Right, ladies and gentlemen, good morning. We might as well make a start. I want to welcome you to RB's full year 2019 results presentation and strategic update. With us today are our CEO, Lachman and our CFO, Adrian Hemer. Just before we start,
need to get the clicker. I just want to
draw your attention to the usual disclaimers on forward looking statements. And as this is a strategic update, there will be a number of those. So Anyway, assuming you've read all that, without further ado, I call on Lachman, our CEO.
Good morning, everyone, and thank you all for joining us. For the full year results, and our strategic review. We will start today by providing you with our highlights of our full year 2019 results. Thereafter, we will cover the results of the business diagnostic and we will review our strategy. We will then outline our plan to drive superior growth and outperformance and deliver long term value for shareholders.
Finally, we will address any questions you have. We are joined today by Jeff Carr, our incoming CFO, who officially takes over on April 9th and by Ranjay Rada Krishnan, our incoming Head of Human Resources, who starts today. Jeff and Ranjay are 2 new members of my revamped leadership team, and I welcome them into the company. I also wish to thank Adrian Henna for his years of service and for helping me immensely get my arms around the business. And I thank Richard Joyce for his years of dedicated service to the company, and I noticed he still has challenges of my last name, which Richard is Narra in them.
I didn't notice that, and I wanted to catch you on it just on your way out. Anyway, So hopefully, you'll remember that as you go. Yeah. Thank you. Yeah.
Nara SIM and Richard. John Dawson has joined the company to help us build a new IR function for the future, and I welcome him as well. Now on to a quick review of 2019. We finished the year consistent with the expectations we set in October. We delivered top line growth for the business at 0.8% on a like for like basis.
We had a modest decline helped by several factors that by positive this year are headwinds for next year. Our hygiene home business continue to perform and close the year with good volume growth and an improving market share trend. I'm also pleased that but there is I am not pleased with its overall performance. And in particular, do not like health volumes. Outside of Mead Johnson, it did not perform as well as it is capable of.
The issues are largely executional For example, our health sellout is ahead of our health sell in in the I will discuss these issues in greater detail in a bit. Let me talk briefly about Mead Johnson. We bought the business in 2017 for $17,000,000,000. There has been a lot that has been positive about the acquisition. Mead Johnson increased our presence in the U.
S. Latin America, ASEAN and China. The RB way has helped the business grow in the U. S. And gain share.
RB's capabilities with e commerce and consumer relationship marketing have provided a strong foundation for growth and innovation. The combination of Mead Johnson's science and RB's commercialization has led to very successful new product introductions as well, including the brand Infinitas in China. The strong performance in the U. S, strong e commerce performance and strong performance with some of our new products led to a business that had a difficult year as circumstances changed. The competitive environment in China has proven more challenging than we expected.
As birth rates declined, the regulatory environment intensified and local competitors captured market share While our performance in infant nutrition was better than many other multinational companies in China, we have lost share and have been slow to recover from our 2018 manufacturing disruption. Our businesses in Latin America and ASEAN also had executional challenges. Consequently, the business has performed worse than expectations we had when Mead Johnson was bought in 2017. We've therefore revalued the business to reflect changes to RB's original assumptions, leading to a noncash impairment of our goodwill in the business. However, as I was as I will detail later, we believe Mead Johnson has strong prospects beyond the valuation, largely reflecting what we believe we can do with the business.
Building on its strong foundations in China, the U. S. And in other parts of the world. This involves us capitalizing in new ways on the businesses strengths. The Mead Johnson brand is loved in many markets, including in China, where it is highly respected for its science and for its quality.
What we've been able to create with digital with consumer relationship marketing with science and cross border platforms are the foundations for growth in new spaces and with new cohorts. We can use these to open new geographies where RB is present, such as India where initial tests have been successful addressing the needs of new cohorts, such as toddlers and youth, and expanding to digital health, all of which are important elements of the future of this company. Mead Johnson's science is also highly relevant for the aging category. We have specific development efforts underway to broaden Mead Johnson and grow it into new spaces, all of which when combined with better execution and performance of the core business, would make it consistent long term with being a mid single digit organic growth company. Turning back to the business.
Adrian Henna will now provide a quick summary of our 2019 performance and its key drivers, I will then come back and provide an overview of the diagnostic on the business, including an overview of some of the root causes. Let me be clear. Our performance in 2019 was not satisfactory. It does not reflect our growth ambition of the potential from our business. It does not reflect my aspiration to rejuvenate RB and return it to a consistent resilient top tier growth company with superior margins.
That will change, and my management team and I are committed to making that happen. Now Adrian will take you through the 2019 performance. Adrian?
Thank you, Lakshman, Narasimhan, That's where you come from, turning to the first financial slide, the, these are the reported numbers for the group as a whole for half 2 and for the full year. We'll cover the trading and impairment in a moment focusing firstly on the other items on this first slide. The net finance expense is very low, a cost of just 1,000,000 in half 2 and million in the full year. There were several significant factors which went in the group's favor in the year. Firstly, as noted at half 1, the RB2.0 restructuring and preparation for the repayment of a former RB MGN bond led to higher than usual cash deposits with group treasury on which the hedge return was made.
2nd, the favorable settlement of some old litigation in Latin America, which we reported in Q3, included an award of interest over a significant number of years. And third, a downward revaluation of a put option held by our partners in a joint venture, which is required to be included in the interest expense. Adjusting for these factors is an underlying net interest cost approaching our ongoing expectation of the cost of debt, excluding the tax related component of around 3%. In addition, the tax related component of interest expense was favorable in the year. The tax charge on adjusted income was 22% in the year, slightly beneath our guidance and on and ongoing expectation of 23%.
This was the result of some settlements at slightly lower levels than we expected. And within this, there is a release of provision for interest expense. Discontinued net income reflects the $1,400,000,000 cost of the Indivior settlement. The million charge in half 2 is the result of the depreciation in the value of the dollar against sterling. $1,400,000,000 had been paid at the year end.
Total adjusted EPS growth at actual rates was 1.8% in the half year and 2.8% for the full year. If the exchange rates at end December were to continue to end 2020, the net translational impact of currency movements would be a 3% to 4% headwind for the full year and a 4% headwind in quarter 1. Turning then to the next slide and the substantial adverse adjusting items in the year. The principal item is an impairment of the value of the investment of Mead Johnson, We'll cover here the arithmetic, the arithmetic of the impairment, Lakshman has already referred to and will cover further in a few moments the outlook for the group's nutrition business that underpins the arithmetic. The book value of the IFCN net assets prior to the impairment was just under billion.
Both the financial model constructed to assess the acquisition in 2017 and the relevant IFRS impairment test focused only on the current geographies and current product types of the business. Future white space is not included. At the time of the acquisition, we expected medium term market growth of 3% to 5% and we expected to move the growth of the business from an inherited decline to the 5% level over a few years. We expected to be able to increase the inherited margin by an incremental 6% to 7% with around 1,000,000 per annum of synergies, largely from removing duplicated corporate costs and greater procurement efficiencies We expected this to deliver a return on capital equal to our weighted average cost of capital in year 5 and the model implied a 3% terminal growth rate. The most significant changes evident over the last year have been in the China market.
The prospects for market growth have lowered as a sustainably as a sustained materially lower birth rate has become likely, and the competitive dynamics have changed with evolving regulation and the progress of a number of local companies. We have also revised our view on the optimum long term design of the supply network This will be more capital intensive integrating Mead Johnson and the RB Health business, especially in LatAm and Azyan, which has led to weaker performance. Taking these factors together and again, just for the existing geographies and product types has led to a reduction in expected top line growth to around 3% at constant rates over the next 5 years and only a moderate net margin improvement from the current position. The geographies we serve have on average general inflation of about 1% higher than sterling. In this context, we now see a 2.5% terminal growth rate to be more appropriate.
Valuing these cash flows at a 9% pretax discount rate gives a 1,000,000 valuation and impairment of 1,000,000,000. Maximo covered a few minutes ago how the group sees the opportunities in nutrition more broadly beyond the confines of this impairment model and the important role they are expected to play in the group going forward. Also included in adjusting items are an impairment of a small China traditional Chinese medicine business, Oriental Pharma, which we acquired in 2012. And also included other costs of integrating the Mead Johnson acquisition and associated RB2.0 costs and the amortization of MGM intangibles, These latter items are in line with guidance and we have, as usual, included an analysis in the appendices to this presentation. And also in the light of the revised strategic direction that lacks will describe in more detail in a few minutes, we will not be incurring some of the expenditure previously envisaged under the RB2.0 program.
