Haleon’s second quarter revenue grew by 4.1% organically in the first quarter, in line with expectations, with price increases contributing most of the growth. That brought the growth rate for the half up to 3.5% with total revenue of £5.7bn.
Underlying operating profit for the first half was up by 11% to £1.3bn, reflecting the revenue growth and easing inflation.
Free cash flow more than doubled to £831mn helped by the improved profitability and proceeds from brand disposals. Net debt came in at £8.4bn.
Full year organic revenue growth guidance is unchanged. Previous guidance was for growth in operating profits to outpace revenue. That’s now been upgraded to high single-digit.
The interim dividend was raised 11% to 2p per share and a further £185mn buyback was announced.
The shares were up 2% following the announcement.
Our view
Haleon’s interim results reassured investors after volumes bounced back in the second quarter, and management came out with punchier guidance on the full-year profit outlook. 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 is being driven by strong sales of Haleon’s portfolio of “power brands” in the consumer healthcare space. These include a number of household names such as Sensodyne toothpaste, Otrivin nasal spray, Panadol painkillers and Centrum multi-vitamins.
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 medicine they trust. 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. Cutting out the middle man should be positive for the bottom line as well.
But brand value doesn’t come cheap. So continued investment in innovation and marketing is in our view essential to maintain Haleon's leading brand positions, which may mean there's limited scope to cut costs beyond the £300mn of efficiencies already identified.
We must caution that volumes could still start to dip if price hikes are taken too far, or the economic outlook deteriorates further. 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.
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 the sale of a handful of non-core names. But pulling too hard on this lever could be at the expense of organic growth and margin expansion.
Strengthening the balance sheet should help free up some wiggle room to bridge the 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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