Haleon - Q1 2024 TU

Transcript

Operator (participant)

Ladies and gentlemen, welcome to the Haleon Q1 2024 Trading Update conference call. I am Darvin, the Chorus Call operator. I would like to remind you that all participants will be in the listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over the conference to Sonya Ghobrial, Head of Investor Relations. Please go ahead, madam.

Sonya Ghobrial (Head of Investor Relations)

Thanks very much. Good morning, everyone, and welcome to Haleon first quarter trading statement conference call. I'm Sonya Ghobrial, Head of Investor Relations, and I'm joined this morning by 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 U.K. and FTC filings for more details, including factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. As usual, we'll take you through some prepared remarks before opening the call to Q&A. For those listening to our webcast who'd like to ask a question, please use the dial-in details on page three of today's release.

Also, while the focus today is on the revenue performance, we've also provided group profit and margin detail on both a reported and an adjusted basis, with a full reconciliation, including one for organic revenue growth in the appendix. As a reminder and for information, we do not intend to provide quarterly profit data on an ongoing basis and will only do this for as long as Pfizer reports our results as part of its financial statements and until our registration rights agreement with Pfizer terminates. With that, I'd like to hand the call over to Tobias.

Tobias Hestler (CFO)

Thank you, Sonya, and good morning, everyone. Let me first start with our highlights for the quarter. We had a solid start to the year with 3% organic revenue growth, driven by 5% price and volume mix down 2%. Positive volume mix in EMEA, LATAM, and APAC was offset by a decline in North America. However, whilst growth was held back in the U.S. from inventory adjustments by some retailers, Haleon's consumption in the U.S. was up mid-single digits and ahead of the market. Adjusted operating profit of GBP 707 million was up 12.8% on an organic basis, with gross profit up 5% organically, funding strong growth in A&P.

As pricing is normalizing and cost inflation easing, combined with our productivity program, you can see that our growth algorithm is delivering even in a low-growth quarter, and it's enabling increased reinvestment. We've made continued progress in the evolution of Haleon to become more agile and competitive, and we're now seeing the results of the productivity program announced last year. We also shared in today's release the proposed closure of our Maidenhead manufacturing facility, transferring production to our Levice site in Slovakia over the next two years, an important step in Haleon building a more efficient global supply chain. As a reminder, with our full-year results in February, we announced that we expect to allocate GBP 500 million to share buybacks in 2024. To date, we have purchased 102 million ordinary shares for approximately GBP 350 million.

The solid start to the year gives us confidence in delivering on our full year 2024 guidance, as stated in our release this morning. Let's look in more detail at our Q1 results. Revenue of $2.9 billion reflected 3% organic revenue growth. Our strong organic profit growth resulted in a 24.2% margin, up 110 basis points on a reported basis and up 220 basis points organically. Turning to slide 6. Coming back to organic revenue, we had guided that Q1 revenue would be just below the lower end of our 4%-6% full year organic growth guidance range. However, in this quarter, we also saw some inventory adjustments in the U.S., resulting in volume mix a little weaker than expected.

Overall, volume mix declined 2%, with EMEA and LATAM returning to volume growth after two quarters of volume decline. Asia Pacific also saw a positive volume mix despite lapping tough prior year comparatives in China following the end of COVID-19 lockdowns. Although North America volume mix was down, consumption was good, reiterating healthy demand for our brands. Price was up 5% and included both carry forward price from last year as well as incremental pricing taken during the quarter. Going forward, we expect a carry forward benefit to reduce a little through the year. Organic revenue growth was more than offset by a 460 basis point adverse impact from translational foreign exchange. Year-on-year sterling strength relative to the dollar and Chinese renminbi were the main drivers.

Given how FX rates evolved through 2023, we always expected the impact of foreign exchange to be most pronounced in the first quarter. Therefore, no change to our full year outlook. Net M&A was minimal and reduced revenue by 0.6%. Looking now at performance across our categories. I was particularly pleased that our health revenues grew 10.6%, with Sensodyne, Parodontax, and Poligrip Polident all up double digits, further building on last year's strong performance.... This was underpinned by a number of successful innovations, such as Sensodyne Clinical White, scientifically proven to whiten teeth by two shades without worsening or causing sensitivity. VMS revenue grew 9.9%, continuing momentum from Q4 2023, and demonstrating our brands remain well-positioned and continue to outperform. Caltrate was up double digits, with strong growth in China.

Strong Centrum growth was underpinned by performance in North America and continued activation of cognitive function claims for Centrum Silver. Emergen-C grew mid-single digits, gaining share and outperforming the immunity category in the U.S. Pain Relief revenue declined 4.8%, mainly reflecting tough comparatives from Q1 2023 with Fenvid in China, and also Advil declined double digits, partly due to elevated demand in Canada last year, as well as inventory adjustments by some U.S. retailers. Panadol declined low single digits, driven by a softer performance in Asia Pacific, given the decline in Australia, and Voltaren grew mid-single digits with strength in Europe. As expected, Respiratory revenues were down, lapping the strong prior year comparatives.

In Q1 2023 from Contac in China, as well as the prior year rebuild of inventories, mainly in the U.S., given low levels at the end of 2022, when cold and flu incidents spiked late in the year. Finally, digestive health and other revenue increased 2.4%, with digestive health and skin health up low single digits. Smoker's health declined low single digits. Turning to regional performance. Emerging markets, which are 36% of revenue, saw 7.7% organic revenue growth, with the benefit from pricing and hyperinflation economies now capped, and despite it, China being down low single digits. Developed markets grew 0.5% organically. Looking at each region in more detail, starting with North America. Organic revenue declined 3.3%, with positive price up 4.5% and volume mix down 7.8%.