We expect a reduction of around 1,000,000 to 1,000,000 on the originally planned million. So turning to the next slide, The half 2, 1.7% and the full year 2.7% adjusted earnings growth comprised the component set out on this slide. For the full year, 1% from net revenue growth, a 3% decrease from the 15 basis points margin decline a 4% increase due to the temporary lower interest cost, which I noted a couple of minutes ago, a 1% headwind from the tax rate, which was 21% in 2018, and then a 2% foreign exchange tailwind. Turning to the next slide This slide shows the revenue gross margin and adjusted operating profit numbers for half 1, half 2 and for the full year for the group as a whole. Like for like net revenue grew 0.9 percent in half 2 and 0.8% for the full year.
Gross margin increased 10 basis points in half 2, a decrease of 10 basis points for the full year and adjusted operating margin declined 110 basis points in half 2, a 50 basis points decline for the full year. BEI spend for the group increased in half 2 as we signaled by 130 basis points, a 60 basis points increase for the full year. And total SG and A spend, which increased by 20 basis points, benefited from a reduction variable pay expense due to the weak performance this year, The lower variable pay improved the operating margin by about 100 basis points compared to a normal ongoing level for a well performing group. A headwind, we hope it's certainly, of course, for 2020. We will return to the business unit operating margins and a closer look at the drivers of margin change in a moment.
So turning to the next slide, and now looking just at the health business unit. In headline terms, you can see that the Health Business Unit had a poor quarter in reported revenue declining by 2.2%. Many of you would have seen market research data, which shows a stronger performance. Market growth was helped by reasonably strong incidence of cold and flu and RB share performance improved still in decline in Q4 but at a much lower level. The market data we access indicates consumption growth of RB product of around 2% in about 1 half with a lower seasonal increase in channel inventory, principally in the USA.
This was largely due to difficulties in the group's supply chain, which meant that not all orders could be filled. Lakshimal will cover this in a few minutes. Improving the group's supply resilience will be a significant focus over the next couple of years. The other half was principally an increase in trade spend. You will also hear more about this from Lakshman in a few minutes.
While the price points for most of the group's health products have been appropriate, There is scope for targeted reductions to enhance competitiveness and contribute to the restoration of balanced price and volume growth. Some adjustments were made in Q4. The 1% Q4 reduction in IFCN comprised further strong growth in the United States, a slight decline in China, with growth at the super premium end, but a weaker performance at other levels as focus switches to our new grass fed product and further declines in LatAm and Aziyan, a combination of weaker market growth and some execution issues. The 2% reduction in OTC revenue was in contrast to slight market share gain in the latest data available and reflected the supply and trade spend issues I've just mentioned. Mucinex revenue declined year on year, but consumption data reflected good market growth and the expected improvement to near stable market share.
Neurofend and Gaviscon showed good revenue and share growth. The smaller local OTC brands showed mixed performance. Mya's 3% Q4 decline in Other Health reflected pricing pressure on Dettol and the signal competitive pressure on Durex from the stage in the innovation cycle. VMS revenue increased with strong growth in China more than offsetting a continued weaker performance in the United States. Turning to the next slide, the price mix and volume data for health Across the business unit in Q4, the 2% revenue decline comprised a 5% volume reduction and a 3% pricemix increase East.
This is a 4% volume decline in full year, a bad number that relaxants already called out and will return to, in the rest of his presentation. Turning to the next slide and analysis of the margin movement in health. Adjusted operating margin decreased by 120 basis points in half 1, to 30 basis points in half 2, giving 180 basis points in the full year. We have set out here a quantification in each of the principal components of the full year margin reduction. Firstly, a 70 basis points gain as the rest of the Mead Johnson cost synergies were delivered, slightly offset by the remaining RB2.0 cost increases.
This was mainly in half 1. Secondly, the impact of the lower variable pay, which had a larger impact in health, reflecting the weaker performance of this business, And thirdly, the increase in BEI, which was oriented to half 2. And then fourthly, the other trading margin change, a net 300 basis points reduction, and there were a number of factors behind this reduction. There was a benefit from lapping the IFCN supply disruption of around 70 basis points. Importantly, there were investments, including increased production capacity R and D systems infrastructure, SQRC and channel capabilities in China, in total around 70 basis points.
There was negative leverage from lower volumes going through the factories and the lower revenue. This was a big item around 120 basis points. And there was an increase in input costs, some specific to ingredients in products in our portfolio, some of which we called out for the first half of the year and other supply costs, exceeding the benefits of price increases and some negative mix, which was about 150 basis points. And then there was a small net increase in SG and A. Okay, so turning then to the next slide and focusing now on the Hygiene Home Business Unit.
HighHo reported another 4% growth in Q4 giving 4% for the year. The business continued to perform well, benefiting from the focus on its brands, and distinct from some of the pressures which have disrupted progress in the health business. Reported growth was slightly higher than the underlying consumer offtake growth, which we see as close to 3%. The reported numbers have been boosted slightly by the legal settlement in Latin America covered in Q3, and which increased reported Q3 growth and by some changes in the go to market model, which will be annualized in early 2020. Growth was again broad based across the brand portfolio.
The 5 largest brands, Finish Airwick, Lysol, Vanish and Harpic all grew in Q4 and in the full year. Turning to the next slide and the pricemix and volume data for Hygiene Home. The Q4 growth rate comprised a 3% volume increase and a 1% pricemix. Increase. This move to greater volume growth was in line with the direction we signaled at half 1.
It reflects the pattern of the prior year comparatives an increase in bei and the pattern of innovations. The 2 year picture shown on this slide therefore shows the balance volume and price mix position that we target. Turning to the next slide. The high the Hygiene Home adjusted operating margin grew by 190 basis points in half 1 by 110 basis points in half 2 and by 150 basis points in the the additional RB2.0 costs, again, almost all in half 1. Secondly, there was an increase of 50 basis points in BDOI spend, Falling a 40 basis points reduction in half 1, we signaled at half year the intent to increase this materially in half 2.
And thirdly, the other trading margin, the net 220 basis points improvement comprises an increase in gross margin, where the progress in half 1 was maintained despite lower year on year price mix increase in half 2. This reflects continuing good cost control which was importantly accompanied by continuing improvement in quality and HSE measures. Investment in Innovation and the full delivery of a programmed optimize cross region costs, especially in Europe. Turning to the next slide. We show here the usual slide on net working capital, We've continued to run the business with negative working capital slightly better than our target of 9%.
There continues to be pressure on receivables, especially in developed markets, from modern trade retailers, but also increasingly from larger players within the e channel landscape. Inventory levels have been quite stable. However, the group is planning some modest increase improve service levels in health, while longer term work is undertaken to enhance systems and processes. And turning to the next slide on free cash flow, Free cash flow remains strong, but free cash conversion at 87% fell below the 100% we target This was principally due to exceptional spend on the integration and RB2.0, which reduced conversion by 10% and also due to the slight increase in net working capital. CapEx being slightly above depreciation and the non tax credits within the lower net finance costs, which I referred to earlier.
Capital expenditure at 1,000,000 was 3.1 percent of revenue, in line with guidance. Turning to the next slide on net debt. Net debt at year end was close to the level at the start of the year and its composition is shown on this slide Broadly, the billion free cash flow generated was deployed just over 1 half on dividends and the rest on paying the settlement with the Department of Justice. The latter has clearly delayed our intended progress in paying down the debt taken on to acquire Mead Johnson. We have set out an analysis of the movement in the net debt in the appendices.
And then finally, in this section, Laxamore covered 2020 and medium term guidance in a moment. We're on the next slide. If we could turn to the next slide. The, so I say, lacks more cover 2020 and the medium term guidance in a moment, However, as context for this, it is worth emphasizing the year on year effect of a couple of items in the 2019 numbers. Firstly, as I've already mentioned operating margin benefited by about 100 basis points from variable pay being materially lower than we would expect in a normal year.
Implying a go forward adjusted operating profit margin dynamic of around 25% rather than the 26% we've reported Also, earnings clearly benefited from several unusual factors reducing the net finance cost and the tax rate below the 23% we expected over the medium medium term. Taken together, these margin and other items increased 2019 adjusted earnings per share by about 7% from about 3 25p to the reported 3.49p. And with that, I will hand over to Lakshman Narasimhan to talk about the future.
Thank you, Adrian. Much appreciated. So that was the review of, the 2019 performance. The last time we collectively met, I mentioned that I joined the company because of its amazing brands, the company's record of performance and its reputation as an innovator with strong commercial capabilities focused on outperformance. Our focus early on My focus early on was to listen and to learn.
The team and I spent time in markets and met several customers all around the world. We visited our field operations. I sold with our sales teams, visited our factories, our research and development centers and immersed ourselves with consumers. To that end, I spoke to many employees, a large portion of whom are shareholders in this company to alumni and to investors. We analyzed our performance in great detail, and assessed our capabilities versus competitors.
