Right. Good morning. Welcome to RB's full year 2018 results. Let me just kick off with a couple of things, before I hand over. So just drawing your attention to the usual later on forward looking statements.
And let me just talk to you quickly about how today's going to go. Rakesh, you're going to start with, with some key messages and some discussion around RB2.0. Then you'll have Adrian giving his normal financials and, and then a quick update on the the plumbing, as I call it, around RB2.0. Then you're going to hear from a couple of new faces in this forum. And I say new faces, I've actually been at the company since I think they left school, but, from, from Addis Segal, who's our CEO of Health and from Rob Deroot, who's the, who's our president of Hygiene Home.
Then we're gonna have a, a couple of messages from the chairman who will then take some brief Q and A before handing over for the normal management Q and A session. So without any further ado, I will hand over to Rakesh.
Thank you, Richard. And I think you already pointed out to the fact that today is like no other a full year present presentation we had because we have some new stars that we are going to, display on the podium. So I'll talk about those stars later. Let me just start, by saying that in the long distinguished history of RB, I do believe that 2018 will be remembered as a special year. It will be remembered as a special year because actually what we did in RB in 2018 was RB2.0.
And I wanted to remind you all, of what I have said about RB2.0 same time last year. Said that there are 3 things that I wanted to achieve in RB2.0, and the first one of them was to transform RB. We are seeing transformation around the world in how we do business, in how we compete and how we actually innovate. And I wanted to make sure that RB was right to be able to complete and outperform in that world. So RB2.0, first and foremost, was about transforming RB And there were couple of other objectives that were laid out at that time.
The second one was we were just acquiring, I had acquired, but we were going to figure out how to integrate Mead Johnson and create a consumer health leader. Mead Johnson was a business which we loved, but also was not performing very well. And we wanted to make sure that we turned around that performance, but also used that as a catalyst to create a consumer health leader. And that's what I wanted to do 12 months ago when we came and talked about this. And the final point was with such fantastic brands, brands that we all grown up with in many ways, vanish and finish and airway.
And Lysol, I wanted to make sure that the performance of these brands, which was over a comparable annual period before that. 2011 to 2017 was 1% was unleashed to perform against the potential of the market, which is obviously bigger. These are the three things I talked about. And I wanted to take in turn some of where we think we are 12 months in this journey. So the first thing is about the transformation of RB, and I wouldn't call the creation of 2 business units to Greg Momentum, and therefore, how we finished the year with 4%, like for like, both in health and hygiene home, really transformation, but really it is definitely a signal of improved momentum that we are seeing in the business from where we were 12, 18 months ago.
And clearly, having upgraded our targets for the year in half year to the upper end of 2 to 3 and, and the upper end of, in fact, increased the target from 13% to 14% to 15% we delivered at the upper end of these targets at the end of the year. But like I said, RB2.0 was also about how we innovate. And innovation moving away from one size fits all to, to innovation that was right and tailored for different consumers, different category, segment needs, and different different markets. And I'm very, very pleased to say that in the 1st 12 months that I see, the innovation engine being reignited, cranked up and really supercharged What I've seen in just 12 months is really, very, very good. If today you are going to see, through Rob and Adi examples, of each of these types of things that we wanted to do, creating new categories.
I can't remember the last time RB actually entered with a new brand We are creating a new brand called Nereva to enter a new category that we are almost creating called Brain Health. Is very exciting. And we want to talk to you about this. In fact, I'm told that your goodie bags has a sample, not for sale sample of brain health. Now you could argue that you don't it and I do, but, you know, we still want you to go through this, experience.
New channels and new benefits and new consumers. And again, there's fantastic example in the pipeline for this and new channels. I mean, there are channel specific innovations being launched, and very sizable still, and you will see examples of that. So I'm very, very pleased with what we've achieved in 12 months to create a pipeline, which is over two times bigger for each of these two business units than was the case 12 months ago. That is really quite special.
The second bit, of course, was, like I said, our world around is disrupting in terms of digital. And I mean, as human beings, that's people, we are actually shopping differently. We are engaging with brands differently. We know that. Everyone knows that.
But knowing that and doing something about it is quite different. And I'm very happy that actually we've the investments that we are making, the resources that we are creating, the capabilities we are building in this area is very, very good. So just between 20172019, we would have tripled the number of amount of resource that we are deploying on e Commerce And Digital in the company tripled. We are going to be, and I don't know whether we are spelling out the numbers, etcetera, more granularly, but this is absolutely very interesting. E Commerce grew by 40%.
In fact, on health, it's now 9% of the business. So it's really, you can see very tangibles, you know, examples of this already in the company, and I'm very excited about that. And I do believe that this would not have been unleashed within RB1.0. And the final bit, of course, that all of you know, we wanted to do was to create what we call strategic flexibility and let's call it structural independence of the business with separate legal entities and all the stuff that goes around that. And we are absolutely fully on track to achieve that, as we've said, by mid-twenty 20.
So really 1 year in, just 1 year in, but I can already see such a lot of work and such a lot of change and such a lot of positive momentum in the business over and beyond what you normally would see in numbers alone. The second bit of what we said was, of course, we wanted to create a consumer health leader in Mead Johnson with Mead Johnson. It allowed us to do that. It doubled our consumer health footprint in many ways, actually. So I wanted to give you somehow a snapshot of what that is.
I mean, and I genuinely say it with humility that 8 years ago, if I asked people, you know, something about health care or whatever, they would have said OTC. OTC was the definition that everyone, maybe still to an extent people use when they describe help. Today, it's become maybe more normal to see it the way I saw it all the time. It's become more normal, but actually what everyone saw at that time was over the counter. Something was that was in prescription, which became over the counter, self cure.
And that itself is a pretty sizable market with GBP 100,000,000,000 estimated, growing at 2% to 4%. But what we saw actually was something more than that. It was something bigger a £300,000,000,000 market, which we call self care. People needing everyday solutions to look after their own health and well-being and to make sure that they can live better lives, not just longer lives. And, you know, obviously, this is a world which is very, very rich, very diverse and very, very, well growing, expected to be 4% to 6% growth.
And over a period of time, clearly, RB built a formidable portfolio, inheriting a bit from the last decade, but building a lot in this decade of growth on both sides. And if you see, this has been a very deliberate portfolio buildup over a period of time when we acquired brands at the end of 2010 early 2011, brands like personal health brands, like Durex and Schole and and and so on. 1213, some of you would remember, the rather controversial acquisition of a VMS Who would remember that here when I announced VMS? And now today, it sounds quite normal because we obviously shown that it was what I always believed it to be. 2014, 2015, some acquisition in fills like KY, and then, of course, the transformational acquisition we've made in 'seventeen, but also some other in fills.
