening toothpastes tend to be not good for sensitivity. So having a product that's clinically proven, I think we've been able to secure dental recommendations behind this. They typically don't recommend whitening toothpaste. But listen, every year we come out with a big innovation on the Sensodyne franchise. Last year, it was Pronamel Active Enamel Repair. You know, a few years back, it was Sensitivity Plus Gum, it was Rapid.

So every year we have a big launch in the beginning of the year and other launches throughout the markets. We'll continue to see that trend as we go forward. I also think Clinical White is a, is a product that will drive growth, in year two, year three of launch. We think it has long-term potential. So I wouldn't necessarily quantify a pipeline or what it looks like, just know that this is our model. We have big launches every year, successful, and we follow them up the following year.

David Hayes (Managing Director and Equity Research)

Thank you.

Operator (participant)

Thank you so much. Our next question comes from Rashad Kawan of Morgan Stanley. Rishad, your line is now open.

Rashad Kawan (Equity Analyst)

Hey, good morning, guys. Thanks for taking my questions. Just two for me, please. First one, can you update us on what you're seeing in China? You said it was flat in the first half. Obviously, tough cold and flu comps, of course, but what was the performance ex cold and flu? And obviously, it's been a tough backdrop across the board, there. What are you seeing in terms of consumption across your categories? Second question, on running down your oral phenylephrine stock. Obviously, the FDA hasn't made a formal decision there, so just curious as to how you think about these decisions, what drives you to take action, at this point in time? Thank you.

Tobias Hestler (CFO)

Hey, thanks, Rashad. So let me do China. So I think, look, last year, China was up over 20%. This year it's flat, and it was up 20% last year due to the pretty much defended, defended upside. So doing it flat on top of the 20, I think, is a really, really strong performance. So I think it just means that the rest of the portfolio is doing really, really well, for, for us. So I think overall, the business has really grown through Fenbid. To take also a step back on Fenbid, actually, very pleased with what we've done on Fenbid, in China. We were able to retain quite a bit of the consumers that came into the category through COVID.

So, sort of the brand is now q butuite a bit bigger than it was pre-COVID in China. So from that point of view, also in Fenbid, even you had the role of... Also, if you take sort of a three or four-year look at it, also good. So look, feel good about China, really good growth in the VMS business, in the oral care business, and also a bit of basic back oral care was a bit weaker in the first half of last year, too, but still overall, good performance. And I think it goes back to our brands, right? These are healthcare brands, right? I think we are sort of not that directly exposed to the economic health of the market and the business.

So I think which speaks to the defensive nature of the brands, that we're selling. So-

Brian McNamara (CEO)

Yeah, let me, let me jump on the... Thanks, Rashad, on the phenylephrine question. Yes, we did make the decision to kind of, take down our inventory on phenylephrine and, launch products, for the cold season, not including phenylephrine. The FDA didn't make that decision. As you know, there was a 14-to-0 recommendation to the FDA from advisory committee that phenylephrine wasn't efficacious, but obviously is still safe. You know, we stand behind the efficacy of phenylephrine, but we worked with our retail partners to do this in a way that allows us to ensure that we will have the products on the shelf for the cold and flu season. Our main focus was to make sure that we could deliver for the cold and flu season, that consumers could, would have the products available to use.

We're not sure when the FDA will make that decision and what the outcome of that decision will be, when the products would need to be phased out and moved off the shelf. We decided to get proactively ahead of that to ensure we can continue to supply.

Rashad Kawan (Equity Analyst)

Thank you very much.

Operator (participant)

Our next question comes from Jeremy Fialko of HSBC. Jeremy, your line is now open.

Jeremy Fialko (Research Analyst)

Hi, morning. Thanks for taking the questions. So a couple from me. First one is on pricing. I think you'd implied that obviously the pricing was gonna step down Q1 to Q2, which indeed is what we have seen. But then actually from kinda here on out, it's a relatively stable picture with the sort of the new price rises, sort of roughly offsetting the carry over effect. So just wanted to check that that is still the message. And then secondly, if you could talk about kind of bolt-on M&As, it's something which yeah, you said you are keen to do.

How you feel the market for these sort of mid-sized transactions is at the moment, and whether you think there could be a little bit more movement over the coming, say, 6-12 months? Thanks.

Brian McNamara (CEO)

Thanks, Jeremy. I'll start with the bolt-on question, and then Tobias will talk for the pricing. You know, just to get grounded on what we've said in the past, which is, first of all, we love the portfolio we have. We don't believe we need to do anything with the portfolio to deliver on our guidance that we've given. But that said, we wanna proactively and actively manage the portfolio, and as a result, you saw the three divestments that we did. We did those 'cause we felt like we generated more shareholder value in divesting than in keeping. And we will continue to proactively manage that portfolio. Bolt-on M&A is clearly something we are actively and will actively look at. It's in our capital allocation priorities, invest in growth one, two, bolt-on M&A, three, return cash to shareholders.

I won't make any specific comments on what we're doing, but obviously, if something strategically makes sense and it creates value for the business, we're very open to doing that.

