Haleon’s revenues saw organic growth of 6.1% in the third quarter. This was driven by both price and volume/mix in broadly equal measure. All product categories and regions were in positive territory.
Organic profit growth of 7.4% outpaced revenues, helped by an improvement in gross margin, which more than offset high-single digit growth in advertising and promotion costs.
Organic sales-growth guidance of 4-6% for the full year remains unchanged. Although profit growth was some way behind the 11% seen in the first half, Haleon is ‘well on track’ to meet previously upgraded guidance high-single digit growth for the full year.
The shares were flat in early trading.
Our view
After a tough start to the year, consumer health company Haleon has managed to push volumes and prices higher for two quarters in a row, and looks on track for a decent full-year result.
Both efficiency gains and the easing inflationary environment are helping the group to hold on to a bigger slice of its revenues.
Meanwhile, topline growth isn’t being taken for granted, with the company continuing to prioritise marketing spending to support its well-recognised brands. These include a number of household names such as Sensodyne toothpaste, Otrivin nasal spray, Panadol painkillers, and Centrum multivitamins. Continued investment in innovation and marketing is, in our view, essential to maintaining Haleon's leading brand positions. But the flipside is that there may be limited scope to drive margins further.
Even as inflation falls, these established brands have been helping Haleon to increase prices without any underlying impact on volumes. Customers tend to happily stomach a higher price when it comes to medicines they trust. We must caution that volumes could still start to dip if price hikes are taken too far, or the economic outlook deteriorates. But so far, we're impressed with Haleon's delivery of new and improved products which we view as key to growing market share and maintaining brand loyalty.
Launches of new categories, such as erectile dysfunction cream Eroxon, may drag on profitability until they gain consumer acceptance. But in time, dropping in new revenue streams to the existing portfolio should be positive for the bottom line.
A growing focus on emerging markets is helping to offset lower growth in more mature markets and e-commerce initiatives are also helping to reach more customers.
Despite the headway being made on debt levels and shareholder distributions, the dividend is still lagging most of the peer group. A relatively strong outlook means we should see further progress towards its revised net debt to cash profit level of 2.5 times.
Offloading some of its brands is one lever the group is pulling on to get there. If attractive prices can be obtained, we’re not averse to selling a handful of non-core names. But pulling too hard on this lever could be at the expense of organic growth and margin expansion in the future.
Strengthening the balance sheet should help free up some wiggle room to bridge the dividend yield gap with its competitors. But with an earnings multiple towards the top of the pack, there is certainly some expectation to deliver. Haleon’s former parent GSK no longer holds a stake in the company, but US pharma giant Pfizer still has a big stake. We think further sell downs are likely, which could also drag on sentiment.
Haleon key facts
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