This detailed diagnostic led to our go forward strategy, designed to return the company to mid single digit growth and deliver superior value I thank everyone for their input. I have no historical baggage here. The board has been extremely thoughtful and pragmatic, and we've all approached this exercise with a laser like focus on shareholder value. And to that end, all options were on the table. I spoke to you all briefly during our Q3 trading update in October to give you my initial impressions based on my work to date.
I said that I believe the company is a good house in a great neighborhood that the company had run hot in a few places and that we had tried to do too much in too little time. Execution improvements were many. And we immediately paused any activities that distracted us from execution. Nothing I have found since then has changed that impression. We have not been waiting to address our challenges.
With pace on multiple fronts to make the required changes. There are 5 key messages I'd like you to take away about RB. First, it's a good house in a great neighborhood with the potential to be a great house again. We have a clear strategy anchored We have a detailed 3 phase plan we are investing in funded by productivity. This will create long term shareholder value while engaging the society with purpose.
And finally, our organization and team that is inspired by this mission, by this purpose, to carry this through. The outcome of this is simple It's about restoring growth and driving strong earnings. In the business over the next 3 years, funded in four ways through an investment in costs of around 1,000,000 that will hit the P and L. Through an enhanced productivity program, that will create the scope to invest 1,000,000,000 over 3 years back into the business. Through a 1 off transformation investment spread over 2 years of 1,000,000,000.
And a higher level of CapEx around 4% of net revenue for the next 2 years. As a result, alongside midterm single digit revenue growth, we expect to deliver earnings growth of 7% to 9% restore strong free cash flows and delever the balance sheet. Let me take you through our plans in more detail. And let me start with why I think RB is a good This is a company with an amazing heritage of 200 years. The trust in our brands has taken decades to develop.
Our company has shaped communities with deep involvement Our presence in hull in the north of England is a great example of this company's pedigree and what a privilege it is to lead it. After all, it is from the port in Hammerside that debt all made its way across the Commonwealth including to India, where I grew up. With many strengths, RB's category leading brands are loved by consumers, Our brand strength, premium new products and strong brand equity investment needs underpin a strong gross margin with good price premiums. Secondly, we've great people grounded in a can do attitude and an entrepreneurial spirit. Our people talk about RB with B as owners.
With a real sense of passion and achievement. We have one of the most stringent ownership requirements for executive management for a fifty-fifty. And indeed, throughout the company, more than 50% of our employees participate in some form of at its best and when focused, RB is an execution machine, moving with pace and with ambition. Our people have a commercial feel for business opportunities like the best entrepreneurs, and they rise to the occasion like no other I've seen, particularly when there is a higher purpose. The recent incidents with COVID-nineteen bring that home.
A company wide team, including teams from Detol and Lysol, came together to overcome many hurdles to ensure our consumers have access to information and access to products. Our people are working round the clock with consumers in mind. We are committed to China. It is a great country with long term potential and we have a very strong business there. And we're doing everything we can to be supportive to that great country.
I can't stress enough how important digital and e commerce will be to our future and how it already is a strength to RB. It's already big in China, but not just there. Meet Johnson with its high order volumes and value is a real positive for e commerce. We've got e commerce operations in over 40 countries today, and it is now over 10% of our overall business by revenue. In its growing, 30% a year, doubling over the last 3 years, and we expect the strong growth to continue.
For example, Digital And E Commerce are large enablers for Durex, which now has direct to consumer sites in 30 two countries. In 15 countries, we can now deliver Durex in under an hour. And provide access and information and purpose or by recognizing the consumer need for convenience and privacy. We have a strong global network with real strength in China, the U. S.
And developing markets. Amplified by the Mead Johnson acquisition. With Rite Aid In Market Scale, our footprint positions us well with a large number of consumers coming into consumption, particularly in developing markets. We've one of the largest bases of talent trained in multiple developed and developing markets. And finally, innovation has been the lifeblood of RB and will continue to be so.
We've strong signs across multiple areas. The Mead Johnson acquisition furthered that strength in science. For instance, we're a leading player in microbiology, foundational across our businesses. We also have a great skill in introducing new products, and taking them to multiple markets, but it's not uniformly great. Our approach to science is strong We encourage open source innovation and in licensing critical to the way tomorrow science is developing, coupled with very strong lift and scale.
We have no ego So our brands, our people, our culture, our e commerce, our global network and our science are what drives our growth. However, there are some opportunities as well for self help and improvement. The creation of the broader real focus to the Hygiene Home business. The leadership team invested in competitiveness strengthened the product pipeline and put in place a strong operating rhythm. The business began growing again and has been a steady performer with further potential to increase market share and to outperform.
Mead Johnson grew as well less than expectations, but grew significantly more than it did as a standalone company. On the other hand, RB2.0 did not go far enough. Health faltered with a pace of change, It became large, unwieldy and unfocused. While synergies were delivered, Mead Johnson had more challenges than expected when we bought it. As well as issues post acquisition require high investment and attention.
Consequently, the leadership's focus on the rest of health beyond Mead Johnson went down substantially, reflected in its performance as we show here. We missed important product trends, particularly in Gerex, and experienced a lot of new product pipeline leakage. In addition, some pricing decisions We've invested well behind our brands and deliver healthy gross margins as a result, which reflect our premiumization priority. As a result, I feel largely comfortable with the level of brand equity investment that we are making benchmarks well. When I joined I heard a lot about RB as being a lean company This is true, yet we are not as efficient as we should be, as highlighted in our conversion, from gross margin to operating margin.
It points to opportunities to find savings here to invest back in growth such as Innovation And Sales. Our analysis showed that we have opportunities to be significantly more efficient and effective in our brand equity investment. Our direct and indirect procurement as well as our end to end supply chain costs. We are 3rd quartile on Brand Equity Investment Efficiency with a higher nonworking spend and a need for better allocation of spend. We used to be best in class in procurement with very strong practices, But we've opportunities here today given the leanness of our team in both direct and significantly more in indirect procurement.
Our end to end supply chain is not as efficient in certain areas or effective. It delivers lower manufacturing cost and quality, a muscle we have built, but it comes at the expense of customer service. We need to improve supply planning including leapfrogging into new machine learning and AI tools. We can increase the use of process automation. We have a wealth of opportunities to capture these efficiencies and reinvest them in capabilities and the expertise to drive growth.
These formed the backbone of our enhanced productivity program, which I will talk about later. Over the last few years, execution, a real strength became an issue, particularly in health. The NJN acquisition created a margin pressure, which meant we cut back in other areas, including on sales teams, which cost us distribution, particularly in developing markets. Growth, faulted and service levels decreased. Illustrated perfectly by poor product availability, in this case, in the U.
S. In peak season. Our ability to fulfill customer commitments also suffered after several years of underinvestment in our supply chain infrastructure. Something that explains our Q3 and Q4 performance, where sell out in Q4 in North American health was significantly better than our sell in, frustrating several customers I had the opportunity to meet on my tools. Our SAP investments while correct amplified this weak underlying capability.
We need I'm pleased to say But the long term fixes, none of which are rocket science are a focus in parallel and do take time. So some clear strengths and some opportunities. What is another benefit is, of course, that we are blessed to be living in a great neighborhood. RB is present with strong sustainable structural growth. Cutting across these are 4 major megatrends, or which provide us tailwinds as well as the 5th, which is fundamentally disrupting the whole world and where we are strong.
These provide tailwinds and shape where we play. To start, the global pressures of urbanization and global warming Make the need for hygiene ever higher. Hygiene is the foundation of health. Creating a strong symbiotic relationship for our business it is entirely visible in the difficult events around us today which are challenging public health systems. Precious and governmental health spending is reinforcing self care, avoiding one visit to the health care system with available self care products.
And digital information access saves money in development markets and in developed markets. Demographics are also a tailwind. We benefit both from the increase of youth coming of age as well as aging consumers. Sexual health and well-being is a big societal issue. There are over 1,000,000 transmitted infections daily, 5000 new HIV infections every day, particularly in Sub Saharan Africa.
At the same time, aging creates opportunities for our science platforms. When combined with digital, we're just completely transforming what people buy and how they buy it. We can expect large growth in areas like personalized nutrition, wellness and digital health. Finally, all these positive megatrends require solutions that are sustainable. These underlying megatrends are very compelling for some time to come and directly support our presence in hygiene, in health and in nutrition.
The magnitude of these societal challenges underscores also why our portfolio must not just do well, but also be authentically engaged in doing good. Given this great neighborhood, the big question was this. How does breadth of our portfolio fit with this opportunity? Undoubtedly, the competitive bar is increasing. Consumers demand more.
Customers expect more. Technology And E Commerce are raising the bar. What it takes to outperform will be loved brands, market presence, customer relationships and capabilities all efficiently delivered at scale. Consumers want to buy trusted brands Our brand portfolio gives us leverage in commercial activation. An example is the flu season.
