Ladies and gentlemen, thank you for standing by, and welcome to the RB half year 2020 Q&A session. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Tuesday the 20th of July, 2020. I would now like to hand the conference over to your speaker today, John Dawson. Please go ahead, sir.
Thank you, Heidi, and welcome everybody. Thank you for joining us on our Q&A conference call for our half year results 2020. With me today, we've got Laxman Narasimhan, our Chief Executive, and Jeff Carr, our CFO. Before we kick off with the Q&A, I'm just going to ask Laxman to give a few opening comments, and then we'll go into the Q&A session after that. Laxman, over to you.
John, thank you. Thank you all for joining, and I hope you and your families and friends are safe. There are four key messages I will quickly recap from today's presentation. First, consistent with our messaging on our Q1 trading update, RB is off to a stronger than expected start for 2020. Importantly, in addition to the demand tailwind from COVID-19 on several key brands, we are pleased that our underlying sales trends are also performing above our plan. Second, RB is making good progress regarding the strategy outlined in February designed to rejuvenate sustainable growth. I believe we have made significant strides in improving our execution. We're also making good progress building an organization with the right capabilities and culture to realize the long-term opportunities for the company. Third, COVID-19 is having a profound effect on consumer behavior, not just for a few months or quarters.
Our research suggests that the increased interest in Hygiene and Health is likely to be sustained over time, albeit at more moderated levels, and our portfolio is well-positioned to benefit and navigate the additional macroeconomic challenges we expect. There is no question that our purpose and fight, which we announced at the end of February 2020, are even more relevant in these times. Fourth, we plan to leverage our strong outperformance in early 2020 by increasing the level and expanding the scope of our investment spending. Those are our summary messages. I'd like to hand this back to John, and we'd be glad to take your questions.
Thank you very much, Laxman. What we'll do is we'll open the call now to questions. For those of you participating, I know you log your calls. Why don't we open it up and ask Celine to kick off with the first question.
Question is about the acceleration in underlying sales growth you said is above plan. I noticed in your presentation strong market share gains. I wanted to understand why do you think in such a short period of time, this has been delivered and, or whether you have seen also the underlying growth coming from better demand in some areas. If you could, on that front, talk about the white space opportunity and quantify it that you see in Professional Hygiene. My second question is on Nutrition, and I noticed that you seem more positive about the underlying performance in China in the second half of this year. Can you talk a bit about the Chinese market, where the growth opportunity is, and how you have developed in terms of lower tier cities as well as understanding the performance. You said that you had a local product.
I heard that in your presentation. I would like to understand in terms of innovation and production capabilities, where you stand on local production. Thank you.
Well, thank you very much, Celine. Let me talk to the first question around the acceleration. There's no question, first of all, that we have benefited from COVID-19 overall. If you look at what has happened over the last year or so, there have been six areas that the focus has been in terms of driving much better execution. The first area is supply chain. I think if you recall, in October last year, we talked about some of the challenges we faced in the supply chain, something I amplified in February when we spoke. We've been working on this since September itself. Improvements in planning, improvements in forecasting, improvements in customer relationships. While we did have some challenges with our fill rates through September, October, November, what we've seen since then is a steady improvement in that.
Coming to the end of February, we actually saw material improvements in how we were serving our customers. Clearly post-February, and the demand has been quite excessive, we have seen a drop-off in that. Overall, I would say underlying the supply chain has done very well. Even in the time of the pandemic, you're seeing evidence that the team has really stepped up in the way they've performed on the supply chain. I feel very grateful for what they've been doing while ensuring our people are safe. The second area is in sales execution. I mentioned this briefly in February. One of the big skills and capabilities that RB had before was in the way that it actually drove sales. Unfortunately, over the last few years, that had been cut back.
We've been investing in this since September, and our sales execution program, our sales stimulation program, has now rolled out to over 50 countries. The third area is marketing spend. This is still work in progress. We spend healthily in the area of marketing. One of the things that we had said in February was it would be good for us to adopt some of the more advanced tools in terms of really embracing marketing spend optimization. That has happened in several markets. It hasn't happened all over. There's still work to be done, but I feel good about the progress we're making in marketing spend, as well as the establishment of our marketing excellence capability, which is housed in our Hygiene Business and will be scaled up over the course of our entire company. The fourth area is productivity.
If you look at productivity, we had announced the fact that we were stepping up productivity, and we did. In the first half of the year, we're about plan on productivity. This despite the fact that we've had to resequence some of the programs in productivity in order to ensure that we can make things happen at a time of the pandemic, and the challenges that it actually produces in its own way. The fourth area is really in the organization, the purpose, and the fight. We evolved to the new organization structure of three global business on July 1st. The purpose that we articulated, we exist to protect, heal, and nurture in the relentless pursuit of a cleaner and healthier world, is something that our organization has truly embraced. The fight is deep inside the company.