Oral Health grew mid-single digits, driven by Sensodyne. VMS was up double digits, and Pain Relief and Respiratory Health both declined due to challenging comparatives and inventory management by some U.S. retailers. Let me take you through this in a bit more detail. While some inventory management is expected through the quarters, this quarter was a little unusual. You will remember that the cold and flu season had an early and strong spike in Q4 2022, very much towards the end of the year, and this resulted in restocking of depleted inventories in Q1 of 2023. Normally, what we would expect, and what we saw in Q1 this year, was destocking in the quarter as retailers sell out stock and reduce inventories towards the end of the season.

As a result of this, and given the comparatives, there was a much higher than usual year-on-year change in sell-in, resulting in the majority of the volume decline seen in the region. Additionally, and to a lesser extent, we saw some inventory adjustments by some U.S. retailers on other categories, which also impacted sell-in. However, looking at consumption data on the market, our consumption increased mid-single digits, and both the market and Haleon performance improved in Q1 compared to the last twelve months. More importantly, Haleon outperformed the market, both in value and volume, demonstrating consumer demand for our brands remained healthy. Turning to Europe, Middle East, Africa, and Latin America. Organic revenue increased 8.6%, with 7.5% price and 1.1% growth in volume mix.

Pricing partly benefited from carry forward from 2023, and also the benefit of incremental pricing taken in the first quarter. Volume mix was positive, despite some offsets from a decline in Middle East and Africa. Across the categories, our health saw double-digit growth, driven by all three power brands. VMS increased mid-single digits, with good growth in both Centrum as well as local brands. Pain Relief in the region saw mid-single-digit growth, reflecting good growth from Voltaren, and Respiratory sales increased mid-single digits, despite lapping a challenging prior year comparator. Finally, turning to Asia Pacific. Organic revenue increased 3.3%, evenly balanced between price at 1.7% and volume mix at 1.6%. A really good performance, particularly given the expected decline in China in Q1.

Within the categories, oral health saw double-digit growth, underpinned by strong growth across key markets, including China and India. In VMS, we saw high single-digit growth underpinned by Caltrate. Respiratory Health grew high single digits, despite the challenging comparative and Pain Relief declined. Turning now to our operating performance. We delivered GBP 707 million of adjusted operating profit, an increase of GBP 16 million. Solid revenue growth with pricing, easing of inflationary cost pressure, and efficiency from the productivity program allowed us to strongly invest into the business and into A&P. Net M&A had a negative impact of GBP 12 million and was a 30 basis points drag on adjusted operating margin. Finally, there was a GBP 59 million or 80 basis points adverse impact from translational foreign exchange. This mainly reflected movements against the U.S. dollar and Chinese renminbi.

Taken together, this resulted in a 2.3% increase in adjusted operating profit and a 24.2% margin. Remember, as you've seen in prior years, the quarters are very volatile, and as such, neither the Q1 absolute margin nor the organic profit growth should be extrapolated for the full year. We continue to evolve and implement change across the business to become a more agile and competitive organization. The productivity program is delivering the expected savings and is funding increased investment in the business and driving growth. In addition, we announced plans for the proposed co-closure of our manufacturing facility in Maidenhead, which is expected to result in a total restructuring cost of around GBP 90 million over the next two years, the majority of which is non-cash.

There is no change to Lamisil and ChapStick impact, which I guided at with the full year results, but I can confirm that we expect ChapStick to close in May 2024. Also, in the quarter, we completed a share buyback of GBP 315 million for 102 million ordinary shares, all of which were subsequently canceled, reducing the number of shares in issue by circa 1.1%. This was part of the GBP 500 million share buyback we expect to complete in 2024, announced with our full year results. The expected impact of translational effects remained unchanged, with an adverse impact of 2% on full year 2024 revenue and 3% on adjusted operating profit. This assumes rates as at the 31st of March 2024, hold for the rest of the year. All other full year 2024 guidance remains unchanged.

So to sum it up, Haleon delivered a solid first quarter performance despite lapping challenging comparatives. We delivered organic profit growth ahead of organic revenue growth, benefiting from improved gross profit as well as efficiencies in the business. Our business is evolving as we implement change to improve agility and our competitiveness. Finally, following Q1, I remain confident that we are well placed to deliver on our full year guidance. Before we move to Q&A, I wanted to briefly say a few words on my own personal news from last week. As you will have seen, I'll be leaving Haleon at the end of the year. It wasn't an easy decision to make, but I'm really proud of the strong foundations we've built and what we have achieved. It's been an amazing period, both professionally and personally.

I was very open about wanting and needing to create more balance in my life, not least because as you get older, managing type 1 diabetes becomes more and more important. So that's been a driving factor in my decision. I'll be focusing on advisory and non-executive work from next year, which is an exciting new phase for me. You also have seen, we announced that Dawn Allen, currently the CFO at Tate & Lyle, will be joining at the end of October to succeed me. She's an exceptional leader and will bring deep consumer and international experience to the business. Haleon is in good hands. In the meantime, it's very much business as usual. I'll be leading us to Q3 and then working with Dawn for a couple of months handover before leaving at the end of the year.

Anyway, with that, let's now move to Q&A, and I will hand back to the operator to open up for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets when asking a question. Anyone who has a question may press star and one at this time. We have the first question from the line of Rashad Kawan with Morgan Stanley. Please go ahead.

Rashad Kawan (Equity Analyst)

Hey, good morning, Sonya and Tobias. Thanks for taking my questions, and congrats, Tobias, on, on all that you've achieved at, at Haleon. A couple questions from me, please. First, from a volume mix perspective, I guess you shouldn't have much noise in Q2 outside of the cold and flu dynamics in China, and North America should be clean. Is it fair to assume that we should expect vol mix to be positive for the remaining three quarters? And in terms of pricing, notice obviously some, some more incremental pricing being taken, which is consistent with what you've said at the full year. Are you broadly done for the year, or is there more selective pricing to take? And then just second question on the Maidenhead facility, if I can.