The common promotions we run-in the U. S, using the scale of Lysol and Mucinex, coupled with sensing data and analytics, help us digitally pinpoint where we see flu the flu season break. We rely on similar programs in the UK with LEMSIP with DETOL and with Eurofan. We see collective opportunities across our portfolio as the number one surface care company in the world. Our scale gives us market presence in the most important markets, which drives availability without excessive deleverage.
In India, Debt Oil And Harpic have grown up together over the years in terms of market presence. And now with 2 focused businesses, also in channels like pharmacy. Having spent time with customers in North America, our largest market, it's clear that scales scale enables access and better customer relationships at the highest levels, particularly in e commerce. Scale enables us to access and develop stronger science networks as in the case of microbiology, which cuts across our business. It helps us access development partners whose small brands are what we refer to as rocket brands, digitally 1st brands, we can commercialize.
It helps us build distinctive digital and e commerce capabilities. For example, our digital and e commerce learnings in China and in health have been very strong over the years. We are scaling these across our entire portfolio and taking advantage of our scale in e commerce, where we build for speed of activation and delivery and use scale from the underlying technology platform, data and analytics. For example, we're doing this in Upstream, a small women's health brand from the U. S.
That is now being scaled to other markets. These rocket brands, coupled with our minority investments, in partners such as Farmer Pack And Your ND and partnerships with incubators like Launchpad And Foundest Factory are pivotal to our future growth. Our portfolio therefore plays in great neighborhood spaces in hygiene, health and nutrition. Given the megatrends, what is required to win in this future requires scale trusted purposeful brands, market presence and customer relationships and capabilities. Therefore keeping the portfolio together, and focus entirely on performance was the most value creating choice.
Yet focus does matter. RB's historical success has been driven by each business having a clean focused playbook on how we run our business at every point of choice about developing the right premium products that underpin our gross margin that fuels high brand equity investments which in turn is supported by flawless execution, coupled with a highly efficient business, thereby creating resources to reinvest and delivering compounding growth, cash returns and long term shareholder value. But all that requires accountable leadership Across our business, there are large elements of commonality in this playbook. When in place, as in hygiene home, It leads to performance and compounding returns, but not in place, it does not work. We therefore need real focus.
After assessing all options, our review concluded with the following observations, we are better and stronger together. We are leaving growth and profit opportunities on the table. But did not bring sufficient stability or focus. We need more and new muscle and need to do it at scale. And greater efficiencies can help that the previous approach would create less value than an approach to stabilize and rejuvenate the company to 1st perform and through that to transform.
I've touched on our business our markets and why I think RB has the potential to be a great house. Let me now set out how we're going to rejuvenate What makes RB distinctive is that the functionality of many of our brands authentically serve a large social cause, be it in hygiene, be it in sexual well-being or be it in nutrition. Harpex campaigns around access to toilets have been very powerful. Durex in South Africa or death hole in India drive availability of high quality products and for the communities in which they live. Today, our brands like Dettol, Lysol, Harpic, finish, Durex, Mucinex, amphibill and move free amongst others, fight at the front lines.
To give our consumers a better life. Our soul is clear. We exist to protect heal and nurture in our relentless pursuit of a cleaner and healthier world each word matters They speak to our portfolio and the categories in which we play relentless pursuit captures RB's entrepreneurial and can do spirit, all in the service of creating a cleaner, healthier world. Our company is inspired by the fight of making access to the high quality hygiene, wellness and nourishment a right, not a privilege. Access has multiple platforms, quality products that are available with attractive price points along with awareness and advocacy, all part of heavyweight high quality accessible.
Our brands will over index on social with intentionality. But while doing so, we will redouble our focus through our brands on reducing recycling or reusing plastics. Reducing our water footprint and meeting our science based carbon reduction targets. The three spaces that RB plays in, hygiene, health and nutrition fit well together with a very attractive mix of market dynamics consumer pull, customer relationships and market based presence and new products that support an attractive earnings model. How we drive performance from the portfolio will obviously be key to returning RB to attractive growth.
There are 4 main levers Our primary focus is and will always be on penetration. When we get this right, we grow significantly. Yet as is evident in the multiple markets I visited, we also see the opportunity to extend where we play. We have opportunities to grow faster in markets we're already in that are not part of our focused category market units. We're also not present in many growing channels in the existing markets that we're in to the levels that we should be.
Our power brands also have a license to play in adjacent spaces. We, however, do have market share opportunities in several markets and need to win at the point of choice. Additionally, We expect to scale digital first rocket brands that we or our partners create or incubate, as well as our brands with e Commerce enabling customer engagement, consumer engagement everywhere we want to play. All of this requires resources but the headroom for growth is clearly there. We've created a clear roadmap of growth for each space that leads up to a company that grows mid single digits.
Let me describe it. The first is hygiene. Are brands of significant penetration potential. For example, in cleaning toilets in urbanizing India and developing India, as well as in Mexico, where we built out Harpic as a leading brand. Over the last 5 years in India, penetration rates in urban environments for Harpic have gone up by 20% in urban areas and in rural communities by over 10% but both still have lots of headroom.
And there are other developing markets we're already in, where we expect to see similar dynamics. Even a brand like Finish, has good growth opportunities as dishwasher penetration in both developed markets like the UK or Germany and in markets like China, are significantly below where they could be in China, less than 2%. Looking at new spaces, our purposeful brands are expanding For example, Air Wake essential Mist aroma taps into a well-being trend that stretches the brand into a consumer need for nurture. Over the last year in Europe, we're seeing strong growth in market share increases. When it comes to new places to be, it's all about putting investment behind our leading brands and their category market units.
The hygiene business today focuses on 40 category market units that drive a significant portion of its growth. Growing materially over the 3% or so category by investing in breadth and capability and adding 10 CMUs to the 40 CMUs, we can add a further 100 basis points to our top line growth. That's just a few of the many opportunities we see that give us confidence we can grow ahead of a roughly 3% growth market and delivered 3% to 5% growth per annum. There are also great examples in health, Health is made up of 2 distinct parts: self care, which includes OTC, death toll and wellness supplements, VMS, wellness supplements. Growing around 3% to 4% per annum and sexual well-being growing at 6% to 8%.
We continue to see solid growth opportunities for OTC, through penetration, multi year product development and brand building. And with brands and their derivatives anchored in spaces, not just specific molecules, or technologies, particularly in emerging markets. The opportunities for data all of this area are large, particularly with a biome lens that we are bringing to the category. Our wellness supplements business has also shown strong growth opportunities, particularly in the digital channels. In sexual well-being, we've had great success developing our brand in lubricants through a normal normalization campaign which breaks down barriers and makes the consumer experience better.
The impact has been dramatic. In one of our developed Europe markets, Since the start of 2019, revenues were up 35% with our market share for the product over 175 basis points, and 80% of shoppers are new, and there's been a halo benefit to our base lubes business as well. In terms of playing in new places, NeuroFend launched 24 hour medicated plasters in Italy and Germany. Previously, this is only a neurofen for children position for us, but now we're starting to play in the bigger growing spaces. When it comes to playing in new spaces, a local product here in the UK is a great example.
Guardian, an asset reflex control tablet, leverages the Gabascone reputation in the broader GI space to offer sustained control of heartburn. This proton pump inhibitor based product has been very successful, reaching a 20% market share within 6 months of launch and helping develop the PPI category by nearly 30% since launch as well. Overall, we bring a strong consumer lens to our health business, from Detle to Durax to Neurofan. With that lens, we've got an opportunity to grow above the average of the sector in the 4% to 6% per annum range. Turning to Nutrition.
As I've outlined before, we currently only really play in infant nutrition. The fundamentals of the category are highly attractive with steady growth and very attractive margins. Key drivers of category growth include increasing birth rates in most developing markets, premiumization, as well as shifting regulation. Yet it is a competitive category dictating the need for meaningful marketing and higher than average capital investment, reflecting the most sophisticated manufacturing processes involved. In the long term, birth rates will decline and seniors will increase in number.
Our brand is perceived as a science driven leader in the U. S. And in China, We have strong endorsement from the medical community. Our continuous relationship marketing program is one of the strongest in the world. I've laid out earlier why we believe that the expansion beyond infant, taking advantage of our signs and market presence.
We have market share improvements evident here. And, you know, we've got examples in the U. S. And Mexico, where we've, we've reversed the trend. As well as further execution opportunities in Latin America and ASEAN.
We have further opportunities with a daigou or Chinese cross border influences, particularly with our wellness products. These new spaces and new places taken together with better science led innovation and the opportunity presented by youth and adult nutrition give us confidence that we can grow this business in the 3% to 5% range. All our spaces benefit from the scale and experience we already have in e commerce. Our ambition is to double our e commerce business again over the next 3 to 4 years. We have created and refined 2 tailored business models for E Commerce.