But what everyone remembers is just the top part, but some of you who've been in the company for some more time, remember that we also actually cleaned up the portfolio, if I may say so or rationalize the portfolio to create what we have become today, taking out private label actually in 2011, 'twelve, and then thereafter a number of other moves that we've made to become, the company we have become. Our global footprint in consumer health is indeed really very formidable starting with 2005 to 2006 with BHI where we got predominantly a European brand in 2008 in U. S, And then, of course, thereafter in this current decade, truly creating a global business, truly creating a global business. And now we have formidable positions in the top 10 consumer health markets around the world. This is not just in geography, also in categories where we had a very small presence in 1 1a half categories in, in the last decade, building it up 1 by 1, but then actually over this decade itself, spreading our wings, but with lot more to go with lot more to go.
So I do believe that while we have treated a formidable structure, formidable, you know, business, which competes with the very best, you know, there is obviously quite a lot more to go. And just as a snapshot where we are with our portfolio of transformation in 2011, just 20% of our business was health care, And today, we have 60 percent of our business in health care. I do not believe for a company that has been there for 200 years to achieve this level of portfolio transformation in such a short period of time would have normally happened if we had not been absolutely determined to create what I believe is really a very exciting future for this company. I also said, you know, 8 years ago, that the world of consumer health is very fragmented and actually the competitive landscape was quite, quite diverse. There was a huge number of pharmaceutical companies that operated in this world, and you've got them Not all of them exactly in precisely, but a lot of them, the big familiar ones, certainly on this page.
And as anticipated, step by step, people started to figure out that actually this was not the place they could be and should be. And today, just 10 years thereafter, the consumer health field is actually quite, quite narrowed And in my opinion, still more to happen. Over the next 10 years, even if I'm not on this stage, you will find that if you were to do this chart again, you will find this narrowed even further. And the reason is very simple. I always said that consumer health is not about molecules.
It's about moms. It's about people. It's not about having ibuprofen and then thinking, well, ibuprofen got discovered 60 years ago, and there's nothing more to do. 100 years ago, a paracetamol. It's about finding consumer innovation that are relevant.
We've done that on Mucinex. You'll sorry, Neurofan. You'll see a chart later. From Addie saying the same thing on Mucinex2, in just ten years, we created from number 7 OTC brand in North America to number 1 OTC brand in North America, not discovering a single new molecule, but innovation, innovating every year with meaningful innovations that consumers wanted and resonated with and producing this unbelievable growth rate. And in that 10 years, all of this has changed, but there is obviously, like I said,
still
a very significant fragmentation in the market. The top 10 companies in each of these sectors that we report are still a very small percentage. The total market. So I do believe that this whole journey of moving from companies that Our focused molecules to companies that are going to be focused on moms will continue to happen. And I hope RB will play an important role in this exercise.
The last bit I wanted to talk to you about was the unleashing of Hygiene Home because, of course, when I grew up, in RB, we had Hygiene Home, and we had Vanish and Air Wick and Finish and Martine. And clearly, we were not doing as well. As we wanted to. And it's not something that we realized at the end of 'seventeen, and they said, like, well, let's wake up and do something about it. It was just not possible to create RB2.0 without Mead Johnson.
We needed that infrastructure, the catalyst, the footprints, to be able to do that and create sustainable business units. And I'm very, very happy with the performance of Hygiene Home in the 12 month period that we've had, and Rob has done a lot of good work here. And yet when I think about where Hygiene Home is in its evolution and principally taking 2 axes, one off market share, you know, the size, slice of the pie and the other one being penetration, category penetration, most, if not all, all of our Hygiene Home brands are still underpenetrated categories. They're still underpenetrated car car reviews. I have somebody in the room, and I'm looking at him right now.
When I show this chart, the next one I'm going to show and, and no huddled, the numbers have changed a bit, but they have changed because penetration does go up from time to time. And this is the latest penetration charts of automatic dishwash in both developed and emerging markets, a snapshot, a snapshot, even in Germany, the automatic dishwash penetration, dishwasher penetration is 70%. And in China, 1%. 99 out of 100 homes in China do not have a dishwasher. I can assure you if this was a tradable company, it would be the best performing company in the next 25 years.
The best performing company in the next 25 years. This is the opportunity for us that we are not really doing as good a job on because obviously we were a larger, bigger company with health on the one side and hygiene home on the other side. And I'm really, like I said, quite happy that in just 12 months, you've managed to convert a 1% CAGR for the previous 5, 6 years to a 4%. And I know it's flattered by some comps and some good things, but I don't also want to take away from the fact that the team has done a very good job in creating this change. And therefore, in my opinion, just 12 months in, RB2.0 is well on its way.
So I said that I will introduce my stars 1 by 1 And as the retiring CEO, I would say that there is a rock in the company. And so let me introduce the rock star. Adrian Hannah. He looks also like a lobster. That's, that's, can we give him a hand, please?
Thank you, Rakesh, I think. Good morning, ladies and gentlemen, and turning to the first slide in the financial part of the presentation. If we can, So these are the aggregate reported numbers for the second half and for the full year in our release. In subsequent slides, we will of course look at the trading performance of each of the business units. But dealing with a couple of the more technical items here before turning to trading, The adjusting items that you can see are principally the cost of integrating the Mead Johnson acquisition and the associated RB2.0 restructuring costs, These are fully in line with guidance, and we have, as usual, included an analysis in the appendices to this presentation.
Reduction in net finance expense to 1,000,000 in half 2 reflects the reduction of the borrowing levels since the Mead Johnson acquisition through cash generation and the sale of the food business It also includes a reduction in the interest component of the tax charge. We include this cost within the tax charge in the adjusted numbers as this is how it's managed. Excluding this tax related item, the cost of net debt remains in line with our guidance of about We covered later the movement in net debt during the half and the composition of the debt at the period end. The full year was 21% and for half to 19%. The tax charge benefited from the settlement of a number of issues somewhat more favorably than we had expected during the year.