Tobias Hestler (CFO)

Good. And on your price question, Jeremy, yeah, you got that, I think, exactly right. It's exactly what we expected. The step down was predominantly in EMEA last time, and that is all driven by the rollover, because, I mean, most of the pricing negotiations across Europe are done in Q1. So in Q1, you still see the impact from prior year. In Q2, you see the new pricing that was agreed. So I think, you know, the step down is really the expected one from how the pricing works. It's not a change in how we're dealing with our customers. And I think in the other regions, it's much more stable.

Of course, in the US, you have pricing taking at different times of the year, so that might be a little bit more spiky, up and down, depending on do you cycle over a year, where you didn't take the cr- the increase or, or where you did. But it's really the EMEA, the Euro pricing. So, and as you said, a step down to Q4, to Q2, and then much more stable throughout the rest of, of the year.

Jeremy Fialko (Research Analyst)

Okay, thanks.

Operator (participant)

Our next question comes from Olivier Nicolai of Goldman Sachs. Olivier Nicolai.

Olivier Nicolaî (Head of Consumers Staples Research)

Hi, good morning, Brian, Tobias, and Sonya. First question on net debt EBITDA, which is below 2.9 times now, so big achievement today. But post the disposals of NRT and considering the stronger EBIT growth this year, is it fair to assume that you could reach your 2.5 times midterm guidance as soon as year-end? And is there more disposals to come? That was the first question. Second, just want to highlight, obviously, very strong gross margin expansion in H1, 150 basis points. How much of it is linked to lower input costs versus the productivity gains? Do you see any benefit yet from the Maidenhead closure to kick in?

I guess more broadly, since you have achieved really good top line growth since 2022, should we expect a bit more focus on margin progression since you are still a bit below peers? Thank you.

Tobias Hestler (CFO)

Good. Thanks. Thanks, Oliver. So look, I mean, on net debt down to 2.9 is really strong. Also, I mean, we returned GBP 700 million to shareholders in half one as part of that. Part of that was supported by the ChapStick proceeds, but also by, I think, very, very strong cash flows that have come through. It's true, at the end of the year, we're gonna get the proceeds from the smokers divest, but also I think, look, for you then roll this forward into 2025, it's also gonna take EBITDA out, right? So the impact on... While it brings the cash in, which is helpful, the impact on leverage is of course much, much smaller.

Look, we're confident on our medium-term guidance range, which we set around 2.5, and, and we're working towards that. And then, of course, look, net, net debt, the net debt formula reacts very, very big to, short-term FX movement as well, so it's very hard to predict, you know, a, a spot landing. This is a little bit like landing a, a 747 on an aircraft carrier, so it's, it's hard to give you that. But, I mean, if you take a step back. It's a highly cash generative business. We've been very clear on our capital allocation priorities and the building blocks for that. So I think the debt is coming, coming down, over time, yeah. On your gross margin question, so I think we've seen, of course, I mean, you look at half one.

So clearly there's still, you know, the help from pricing, because pricing was with the rollover a bit higher in half one. Some of that that reduces slightly in the second half of the year, given the rollover from Q1 that I just talked about in the prior question. Then what we're seeing is easing inflation. So there is still inflation, but it's on material costs. I mean, there's the first few materials are now, I think, actually getting into deflation. But then we have labor costs to cover, because I think a lot of our costs of goods are tied to either our own labor or then the labor of our contract manufacturers, because I think both our conversion is very much labor intensive.

It's less exposed to the material costs. So but that's clearly easing compared to last year. But we're also seeing efficiencies improvement as we bring up our operating efficiencies in the sites. And I think that helps offset, and I think all these factors together. And there's a bit of freight cost as well. Last year, we shipped a lot of air freight because we had these unexpected spike in demand. So that was also a bit of help there. Your maintenance question, not yet. I think it takes time to shift production. So I think these impacts are, the positive impacts are further out. We haven't shut down the site yet. We announced that we will do that.

So these are usually, you know, two-ish year processes to happen. And as we shift production, you're gonna see the benefits come through over time as the production moves across. So thanks.

Olivier Nicolaî (Head of Consumers Staples Research)

Thank you.

Operator (participant)

As a reminder, if you would like to raise a question, please press star followed by one on your telephone keypad, and to remove yourself from that line for questioning, please press star followed by two. Our next question comes from Celine Pannuti of JP Morgan. Your line is now open.

Celine Pannuti (Private Banking Executive Director)

Thank you. Good morning, everyone. I have one question on margin in the US, which was down 175 basis points reported. Can you flesh out, you said that's higher A&P, you know, maybe a category or wherever, why that was quite a drop? And did I understand correctly that you said that last year, H2 margin had a tax credit, so this year we are facing that plus further A&P, so are we expecting US margin to be down several hundred basis points for the year? Thank you.

Tobias Hestler (CFO)

Yeah, thanks, thanks, Celine. So, yes, I think U.S. margin was down. I think it's a factor of several points. One, of course, the volume decline in the market, given the sell-in and also the stock, the inventory, or the retailer de-stocking. So I think that, of course, if you're in a declining volume environment, that it leaves some marks on the gross margin side. And, of course, that is very hard to offset with efficiencies that the team, of course, is still running. And then secondly, it's really I think most importantly, is the step up in A&P and the investments we're making into the market.