The level of engagement that we have in the company is at an all-time high. Pride in the company is about 11 points higher than the peers based on surveys that we have done and benchmarks that we have done. The purpose fight in the organization has taken hold. The final area of step-up is really in e-commerce, something I'll touch on as well in the case of the infant formula business. But our e-commerce business is one that we have invested in capabilities over the last many years. As we came into September and January this year, we amped up the investment even more in e-commerce, and you see that in the performance of the business. Consequently, when you start looking at the underlying performance of the business and the acceleration, it is driven by what has happened along those six fronts.
On your question on the white space with Professional. Clearly, consumers are anxious. They want to feel safe, not just at home, but also where they go. The second is our brands are a large trustmark at this time. We try to highlight for you just the scale of some of these brands. The retail sales of just Dettol and Lysol are over GBP 4.5 billion. On top of that, you have brands like Sagrotan in Germany and Central Europe. You've got brands like Napisan in Italy, Australia, and Veet in Japan. Our brands are the large trustmark at this time. Our partners like this. We've been very selective with whom we partner, and we are moving with speed.
Some of our partners have independently done work on which brands are the right trustmark in this time. They have highlighted that Dettol and Lysol are very strong trustmarks. If you look at the partnerships we've announced with Delta, which we did yesterday, or Hilton Hotels, started with the U.S., then of course, the rest of the world, including China, the Avis Budget Group or Grab, which is a shared service or a shared riding service across many markets, or Uber in some countries or PVR Cinemas in India. What you see is the breadth of the different sectors that bringing this kind of trustmark really matters. Other companies have talked about this business being a mid-single digits part of their overall portfolio. We see that. What we are thinking very much, of course, is that this is about front-of-house appeal.
We are building supply for this business and ensuring that we have partnerships and logistics capability for this business. We see the headroom, and we are approaching this, of course, with usual caution, ensuring that the execution of this is consistent with our brands, the standards of our brands, and the trustmark that they deliver to our consumers at this point in time. On Nutrition, which is your second question, to go to the underlying performance. Let me just touch on China and your question there. Firstly, let me talk about the challenges. Hong Kong, the Hong Kong market has been a challenge for us. We didn't expect, of course, the situation to continue like it has, and it has impacted us, and we are more exposed to Hong Kong than most. That has been a negative drag on our business.
We have offset this with the performance in mainland China, and I feel positive about the performance in mainland China, in the way that we have grown this business, grown our market share and customer acquisition, as well as the way we've been expanding the business and the way we're executing offline in stores as well as online with e-commerce. Our business in some of the lower-tier cities has grown, and it has grown with a combination of what we're doing with e-commerce as well as what we are doing as we look at offline distribution to those different cities. With regard to your question on local production, we've introduced a brand that is made in our factory in China, and that is the transition that we have been going through.
Early results are or early interest is good, and we're looking to see how this brand does. It clearly is a complement to what we have at Enfinitas, which is our super -premium brand that continues to do very well and that continues to grow and take share.
Thank you.
Thank you very much, Celine. Thank you, Laxman. Let's take the next question from Richard Taylor at Morgan Stanley.
Good morning, everybody.
Good morning.
I've got three questions from my side. They're on Professional penetration and profitability. They're three Ps. On Professional, can you give us a little bit more color on how big, size-wise, you think that opportunity is? Also, should we assume that it's margin neutral? Secondly, on penetration and distribution, you said in the past the opportunity is huge. Can you give us an idea of the progress you've made on this? On profitability, you said in your own slides that the operating leverage in the first half was 360 basis points. If we take your full year guidance of 8%-10% for the full year, that implies another 4%-6% top line in the second half. Broadly, that should be another 150 basis points of operating leverage.
You'll get more from raw materials and lower media rates. If you add all that up together, that's 750-800 basis points of investment that's implied for the second half. Can I clarify that you're spending over GBP 650 million in P&L investment in 2020, please?
Richard, let me take the first and the second question and leave the third question for Jeff, if that's okay.
Right.
On Professional, we clearly recognize the fact that our brands play very well in areas where they need to communicate a trustmark to our consumers. We're approaching this business cautiously and building it out steadily. We have moved with speed, though, with some pivotal partners, and feel good about the type of arrangements that we have set up with them. These are not short-term contracts. These clearly are longer-term contracts. Given our focus, which is really on front-of-house brands and front-of-house propositions, and given the different mix of costs and brand building that we have, these businesses are largely margin -neutral. Again, that gets back to how we're trying to build this business. On your second question on penetration, the sales execution program that I mentioned earlier is now in over 50 countries.
There is a very clear focus on the different points of distribution, what SKUs are available in what store, how we're executing at point of sale, challenging, by the way, in these times with the pandemic. What you are seeing is actually an increase in the points of distribution. If you look at India, we've seen increases in points of distribution and the overall India business grew high single digits in this time. It's further complemented by the fact that with this pandemic, you are seeing shifts in consumer behavior. There are more consumers entering these categories. You saw that with a brand like Lysol in the U.S., where we gained over 600 points of share. That is driven by a combination of increase in penetration as well as an increase in frequency with our core consumers.