How should we think about the phasing of the GBP 90 million restructuring over the next two years, and what level of cost savings are you expecting? Thank you.

Tobias Hestler (CFO)

Great. Thanks. Hi, Rashad. Thank you. Thank you very much. So let me, let me start with your volume question on, on Q2. So in Q2, as you mentioned, there's still the noise or prior impact on Fenbid in the base. Yeah. So, and, and remember last year for Fenbid, China went into their second wave of, of COVID infection, so it was actually the impact on Fenbid in Q2 was bigger than in, in Q1. So that is pretty much what's left in the base. I think all, you know, the Respiratory, the Respiratory swaying, also the U.S. swaying is, is a base effect that impacted Q1, that is, that is behind us. Yeah. On your question for volume for the year, I think we're confident in volume growth for the, for the year.

I'm not going to guide to the quarter, but you would say, you know, would expect from that the big gap is behind us from the base, but you see an improving trend from Q1 forward. Yeah. Then on pricing, so overall, I think, you know, very pleased with the pricing, how it started. I think very much on track, what I had guided for the full year, where I said, you know, that from a price volume mix, 2024 is a stepping stone, and also said we wouldn't be at a 50/50 mix between price volume in 2024. So, I think we're gonna get back to that, but not in 2024. So last year, as I remember, 15% was volume-driven, 85% was price-driven.

2024 should be a stepping stone to more balance, but not the balance yet. We've taken the majority of the pricing in Europe. So I mean, for example, European retailers, you do that once a year, so most of these negotiations have completed, and we're very much on track on what we expected. But then, of course, we have countries like in the U.S., where we take pricing, you know, not at a given time in the year, but you try and do pricing together when shelf resets are done. So we will see how the end situation evolves, and you might see pricing here or there come through.

And then, of course, in the emerging markets, we take pricing on a more regular basis to be aligned with that. And then on Maidenhead, so the GBP 90 million, I mean, it's largely non-cash. I would assume probably roughly half and half for 2024 and 2025. I mean, 2024 is mainly the write-down of the assets, and then you would have the severance cost roll through a bit later on.

The savings are incremental to the GBP 300 million productivity program, and they'll start to come over the next two years as we ship production to the Levice and to third parties, as well. So thank you.

Rashad Kawan (Equity Analyst)

Thank you very much.

Operator (participant)

Thank you. Next question comes from Guillaume Delmas with UBS. Please go ahead.

Guillaume Delmas (Executive Director)

Good morning, Tobias and, Sonya. I've got two questions. The first one is on the volume contraction in Q1 in North America. Tobias, could you maybe provide a bit more granularity on how much of this Q1 weakness in North America was attributable to Advil in Canada, to last year's unusual reordering pattern in the U.S., and then this unexpected, from the sound of it, inventory reduction in the quarter? And I guess related to this, I would expect the first two factors, so Advil Canada, and last year's unusual ordering pattern, to be a non-factor in Q2, but do you expect further inventory adjustment affecting your Q2 performance, or do you think retailers' stock levels in the U.S. are now quite low, or at least healthy?

So any indications on when sell-in and sell out should be a bit more aligned would be helpful. And then my second question is on your gross margin improvement in the first quarter, because it was quite significant, despite what I would think was negative mix with OTC down, negative volumes, FX headwinds. So what were the key drivers behind this improvement? And would it be fair to assume that mix, FX, operational leverage should all improve at the gross margin level going forward? And if so, is your current mindset that most of this gross margin benefit should be reinvested, particularly in the A&P spend? Thank you very much.

Tobias Hestler (CFO)

Thanks, Guillaume. So let me talk the volume, on the volume point, first. So, as I said in my remarks before, the majority, and the large majority of the volume, decline in North America is driven by the two things you mentioned, which is the Advil, the Advil Canada, and in the U.S., it is the swing between, an inventory burn, normal this year, and an inventory build, unusual, last year. So that's the, that's the vast majority of the, of the swing, and as a result, that is in the base and, and will not repeat, going, going forward. So I think from that point of view, we know we are leaving that, behind us. Then, as you said, there were some additional...

As I mentioned, there were some additional inventory adjustments by some retailers that impacted other categories. Look, I think what we've been seeing is that retailers are focusing more on working capital. I mean, when you look at the drug channel, clearly, their overall situation, that doesn't surprise you, did you focus more also on the cash side, on the working capital? Also, I think, what we've seen over the last six-nine months is that, you know, the supply chains, not just for us, but in general, are much, much more stabilizing. Volumes are much more stabilizing, so I think that allows you to better and improve your inventory management, and that's what we've seen retailers do, right?

It's very hard to predict what they're gonna do, because they're not gonna tell you exactly what they're doing. So, you know, I can't, I can't tell you if this is, this is all done. We're watching it very tightly. What I can say is that at the moment, we're having about one week less of inventory compared to what we have seen historically. So I never felt the inventory was too high, at least compared to historical trends, and it's about one week, one week lower than what I've experienced in the past. So I think it's in a, you know, pretty normal level from what I can say, but, you know, we'll keep you updated on it. But look, most importantly, I think is really the U.S. consumption. It was strong. I mean, we're growing mid-single digit.

We're outgrowing all the categories that we're playing in, in the U.S., and also we see the market a bit improving in the U.S. I mean, the market was in quite a bit of volume decline last year, which I had shared at full year. It's now still in a small volume decline, but we've been growing volume in that market, which I think speaks to the performance of our brands and our execution in the market that is moving in the right direction. Then let me move to your gross margin improvement. So as you say, I mean, we had a very strong start to the year.

Gross margin improved by about 100, a bit more than 100 basis points, which is great, of a combination of easing inflation, and the pricing coming through and the efficiencies we're driving. Mix isn't really a factor, Guillaume. I think, you know, Oral Health has done very well. Oral Health has very similar margins to OTC, so that helps us carry through. Over 10% increase in Oral Care carries us, especially on very premiumised products like the ones we have launched as well. Now, also take a look back at last year. Last year, Q1 was the quarter when we took the biggest hit because we had exactly the opposite effects happening.