Total reported earnings per share in the half year and full year was lower than last year due principally to the benefit last year from the sale of the food business and the reduction in the deferred tax liability as a result of USA tax reform. Excluding these adjusting items, total adjusted basic earnings per share at actual rates was 3% up in the half year and 4% in the full year. And on the next slide, we will set out the sources of this EPS growth. Looking forward, we continue to see a tax rate including tax finance costs of about 23% And if the exchange rates at end December were to continue to end 2019, the net translational impact of currency movements would be a 2% tailwind for the full year and also a 2% tailwind for quarter 1. The value of sterling has of course been quite volatile in recent months.
And if the end January rates were to hold until end 2019, the net translational impact of currency movements would be flat. So turning to the next slide. Here we look at a half 2, 3% and full year 4% earnings growth, as comprising the components we set out on this slide, we got on the left hand side half to on the right hand side the full year, but focusing on the full year, we can see that the 3% we get 3% growth from pro form a net revenue growth to top row A small contribution from the 20 basis points positive pro form a margin improvement, which rounds to 0 here, arounded 1% from paying down debt through cash generated, a 3% increase due to the temporarily lower tax rate, and this will, of course, reverse as the tax rate returns to trend, a 5% foreign exchange headwind in the year and a 1% net increase from the combined effects of acquiring Mead Johnson and selling the French's food business. So that then is the composition of the 4% full year reported earnings growth. Turning to the next slide.
This slide shows the actual group revenue gross margin and adjusted operating profit numbers for Q4 and half 2 and the actual and pro form a numbers for the full year. Like for like net revenue grew up 4% in Q4 and 3% in the half, giving 3% for the full year. Operating margin decreased by 30 basis points in half 2. Following a pro form a 50 basis points operating margin increase in half 1, This gives a 20 basis points increase for the full year. The reported operating margin declined by 60 basis points for the full year, The 80 basis points difference between the movement in the pro form a and the reported margins is, of course, the effect of consolidating the lower operating margin Mead Johnson business.
We will return to the business unit operating margins and to a closer look at the drivers of margin change in a moment. Turning to the next slide. Here we show an analysis of revenue growth for the group between volume and pricemix. For Q4, you can see that the 4% group growth comprised 1% volume and 3% pricemix. Volumes growth was stronger than Q3 following the supply disruption in the earlier period.
You can also see that after turning negative in half 22017, price mix has strengthened progressively during the year. And again, we will return to the volume pricemix balance within each business unit in a moment. Turning to the next slide and group margins. Gross margin declined by 70 basis points in half 2. The net effect of in quarter 3.
BII spend, brand equity investment spend was lower by 100 basis points in half 2. This was in large part the result of cost efficiencies, within the Mead Johnson spend as we applied an RB approach to sourcing and deployment. There was also a small underlying reduction. This was normal year on year variation. What exactly constitutes the good cholesterol of BEI is evolving as technology develop and our business model evolves, but we do not see the effect of these changes leading to a trend reduction in our BEI levels.
Brand equity development, together with innovation intensity and channel and other operational excellence, remain the cornerstones of our business model. Other SG and A costs increased by 60 basis points in half 2, the net effect of Mead Johnson synergies, additional RB2.0 costs, and normal trading costs. Following a 40 basis points pro form a reduction in half 1, we signaled an increase in this area in half 2, giving a pro form a reduction of 10 basis point of points in general admin costs for the full year. And again, we'll return to analysis of these margin movements by business units in a second. Turning then to the next slide and turning to the Health Business Unit.
Here, we have set out the revenue and revenue growth for the 3 main segments of the health business: infant nutrition that is Enfamil, Nutramigen and so on, which accounts for nearly 40%, 37% of health revenue in 2018. Over the counter medicines, that's Mucinex, Gabiscon, strepsils and so on, which accounts for just over a quarter of revenue, and other consumer health products, which account for 37%. This includes personal health products, in particular, Detol and Durex, and VMS products, Move Free, airborne, and so on. In headline terms, you can see that the health business grew by 4% in quarter 4. And 3% in the full year.
Adi will give you more color on the dynamics behind these moment these numbers in a moment. But first, a few comments from me, on the overall progress of the business unit and on some specific ins and outs in the numbers. Firstly, the market the unit serves. We continue to 2018. Growth has been tempered a little more recently by slowing China infant nutrition demand as the number of new births declines.
And also in the very short term by a weaker flu season so far in the northern hemisphere, but absolutely nothing to change our medium term expectations. Secondly, our performance against the market. As you know, it is our medium term expectation to perform at or above the top end of the market. We have built a synergistic set of consumer health segments to which we are applying a proven and also evolving operating model. As well as the usual RB energy and drive.
We are clearly not yet outperforming. We are losing some share. The underlying rate of growth in this business unit is beneath our medium term expectation and goal. And why is this? Well, as noted at the half year, we have come through a testing period operationally, and we are in the process of reconfiguring the business with a major acquisition and a substantial reorganization at a time of material marketplace change.
We've also, this year, faced specific share challenges in Mucinex and Shoal And while the IFCN share trajectory is improving, we're not yet achieving our medium term objective of performing consistently at the top end of the market range. Within the Consumer Health Business Unit we are seeing progress in configuring the details of the business which we would not otherwise have seen if the same management teams were still covering all brands from Mucinex to Vanish. And the consumer health field is more diverse than the household field. There are huge synergies and commonalities between the consumer health areas we've assembled and also differences, differences in innovation cycles in brand equity building and in purchase influences. The optimized operating model captures these commonalities and respects the differences.
The business unit is very well, very well placed strategically and the historic RB operating excellence is on its way back. Turning then from the broader picture to the ins and outs of the health numbers. Across the business unit in Q4, the 4% growth comprised 1% volume and 3% pricemix. Price mix was stronger in infant nutrition, but still positive in RB based health. The 4% the 4% Q4 growth was influenced in particular by the 2 factors we highlighted with the Q1 for the half 1 and Q3 numbers.
The supply of and demand for our infant nutrition products in China following the supply disruption in Q3 and of course, the strength of the flu season. The IFCM business grew up 5% in Q4. Within this, we saw a further strengthening of the performance in North America, somewhat flattered by the tail end of the NeuroPro launch effects. We saw broadly flat revenue in Greater China. While the supply disruption from Q3 is behind us, We do remain supply constrained in our China business and have been able to satisfy all consumer demand due to empty shells in a number of areas.
And he will cover this in more detail in a moment. Growth in the OGC segment was 2% lower was 2% lower than in recent quarters. Two main reasons for this both signaled during the year are the weaker flu season and the consistent availability of private label supply of Mucinex competitors. In the United States. Until mid December, and then a significant double digit percent year on year reduction in the second half of December in the USA lapping a strong prior year.