Penetration is an area of great emphasis for us, because at the end of it, what we have to do is drive category building. We believe that this is an area that the entire company is very focused on. On your third question of profitability, let me hand this over to Jeff. Jeff?
Thanks, Laxman, and thank you for your question, Richard. I can confirm we're making considerable investments in 2020, even though, as we've said in our statement, those investments to date are a little behind where we expected them to be, and they'll be more heavily weighted to the second half of the year, and some of those investments will actually cross over into 2021. We will be making significant investments in the key areas, in terms of price and investments in price. We'll be making investments in marketing execution, opening up new white spaces and new categories like Professional. We'll be making investments in commercial fixed costs, which run into many areas, but they're areas which are focused on developing the muscle for long-term sustainable innovation and top-line development.
Areas such as R&D, regulatory, investments in sales execution, investments in digital and e-commerce, which you're already seeing success from. We'll be making investments well over GBP 500 million. I'm not going to get into the specific number, but well over GBP 500 million. You can see from the margin bridge that we provided in the presentation that we had significant leverage in the first half of the year. In addition to the investments which come from both the productivity program, which we're reinvesting and which is delivering on schedule, slightly ahead of schedule in the first half of the year. Also in terms of the transformation cost and the margin reset. Against that, we also have significant COVID costs. We incurred around GBP 69 million of COVID-related incremental charges in the first half, which is around 100 basis points.
We talked in February about the headwinds that we have on margin. These are a little higher than we anticipated. This is largely variable pay, running at around also 100 basis points. We have the impact from various one-off costs, which partly include the margin effect of the revenue recognition adjustment, but also, as I mentioned in the trading statement, some legal charges and various one-time charges, which we've incurred in the first half. If you sum that together, yes, we have room to invest well over GBP 500 million this year. That will be stepped up with significant investments in the second half of the year as we invest to make sure that we capture the growth opportunities and build increased confidence in delivering mid-single digits in the top-line growth in the medium term, which is in line with our guidance. Thank you, Richard.
Thank you.
Thank you. Let's take the next question from Iain Simpson, please.
Thank you very much. A couple of questions from me, please. Firstly, I'd be interested to understand the phasing of the step-up in Dettol and Lysol. I think manufacturing, not end demand, has been the limitation there thus far. Just to help us think about Q3, what was the shape of your second quarter for those brands? Was June stronger than April as you ramped up demand? Anything along those lines would be very helpful. Secondly, just thinking about your margin guidance. You've talked about 350 basis points of investment versus 2019 for 2021. Now, given your commentary around COVID-19, it's pretty clear you're going to have a bigger business in 2021 than we would have assumed six months ago as consumer behavior has shifted. How much of that 350 basis points investment could be offset by operational gearing?
Sorry to get overly detailed, but thinking about variable pay. Top line is presumably coming in well ahead of expectations this year. Variable pay is likely to be more than the 100 basis points of headwind that you previously guided for. Thinking about 2021, your top-line guidance is pretty disappointing. Presumably, an element of that variable pay unwinds. I just wondered if any commentary on what you're doing there and how should we think about that as a moving part? Thank you.
Laxman, would you like me to take-
Yeah, go ahead, Jeff.
On a couple of these questions? Thank you, Iain. Let me take on your question about 2021 being larger and what does that mean in terms of the 350 basis points. We're committed, as we say in the guidance, to deliver the full 350 basis points of investment. What we've also said is we'll increase the investments by reinvesting available leverage this year. What that message is clear that we see opportunities to invest in growth. We have real potential at this point, and we don't want to constrain our businesses. We will be making the full investments of the 350 basis points. We'll be monitoring that very carefully to make sure we're making the best investments and we're getting the right returns for those.
Within the areas that we described in terms of Professional, in terms of the white spaces, clearly we see significant opportunities. Of course, with the economic outlook and the uncertainty around health, we need to be cautious about what that can deliver. We'll get into that in more detail as we go through later. As we have some more quarters under our belt, I think we'll be able to have a clearer understanding. Clearly, we're in strange times. Putting together more changes to the forecast other than what we're giving, I think would be unwise. In terms of variable pay, we accrue based on expectations. For 2021, we'd expect variable pay to be at a mean level. That's how we start the planning for each year. Obviously, we're below the mean level last year, and we'll be above it this year.
Yes, there'll be a bit of a give back in 2021. The way we organize that is obviously as we outperform, we accrue the variable pay to a higher level. In terms of the first question, which was how the run rate is for the disinfectant franchises, we continue to see a strong performance. For example, again, in the presentation this morning, we mentioned that Dettol was around 60% for the half, but it stepped up to 80% in the second quarter. Clearly there you can see a step-up in the second quarter. We're making estimates of how that's going to play out for the second half of the year and for 2021, the same as everyone else. It's clearly very uncertain times, and we need to have a level of caution about our estimates of how that's going to play out.
Clearly, we see an opportunity to continue to develop those brands, and that's where we'll be investing as we go forward. I hope I answered all of your questions, Iain.
Thank you. Just very quickly, how did June compare to April for Dettol?