Last year, we still had the impact of increasing inflation that then from the second half of the year, that really came through to the P&L in Q1, coupled with not all the pricing yet being in place. So I think you, you see a bit the offsetting effect. As we have said, we believe gross margin will improve for the full year, are very much on track with that. We've done that in Q4. So in Q4, it came up 70 basis points. We've had another gross margin improvement in Q1, but of course, then by the end of the year, we'll also start cycling over that a little bit. And then, yes, absolutely, the intent is to continue to invest in A&P.

We increased A&P, invest strongly in Q1, and we intend to do that, going forward to really capitalize on the, on the opportunities we have in the market, and also to, you know, drive continued growth for the rest of the year, and that gives us confidence in the, in the 4%-6% outlook. Thank you.

Guillaume Delmas (Executive Director)

Thank you very much.

Operator (participant)

Thank you. The next question comes from David Hayes, from Jefferies. Please go ahead.

David Hayes (Managing Director)

Hi, good morning, all. I've got one follow-up and two questions, if I can. Just following up, you mentioned the 50/50 a midterm on price volume. I think you said 40/60 was what you were thinking, roughly, when you talked at the full year stage. So just a question whether that's what you did say and whether that's changed at all based on what you've seen in the first quarter. And then the two questions are: on the Maidenhead closure, two things on that. I don't think, and if I missed it, apologies, that you quantified the savings from that closure, but also, is this part of a bigger plan that's going on in terms of a supply chain savings initiative beyond the GBP 300 billion, as you talked about under the new supply chain ahead?

Should we expect more of these kind of announcements to come over the next couple of years, and is that something you could maybe quantify roughly, as additional savings over the next couple of years? And the final one for me, just in terms of the price increases in the quarter, was there any pre-buying at all, ahead of price increases through the period? And were those price increases across the regions, or was it mostly focused in Europe? And again, apologies if I missed that. Thanks so much.

Tobias Hestler (CFO)

Sure. Thanks. Thanks, David. So, on your follow-up question, right? I mean, what I've always said, pricing and volume, it's about a, you know. It's about half and half, so it could be 40/60, or it could be 60/40 in one, in a year, right? It depends on when do you take volume and when do you take price, right? So I would say, you know, anything that is between 40 and 60 in either year, in either direction, is sort of the approximate balance between the two, right? It's not an accurate 50/50 balance, but somewhere in this, in between those two, and that's what we have seen historically, and I think we're going to get back to this broad balance, over probably the next, the next two years, or so. But thanks for, for the, the clarifying question on, that.

On Maidenhead, so first of all, the savings are incremental. We're not specifying them, but I think that there are good savings. I mean, it's a site with 430 people in Europe. We're shifting that to a much bigger site in Levice in Slovakia, which is our key manufacturing site for Oral Care products. And as a result, it will have a very fast payback on the one-time costs or the cash costs that are associated with that. We're doing that, I mean, pretty much, I mean, we said that I think when we even at the Capital Markets Day, that there will be a phase where I think we're going to make Haleon, and we're in the middle of this, a more agile and more competitive company.

And that is part of that that we look at where are opportunities to make this a business, and where can we free up resources to then reinvest in the business and with that, to accelerate growth. So it's part of this program, but I think given it's incremental to the GBP 300 billion productivity program, we also announced that separately. So you see that there is additional benefits that we're delivering, but also against the incremental one-time costs that are coming through. Yeah. And then on price increases, we do not tend to see massive forward buying, and also we try and limit that, right?

I think also, don't forget, a lot of our sales are to a lot of individual pharmacies and customers, so there isn't. So I've not seen any trends on that. I think most, and you've seen, look, most of the pricing was taken in Europe. The pricing in the U.S. is taken at different times throughout the year. And then look, APAC also, I think, look, has a much lower inflation environment and also the pricing was lower. But I think so no, no concerns about anything spiky from pricing increases. That does not tend to be the case in our business, so.

David Hayes (Managing Director)

Great.

Tobias Hestler (CFO)

Thank you, Tim.

Operator (participant)

Thank you. The next question comes from the line of Iain Simpson, Barclays. Please go ahead.

Iain Simpson (Equity Research Analyst)

Thank you very much. A couple of questions from me, but Tobias, very sorry to hear the news of your departure at the end of this year, and the support you've given the analyst community since then will be much missed. So questions from me, if I can. Firstly, just thinking about the moving parts going into Q2, I think you've got a slightly tougher comp in China, but clearly a significantly easier U.S. comp. Would it be reasonable to expect Q2 being back in that 4%-6% medium-term range then? And just as a kind of adjunct to that, I think you made a comment about where inventory levels were versus pre-COVID, but I wasn't clear if inventory levels were a week more or a week less than they were pre-COVID.

Any clarification there would be very helpful. And then secondly, just looking at Oral Care and VMS, you know, 10% growth in the clean parts of your business is pretty impressive. I wondered if you could provide any color as to how much of that 10% was pricing that we might expect to see sort of fade a bit as the year progresses, and how much of that 10% was volume growth from all the usual stuff of, you know, share gain and rolling out into white space and innovation and all those things. Thanks very much.

Tobias Hestler (CFO)

Good. No, thanks, Iain, and thanks very much for the initial comment. Appreciate that. But we'll have eight months together to celebrate and toast, and we'll see each other along the way. So I think that's time for that. But going back to business, so it's one week less of inventory than what we had historically seen. So I think right now, when I look at my week of stock coverage, it is one week down, so that means one week less in the sitting in the retailers and in the store, compared to where it was historically. And what we've...