Mucinex revenue declined slightly in Q4 year on year. Neurofend growth was modest. The pattern of the season will impact Q1 growth. Last year was a strong season from mid December through January. This year is double digit below average through January.
The combination of weaker consumer demand and retailers adjusting inventory accordingly has led to a weaker start in Q1. We also expect modest further Mucinex share loss to private label as consistent supply becomes available to retailers. Within Personal Health, growth strengthened with continuing strong Dettol performance in India and China and some improvement, but still in a weak market in the Middle East. Durex continued to perform very strongly. Within VMS, we continue to see good growth in the United States and also in China, where we are building Move Free as a predominantly online brand.
Turning then to the next slide. Here, you can see the geographic progress of health revenue. The 5% Q4 growth in North America reflects the strong infant nutrition and VMS revenue mentioned a minute ago, offset, of course, by a slightly weaker Mucinex. In Europe, revenue declined by 3%. Our health portfolio in Europe has a high proportion of OTC.
Market growth in OTC was reduced in the quarter by the weaker flu season. New Defense sales grew in the quarter with a strong share performance, but strepsils and many other flu related brands declined. In addition, the gradual destocking we have seen through this year in Russia, as we evolve our distribution arrangements continued. Within DVM, revenue grew by 7%, Strong growth in the RB based brands was diluted by the flat performance of infant nutrition in China. We saw good growth in all the big markets, India, China based brands, Brazil.
We also saw strong infant nutrition growth in several ASEAN countries, though this was flattered a little by a weak comparative. Turning to the next slide. Of each of the moving parts of margin, which we described in February July last year, as playing out through 2018. At half 1, we showed this for the group as a whole, Here we show it for the health business unit for the full year. Firstly, the arithmatic the arithmetical 160 basis points effect of consolidating the lower operating margin MGN business.
This was clearly 0 in half 2. Secondly, 180 voices points gain as the Mead Johnson cost synergies were delivered. We have delivered these cost synergies faster than originally planned. And most of the synergies, of course, lie in the health business unit, and we'll return to these synergies in a moment. Thirdly, the 40 basis points cost of the RB2.0 changes.
These costs arise in both health and hygiene home. They are in line with our expectations in magnitude, but have built somewhat more slowly than we had planned, meaning that there will be a small further increase and a full year effect in next year's margin. And fourthly, the trading margin change. This was a net 110 basis points reduction. The larger part of this reduction was in gross margin.
A material part of the gross margin reduction was the result of costs associated with the infant nutrition supply disruption in But in addition, increases in cost pressures exceeded the benefit from price increases, and we have invested in some increasing capacity as a result of lessons learned from last year's post cyber supply shortages. We saw some reduction in marketing spend beyond the MJN cost synergies but in the context of normal year on year variation. We also saw some increase in expenditure in a number of scientific and clinical areas, as Rakesh has mentioned, important to the health business and also, of course, in Digital And E Commerce. Turning to the next slide, Here we show progress on achieving the Mead Johnson cost synergies. You can see that we achieved 1,000,000 in half 2, a total of $178,000,000 to the end of 2018, cumulatively, that is.
This was ahead of our expectations on timing. We are still on track for $300,000,000 in total and therefore have a lower tailwind from synergies to come in 2019. So what does all this mean for our expectations of health margin in 2019 and beyond? We expect the bulk of the remaining GBP 45,000,000 MGN cost synergies to be delivered in 2019. We were close to the expected ongoing run rate for the additional RB2.0 costs by year end, but there is a full year effect headwind in 2019, which we expect to substantially offset the cost synergy tailwind.
Beyond these factors, We see the usual RB efficiency and can do programs continuing to deliver material cost reductions and that these will be reinvested in the business deliver both resilience and growth. We consider the 2018 health trading margin to be at a balanced and sustainable level. Turning then to the Hygiene Home Business Unit. And on the next slide, Rob, who runs this business, will give you more color in a moment, but first a few comments from me from a financial lens. We see the market served by this business unit as continuing to grow in the top half of the 2% to 3% expected medium term growth.
Europe remains a particularly tough market at present, and it is our largest geographical market, market in High Ho. With the sharper RB2.0 focus and a good stream of innovation, we reversed the share decline of the previous years during 2018. But still an underlying cadence of around 3% in the HIFO business at present, therefore. You can see here that a reported 4% growth rate in Q4 and the same rate as for the other 3 quarter same rate as for the other 3 quarters of 2018, a significant improvement on the weaker growth rates for the Four quarters of 2017. 2018 reported growth benefited in Q1 from a very strong flu season and in the later quarters from lapping the supply disruption, flowing from the mid year cyber attack.
The Q4 growth rate comprised 1% volume and 3% pricemix, The stronger price environment, which we saw in Q3, has continued, though Europe continued to be tough. Growth was broad based across the BAM portfolio, the 5 largest brands, Finish Airwick, Lysol, Vanish, and Harpic all grew. And if we turn to the next slide, we've set out a geographical summary of the revenue in this business unit. You can see that in 2018, 31 percent of the revenue was in North America, 45% in Europe and 24% in Developing Markets. Revenue was flat in Europe.
It remains a tough market. Growth in North America was encouraging across most brands. As was growth in developing markets, with the 2 largest markets for Haimo, Brazil and India, both performing really well. And then turning to the next slide, We have set out here for Hygiene, for the Hygiene Home Business Unit, a quantification for the full year of the moving parts on their margin. Firstly, a 30 basis points gain from Mead Johnson cost synergies.
These are the reduction in hygiene home share of corporate costs. Secondly, the 70 basis points cost of the RB2.0 changes. And thirdly, the trading margin change. The net 20 basis points improvement comprises a reduction in gross margin as input cost increases exceeded price increases for the year as a whole, a small reduction in BEI and G and A spend broadly flat as a as a proportion of revenue. And on the next slide, Further on the high- Hygiene Home margins.
So what does all this mean for our expectations of Hygiene Home margin? In 2019 and beyond. We have seen a reduction in the hygiene home operating margin of 160 basis points since 2016. This reflects a net 40 basis points impact from the increased RB2.0 operating costs, net of synergies and 120 basis points reinvestment in the business. We see this adjustment as essentially Okay.
Turning them back to the group from the business units. And on this next slide, the margins for the group as a whole. Could almost hear a number of you thinking, is this guidance for the business units a margin reset? Is there more to come? On the first question, is this a margin reset?