As I said, the second quarter, the run rate in the second quarter was higher than the first quarter. I'm not going to get into month-by-month interpretation of individual brands, but clearly the second quarter run rate was higher than the first quarter. As we look to the third and fourth quarters, we have to have an element of caution about us. I'm not going to get into quarter-by-quarter guidance. I think it's clear in our full-year guidance that we expect the total franchise to be at high -single -digits. That takes into account not just the disinfecting brands, but also how we see the development of areas like OTC, where we're predicting there's going to be quite a weak cold and flu season.
Thank you very much.
Thank you very much, Iain. Let's take the next question from the line of Tom Sykes.
Yeah. Good morning, everybody. Just firstly, on the supply side and your use of co-packers in contract manufacturing that you mentioned in the presentation. How should we think, given the demand potential volatility, potential second wave, how will you be maintaining your flexibility at the same time as looking to bring on additional capacity? Is there any sort of number we should think about in terms of how much you may be internalizing externally produced revenue at all, or the degree to which you'll be internalizing co-packer -produced product? In terms of the SKU reductions that you spoke about in the presentation, those obviously were relatively meaningful at points. Will you be getting behind a fewer number of SKUs going forward? How does that square then with the innovation cycle that you have?
How important may have the tail of SKUs been historically when people were trading down in a cycle at all, please?
I think it's a very good question, Iain. Thank you. Sorry, Tom, thank you for it. On the supply side, we're being clearly approaching this in the short term with arrangements that help us bridge the demand-supply gap with partners that we have worked with over the years. By the way, at the same time, investing in lines, simplifying what we do in order to increase our own throughput from our own manufacturing factories. We're doing both. If you look at the CapEx guidance that we had given in February, and you look at what we are saying now, we are clearly looking at increasing the CapEx from February by about GBP 100 million.
What that'll do for us is give us some flexibility around where we believe it's right for us to make it on our own versus how we think about partners and others in order to get supply with the flexibility that it also brings. We're watching this very carefully and balancing both, recognizing, of course, that there is demand to be met and quality standards to be kept. Given all of that's the extent to which I can give you a sense of how we're thinking about this. It's clearly an area of focus for us. On your question of SKU rationalization, I'll give you an example.
In the factory in Wuhan, in China, we actually eliminated 80% of the Dettol SKUs when we were at the peak of the pandemic, largely to increase capacity or to increase the throughput of some of the core SKUs. We're now up to only a 20% reduction, and we've been very cautious about things that we bring back in order to ensure that they meet consumer demand, they have the right terms, and they're innovation that actually works. We also have a whole pipeline of innovation that we need to overlay on all of this, and we're working that. Some of that has been delayed to the back half of the year to the early part of next year, just as we focus on meeting the core. Your point about the tail of SKUs is correct. We are focused on them. We understand the cash contribution of the SKUs.
We also recognize the complexity that some of these SKUs bring. We also understand your point about the role of these SKUs in meeting lower price points or pack sizes for channels, as the case may be. We're balancing all of that as we look ahead.
Many thanks.
Thank you very much. Let's take the next question from Guillaume Delmas.
Good morning, gentlemen. Thank you for taking my questions. Two questions from me. The first one, going back to your medium-term like-for-like sales growth expectations. In the press release this morning, you talk about the increased relevance of your categories that will remain at a higher level than pre-COVID-19. You also talk about incremental investments of GBP 100 million to accelerate growth in disinfectants, e-commerce, Professional services. Basically, putting all that together, it seems you're talking about higher category growth, a higher level of outperformance going forward led by these additional opportunities. Should we then conclude that you now see some upside relative to the medium-term like-for-like sales growth outlook you provided back in February, and particularly when you were talking about reaching 3% like-for-like sales growth by 2023? My second question is on e-commerce.
It expanded very fast in the first half, now 12% of your sales, and it seems a clear priority going forward. How should we think about the level of profitability of your online business today? I appreciate this is not a homogenous business, but overall, is e-commerce, at least today, accretive to your gross margin? I guess more importantly, how should we think about the profitability of e-commerce going forward? Thank you.
Well, Guillaume, thank you for both questions. Let me address the first one, because it is obviously the big question. You are correct. We are reporting better than expected performance of the underlying business. We do see structural shifts in consumer engagement in Hygiene and Health that favor some of our categories. We are expanding investment. Your question is correct. Why aren't we increasing our medium- and long-term growth expectations? As I said in the presentation, the answer to this question really has three parts. We unquestionably have greater confidence in achieving our medium-term growth and margin goals. Second, while we feel confident, even perhaps leading towards, if I might say, being more bullish, we recognize that we are operating in a highly uncertain time. There are significant public health challenges out there. There could be economic dislocations that happen, frankly, with very little notice.