Be big focused on B2C And Marketplaces with an emphasis on driving scale and efficiency and be fast focused on direct to consumer cross border, online to offline, as well as digitally native brands with an emphasis on fast cycle test learn correct scale loops. Both these models are in play with a very clear operating model that has been scaled across the entire company. As a result, we see many reasons to believe in the growth opportunity. Our power brands will move from a focus on 75 category market units over time to 800, with a primary focus on penetration and category creation. And therefore earn market share improvement and broadening where they play in new places and then adjacent spaces.
With the right focus and investment, we could rejuvenate the best of RB to drive sustainable mid single digit top line growth in the mid to long term. Ahead of underlying markets with a healthier mix of volume as well as pricemix than we've done in the past. I've covered our portfolio review. I'll lay out in more detail our plan to get the company to outperformance. We've developed a phase plan to sequence the change.
The 1st phase is to stabilize and We expect the 2nd phase to be to perform and build momentum and thereafter, we expect to be on the path to sustain our performance. Let me put some more detail on that. Our first phase is about addressing competitive gaps. Fixing the foundations and launching the productivity program with targeted capability investments. The focus is to sustain the growth rate of hygiene as well as reignite volume growth and health and nutrition.
Our competitive investments include specific pricing actions and brand building spend in markets with heightened competitive activity. We have continued to invest in foundational end to end supply chain planning, debottlenecked seasonal capacity shortfalls, as well as in safety and quality. We've already launched our enhanced productivity program, savings generated this year will support some of the capability investments in hygiene to expand category market units as well as targeted investments in e commerce, digital, technology insights research and development, particularly base health product development. We are launching channel of its sales excellence program. I was with the team yesterday, and tomorrow, we are launching this to 60 countries, bringing back to life Wool was already entrenched inside the DNA of RB.
Our investments in Brand Building include resources for Design, demand space insights, digital and more advanced revenue management and spend optimization tools. We also expect future proof of our product portfolio. To gauge our progress, we will also broaden our internal scorecard To more effectively monitor metrics such as customer service, distribution point growth, brand investment returns, innovation pipeline, vitality and leakage, total productivity, e commerce growth, pricemix, volume and value market share. The 2nd phase beginning in the second half of twenty twenty one is about sustaining and building on the momentum from the 1st phase. In this phase, we expect the productivity program savings to further kick in across hygiene, health and nutrition.
Additionally, we expect volume growth to start providing fixed cost leverage across the company. We intend to use the fuel from productivity and the cost leverage to drive growth, as an example, from additional CMUs and additional challenges, channels, redeploy savings to Investment Brand Building innovation and execution and continue to invest in design research and development, e Commerce And Digital. We expect the capabilities built to prepare the business to further accelerate growth as well as start delivering margin improvement in health. We expect to continue to make maintenance level investments in our foundational capabilities. While beginning to make investments in get ahead capabilities.
We expect to fund any acceleration resources we need to deliver these capabilities from internally generated productivity. Many of the scorecard metrics are the same, but in the 2nd phase, We've put even more emphasis on improved customer service, net revenue realization, innovation pipeline quality, our e commerce growth rate, and further enhancements to productivity. Meaningful margin progress, particularly in health and nutrition, will be very important. By the time you get to the 3rd phase 2023 onwards, we expect that the business will be operating with all three business units in a virtuous cycle of volume growth and productivity, funding revenue growth, capability investments and margin improvement. At this stage, we expect to see growth at or over the category growth rates we've outlined earlier Before I move on, let me The billion 3 year program will play a key role in how we will create room to invest in growth.
As I outlined earlier, there are many areas in RB where we have taken our eye off the ball in execution and core capabilities. These all represent opportunities for productivity. In particular, we'll focus on direct and indirect procurement, supply chain efficiencies, commercial levers as well as fixed costs. We will look at the entire cost structure of the company to ensure they are focused on driving sustainable growth and competitive risks. Taken together, These should provide the scope to enhance our typical productivity initiatives to around 3% of revenue per annum compared to a typical 1% to 2%.
Looking at our journey to the medium term in more detail, it's clear that 2020 is a transitional year in terms of revenue. We've started the year strong and in some cases much stronger than last year. And we've got some weak quarters to lap, particularly in the second half. Looking at our plans, This would typically be a 1% to 3% growth year. However, we've also got some uncertainties.
China is over 10% of the business, and the full impact We've got issues to fix, particularly around our supply chain, and this will take time. With all this, I expect us to grow faster than 2019 consistent with the progress towards becoming a mid single digit growth company and we will update you as the year unfolds as to the trajectory that we are on. From an operating margin perspective, we expect a significant decline in 2020. Firstly, we enter 2020 with 100 basis points of operating margin headwinds previously outlined by Adrian, and mainly related to variable pay. Secondly, we plan to invest an incremental million into the business, to rejuvenate our commercial muscle and address issues where needed with consumer value.
This will have an additional 150 or so basis points impact on operating margins. With these 2 components, we are at a decline of 250 basis points of margin. Lastly, we expect to incur some finite life on nonrecurring transformational costs of roughly 1,000,000 or about 100 basis points in each of the next 2 years. Related to the costs to achieve I know these are often referred to as restructuring or exceptional items, but these have costs to reposition our business for better future growth. I am therefore putting them into our adjusted operating profit.
These will roll off after 2 years and provide short term margin acceleration. Taking all the 3 components into account, is how we build to This will obviously have an impact on earnings as well. As Adrian previously mentioned, we will also face headwinds from interest and tax benefits seen in 2019. As a result, adjusted earnings per share will be around 20% lower as we set out in our preliminary results statement. 2020 represents a base on which to sustainably grow.
As we stand now, I would expect top line to further improve versus 2020, and for incremental investment to be fully funded by productivity initiatives. As we then look towards the medium term, we transition towards our long term target earnings model. Looking longer term, I expect RB to have a sustainable growth algorithm and earnings model. Specifically on top line, I expect us to grow mid single digits from execution competitiveness, penetration focus as well as widening our aperture to new places and adjacent spaces. On operating margins, I expect some good margin expansion as we lap our finite life transformation costs and then modest expansion driven by operating leverage.
We will remain a highly cash generative business with continued focus on net working capital cash conversion and DD bridging our balance sheet. This will enable us to sustainably deliver 7% to 9% EPS growth. Which combined with a stable and sustainable dividend policy of around 50% of adjusted earnings, should provide an attractive and sustainable TSR proposition to our shareholders. Finally, efficient capital allocation will be a key priority for Geoff and for me. In 2020, We're going to see a lower level of free cash conversion as we step up capital investments and invest selectively in working capital to ensure customer service while fixing our inventory management systems.
Our long term ambition is unchanged. To be a strong generator our portfolio. The first priority of cash generation is the investments into our continued operations of the business, with a focus on maximizing our return on investment. We intend to sustain our dividend payout at current levels until we rebuild cover to around two times. And importantly, we intend to rigorously manage our brand portfolio to maximize shareholder value.
We will continue to evaluate and actively migrate the portfolio to higher growth and returns. About our progress in Before we finish, I'd like to share a few thoughts on how we're going to set a fresh direction for the business, focus on addressing the needs of tomorrow's society, and the changes we are making to the organization and leadership to deliver our plans. Earlier, I talked about how our clear purpose and fight, shape our strategy. This new purpose agenda builds on progress, but its widespread push is a change. Underpinning the shift will be a new set of values for the business set out in our compass, which will guide us.
At its heart is the goal of always doing the right thing. But with clear principles around putting consumers and people first, seeking out new opportunities, striving for excellence, the basis for our performance. And building a culture will celebrate what has made RB successful, yet we'll contemporize it for what is required for sustainable growth and success in We will also relook at reinforcement measures, including compensation To reinforce my words, but also incentivize for the long term success of the business. We are critically dependent on the commitment and bring success through their inspiration. As I said earlier, we need to have clear playbooks in our focused, hygiene, health and nutrition businesses.
We also need to get the balance right between focus and accountability as well as scale. As a result, we are setting up our organization to address this. We are moving to 3 global category focused business units hygiene effectively our whole hygiene home business, as well as health and nutrition, aligned with the spaces with full P and L accountability. Given these within these, We'll develop capability centers of excellence that can be leveraged across the company. Given the importance of China, we will operate China as an integrated business across the 3 category business units.
Building leapfrog capabilities in digital data and analytics can further speed the rapid growth that we're seeing as digital, e Commerce and analytics. Are at a major turning point for the consumer. Our e commerce capability will support all 3 category business units, as well as our global functions. Our priority was a focus on performers and minimize unnecessary organizational change. It is intended to sustain the momentum of hygiene It elevates the focus and oversight for the health category innovation, and enables senior oversight of nutrition category innovation and development with minimal impact on the front line.