We have delivered our expected operating margin in 2018. With the benefit of a faster delivery of synergies and a slower incurrence of the full RB2.0 cost than we had expected. A combined benefit of around 60 basis points. And this benefit has been offset by some costs associated with the IRC N supply disruption. And also some additional spend on supply capacity, including capital spend, on scientific and clinical capabilities within the health business, and on digital and e commerce items.
We expect in 2019 And we expect the benefit of lapping the cost of the supply disruption to be broadly equal to the ongoing effect of the increased spend including depreciation on capacity and capabilities. So the second question, is there more to come? You will hear from both Adi and Rob in a few minutes. On how we see margins in each of their businesses. You will see in both business units how our margin compares with that of our peers, why it is at this level and why we believe why we believe that it is the balanced sustainable margin in the medium term.
So no decrease in margin experienced or expected, continued RB Energy and focus on spending efficiency, efficiently, and sensible investment in new capabilities. Turning then from P and L to balance sheet and the next slide. We show here the usual slide on net working capital, We continue to run the business with negative working capital slightly better than our 9% negative 9% target, We continue to find opportunities in payables. We have seen further pressures on receivables in developed markets, and we have seen some increase in inventory from the slightly more inventory intensive infant nutrition operating model and frankly that focus on enhancing service levels. On the next slide, We look at free cash flow.
Free cash flow remains strong, but free cash flow conversion at 84% fell beneath the 100% we target. This was, of course, principally due to exceptional spend on the integration and RB2.0, which reduced conversion by 9 9 basis point 909% and the signaled increase in capital spend, which reduced conversion by 6%. Capital expenditure increased to 3.3 percent of revenue in the year, in line with guidance given The historic rate of 2% to 2.5% in base RB is reflected in the depreciation charge. We expect capital expenditure to continue at around 3% to 3.5%. The increase is in part a reflection of the more capital intensive infant nutrition model, in part, an increase in spare production capacity.
Being implemented following the supply constraints experienced during 2017. Turning to the next slide on net debt. Net debt reduced by 1,000,000,000 in half 2, the 1,000,000,000 of free cash flow generation was offset by 500,000,000 for the interim dividend and 300,000,000 of adverse currency movements. You have set out an analysis of the movement of net debt in the appendices. So turning to the last slide in this part, in this financial part of the presentation, and a few words on the progress of RB2.0, This slide you're seeing here was actually taken from last July's presentation.
The program, the program that we described then in some detail, and it's reflected here in this summary slide at the half year is fully on track. The 7 work streams we described and, indeed, are shown here, moving very fast. We are at peak speed for the project. Every month now, we have a series of legal entity changes systems implementations, shared service arrangement changes, reporting changes, detailed operating model changes. And we are fundamentally on schedule to deliver dedicated infrastructures for each business unit by mid-twenty 20.
And with that, I'll hand back to Rakesh to cover our 2019 targets.
Thank you, Adrian. And before I invite, both Adi and Rob to speak about their business units, let me just remind you of the targets that we have communicated earlier today, which is our top line growth rate in a rather narrow band of 3% to 4% as Adrian has already mentioned, do not expect this ban to be true in every quarter of the year, but we have taken into consideration everything that has been said so far in the setting of these targets. So, that's on top line growth rate. And on operating margins, we expect 2019 to be flat operating margins to maintain our operating margins. So with that, before I take Q and As, at the end, I wanted to invite, Adi, to come and speak about the help, doesn't it?
Thanks, Rakesh. Good morning. That's a tough act to follow after Adrian. My name is Adi Fiegel, and I'm the chief operating officer of RB Health. I have worked in only one company for the last 25 years, and that is this one.
I joined the company in India. And after that, I've worked in various markets like India, the U S, UK. I've had experience in developing markets and Europe. And all of these markets have had an impact on who I am. All of these markets shaped me, they taught me, but no market was as transformational for me as China.
I spent 7 years in China between 2008 2015, and that really made a difference my life, and I'm going to show you some of the results of that as we go forward. I have also had the privilege of running our global category organization for health care and also of running Mead Johnson after we acquired it till the point where it was integrated into, into RB Health. I'm excited to share my perspective on RB Health in 2018, 2019, and also beyond. But first, I want to tell you about why this company is so special, what is our mission, and why I believe that we are really different. So the mission of RB Health is to create innovative solutions to put health in your hands.
Now if you think of the world of today, we live in a multiple world, and we have markets like the U. S. Where 20 percent of the GDP of the country goes into health care expenditure. In the UK as well, there's a very high level of expenditure on the NHS. If we think about other markets on the on the extreme, you think about Africa, you think about India, you also have markets, which are at 1% of GDP, sometimes even less.
So there is this huge diversity. We also live in a world where the pressures on these health care systems are becoming more and more acute. More of us are living longer. And as we live longer, our needs of health care increase, and this is a trend that's inexorable To see the future, you can see what's happening in Japan. That's the kind of situation that will happen in many happen in many parts of the world.
We also live in discontinuous times in terms of technology, and there is a lot of progress and technology that is coming up, which enable people to take care of themselves, self care and also where appropriate self cure. And that's why RB's health health's mission to empower people to take care of themselves and to provide them innovative solutions is so inspiring for me. From a financial perspective, If you look at the size of the We know that more and more procedures, more and more and more of this is moving towards self care. If 2% of this 7,000,000,000,000 were to move over through innovative solutions into the area of self care or self care, the OTC industry at 100,000,000,000 would more than double. So there is a massive commercial opportunity here, but the beautiful thing that makes us unique is When we do good, we also do well.
When we do well, we also do good. And that is something that's quite unique about how we are seeing the world of tomorrow. And this is really very exciting. Rakesh had shared how we have very deliberately step by step, constructed this portfolio. Which goes across categories and across markets.
We are one of the few companies that actually is able to give solutions from cradle to the end of life. With more and more focus and capability on new technologies, we are able to build relationships with consumers that span a lifetime. And you're talking about lifetime values that become extremely significant when driven across a whole portfolio or across a whole lifetime. RB has a consumer centric vision of health, and this gives us a tremendous amount of space to expand. While we have been deliberately building this portfolio and organization for many, many, many years, specifically 2018 was a foundational and transformational year for RB.
It's been the biggest change in this company for years. We launched RB2.0, We built the RB Health Organization. We integrated Mead Johnson, and we have now created the platform that is going to lead us from performance to outperformance in future. We announced RB2.0 in mid October 2017. In the next 75 days by 1st January, we had done a number of things.