We're only six months into the implementation of our strategic plan and transformation. I'd like to tell you that, "Hey, it's all done," but the reality of this is this is early progress, and we are pleased with it. We do not want to get ahead of ourselves. What I'd like to do is to suggest to you that we will update you next February on our journey. That's the first question on guidance. The second question on e-commerce. As I said in February, when we talked about our growth agenda and what we would invest in, we had highlighted in February that e-commerce was in fact an important area of growth for us. In the first six months, our gross merchandise value, GMV, for e-commerce was around GBP 1.5 billion in the first six months.
This business has multiple models in it, therefore it's actually very complex, as you rightfully put it is not homogenous. We have B2B. We have eRB, which essentially includes as well several of the rocket brands that we're incubating, including with partners. We look across the mix of those three, what I would tell you is that if you look at the gross margin level that we're able to achieve, particularly with mix, particularly if you look at categories like Sexual Wellbeing, which are very sensitive to e-commerce, given the privacy concerns. If you look at the assortment that we have, what we have over here is a mix that on the gross margin side is not diluted. We watch that and manage that very carefully.
Thank you very much.
Excellent. Let's take the next question from the line of Alicia Forry.
Hi. Good morning, everyone. Two questions from me. First, on the underlying 3%-4% like-for-like growth, can you give us some indication how this breaks down between Health and Hygiene? Are they running at similar rates than Health, ex-COVID? Secondly, I wonder if you could dig into India a little bit more, especially now that it is out of lockdown. I think you said it was up high single digits in H1, which is quite impressive. Is there any further detail you can provide on how that business is performing?
Let me give you a little bit around the 3%-4%, and then on to India. The underlying 3%-4% at the end of the day is a judgment. We run multiple analytic models, three different analytic models, to try and understand what the underlying growth is. We recognize that we have certain brands that have benefited from this, certain brands that have not. We are also dealing with lap issues in certain parts of the business. If I were to therefore look at it across the board, we have ended up with 3%-4% as being the right judgment in what we believe is happening in terms of the underlying. If I look at the operating part of the business, the Hygiene business is clearly doing well, no question about it. I think Health is improving, but is not at the same level as Hygiene.
We're clearly working to improve that, and it goes back to the things I talked about the things we're doing in an underlying level to improve it. There's really been improvement in Health, but it's going to take more time. That's the underlying 3%-4%. On your comment on India, let me give you a couple of things. First of all, it did grow high single digits in this period. Dettol, as a brand, is a power brand in India, and in fact, achieved the number one share in soaps in India for the first time. It boils down certainly to the fact that there are tailwinds that you get from COVID in India, but it also boils down to some of the execution improvements we are seeing in both the Health business as well as the Hygiene business.
What we are seeing there is a focus on distribution, a focus on ensuring availability, which hasn't been easy given all the lockdowns in India at various places and at various points. I really compliment the team for its resilience in working through all these different challenges and achieving the result that they have. It also gets down to brand building. I think you've seen some of the work we've done on brand building, the Dettol TikTok campaign in India is a great example of it. We had 124 billion views of this campaign. What we are doing there is not just a focus on financial results per se in the short term, but also building the equity of the brand. The Dettol brand equity is at one of its highest points.
We're also heartened by the progress we're seeing in Lysol, as well as in Harpic in India, and the continued scale-up of that business. I also feel good about the fact that we're doing this in the right way, that some of the investments we have made, as well, with the public health authorities to communicate the lessons of hygiene in India, the product donations that the team has done. We've donated 10 million units of soap in India with Dettol. We've also donated over a million liters of Lysol and Harpic in the market. It's a pretty holistic view around how we're committed to India. I do recognize, of course, that it is a country that is going through a lot right now, and the team is focused on ensuring that we're as supportive as we can to the country. It is clearly an important market for us.
Thank you. Very impressive.
Let's take the next question from Martin Deboo at Jefferies.
Yeah, morning, everybody. My question actually-
Morning, Martin.
Morning. My question relates to what you just said, Laxman, in response to Alicia's question. I think the estimate of 3%-4% of the underlying momentum of the business is clearly crucial to understanding the way the business is going to trend in the medium term. I need to push it a bit. Laxman, you gave some very useful detail just now, broadly, to Alicia, but I think I have to ask, in a business that is clearly so net positively geared to COVID, how can you have any confidence about what is COVID and what is underlying? Maybe the precise question I could ask you, just as a litmus test, is how are you accounting for Dettol and Lysol sales relative to COVID or underlying, just to try and understand how you're coming up with a calculation. That's the question.
Martin, as I said, we ran three different analytic models, and it's one that we keep updating all the time. We do look at countries that are in various stages of progression, and therefore, it does have an impact on the underlying demand. We looked at sales that were pre-COVID, particularly around February, January, February, versus what has happened since to get a sense of the underlying trends. We look at some of the operating metrics as we start looking at things like availability, service levels, how we feel about brand equity, which is really, in some ways, the qualitative overlay that we have to try to understand how we ended up with a 3%- 4% underlying growth for the business.
Okay.