What I've experienced for, you know, over, you know, a very, very long, very long, long time, which gives me a bit of confidence that I don't think it's, you know, it's overstocked. But clearly, as I said, retailers are now more focusing on it, where they are. So we'll keep you updating on it, as we track this. You can imagine we track this very tightly, with our retailers. On the moving parts in Q2, so I think you mentioned, right, tougher comp in China, to cycle over an easier comp, a much easier comp in the U.S.

So I think clearly an improving trend from Q1, but I don't want to get into guiding for quarterly growth rates. I think ultimately, you should take some comfort into us having, you know, very much confirmed our 4%-6% guidance for the year. And then look, thanks for also asking a question on the stuff that's going great. So, Oral Care, really good, really good quarter with 10.6% growth. What's driven that? Partly was driven by the launches we had, so really strong innovation come through, and that is on top of innovation we had pretty much a year ago. So I think last year we launched Pronamel Active Shield in the U.S., also in Q1. We now had a big...

another big innovation within 12 months. I mean, the normal thing is probably 18 or so. So I think we got two big innovations through. Of course, there's still growth coming from that innovation that we launched a year ago, so that continues to go well. And then, of course, now we launched on top Sensodyne clinical white and also taking that to other markets. So there's a bit of, you know, sell-in and piping impact on that. But then overall, I think, look, no, it was both. It was volume, and it was price, and it was more volume than price for Oral Care.

And I think it's just a combination of launches, good execution, and then also, I think, you know, Denture Care is still benefiting from the innovations we had in the last 12 months in that business too. So it's like now, I think all the three big brands really firing from all cylinders, which is, of course, great to see. And then look, on VMS, I mean, we've, you know, we've always said very consistently that we believe this is a category that is growing. The category growth is now back to mid-single digits, so in Q1, which we always said it would. And then we also said we believe our brands are doing well and are well-positioned in that, and that is exactly what happened in Q1.

By the way, very similar to the numbers I shared at full year, when I shared with you the sell-out on the three brands. Of course, very much as expected, the drag from Emergen-C on the vitamin C category has now ended, so you have all the three brands going well. We got a little bit of help in China with a competitor that had some supply issues, so the team was able to capitalize on that. But in aggregate, I think really good, really good performance. And, you know, it's a mid-single digit growth category that we're playing in, and we're outperforming that category, and that's where we would love to see that. I hope I answered all your questions.

Iain Simpson (Equity Research Analyst)

You did. You did. Thank you very much.

Tobias Hestler (CFO)

Thanks, Iain. Appreciate it. Thank you.

Operator (participant)

Thank you. We now have a question from the line of Bruno Monteyne from Bernstein. Please go ahead.

Bruno Monteyne (Senior Analyst)

Hi, good morning, Tobias. We hear a bit less these days about the Voltaren and the growth rates than necessarily as they were historically, but, you know, together with oral and VMS, as you just discussed, it should be one of those engines that pulls Haleon forward. Is there a need for more innovation in Voltaren? Is something like, like that common, coming, like you've done with Sensodyne and new product varieties? Can you comment on that? The second one, I think you did start talk about A&P being up, but I'm not sure if you quantified as a percentage of sales. You know, how much is it up? Is it comparable to the increase in gross margin that you talked about as percentage of sales for the group?

And last but not least, I think there is still some, you know, hope or expectations for erectile dysfunction cream to land in the U.S., I think in quarter four. Is that on track, and is it still sort of set with some good additional volume growth towards the back end of the year on top of the usual run rate? Thank you.

Tobias Hestler (CFO)

Thanks, Bruno. On your last question, I didn't get the topic, so could you just repeat the third one? The other two I got, yeah.

Bruno Monteyne (Senior Analyst)

Yeah. The erectile dysfunction cream that you meant to launch-

Tobias Hestler (CFO)

Ah.

Bruno Monteyne (Senior Analyst)

In the U.S., I think at the end of the year.

Tobias Hestler (CFO)

Yeah.

Bruno Monteyne (Senior Analyst)

Is that on track?

Tobias Hestler (CFO)

Got it.

Bruno Monteyne (Senior Analyst)

Should we still expect some good volume from that?

Tobias Hestler (CFO)

Perfect. I didn't hear of the ED cream. Then it's good. Thank you. I got it. So look, let me start with Voltaren. So mid-single-digit growth, brands in growth. You know, always we said, you know, it's a brand that topical pain relief usually, if there's a lot of cold and flu going around, people take a lot of Panadol or Advil, then they use a bit less topicals. I think now also that stabilizing usually gives us a bit of a benefit on the Voltaren, so there's been an offset in the portfolio with that. So I think pleased to see the performance being good on Voltaren in the quarter.

From an innovation point of view, I think given it's OTC, these have much slower innovation cycles. I mean, the last big innovation cycle we did with Voltaren was the double-strength or extra-strength formulation, which I think is now nearly everywhere in the world, but not fully. So there's a few more markets to go, to go with that. These innovation cycles take a bit longer. So, I mean, it took us eight or nine years to roll this out, so the world is out globally. Whereas an innovation like in Oral Care, you get rolled out probably within 12 months or 18 months across the world, at least to the markets where it makes sense to have that innovation.

Of course, what's happening on Voltaren is some smaller innovations on, you know, packaging, sizes, as well. So I would always expect, you know, much less innovation in the OTC brands, and then the continued fast-paced innovation in Oral Care and also in VMS, which I think we're both delivering. On A&P, we haven't specified as a trading update. We carefully use the word strong after taking guidance from Sonya, what strong means. She told me all of you will be able to translate that, and it means more than sales growth, because sales growth was solid. And also, I think we really invested a good part of the gross margin expansion back into A&P.

So I think, really executing on what we promised we would do there. And then on Eroxon, the erectile dysfunction cream. So we had said that full year that we would intend to launch it in 12 months, so that means now within 10. We're making good progress on ramping up and building the production. So all these plans are tracking along nicely. And then sort of once we get closer to the launch date, we would of course inform you about it. So excited about it. The progress is very much as planned. So next 10 months, this should come to the market, then as well.