We had integrated Mead Johnson, which by itself was a big task. We had carved out people and business and the 2 business units in RB, and we integrated Mead Johnson into this. We aimed to separate the front facing parts of our business while still being connected at the back end. Over twenty five thousand people started the new year in new jobs, in many cases, in new locations. I do not know any other company that could have managed an integration, a transformation, a change of 25,000 people in terms of roles and still delivered performance in this short period of time.
And that is something that makes me extremely proud of the culture that we have and of the people that we have and the ability of people in RB to take change and find the positive and find a way to accelerate the speed at which we can do this with precision so we don't make major missteps through this dramatic series of changes. We delivered strong results in the year with momentum that increased through the year. In developing markets, we delivered good performances in our businesses in India, and China. And China was driven by Durex and Dettol, India by Dettol. We delivered a strong performance in LatAm, delivered by our OTC business there.
We had strong results in IFC and China as well, and I'm going to show you this in a later chat, but our supply disruption in Q3 slowed our momentum in China. We are working very hard to get back to our previous momentum in China, but the carryover impact on our consumer offtake as well as restocking the trade means that this is going to take us some time to get back. Europe was impacted in the first half by Shaw, in the second half, as Adrian explained, we had slow market growth and a weak flu season in Europe, and this was further impacted with gradual destocking through the year in Russia. Our mindset for Europe needs to change. Europe is a place where there are pockets of growth we need to serve consumers better and participate more strongly in these growth channels to return Europe to growth in the medium term.
So that is a lot of work to be done in Europe. We are not I'm not very satisfied with where we are in Europe at the moment. In North America, we had a very good year overall. You heard from Adrian, the flu season, where we were impacted by a very weak flu season as we closed the year. However, this was balanced in 2018 by a very strong performance on our core brands.
So first of all, VMS vitamins had a very strong season, both in the U. S. And also in China, and this delivered a double digit growth. In IFCN, Our Enfamil brand performed very slowly, very strongly, sorry, and our NeuroPro innovation helped us to deliver strong growth And now also in the latest periods, we can see the share start to turn and share gains as well in the U. S.
And between them, BMS as well as IFCN balanced the numbers in the flu season for us to still deliver a strong growth. As we have said, the integration of Mead Johnson was a really big thing last year. And we really focused on using Mead Johnson as a catalyst to drive what we call the best of both in the company. In the RB Health team, over 25% of our people are the fantastic talent who have come from Mead Johnson and who have now integrated with the business. And they are really very talented.
RP has always been a very purpose driven organization, but Mead Johnson has been even more so. Mead Johnson has been purpose driven, in my opinion, really off the scale And the team has always been very passionate about make doing good in the world. Mead Johnson's purpose was to nourish the world's children for the best start in life. And something that really has inspired me through this journey, working through Mead Johnson over the last year and a half and even a bit before, is the potential of taking the drive energy, tenacity, entrepreneurship and the sheer power of RB and putting it to the service of this fantastic mission and thereby turbocharging the speed of that mission and thereby doing some good to the world. Mid Johnson also helped bring even more strength to our scientific, medical, clinical and quality practices.
And these are very important as we go forward to become the leading consumer health care player in the world. I was part of the team that made the Mead Johnson acquisition, and I also was honored to run the business for the 1st 6 months till we integrated it. And I am as excited today about Mead Johnson as I was when we first heard about it, when we first decided to buy it, and when we first acquired it. We confirmed our hypothesis that we could add value, and I'm going to show you that in a minute. In the mid term, we do expect a 3 to 5% market growth globally, and we do expect to perform at the top end of this market.
As you heard, we delivered our synergy savings ahead of plan, And as you will see, you may have seen with some innovation that we've announced and also with innovation that'll come through in the succeeding quarters, that we have more than doubled the innovation pipeline for Mead Johnson. And we are very happy with where we are on that area of progress. Before we acquired Mead Johnson, Mead Johnson declined or was flat for 9 quarters. After we acquired Mead Johnson, the 1st quarter, it grew 1%, then it grew 3%, 6%, 9%, then we were hit by our supply disruption and had a minus 6, which was not very nice. But then in the last quarter, we bounced back with a plus 5, even though we still had some supply shortages in China.
And what is even more gratifying and even more positive and tells me that we have been able to make a difference is this chart. It shows you that every region of meat of the world The USA, China, Southeast Asia, and LatAm all grew in a year for Mead Johnson. This has not happened for a very, very, very long time in that company. So even in the past, when the growth was coming, a lot of it may have been driven by one region or the but I'm really proud of how this has come through across the regions. You can see the blip there in the IFC And China business that actually slowed our momentum, but you can also see how we are starting to come back from it.
Moving on to China. So the outlook for China. In China, we expect mid single digit growth We know that births are declining. So after the big increase, after the one child policy was relaxed, there has there was a bump, and that started to come down. And there's a double digit decline in the number of births.
However, this is more than balanced by increased premiumization in that market. There are some very strong pockets of growth in China. So we know that e commerce is growing extremely fast. We know that super high premium has a very significant growth rate We know that the mom and baby stores in lower tier cities have a fantastic opportunity. So there remain very large pockets of opportunity in China, And for us, our key priority is to focus on and win these opportunities.
And to do that, we want to apply the RBDMA to win in China. We have doubled our innovation pipeline in China. We have made a major investment in supply chain capability with increased resilience of our supply chain infrastructure with our factory in Derimut in Australia coming on stream. We have set up a dedicated e commerce business applying RB learnings. I'll show you some of these learnings later.
But essentially, when we acquired Mead Johnson, 15% of that business in China was online. That has already gone up to over 25% now. We are focused on growing our real world distribution especially in the lower tier cities to tap into that opportunity and to make sure that consumers in those cities have the chance to get the best science in the world. Which is there in our products. To do that, we've entered into a whole series of partnerships.
Some of these are with technology companies like JD dotcom and Alibaba to use our online strength to drive online to offline and business to business models that allow us to work with them to service stores in smaller cities. And part of that is actually increasing infrastructure in smaller cities, and working with the mom and baby store chains in close partnerships so that we can drive that opportunity. China remain in the fragmented market And even as growth slows down, there is lots of opportunity. So to summarize, Our organization is in place. We integrated Mead Johnson, and RB is ready to unleash the magic of innovation and performance management.