It's not going to be the end of it. I'd love for you to tell you that it's completely precise. Recall that Hygiene was already growing at north of 3% at the end of the year last year, right? As you start looking at that and you look at some of these other businesses, and the step-up that we are seeing, that's where we've ended up. We're also offsetting some of the laps that we see. Some of these businesses have had laps from the previous year. One example would be the inventory build in the infant formula business. As you look at the inventory build from 2019, the first quarters of 2019, until now, it has had an impact as well on the underlying performance of the business. We're putting all that together, and there is judgment involved.
No, it's very clear. Thank you.
Let's take the next question from Chris Pitcher at Redburn.
Thank you very much. A couple of questions from me. To go back to the Professional business, are you able to give the contribution in the first half from Professional for Dettol and Lysol? You mentioned that you have long-term contracts. Do you have visibility through to the first half of next year, obviously? Following on from that, your customers are consumer-facing Professional businesses who are obviously using your brand to build trust. Is the more raw business-to-business opportunity still something where the margins are a bit too low for you to compete in? Secondly, in terms of Mucinex, on the presentation, you mentioned that you've done a lot of work to improve the supply chain. Do you think you'll be able to run with lower channel and retailer stocks for Mucinex to improve visibility on that brand?
Because historically, it has been one of the more volatile. Thanks.
Great. The answer to your first question is very simple. There is no contribution to the Professional business at this point in time, the first half. It starts ramping up only now on. Second, on your question about B2B, and the margin piece of it. We have said very clearly we are a front-of-house business where our brands play a big role. We don't have a back-of-house business. We would have partners that would probably do that, but that is not a business that is us. It's service-intensive, it's people-intensive. It is something that, at this point in time, we wouldn't consider that, but we would certainly have partnerships that we would consider, and we clearly have them in a few places. On your third question on Mucinex and the supply chain. It has been a volatile business because of two reasons.
One is because it is dependent on the flu season, and we expect the flu season in the back half of the year, as Jeff pointed out, to be weaker given what we're seeing as early returns from Australia and some of the Southern Hemisphere countries. At the same time, it has also been volatile because of the way that we have dealt with the supply chain. The investments we are making, both in customer relationships as well as supply planning, and what we're doing, particularly with inventories in the system, to ensure that we're able to respond to whatever may happen, essentially will help us better deal with the volatility that Mucinex inherently has, given the fact that it is a seasonal business.
Thank you.
Let's take the next question from Alan Erskine at Credit Suisse.
Hi. Good morning, everyone. Three questions from me. First one, a very simple one. If possible, could you tell us what percent of your e-commerce sales were direct-to-consumer from your own websites? My second question is on gross margin. It was up 70 basis points in the first half. I appreciate that you're probably positively impacted by OTC performing better in the first half than it's likely to do in the second half. I think that Dettol and Lysol, particularly, the sort of big-selling SKUs, are probably below group average of gross margin. I wonder if you could just give us any indication at all as to whether you think gross margin will be up for the full year.
My third question, and apologies for this, but I am going to go back to this 3%-4% underlying growth calculation, because I am intrigued as to how you did it. To help us, could you tell us what, within that three to four, you assume the underlying growth rate was for Dettol and Lysol or the disinfectant category, if you like. Thanks a lot.
Well, thank you for your questions. I think, if I go back to your first question on e-commerce. We normally don't break out by type of channel. It's not what we normally provide. Let me just tell you that if I look at our underlying performance or if you look at the performance of the e-commerce business overall, we have had a real uplift in this business. Our direct-to-consumer business, which, as you know, has both Enfamil, it has Durex, it has a bunch of other brands in it, too, that go direct to consumer. We will be opening, literally in the second half of the year, another 15 new direct-to-consumer sites. I mean, we run a whole bunch of our own stores and various platforms that have our brand on it. As you can imagine, with a brand like Durex, it's something that consumers really appreciate.
We've had a doubling of our direct-to-consumer business in the first six months, just in terms of what we have seen. Let me just address the 3%-4% underlying growth, then I hand over to Jeff so he can talk a bit about the gross margin piece. As I said, on the Hygiene part of the business, we've had a business that last year delivered 4% growth. If you start looking at the underlying piece of the business overall, we think it's in the 3%-4% range. Again, it's proven by some of the analytic work we have done. Now, clearly, over time, this can have an impact, but the reality is what we see at this point in time is 3%-4% growth as the underlying growth in our business overall.
Let me hand over to Jeff so he can touch on the gross margin question. Jeff?
Yeah, let me just, if you don't mind, I'll just come back on the 3%-4%. One of the methods that we look at is we take the undisturbed market growth and market share development from pre-COVID impact, we extrapolate that with analytical models as best we can. We do that country by country, obviously, depending on where we've seen bigger uplifts or smaller uplifts. That's one of the methods that we get to the 3%-4%. We're not going to break it out by brand, clearly, as Laxman mentioned, Health is a bit lower. IFCN, for example, is lower, Hygiene is at the highest side. That's one of the methods that we use. In terms of gross margin, we had a favorable mix in the first half.