Bruno Monteyne (Senior Analyst)

Thank you.

Tobias Hestler (CFO)

Thanks, Bruno.

Operator (participant)

Thank you. The next question comes from the line of Viktoria Petrova from Bank of America. Please go ahead.

Viktoria Petrova (Director)

Thank you so much. My first question is on Advil U.S. market share. Last time we talked, you commented that your market share has stabilized. Were you seeing any improvement in Q1? How should we think about it into the end of the year? And my second question, once again, let me try to ask it slightly different. How should we think about the volume shape of recovery? We still have sort of a negative impact from comps in China in Q2, but it's obviously much smaller than all in Q1. And then we should have very positive or supporting comps in the second half of the year. Is it fair to assume that volume would turn positive immediately?

Should we also think about it in terms of matching your comment on sell out in North America in Q2 with what you saw in Q1, only on the sell out part, when you commented on mid-single digit dynamics, should we see it already in the second quarter on the results? Thank you very much.

Tobias Hestler (CFO)

Thanks, Vika. So let me start with U.S. Pain Relief. So we've gained share in U.S. pain relief in Q1. And this means the green shoots we've been seeing have continued to progress. Overall, I think we were able to gain share in the Pain Relief segment in the quarter, which I think is positive. Advil's back to... It's back to growth, so I think that's good to see. But look, I mean, it's early in the journey, right? I mean, this is two quarters into a turnaround plan, so I think let's be cautious. Let's be cautious on that. Also, given the overall environment in the U.S., with you know, inflation continue to be high.

So I think we just have to be mindful of that. That probably answers then also a little bit your second question, right? I think we're very pleased to see that sell out is good in the U.S. I think driven by, I think, Oral Care driven by, driven by the VMS brands, and also us gaining share across the other categories. But again, you know, I think I wouldn't immediately roll this forward into the next quarter, just given the overall situation. And then on your volume shape of recovery, I think it's a gradual step up, so it will be better than Q1. So it's a gradual improvement.

But of course, I think more, of course, more phase to the second half of the year, as we always expected, because we have to still cycle through Fenbid. I mean, I think you should take some comfort from Europe or EMEA LATAM being back in volume growth, which was a drag in the second half of the year. And also, I think, you know, APAC, which had a good quarter, and then we'll see where we get to with the U.S. and also on the inventory side as well.

Viktoria Petrova (Director)

Thank you very much. Tobias, you will be missed. Thank you so much for all your help.

Tobias Hestler (CFO)

Thanks. Thanks, Vika. I'm around for eight more months to help, and-

Viktoria Petrova (Director)

That's amazing

Tobias Hestler (CFO)

... I look forward to seeing you.

Viktoria Petrova (Director)

Thank you.

Operator (participant)

Thank you. The next question comes from the line of Celine Pannuti with JPMorgan. Please go ahead.

Celine Pannuti (Managing Director)

Yes, good morning. I have a follow-up and two questions. My follow-up about pricing. So you had the strong pricing, which was the rollover plus new improvements. Can you just help on how we should think about the phasing or the step down pricing through the year? I mean, was it really a Q1 benefit? And then slowly we have a step down into Q2, is it a progressive normalization? My two questions, number one, I wanted to understand if you could give what growth rates you had in China, and within that the volume performance. You mentioned that Fenbid was a success, and it's gonna be a success something in Q2, but if you could, what's China volume negative? And, yeah, if you could flesh out the different business performance.

You just mentioned Europe, Latin America, that was back in volume. Can you talk about where that volume come from, the picture for LATAM, and what you saw from the category perspectives? Thank you.

Tobias Hestler (CFO)

Good. So let me maybe start with the pricing question. So yes, I mean, pricing was good in Q1, right? I think we expected good pricing going into, into the year, and I think that came through, which I think is positive. So I think what we had planned for the year is coming through the pricing negotiations, as I mentioned earlier, before. So I think that is encouraging. Of course, there's still some rollover pricing looking at when when Europe took pricing. So I wouldn't expect 7.5% price growth in EMEA for the rest of the year. So that's the one that probably comes down. Whereas I think in the others, I mean, it's probably more stable there, right?

I think APAC wasn't that high, and or it's normal. And then I think also the U.S. is pretty stable. But again, in the U.S., it's a bit more spiky because we take pricing at different points of the year and depending on when we rolled over. But it's really EMEA, LATAM, that I think will... I would expect to come down slightly from the levels they've been, right? But again, if you take the bigger step back, I think for the full year, I think we won't be in this, you know, roughly half-and-half split, where I think consensus currently sits, right?

I think that's the important message for me, that I think there is more pricing, there's more pricing this year than compared to what the consensus is seeing. Yeah. Then on China, I think... Look, I think overall, you've seen from some of the commentary, I mean, not surprising. I think, I mean, Pain Relief was down significantly, given our cycling over Fenbid. So that was a massive double-digit decline on pain, very much as expected, and then that would even be a bit more in Q2. And don't forget, Fenbid is one of our top three brands in China.

And then, on the flip side, we had really good growth in in VMS, so so high single high single digit growth across the across the category. So I think that that is positive, and and good. And then I think Respiratory was, you know, slightly down, so despite cycling over the the benefit, and then Oral Care had a really good quarter in in Q1. If you remember, Oral Care was a bit struggling in China in half one. So I said before, look, while we had all this benefit from Fenbid, there's also a bit of a, not all the, not the business wasn't firing from all cylinders last year. So and we're starting to see that come through with Sensodyne and a few other brands doing doing well.