So let me go back to the mission, innovative solutions to put health in your hands. We talked a little bit earlier about what health means, the definition of health. I'm going to focus a little bit on innovation. There are many things special about RB, but there is one thing that you can verify for yourself. If you go back and just look at the mission statement of every consumer health company or every FMCG company in the world, you'll find that RB is unique.
Normally, they sound very much like each other, but RB's does not. That's because RB is the only company that has innovation in its mission statement. Check it out. Is completely missing in the mission statement DNA of any of our peers. And I'm going to talk about how we designed RB2.0 to bring innovation even more to our core.
We made major investments in capability To name a few, we talked about over 100,000,000 invested in our new R and D center in the UK, which comes alive in, middle 2019. We've more than tripled our clinical spend. We've doubled our external partnerships and we've reengineered how we engage with external partners So there is a lot more outside in innovation coming through. We realized that in the world of today, there is a lot of innovation happening everywhere. And innovation within the company will never be more than maybe a percentage of the total innovation in a category that exists.
So the way to to engage with outside partners is very, very important going forward, and we've really worked on that in RB2.0. Also, in a global world, local insights and agility is very important. We all know that small brands are winning disproportionately because they are closer to their consumers they are more agile. One of the big investments we've made in RB2.0 is to equip ourselves to compete on equal footing in that world. We've created 6 new local innovation centers in the USA, in UK, India, China and Mexico.
And these innovation centers are focused on our local hero equities, which are very iconic in their local markets and also on taking up power brands and really using local insights to double charge some of this. And I'm going to show you some examples. So when we designed our structure in RB2.0, We designed innovation to be able to create new categories to go after new consumers with new benefits and also new markets and new channels. And I'm going to show you some examples of all of these. Even though I'm not showing you all the innovation that's coming through, I'm going to show you what we are launching essentially in the next couple of months.
So you saw our portfolio earlier. Yeah. So to begin with, I'm very excited to announce, and Rakesh has already told you this, entry into a new category, which is called Brain Health, with a brand called Newriba. So I'd just like to show you a little video that explains what Newriba is all about.
Let's start by saying We get it. It's not easy being you. Work, emails, conferences, life. There's a lot on your mind. But what if that mind
were a little sharper? A little bit
faster on the draw? And what if you could get that in an all natural pill? See where we're going with this? The brain segment is exploding, but no true market leader has emerged as the science wasn't there until now. Say hello to Nariva.
From the Greek word for brain and allow in the U. S. And
in the U. S. And in the U.
S, in the U.
S, in the U. S. Finds the best of science in nature to deliver results that no one else has. The secret: neurofactory. A coffee berry extract, proven to increase the neuro protein BD and M, which is critical for promoting focus, accuracy, concentration, you know, brain stuff.
Nariva is more than supplemental. It's a multi touch point experience. It's an app that offers brain training and support, and it's all backed by scientific expertise that proves Town and Riva helps all brains be the best it can be. You know what brains love? Some reason.
So let's sum it up. Nature made it. Science proved it. Brains Loveda, introducing Nariva, get ready to Brain Better in April 2019.
So like I said, this is not just a product. It's a full suite of solutions. So there is a bunch of products, but there also is, our apps the training programs, there are all kinds of things with this launch. You revise the first brand that offers a holistic ecosystem that supports brain performance and is clinically proven with 2 natural ingredients that help improve focus, accuracy, memory, learning and concentration, which are the 5 indicators of healthy brain performance. As Rakesh said, there are some samples of Nureba in your, guri bags, and, I hope you enjoy them.
Coming on to Enfamil. So we launched NeuroPro last year. And, neuroPro is the first formula that has a breakthrough MFGM, milk, fat, globular membrane and DHA blend. For brain building benefits which are similar to breast milk. This launch was highly successful, and it was a key factor in our turnaround in the U.
S. And in the recent share gain and the strong growth that we see. We are now rolling out the same benefits and the same form, the same benefits of the formula with MSGM to the entire range in the U. S, which includes the toddler, the AR product, the regular line product, and gentlease. Moving on to another iconic power brand that all is a much loved iconic brand across a large part of the world.
It's the number one family protection, disinfection hygiene brand in the world. It's a massive, massive brand which we all love. We are relaunching this brand for the first time in over 10 years with new branding. We are also relaunching our portfolio of personal wash products, starting with Southeast Asia with more natural ingredients derived from nature, while retaining the same junkill and efficacy and protection that it all is known for. But it's not just that.
We've also been working very hard on product that are great for consumers and also great for the environment. And we are just about to launch a new wipe, a new default multi surface wipe, is made from 100 percent biodegradable plant fibers, and these wipes will kill 99.9 percent of bacteria and they are plastic free. Moving on to Durex. We started a global multiyear partnership with RED and with celebrities like Zara Larson and the Bono. To fight for safe sex and our HIV free generation.
This is accompanied by a lot of work that we are doing on the ground in places like South Africa. This campaign includes specific products with money that goes to red, massive on ground activation and social campaigns. And this campaign in the last 3 months alone has been seen by more than 1,000,000,000 people. So it's massive. On shore, Over the last couple of years, this has been a big talking point, both outside the company as well as, as you can imagine, inside the company as well.
And we have worked very hard on Shaw, to restructure our innovation and portfolio away from the instant gratification of devices more into the core area of Shaul, which is providing therapeutic problem solution benefits for people who have issues with their feet. So if you look at the pipeline that we are launching now, we are launching an orthotic insole range, which actually works on your feet to help with lower body pain that is caused because of feet. We are launching a fungal nail product that actually reduce, removes the source of fungus and works in a week. And we are also launching, and, and, and athletes would dream which actually gets rid of the issue and the HNS in a week. Last year, Rakesh had shown you the launch of the Neurofen plaster This is indeed a fantastic, fantastic product.
We know that 50% of all pain occasions are body pain related and only a very small amount, only less than a quarter are actually treated by OTC. So there's a max massive opportunity here for helping people and treatment. This is the world's 1st clinically proven 24 hour patch, which is based on ibuprofen. And the great thing about it is not just the 24 hours, but how it is designed because it stays very you put it for 24 hours. And that's also quite rare.
The product lasts twice as long as competing products and stays in place all day. We launched this in a test market in the UK, Ireland and Belgium. It has done better than we expected. In fact, 3x better than we expected, so we are just rolling it out across all of Europe this year. Moving on to more channel specific innovation, Rakesh last year talked about VMS and how we've worked on VMS and really made a difference in VMS since the acquisition.