We expect mix to be slightly unfavorable in the second half, probably coming in around neutral year-on-year. We do expect to have a slightly unfavorable mix in the second half. You're right to point out, with the strong Mucinex performance, and obviously some of the strong-performing brands in the second half, such as Dettol and Lysol wipes, have a slightly lower margin. We do think it'll be a slightly negative gross margin in the second half, and that should come down to the fact that the full year will be pretty much year-on-year neutral.
Thank you.
Excellent. Let's take the next question from the line of Jeremy Fialko from HSBC.
Hi. Good morning. Just got a couple of questions for you on the 5%-6% headwind you talk about for 2021. Logically, you take the 3%-4% underlying, then your high single-digit growth, which you're expecting, then effectively you're reversing that for 2021. I guess the two related questions to that are, first of all, to what extent are the sort of ongoing pent-up 5%-6% reversing? Second thing is, logically, there would be some areas where you might have easier comp, say, for example, in OTC cold and flu, given the low season you're expecting this year, that might reverse next year. Particularly on the first part of that and then to the second part, just a bit more perspective on what's actually implied in that 2021 commentary.
Okay. Thanks, Jeremy. It's Jeff here. The 5%-6% obviously I don't want to get into too much detail. Projecting the rebalance of 2020 and 2021 in this uncertain times is difficult. The way we've looked at that, we do factor in the pluses and the negatives to get to that headwind. We also factor that in in the 3%-4%. If we've had a brand negatively impacted by COVID, that's factored into the 3%-4%, obviously then that gets factored into the unwinding in terms of the increases in penetration and the various brand initiatives that we have to develop and expand our portfolio. That's not factored into the 5%-6%. Clearly, if we're moving into new white spaces or increasing penetration, that's part of our organic growth, that's not part of the headwind.
If I were to just add one thing, Jeff, this is a reflection of the high degree of uncertainty that we all face. There could be significant public health challenges. There could be economic dislocations. As I said earlier, we're six months into the implementation of the strategic plan of transformation. We're pleased with the progress, we do not want to get ahead of ourselves. You can expect a better update on this from us next February.
Yeah. Again, just to come back, clearly, we are expecting some increased level of use of hygiene products going forward, but we're not going to be at the level of the months of March, April, May, and June as you've been at the peak of the COVID issues. Now, what happens in 2021 is anyone's guess, but we're not assuming there's a major second wave in those numbers.
Excellent. Let's take the next question from the line of Karel Zoete, please.
Yes, good morning. Thanks for taking the questions. I have a couple of questions today. The first one is value offerings. You mentioned this is something you're going to expand into more. At the same time, certainly in the Health portfolio, you have a fairly premium proposition. What are the plans here? What is the value portfolio today within Reckitt? That's the first question. The second one is, you mentioned a couple of times you kind of boost or have additional investments in e-commerce. What are you specifically investing in? Is that more search? Is that people capabilities? Is that more marketing? The third question would be on the environmental commitments. I think you've now showed them the new ones. Can you share anything on that? Will those be included in management targets, et cetera? Thank you.
Could you re-clarify the third question? Did you say environmental targets? Is that what you said?
Yeah. Are those new indeed with regards to greenhouse gas ambitions and being a net carbon neutral in 2040? Can you confirm those are new targets? Will those be implemented in the compensation packages for management as well?
On the first question on the value offering. We have gone back in time and looked at how we have responded to economic downturns. If you look at our business, particularly price pack architecture by channel is a very big lever for us. We have teams working across our brands ensuring that we're getting the right SKUs, the right price pack, across different channels, so that consumers have a whole range of offers available across various price points, across various channels. Clearly it's an area of emphasis, it's part of the learning that we've had before, and it's part of what we're scaling up. In terms of e-commerce, what are we investing behind? There's no question we're investing behind people. We've made a large number of people moves internally into this business, but also through targeted external hiring.
We are investing in their capability building. Third, we are investing in marketing. What we have done as part of our new organization is we have set up eRB, which combines both our digital capabilities as well as our e-commerce capabilities under one roof. We've done that, too. The fourth is we're investing in supply and ensuring that our supply is ready to meet the kind of specific needs for e-commerce. On your final question on environmental targets, we did make public our targets around our commitment to hitting the commitments of the Paris Agreement and doing it 10 years ahead of when was necessary. That was new for us, and we did this over the last six months.
It is being built into our business plans, and over time, we'll be working with our Board as well as with our Remuneration Committee, to talk about what this means in terms of targets for management.
Thank you.
Excellent. We have time for maybe a couple more questions, so if you do wish to ask a question, please press star one on your phone and the operator will put you in the queue. In the meantime, let's take a question from David Hayes at SocGen.
Morning all. Thank you, gentlemen, and thank you for this new format. It's very good. Gives us more question time, thank you. Just two areas for me. Firstly, on the infant formula, and secondly, a bit more of a softer question. Infant formula-wise, just keep coming back to this 3%-4%. Sorry. I know it's a bit sort of very specific, but just in terms of the Brazil, Hong Kong infant formula effects, about 60 basis points in the first half impact. Is that included in that 3%-4%? If you make that adjustment as well, are we talking about 3.5%-4.5% rather than the 3%-4%? Related to infant formula, you're still down a couple of percentage points, I think, if you make, again, that adjustment of the GBP 40 million.