Finally, key to this turnaround will be the company's leadership. Today, I'm announcing further appointments in the organization. We will be building our new team from the best of RB's existing talent supplemented by some targeted outstanding new hires. Who can bring fresh perspectives and the capabilities we will need to strengthen in the business. Jeff, Chris, Runjay, Abi, Zephany and Harold are great examples.
You will hear about the moves of both internal people and select external hires over the coming years. I therefore hope you will walk away with 5 key messages about RB. Good House in a great neighborhood, the potential to be a great house again. Clear strategy anchored in purpose to rejuvenate mid single digit growth in the medium term. Detailed 3 phase plan that we're investing in funded by productivity will create long term shareholder value, while engaging with society with purpose.
And organization and team inspired by this mission to carry this through. I look forward to sharing
Thank you, Lakshman. Mr. Narrow Simham and Mr. Henner will now be happy to take your questions. Just put your hands up in the usual way, just announce who you are, and, and we'll go from there.
So why don't we start with a very eager Richard Taylor sitting there in the front row? Go ahead, Richard.
Good morning, everyone. Richard Taylor here from Morgan Stanley. I have to say that a very detailed diagnostic sticker of the issues, which I think are particularly helpful. I suppose, first observation I'd make is the diagnostic suggests too much organizational change and too little investment, solving that with more organizational change and more cost savings. So can I ask as my first question for a little bit more detail on where those cost savings are going to come from?
I know you had a slide up about it, but I like a little bit more granularity on that? And then secondly, just very specifically, that 100 basis points variable compensation number, in 2020, if I interpret your guidance correctly, which is better than 2019. So conservatively assume that that means 1% to 2% top line growth. Will that variable compensation kick in I hope it isn't going to kick in, but I'd like to ask if it is going to kick in. And then finally, I'd like to ask about price hearing.
So I think there's been a lot of discussion about pricing, being too high with the Record brands, not something that I personally, but we believe but there is a fair argument to say that strong brands should be have an umbrella of price hearing behind them. So can you talk a little bit around that, please?
Great, thank you. There's three questions in here. First one is about organizational change. You're doing more when you said that was the issue. The other one was about variable compensation, and the third is about pricing.
Yeah. So I'll start with the first one. I think one of the things that, we have seen is that, as I showed you earlier, we were able to bring focus to Hygiene Home, and that actually led to growth and performance and health costs loaded. If you look at what we are doing, we're actually elevating the oversight of the categories with senior leadership, and that's going to give us a lot more focus and senior leadership on innovation. We are minimizing frontline change, which was part of the previous efforts that went through.
So we're trying to bring focus. We're trying to ensure that we're also enabling it with scale, with the capabilities that we are building, and we are minimizing frontline change. So that is different from what we've done before. The second question, which is on variable compensation, we want to pay our people. And, we're, you know, with, with performance, that comes back.
And so we would celebrate if it were to come back.
Lead out to that one? Yes. Because I suspect in Richard's mind is the LTIPs for the executive directors. Will they pay out the guidance? No, they won't.
You could do that calculation and see very clearly. Actually, when you look at total variable pay, the greater part in our organization is the annual bonus for people in general. And the outset for people in general is also subject to adjustment by Aramchol. So clearly, we have looked at, we have looked at getting to that 100 basis what we would expect to pay out for, what you've seen as a guided good number in 2020.
On pricing, This was an area of, of work. We went through, we looked at different elacestities, we looked at the, at the proposition, the brand strength, how consumers are responding to it. And actually, you know, we had it largely in a good place. We clearly had places where there were hotspots, and we're addressing them. Both market hotspots, as well as some brand hotspots, and we're addressing them.
The foundation of this, is very strong brand equity investment, brand building, which consumers love. I mean, you see this, the sellout is actually better than some of the sell in numbers that we've had in some of the market So the consumer's feeling good about it in a lot of ways. What we have to do though is just ensure that we manage this very tightly, and we are building a advanced revenue management capability that will ensure that we don't have this issue occur again.
Good. Thank you, Richard. The second question I think came from Martin Lebout. Ma'am, do you want to put your hand up so you can get your hand up.
Thank you, Martin Davoo, Jefferies. A couple of sort of I guess, quite surgical questions on the shape of the medium term guidance. You've couched the revenue target in the language of net revenue growth. Now historic at record net revenue has included an M and A component rather than the FL measure. And you've got positive gearing from top line to earning story.
So the question I just want to clarify is, is anything assumed about M and A either net acquisitions or net exit in the shape of the guidance. That's the first question. 2nd question is the productivity savings are significant 10 percentage points of sales. If they phase in over 3 years, you know, putting all the other moving parts in place, you'd be back to mid-twenty percent margins pretty quickly, but I'm assuming something is being assumed about ongoing reinvestments of those or not. That's the second question, just what's being assumed about net retention of the GBP 1,300,000,000 rather than the gross benefit.
Our Thank you, Barton. Two questions, net revenue as well as savings. The net revenue guidance we're giving is organic net revenue. In terms of the savings, this is the fuel that is going to get the company to get to and sustain growth. So we're assuming all of that is invested in what we need in order to ensure that we are building existing muscles, as well as new muscles in order to support the growth.
Let's go with James. James in the terms of the front door.
Jen's Edward
Strange from
RBC. Firstly, if you do get back to mid-20s margins, it seems probable that the margins in each of your businesses, health, nutrition, and hygiene and home will exceed your peer groups, everyone in your peer groups, they certainly do at the moment. Is that the way you see it? And if so, why should that be the case? And secondly, staying on compensation, can I ask you that one's probably slightly rudely, what is what are the determinants determinants of your variable compensation?
Are there any different from the LTIP we, we know about?
On the first question, we are privilege to be in very good spaces with a portfolio of brands that consumers love. And so, if I look at what we were able to do with the premium brand positions we have, with the innovation pipeline that we are bringing into the market, it does support what we're giving you in terms of guidance going forward. I will not comment on the competitors and where they currently stand, but if you look at our position, it is definitely different from many of them. On your, direct question on, on my compensation. I think we've published everything.
And whatever's in there, is exactly what it is. I have a lot of skin in the game. And so, I'm completely going to be compensated by the shareholder value creation of the company delivers.
The problem with adding much more than it is your intent as you look over the next year to be thinking about how we should evolve you should evolve the direction incentive pay, though. So I think that's probably also behind you in this question.
And that's something we're going to be looking at at the back half of the year.
Yeah. Thanks, James.
I think we've got Jeremy next. Jeremy, if I could just stop that. Jeremy, keep your hand up.
Morning, Jeremy Falco, HSBC. I've just got one question which is on innovation. It's something which, you addressed briefly in the presentation, but could you talk a little bit more about kind of how you see record innovation capabilities at the moment? Perhaps more reasons why you don't think it has been as successful as you'd have liked over the last few years? And then also talk about if there's some more specific steps or changes in the process that you think you need to make in order for records of innovation machines to be humming perhaps as
it was a few years back?
But thank you. I think our innovation machine in the Hygiene Home business is working well. Innovation vitality is strong, and we have a pipeline of great things that have, come into the market. I mean, just this year, we're going to continue expanding our laundry sanitizer, products We've got them in the U. S, and they're going into a whole bunch of other countries.
And this is about really killing germs at low temperatures as the way people wash their clothes. You know, we have Airwave Botanica, which is a new creation within the Hygiene Home business. So feel generally very good about the, the, the situation of the hygiene home business with regard to renovations. In the case of the nutrition business, there's been a lot of work there too. We'll be launching a new NFA A2 in Hong Kong, this year.
We've got Nureba, which is a brand targeted at seniors, we launched last year. We have dummies coming out this year. So again, the pipeline looks good. I think it based health, we've actually had issues, as I showed you, you know, we've missed some innovation cycles. And, you know, some of the, some of the ideas that we had in the Hopper, haven't made themselves, you know, shown up in the, in the marketplace because we've had innovation leakage.
So what are we doing about it? We're essentially investing in capabilities to ensure that we get the white consumer insights, that we're then looking at the process and the level of oversight. So there's no sort of deviation and focus. We ensure that the ideas that we have show up in the marketplace. So we get to see more innovations coming in.
Think it's an issue of focus. It's a question of elevation of the seniority of it. It's a question of investment in the insights. There's a science base that is strong, that we need to continue to work on, obviously, and we are. And that's what we're doing on innovation.
Keep keep your hand up.
Okay. Speak though. I have two questions. First one is offering 20 suppliers of sales. Business.