You saw in, maybe you've seen in my slides, the sell-out, right? Mid-single digit sell-out growth. You know, the overall environment, the US market overall is still in a slight volume decline, right? So, we've been gaining volume, so we have to work for that. Plus, I think Brian mentioned earlier also, I think the launches we've done and the support we put behind the Sensodyne, support behind the Centrum, the Centrum claims. We've also launched Benefiber extension. So I think there is strong support to deliver the continued growth in the market overall there. I look for H2, we're not guiding on segment margin, but you should expect us to continue to invest in the US as well.

Also on top of that, behind Eroxon launch later this year.

Operator (participant)

Thank you. Our next question comes from Iain Simpson of Barclays. Iain, your line is now open.

Ian Simpson (Managing Director and Staples Research)

Thank you. Thank you very much for allowing me a follow-up. I just wondered if we could sort of briefly touch on some of the items between EBIT and EPS, because certainly historically, there's been pretty good EBIT and above delivery, but EPS has, you know, not done an awful lot in the last year or two. So as we kind of think through 25, I guess, you've told... We saw finance costs come down a little bit this year. Presumably we'll get continued benefit there from deleverage. Nothing weird is happening to tax rate unless you're gonna tell me otherwise, and share count presumably comes down as well.

I'm just trying to think about how confident we can be that that 6% EPS growth that you did in H1 2024, that we are now kind of in a place running forwards where EBIT growth translates to EPS growth. Thanks very much.

Tobias Hestler (CFO)

Thanks. Thanks, Iain. So look, yes, net finance costs should, you know, continue to come down as our net debt goes down. I think you've seen that very much come through in half one, where net finance costs were eleven percent lower than a year ago. So I think that's absolutely happening. On the adjusted tax rate, we're bang on in the middle of the guidance range we've given early in the year already on 24%-25%. So I think that I think is, I think I believe we're here absolutely in the right range. Of course, there's still, you know, pluses and minuses on that as Pillar Two laws are enacted around the world.

So I think there, you know, that could ease it that, you know, but it's within this range, but ±50 basis points. Let's see where we get to, and, but I think very confident that's the right range. Then let me mention one of the things you didn't mention, which is the non-controlling interest. Those were very much higher last year, given the dividend spike. Dividend sits in the joint venture part, so there was much higher non-controlling interest. That's normalized now, so what we have in half one is actually a pretty good run rate for the rest of the year. So, so probably you should take a look at half one as a, you know, would say, it's pretty balanced, in half one and half two, what we expect on that line.

And then, yes, from the share, from the share buybacks, we're gonna get the benefit of the share count coming down, which has also, which has also been happening. Yeah. So all of those, I think, moving, moving, in the, in the right direction, and are supportive to EPS overall. Yeah. Mm-hmm. Thank you.

Brian McNamara (CEO)

Thanks, Iain.

Operator (participant)

Our next question.

Sonya Ghobrial (Head of Investor Relations)

I think we take one more question.

Operator (participant)

Okay.

Sonya Ghobrial (Head of Investor Relations)

If we take one more question and then come back with some comments at the end.

Operator (participant)

Of course. Our next question comes from David Hayes of Jefferies.

David Hayes (Managing Director and Equity Research)

Hello, I'm gonna join the theme of second questions. So just to follow up on the margin question we had earlier on the U.S. from Celine, I think. Is there also a one-off cost associated with the switch from the FDA-reviewed products? Do you have to buy those products back and effectively write them off? Is that part of the equation in the first half as well, which obviously we wouldn't see in the second half? Just want to understand whether that was contributing to the margin performance. Thank you.

Brian McNamara (CEO)

Thanks, David. I mean, not material, right? I mean, there might be a packaging material here or there that's left over, right? But I think we've really proactively started at the beginning of the year to ramp down those inventory and not to replenish them, right? So the big mark in the PNL is from just the selling less, of course, of higher margin brands into the market. That is gonna reverse out in the second half of the year. I think, you know, the write-offs on that, we're not buying it back, right? So the write-off should be, you know, not material. Of course, always some stuff left here or there, but not in the, you know, not in the grand scheme of things that should impact the group margins materially in any way, yeah.

Great. Thank you.

Tobias Hestler (CFO)

With that, back to Brian then.

Brian McNamara (CEO)

Yeah, super. So listen, thanks, everyone, for joining us today. As you can see from the results, our model is delivering. We feel really good about our first half. Do let Sonya and the IR team know if you have any further questions. But before we leave the call, I'd like to express a big thank you to Sonya. Today will be her last Haleon investor call, and it's been an absolute pleasure working with Sonya these last four and a half years. I'm forever grateful for all she did to help in the creation of Haleon. She's had a huge impact. I wish her well in her new life at Diageo. And just wanna say a big thank you, Sonya, and well done, and wish you well.

Okay, everyone, if you have any further questions, again, reach out to the IR team and have a great rest of-