You talked about China. One question on China, is the new product introductions, have they been approved for market entry? Just a little bit more what's happening outside of China in the U.S. That's obviously been a tough area for those markets, but what's being done differently there the second half that gives you this confidence of the momentum picking up in infant formula second half? The soft question is just around the new structure in July. Obviously early days, only four weeks in, but can you just talk briefly about what impact that's having in terms of change of approach and decision making with the new structure? In terms of then the staff impact, you obviously probably do these staff surveys quite frequently. Can you talk about what's changed in terms of the output of those?
What's better, what's maybe worse over the last 6 -12 months of the changes that have been put in place in terms of employee feedback? Thanks so much.
Well, Brit, I think the first and second question are linked around how you want to think about the underlying growth in this. Rather than break it out by specific categories, look to see what they're lapping, what we believe the underlying performance was pre-COVID, as Jeff said. What we see is the operational improvements that we are seeing, and we came to the conclusion across the board because there are things that are positively impacted and there are things that are negatively impacted for a variety of reasons, like I've explained before, that ended up with us being at a 3%-4% range. If I go to your question on China, the new products have been approved. In fact, they've been launched. The initial traction we see is good.
There was a live event that happened in the last couple of days, and a large number of people watched the live event for one of our new products. I feel good about that. To give you a tour across the infant formula world, I'm pleased with the performance of the U.S. business. It has improved, and it is doing well. If I go to Latin America, the issue was not Brazil, per se, by the way, it was the dryer in Mexico. Again, it was planned, it has been done, and the factory is up and running, and the supply is being ramped up. Market share evolution in the early part of the year felt good to us. If I go to ASEAN, the performance is mixed. There are some places we're doing well and some places we are not. I think Thailand is one example.
It's a hotspot. We're not doing well, and we've got to find a way to fix that. If I go to Hong Kong, it's a challenge. Again, you've reflected that in the numbers that you just mentioned. As far as mainland China goes, I feel good about the progress. It is a competitive market. We have invested in price competitiveness in that market. At the same time, you do have local Chinese players we respect who are doing well. What we're doing in that mode is we have done well. Our shares are increasing. A real focus on offline execution, a real focus on e-commerce execution. Again, much stronger than it was before. With the innovation that's in the market, we expect that this will be in line with the growth expectations that we have for that market.
You want to touch a little bit on the new structure and its impact on the business, structure?
Sure. Yeah, the second question on new structure. We've been working on the new structure since March. From March 1st until July 1st, there was an effort internally in order to make that happen. We announced the details sequentially, and over time, we have now moved into the new structure. As you saw with the organization chart that we put up there, Kris Licht is running our Health business, and he's the Global Chief Customer Officer. Harold van den Broek, an internal who's been in the company for a while, was elevated to run the Hygiene business. Adi Sehgal is running Nutrition as well as the eRB part of the business. From what we have seen, early days, but the feedback has been strong. The reason for this is we have got business units that are focused end-to-end on ensuring that they deliver.
The Hygiene business had that level of focus. If you recall what I said in February, we brought focus to Hygiene, but the Health business became incredibly bloated. What we have done with the creation of these two business units out of the previous Health business is we have created dedicated units that focus on Health and that focus on our Nutrition business, the broader definition of Nutrition. What has happened as a result of this is we have dedicated innovation teams for Health as well as for Nutrition. There's no sort of diffusion in focus that clearly happened over the last few years, particularly on our base Health business or what is now our Health business. There's work going in in order to ensure that we can fix that.
What we're seeing with Glint surveys is that the level of support for the direction, for the purpose, for the fight is very high. The pride in the company is very high, higher than what we see in the benchmarks from that survey. In the areas of what could be better, there's no question that as you look at what we're doing, we're working remotely. This is a company that has an incredible amount of agility. I'm very proud of its agility. This is a very entrepreneurial company that moves at speed, and so that is clearly happening. At the same time, what you do have is we do have certain hotspots where people are, in fact, working very hard, and we're finding ways to ensure that we can pace what happens in those places. Supply being one example, by the way.
You can well imagine why as to what is really happening. We're working on that and ensuring that we are streamlining the work, working remotely. Again, what it has done for us, it has just further unleashed the focus of the business on the business versus on other things. It has unleashed the entrepreneurial energy inside this company at a level that I'm very impressed by. Real thanks to my team and to the people out there in terms of what they've gotten done.
We're going to need to finish the call there. Thank you very much for everybody's participation. It's been hopefully a useful and engaging hour for you all. We have a couple of people left in the queue. Apologies. Just call me, and we'll go through any questions that you might have separately. It'll be my pleasure to deal with those. Thank you all once again for your participation. Keep well, keep safe, and we'll talk again in the near future. Thank you.
Thank you all.
That does conclude our conference for today. Thank you for participating. You may all disconnect.