Adding 25 business and market sales How quickly do you plan to add those and where were the mostly emerging markets or across the board? The second one is, coming back to the dividend, you say highlighting, a stable dividends payout ratio. Does that basically imply a more or less 20 percent cut in the dividend? If EPS is 20% down or does it mean stable dividend? And the third point is supply chain, and that has proven to be relatively shaky whenever there was a shock and lengthy as well.
Can you be a bit more specific on investments you plan to do in supply chain and how that's going to drive performance? Thank you.
Well, let's start with the second question, Adrian. You want to take that?
Yes. It's the easy one. Yes. So we're intended to say maintain the the 2019 sterling dividend level in future years until such time as we reach again the 2 times adjusted earnings per share, at which point it can then go back up.
On your question on the 25 category market units, 1st of all, these are market units we're in. But we haven't invested in, as well as we could have, in order to drive growth. What is interesting about them is A few of them are actually in developed markets, including in Europe. So it does not just developing markets, but it's also developed markets that we feel there's more potential And clearly, and I say developed, when I say Europe, I mean, not just the developed part of Europe, but just more broadly in Europe, But clearly there's developing markets as well that form the basis for us. You can expect that we will start making investments next year.
In order for us to expand. This year is about stability and about ensuring that we perform and deliver and restore our performance credibility next year, we can start seeing us begin to do that. On the supply chain, we've taken a customer back lens to this. Right. And our big issues, of course, is customer service.
We have the hard infrastructure, with the plants, clearly, we're continuing to make capacity investments to ensure that we don't run out at the peak for some of these, products that we have that frankly consumers demand and we can't fulfill. But at the same time, what we are doing is looking at the underlying in a supply chain processes and ensuring that we are making big improvements to that. So that is process improvements, which of course will be enabled by technology investments as well as we do that. Okay. I
think Ian probably had to stand up. Ian Simpson.
Thanks very much. So just firstly on the margin, that reset in 2020, is that spread evenly across all divisions or concentrated on health and nutrition. And within the margin as well, there seems
to be quite a lot of
focus on indirect costs and the cost savings, a bit surprised there's still stuff to do here after Project Superchart, which I guess was before your time, but I recall indirect costs being a very sort of large area of focus there. It feels, that nutrition is a much more holistic category than IFCN. You're talking about targeting a range of consumers with specialized needs. How long before that's a meaningful part of your business? Could we see that go into medical nutrition as well or sticking with the sort of consumer facing element.
And then just lastly, a bit of housekeeping, you've talked about supply chain issues leading to Paul on shelf availability in Q4 'nineteen, of certain products, especially flu, is that likely to be an issue through first half twenty twenty as well? It seems to be a very strong flu season right now. Is your on shelf availability good as we speak? Thanks.
Great. So first on the, on the, cost savings, and in particular, on indirect costs, or procurement costs. This has been an area of great strength for RB, But I think over time, what has happened is as the business has gotten bigger, and more, you know, and, you look at the level of resourcing in some of these areas, It has not been strong. So I would say that actually some of the capabilities in this area have, in fact, are not where they need to be. And it's not because I don't have people in the company who are working incredibly hard in these areas and doing great things.
They essentially have a bunch of existing muscles, and these muscles need to get well as new masters need to get built. So, the productivity comes from that, from that look, to say, if we could get to best in class in many of these areas, it would actually give us even more savings. So that's the answer to your first question. In the case of nutrition, yes, it is a more holistic look. We have no plans at this point in time to do anything that is, that is not consumer facing.
So it's clearly a consumer facing view to, to nutrition. It doesn't mean we wouldn't be, obviously, medical selling is a big element of this. So that's clearly an area to strengthen and grow, but it is a consumer facing view to this. We already have a few products in market, right, and we continue to expect that over the next 2 years or so, we will have even more come and that will justify why we believe that this is a 3% to 5% growth area for us. On supply chain, your final question on Q4 2019, and likely look, we've clearly made improvements.
We clearly have made improvements, but some of these will take time for us. So, I don't think we're fully where I would like us to be, you will still see some empty shelves, which I don't like, but the fact is they're there, but we are making improvements, and it's looking better, but we're not where we want to be fully. It'll take time. On the, On the margin investment, it is largely concentrated in the case of, of health. Health and nutrition.
That's where the, that's where the margin investment case. Hygiene Home, as you know, we're elevating and they're elevating the focus on productivity. So they're actually going to get productivity savings that will help us do think what you'd asked about in terms of investing in some of the new places that they could be in.
Thank you, Silane Panetti, JPMorgan. A few questions. So first, on this reinvestment, so GBP 200,000,000 in P and L, where is this going to be invested in? And then there is the GBP 250,000,001 off, like some question like where is the investment going? And then maybe the same side of the question, there seem to be you have a long list of all the activities.
Can you give us concrete example, 2020, what are your teams com, where is the focus on 2020 in terms of market activities? Is it about hiring new people? I don't know, like if you could give us a concrete example. Then my second question is on portfolio. So by and large portfolio, as you would quite a bit as we change it to 3 categories.
But untouched, when you say stronger together, does it mean that you happy with the shape of the portfolio. And at the same time, you said that you will review bits or pieces in the portfolio. So are we talking about small brands, while we're talking about a bigger, or nothing is out of the table. And I'm sorry, but lastly, I didn't really understand these ROCCAT brands. Are those investments that you've made or are there as well?
Born within Reiki Bank Hiza. Thank you.
Great.
Well, thank you. In terms of the focus of the company. The focus of the company for this year is stabilize and perform. We are entirely focused on restoring performance credibility. What that means therefore is if you stop looking at where the investments are going, or what is it that people are spending time on, the productivity program, and ensuring that we start getting savings is a big area of focus.
The second area of focus is execution. Ensuring that in market execution is strong. And there's a lot of effort that's going into that, just ensuring that we get that right, is a second hit. The third is we continue to invest in foundational capabilities. That is really what we've been doing, to strengthen our core infrastructure.
And the 4th is we are building select capabilities. So there is, in fact, for example, you know, one of the things that we've done or part of that investment is channel specific, sales execution. We're rebuilding some of the muscle that we lost. And, that is part of what we are doing as of tomorrow. When you roll this out into 60 different markets, What we have is it gets back to building the hip, hiring people to actually do that.
We can't be losing distribution points in emerging markets. That's not a great idea. How do we ensure that we actually get that back? And finally, just ensuring that we've got the right, you know, the right organizational model, the, the teams in place, to build capabilities of scale to support our 3 businesses. In terms of your portfolio question, we set you to portfolio question We concluded after all the review, that scale was important.
We felt that focus was important, so we've organized for it. On the portfolio itself, your question around what does that mean? What that means is, you know, we are laser like focused on shareholder value. And we continue to evaluate the portfolio for strategic fit, and we will migrate the portfolio to higher growth and returns. And, when appropriate, we will update you on it.
Okay. Thanks. We'll go to Harold Thompson in the second
sorry, there's a third question on Rocket Brands. Yes. Rocket Brands. 3rd question on Rocket Brands. These are digital first brands, some of which we create and some of which our partners create that will ride on our system over time.
Yes. Good morning, Harold Thompson from Ashpark Care. Just three questions, please. I mean, I guess RB is not unique in having pushed margins too far and I think Pepsi in a way did the same, and therefore, the industry keeps having to reset itself when it does. Why do you think the energy falls in the same track time and time and again?
And how confident are we that you're not going to yourself in a few years' time not make that that same misstep. My second question is GBP 200,000,000 of extra investments. I mean, how did you come up to a number like that? Is it kind of bottom up? Is it top down?
Is it what's acceptable by the market? Mean, how do you actually work out CHF 200,000,000 as the right number? And the 3rd and final question is, how sure are you that higher hose recovery is really linked to its more recent focus rather than the motivational prospects of independence.
Thank you. Your first question the most value creating thing we can do with our company is to drive top line growth. And that is where the entire company is focused. Where I am focused, because I realize long term shareholder value is going to come from our ability to drive top line growth. And we have been thoughtful about margins and where go, which is kind of what we have done.
We're investing to prime volume growth and drive growth in the long term. Your second question on the $200,000,000 extra investment, It comes from 2 things. It comes from a bottom up assessment, very detailed assessment of where we currently stand and what we need. And it also factors in the organization's capacity to go make it happen, the executional capacity to what we need in order to make it happen. It is not driven by what is acceptable versus not, but it's those two things that actually truly drive what we are doing.
On your third question on HIFO and recent focus, I think the fact that, the business is stable, the business is a clear operating rhythm, The business knows what the playbook is, has been a huge element of the growth, and you see that even today. Today, we have a new leader, you know, as a new president of High Ho, and I look at him and I look at his team and I look at how they're operating, And they clearly get the picture. They clearly get that at the end of the day, they're incented with a long term shareholder value creation of RB, and they're driving towards it. Hey, Gerald. We'll go right off the bat now.