But in aggregate, it's correct. China was down. It was down in Q1, which again, I think gives you a bit, you know, even despite that, you know, emerging markets were up high single digits, so it shows you a bit of the strength of the portfolio again, that from a geographic basis, even with the biggest market, with a nearly 10% weight of our business being, that being down or being a third of our emerging market, we're still able to grow the emerging market at high single digits, which I think are supportive to the 4%, 4%-6% growth algorithm that, that we had, yeah? And then on the EMEA LATAM, I think, look, volume growth. I mean, I think, EMEA was down a bit.

I think there's a bit of, you know, delays from the Red Sea, so we had some shipping delays there. Also, you know, we see a bit, you know, consumers under pressure in Turkey, so smaller markets, as well. But so that means the volume growth really came from both Central Europe, but also from Western Europe, which I think is encouraging, because that was sort of, you know, the areas that we were probably a bit more concerned about consumers and how they're behaving. And I think this just, again, shows the strength, but also probably the strength of our distribution model, as a big part of the business is sold through pharmacy, so.

Sonya Ghobrial (Head of Investor Relations)

That time was actually slightly positive in volume as well, so.

Tobias Hestler (CFO)

Ah, thanks, Sonya. Yeah. Mm-hmm. Great. Thanks, Celine.

Celine Pannuti (Managing Director)

Thank you.

Operator (participant)

Thank you. The next question comes from the line of Tom Sykes with Deutsche Bank. Please go ahead.

Tom Sykes (Managing Director and Head of European Consumer Equity Research)

Yeah, morning. Thank you. Three quick questions, please. Firstly, just how much of the revenue line, if at all, is from products that are sold in one currency, which is different to the local currency, please? And is there an effect on that, on organic growth, particularly in given FX moves and particularly in emerging markets? On COGS and the gross margin, is there much of a gap between when you take price increases and when you see increases in, say, third-party manufacturing costs in particular? And is there anything that would lead to a impact, a closing of the gap in gross margin at all?

Then just on the JV in China, can you just let this lapse, or would you have to pay to exit prior to September if you at all wanted to exit? And if you did exit that JV, do you think it makes any difference to your distribution capability, please?

Tobias Hestler (CFO)

Good. Thanks. Thanks. So let me start with transaction on the revenue line. No, I think that, look, there might be here or there some of the odds, one, where, you know, we export to a distributor market, but I think, you know, we have own businesses in over 45 countries in the world where we sell in local currencies, and then this gets translated back, you see that come through in the translational currencies. Of course, there might be here or there, a bit a small market that that exports, but I think this is tiny and, and not a, not a material factor for us, just given the global, the global and large distribution footprint that we, that we have and that we have maintained, and that we have, we have kept, yeah.

Then let me talk the joint venture in China. So first of all, the JV agreement expires, right? There isn't any payment in either direction, right? So could we let it lapse? Yeah, you could, but there's absolutely no interest for either side to do so, because I think this is one where I think, and I said that, I think before, we really depend on each other. This brings benefits to both sides, and both sides are very, very much, you know, I wouldn't say, say dependent, but both sides benefit from that, from that collaboration, especially because the skills and the capabilities that both sides bring are complementary, right? We are bringing, we are bringing marketing skills, we are bringing our brands, we, we, we bring IP.

We run a good part of the administration of that joint venture. The other side brings manufacturing capabilities, but we also supplement that with capabilities we bring in globally. So it is very, very much a joint venture, not... And, look, this is an operational joint venture. It is not a joint venture where you just sort of have an entity and one part owns X% and the other one. It's not a financial asset. This is a joint operation of the business, and we're in very cordial discussions with the other side to how we continue this going forward, right? So I think there is no benefit to either side of letting that lapse, yeah.

I couldn't track your question on cost, cost of goods and how pricing impacts third-party pricing. So could you just help me either repeat this or-

Tom Sykes (Managing Director and Head of European Consumer Equity Research)

Yeah, it was-

Tobias Hestler (CFO)

I understand that, so what you're asking.

Tom Sykes (Managing Director and Head of European Consumer Equity Research)

Yeah, it was just on the timing of any cost increases for your third-party manufacturers.

Tobias Hestler (CFO)

Okay.

Tom Sykes (Managing Director and Head of European Consumer Equity Research)

Would you say that is in sync with the pricing that you're taking?

Tobias Hestler (CFO)

Uh.

Tom Sykes (Managing Director and Head of European Consumer Equity Research)

Or is there basically, what are the cost increases in third-party manufacturing to be expected this year, I guess is it?

Tobias Hestler (CFO)

No. Okay. No, look, I think, as I said before, right? So third-party manufacturers, I mean, they all, they all battle with the same thing that we do, which is labor cost increases, because a big part of what they do for us has a big labor cost component. Usually, usually these prices are we have usually long-term contracts, because these are long-standing relationships, given the regulatory environment we're in. And these, these, these, these, these deals usually have a built-in price mechanism. They're different across the contracts, but it usually hits once a year. So you can actually plan for it, and you can build it into your, into your forecast for the year. So our units know when this is, when this is coming.

It was a bit more extreme, and there was a lot of commodity cost pressure, which were passed on it a bit more quickly. But sort of the general conversion cost increases, I think we have good pre-warning and we can plan for those. So I don't think there is a, there's a significant change in that from a timing point of view, when we can take, when we can take pricing. Yeah. And I think anyway, on pricing, I mean, certain things are more given when you do them, right? I think the European mass market pricing, you negotiate once a year. That usually happens in Q1. In India, you take pricing once a year because you need to resticker and label all your products.

In the U.S., you tend to take pricing if and when the shelf is resetting. So you try and combine it together with when the retailers do their work. So it's all a bit, you know, different drivers of that. But again, I don't see a major time gap in either direction of that. The only thing to keep in mind, it always takes, you know. With the inventory we have on hand, it takes several months until it sees, hits the P&L on the negative as well as on the positive as well. Hope that answered the question, Tom.