It's David, I think. Yeah. Alright.
It's David Haysen from SocGen. 2 for me, if I can. Just on Mead Johnson or the nutrition business, as part of the review process, did you look at the options around that in terms of looking to exit? It feels like in many ways, that was the straw that broke the camel's back in terms of of health. We've heard these cultural issues, integration issues keep coming up.
Was that considered particularly with China changing as you say in terms of the competitive playing field, was that considered and why was that rejected if it was considered? And then secondly, in terms of the people focus, which you mentioned, If you look at the churn rates of staff as a metric, is that something that's been deteriorating at record over the last 12, 18 months? Is that improving more recently? And that something that you need to improve and our steps in place to make that better? Thanks so much.
Great. Your first question, The board and I had a very pragmatic view of our portfolio. All options were on the table and all options were assessed. We feel good about the business. It's a business that has solid growth.
It's got very good margins. It's got a platform from which we can expand It has certainly had an impact on RB, an example, geographically, North America, Latin America, ASEAN in China helped us a lot. I said RB has helped to be Johnson a lot with what has happened with regard to performance. And in growth rates today are almost 500 basis points higher than they were, when the company was a standalone business. The circumstances changed, but the business is good.
And we thought it gave us a great platform to expand. If we brought focus to it. That's where we ended up with where we did, but all options were on the table. The second thing on people, this is an area of future focus for me, ensuring that we drive engagement, ensuring that people are inspired by the soul of RB, by the fact that we have a purpose that is distinctive, we have a fight, we have a compass that will guide our values. This is an area of future focus for me to ensure me greater engagement and greater retention.
Chris Pitcher from Redburn. Couple of questions, please. In terms of the new focus around the 3 groups, hygiene, health and nutrition, does this mean there'll be a different reporting structure for the group? Will you be reporting profitability? For nutrition separately before we go off and rebuild our models to find something different.
And within that, in the review of the goodwill, you do say that you expect IFCN margins in the short to medium term to remain generally stable. And yet in your earlier comments, it sounded like a decent chunk of the reinvestment was going into the Nutrition business per se. And then secondly on innovation, when should we expect real game changing Durex innovations to come to market? I see the innovation in the list today as a packaging innovation rather than something more market leading? Thanks.
So on the first one, yes, it is the intention to have, and I'm speaking on behalf of Jeff Carr here, of course, but but it is the intention to have, a change to the segments to reflect the new structure. You will probably, and it's subject to Jeff doing this, but you'll probably get historical data for those go forward segments with the half year numbers. The, the second point on IFCN margins, Well, you heard that a significant part, or in fact, most of the reinvestment is going in health and IFCN so yes, that does reflect the margins that there will be an ICN. Innovation on Juricks, I'll leave to you.
Yeah. I think, so first of all, I wouldn't, necessarily say that packaging innovation is not necessarily a form of innovation. So, you know, it's certainly one element of it. It is a breakout. It clearly is refresh.
It clearly brings new news to the category, and we've done that in Europe, and it's, the appeal of it has been strong. Having said that, what we are working on is ensuring that we recover our position as leaders in the category and act like leaders. So there's investments going into science, there's investments going into, into partnerships, in order to ensure that we have the right platform for which we can actually expand Jurx. You can start by the way, because we also have very rigorous standards around testing. We don't just put products out there, particularly in this area.
It does take time for us to get that. So you're going to see works going on in full stream, and, sometime next year, you're going to start seeing, progress on Durex Innovation. We just introduced a Ultrafin Latex Congog. We brought, it's been introduced 3 months ahead of time to give you a sense of how the pace is now changing, 3 months ahead of time, and it's going to 20 countries. And we expect very good response to it.
So we are moving, and you'll expect to see more of it next year.
Thanks, Chris.
But one last thing on Durex. We shouldn't take away from the massive opportunity we have to ensure availability. If you look at India, Durex is available in 75,000 points of distribution in India. Some of the competitors are at 600,000 at much lower price points, but the opportunity for us to scale distribution in India in DRS is one example of the kind of things that we believe are opportunities for us to drive top line growth. Okay.
Thanks, Chris.
Hi. It's Guillaume Delmas from UBS. A couple of questions for me. The first one is, could you help us reconcile the fact that you're moving at pace. You're already seeing early benefits from enhanced execution.
You were exposed to structurally superior categories, the great neighborhoods, And yet, it seems it's going to take 4 years before you can deliver 3% organic sales growth, which today would be broadly in line with industry average. So how do we reconcile that? Or maybe you're just being overly cautious and conservative both from a timing and a, organic salesforce performance standpoint. My second question is on, the slide you showed about Mid Johnson, strengthening your scale. I mean, there's no doubt it's been the case in China, in the U.
S. But when I think about many countries in LatAm and ASEAN, you still don't have critical mass yet in many of those countries. And these countries have been consistently for the past two and a half years, sources of dilution headaches rather than gross engines. So what's the plan here? How you are you going to address this issue that seems structural in nature?
So your first question is really around timing. And why do I expect it just to take 4 years, I think, what you've said? Look, we are building steadily. This is not a, you know, believe in the 4 years, and we'll get there, and there'll be a hockey stick. There is steady growth year over year in order for us to get there.
I run businesses, We know that we have to hire people, bring them in, build a capability that takes time. Now I would be disappointed if it was later, But what I will do over the next year or 2 is continue to give you progress as to where we are. And so we're setting expectations I want to be sure that we're setting expectations that we can meet. On your second question on Mead Johnson in Latin America and Arcea and the us. Well, let me give you a story of Mexico.
I was in Mexico, you know, 3 weeks ago and, looked at our market there and looked to see what we've done in that in that market, particularly with, with our business in nutrition. And what you're seeing there in a market like that? Clearly, it's a very strong business for us. And what you have seen there with the kind of investments we have made, with our approach to medical marketing, With our execution installs, we have seen good growth in Mexico and we're gaining share. Now it doesn't mean we're fully out of the woods.
We still have things to go do, but the reality is we do have ways to go into these markets focus on execution and actually get it to be better. And I think we had some challenges to be very frank on focus, you know, with the integration that happened over the last 2 years, the level of investment that went into, this business went more into China, went more into the U. S. And I think we had challenges in, in LatAm and RCa. It is going to be an area of focus.
Finally, when you look at the scale of our collective business in LatAm and in, and in ASEAN, a lot of things we are doing, including with digital and e commerce, that actually give us access to markets that frankly, physical scale may or may not give us. In some of these places and the investments there are large and the results you're seeing are very strong. No. Okay. We'll put that in here.
Thanks, John Ennis from Goldman. I've got a couple of follow ups. The first is on innovation. Wondered if you could quantify the proportion of the GBP 200,000,000 P and L investment attributed specifically to that spend and then related to innovations, is it now that you expect perhaps a longer payback period from innovations you're making? And hence, the delay in the mid single digit growth target 2023, or is it something different?
And then a follow-up on pricing, you talked, in some of the slides about reductions for both debt and parts of the OTC business. And yet, we've still seen 3% price mix growth for the health category. Can you explain which brands are offsetting the price cuts there? And then specifically, do you think you can get an improvement in volume growth for that business without significant reductions in price mix? Thanks.
So on the innovation, how much of the spend is going into that? Now I'm not going to break it out into into Gory level of detail, but you can broadly assume that a combination of investments in brand building and in innovation are probably going to be somewhere in the range of a quarter of that overall investment, a quarter to a third of it. On the pricing front, A lot of this is mix. As we pre optimize and introduce new products, it's going to be in that space in terms of the investments in mix. We have looked at pricing where we felt we were too hot.
We have addressed it, but our brands are strong. We've looked at all the elasticity numbers, and they can carry the currency have in terms of the price gaps once we've addressed the hotspots we have. Do we get holding up? The question on volume was, again, Oh, I believe we can because again, we're talking, you know, across the entire portfolio the movements are different in different places. We can get volume growth.
And at the same time, we can get price mix because it's in different places.
Okay. That's about what we've got time for. If you've got any questions that haven't been answered, John Dawson here in the front row, I'll be very happy to answer them. Afterwards. Before you actually, do you want to finish the last few minutes?
First of all, I want to thank you all for being here. And appreciate, all your questions, and I'm sure you'll have more. But I'd like you to walk away with 5 key messages. The first one is RB is a good house. It's a great neighborhood.
It has a potential to be a great house. We have a clear strategy to rejuvenate growth. We are investing We have an investment plan and productivity to deliver the growth. We believe this plan will deliver sustainable long term value and will engage with purpose. And finally, it's going to ensure that our people are inspired and that they commit and engage in delivering overall success to the business.
Thank you again for your time this morning.