Tom Sykes (Managing Director and Head of European Consumer Equity Research)

Yeah, that's great. Thank you very much.

Tobias Hestler (CFO)

Thank you. Great.

Operator (participant)

Thank you. Next question comes from the line of Mikheil Omanadze with BNP Paribas Exane. Please go ahead.

Mikheil Omanadze (Executive Director)

Morning, Tobias. Morning, Sonya. Thanks for taking my questions. I have two. The first is on Oral Care. So could you please comment on the market share evolution of Sensodyne in the U.S. and other major geographies? And also, how did Aquafresh perform in Q1? And my second question is on RX to OTC switches, if there is any update on the process. Thanks.

Tobias Hestler (CFO)

Good. So let me work backwards. So Rx-to-OTC switches, you remember we had said we had two in the pipeline, but we also said that those, we're working with the FDA, and those are a bit later than what we had originally said at the Capital Markets Day. We're still working on both of them. Remember that, you know, all the switches, ours, but also competitive ones, they all have, they all have certain complexities, as do ours. So, I think really nothing to update on that. Also, just a reminder, the switches are outside our 4%-6% guidance, so when they come, I think in quotation marks, I see them as icing on the cake.

We continue to work on them, and I think the more immediate one that could come is the erectile dysfunction a treatment that Bruno asked before earlier in the call. And then on Oral Care, so, I mean, look, as I said, I think we gain share overall in Oral Care, I mean, which we should, with a double-digit growth rate. So the sell-out continues to be strong. I think we're doing well on Sensodyne globally as well. So I think with the innovations and the launches and good execution, I think there's two things happening, is, one, we grow the market.

So some of the growth comes from expanding the market, which actually benefits us, and it benefits the retailer, because their, their share of the pie becomes bigger, which is positive. So it's not just about share. So I think, because when you think about Sensodyne again, what makes this such an attractive proposition is that you have 40% of the world's population have sensitive teeth. Only 30% of those use a sensitivity toothpaste. So this is about getting more people using a sensitivity toothpaste. This isn't about fighting for share in an already well-established segment. This is still an... You could call it an emerging segment, even if the Sensodyne is very, very big, there's a lot of penetration opportunity in this brand.

So I think that's probably the more important driver than actually looking at, are you gaining or are you gaining share, everywhere? Because it's unlocking the penetration, but and if you unlock that, then people are moving from a $3-$4 toothpaste or a $2 toothpaste to a $5, $6, $7, $8 toothpaste, and everybody wins when that happens. The consumer wins because they're treating, they're treating their condition. The retailer wins, because their share and size of the category they're selling is growing, and we are growing because our brands are growing. And then, look, Aquafresh, I think it benefited a little. You know, you saw that did well last year. Given the overall environment, I think that has come probably down to what is more normal.

You know, this is a brand that's been, you know, flattish, sometimes slightly declining, so, so nothing to particularly call out. If it would generate a major up or down in the category, we would call it out, but I think it's now back to what it's always done. I think it's a non-strategic brand for us, with the exception of, you know, a few markets here or there, and it's rather small now, so it also doesn't impact the overall growth of the category, dramatically.

Mikheil Omanadze (Executive Director)

Very clear. Thank you.

Tobias Hestler (CFO)

Thanks, Mikheil.

Sonya Ghobrial (Head of Investor Relations)

We have time for one more question.

Operator (participant)

Thank you. Ladies and gentlemen, we will end the question and answer. Sorry, we do have a last-minute question. The next question is from the line of Chris Pitcher with Redburn. Please go ahead.

Chris Pitcher (Managing Director)

Hi, good morning, Tobias, Sofia. Sonya, hopefully, you can hear me. I'm on a mobile.

Tobias Hestler (CFO)

Yes.

Chris Pitcher (Managing Director)

Tobias, I appreciate you still got eight months to go and a couple of quarters to deliver, so I'll save my thanks and appreciation for the last meeting. It's been noted you've delivered a lot over your time. What's Dawn coming in? What's left for her to do? I mean, clearly, there's a productivity program to deliver. There is more, is there more to do on working capital, but you did make some improvements in 2022, 2023, the M&A? Just can you be a bit more specific, what in her skill set is it that you think made her a good fit? Thanks.

Tobias Hestler (CFO)

... Thanks, Chris. So look, I think I don't think the journey is done, right? We, I mean, when we came out of the capital markets day, right? Brian and I said, "Look, there's a phase now that we stand up this company and establish it as a self-standing company." I think we've done that, we've done that well. And then there's a second phase of making this a more agile and more competitive consumer company, and we're just starting on that phase, right? I think that's why we started the productivity program, but there's way more and much more to do on that journey, because that is a multi-year journey. And I think that is something that, you know, I'm working on right now, and I will continue to do so.

I think then this is something that I absolutely have absolutely believe in, that Dawn will be able to continue on that because she brings over two decades of deep, deep, deep consumer experience, even more than I had, right? She spent her whole career in the consumer world, given that she's done, and she's had local roles, regional roles, global roles, sales roles, marketing. She's really a deep consumer expert, which I think will be good for the business going forward. So I truly believe that the business will be in good hands with her as well. And I think the continuation of the journey that the company is on. So pleased what we have delivered, but I think, look, way more, way more to do and to go.

I look forward to catching up with you and seeing you in person, Chris.

Chris Pitcher (Managing Director)

Thank you. Cheers.

Tobias Hestler (CFO)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Tobias Hestler for any closing remarks.

Tobias Hestler (CFO)

Thank you, and thanks, everyone, for joining today. Look forward to speaking in the coming days. As always, if there's any questions, contact Sonya, the IR team. They're ready there for you, and I look forward to seeing all of you later in the year as well in person. Thanks very much, and have a great rest of the day.

Sonya Ghobrial (Head of Investor Relations)

Thank you.

Tobias Hestler (CFO)

Thank you.