2018 was another year of double digit growth, And in China, Mufry was now the number 2 brand on Alibaba on the 1111 festival, which for those of who you know, you who know it, is the biggest shopping festival in the world. So fantastic results there. We are now launching 7 new SKUs in the US and cross border into China. Now Coming on to local hero innovations, I had talked about all these new innovation hubs in local markets that we set up. And these were focused primarily on our local hero brands.
And you can see some examples there. There's a brand called, LemSIP some of you will know in the UK, there's a launch called lemlift, which works on of lemsip. As you can see, there's lots and lots of innovation. I'm just showing you what we have for Q1. And, there are just too many to talk about.
Maybe we can talk about it separately at some point, but you can clearly see the amount of progress we are making on all the local heroes already starting to come through the innovation hubs that we set up. In our mission statement, we don't say we are about innovative products only. We say we are about innovative solution. The next solution I'm going to show you is the result of a special special partnership.
I'm overwhelmed by thinking about the cost.
I don't even always have the time to even take the time off.
The most trusted information brand, our participation in the initiative will drive improved access to health care across the United States.
We are so excited to partner with RB and Walmart to truly make a difference with the health for all initiative.
With partners like Walmart, Google, WebMD and the live better Alliance to bring health for all to all of America. And this is very, very core to what I said our mission is. Which is innovative solutions for to put health in people's hands. This is all about how we put health in their hands. It's a major program that helps us to serve people with products and solutions that help them to take care of themselves better.
So we talked a little bit about innovative solutions. And now I'm going to talk about how RB2.0 is designed to even to put this innovation in consumers' hands. Today, consumers' hands are in many places. But if you actually go into the subway in the UK now, you'll find that about 90% of hands are holding a mobile phone. And mobile phones are used for many things, but more and more even in place like the UK for shopping.
Now if you go back 4 or 5 years, when I first when I moved from China to the UK, I used to be quite surprised because I used to go into these trains, and about 60% of people still had newspapers. Right, and you can see that movement has moved a little bit to mobile phones. At that point of time, in China, 90% of people had one mobile phone, And today, when you go to China, what surprises me, you go to a subway in China, 90 60% of people don't have one mobile phone. They have 2 mobile phones. It's just crazy.
How that economy is transforming, and in my opinion, is leading the world in what's happening in digital And E Commerce And I was super fortunate to be in China at a time when it all happened and we all exploded and to learn from China. So we learned how to do e commerce in China. And this chart actually shows you the progress of our China business over the last years. The pink there is e commerce. The blue or the gray is the base business.
The first thing you should note is the base business continue to grow. The second thing is e commerce came in on top and made a massive difference. As an FMCG, we have really created what we call ERB, which is a company, which is more than 50, actually it's closer to 60% ecommerce already. And we achieved this, as you can see, steadily year on year and we now have a 8 or 9 year experience curve on how to do this in China. We took these learnings from China as we designed RB2.0 and we built them into how we were looking at creating the RB2.0 model.
The first thing we learned in China is that ecommerce is not a channel. It is multiple channels. And each of these is different and you cannot approach these in series. You cannot say that I will do very well on Amazon for the next 2 years. And then I will start looking at Alibaba.
Because what will happen is that there will be all kinds of people who will have already done very well on Alibaba and would be way up the learning curve. You have you don't have a choice to do it like you used to sequentially. You have to do it in parallel. And we have all kinds of channels and models, things that you have not heard about. So I'm going to forgive me, I'm going to lapse into some jargon here, but I'm going to tell you a list of channels and models that we are working in China.
We are doing B2C, C2C marketplace cross border, D2C, O2O, P2P, B2B2C, OMO, S2 B2C, These are all each of these trust me is different, needs expertise, and RB either has a business or it has a test going on in each of these. Each of these requires deep learning and deep expertise, and it also requires a specialized organization. So based on these learnings from China, last year, we built a global organization and which spans the world, including local teams, and I was leading this team personally till the end of 2018. This is an end to end team with deep expertise. We tripled the number of people in e Commerce and RB Health.
Between 2017 2019, from just over 300 to over a 1000 full time people only on e commerce. Building on the success of our US and Chinese direct to consumer platforms in 2018, we have launched over 22 new platforms around the world for direct to consumer e Commerce. We established a whole series of partnerships. 1 of the rules we learned in China is no market is an exception. We also learned no brand is an exception.
So we went to every market in the world, and we built deep partnerships with the key e commerce players. And we have these partnerships ranging from Argentina and Colombia to China and the US to Pakistan and Bangladesh every market We have an ambition, we have an organization, and we have the partnerships. And these partnerships are really important because between and between these partnerships and these models, we have a very broad based multichannel business where no customer or no channel is more than 15% of our Global E Commerce business. So this is actually quite different from how many other companies have approached E Commerce. And we really did take the learnings from China and apply them here.
After we applied these learnings, actually in Southeast Asia, we applied them on Enfamil, And in 1111 in Southeast Asia, which was a big deal this year, because Alibaba has acquired Lazada, which is the key platform in Southeast Asia, We competed with everyone else, and Enfa was the number one brand on 1111 across all of Southeast Asia. So clearly, it's a model that was born in China has clearly been very successful for us in China, but we found a way and we are finding more and more ways to take these learnings and actually make it successful everywhere else. And I have found that the RB values and the DNA of ownership entrepreneurship partnership are key in e Commerce and agility that RB has has a major advantage. So if you look at the numbers in China differently, and now this is as a percentage to revenue, you can see that we expect every market to scale, perhaps not at that pace, but certainly over a period of time, in a similar direction. And you can see where RB Health sits on that curve today, and you can see that there is everything to play for.
If we compare ourselves with our peers, We are close to best in class already, and we are really poised to scale on e Commerce. So I talked about sustainable growth, and I talked about how RB2.0 has set us up so that we can deliver and drive sustainable growth. But for a great company, and I'm sure you will agree with this, it is not enough to have sustainable growth. You need to have sustainable margins as well. And there's been a lot of talk and discussions about our margins and the sustainability of those margins.
And today, I'm going to explain to you exactly why our margins are sustainable. So let's first take a look at our operating margin. So essentially, we have a best in class operating margin compared to our peers. And this really comes from a higher gross margin than appears. This gross margin that we have is the central reason for a strong operating margin performance.
Of course, we have tight operations, and of course, we try and manage our costs. And in RB, we have the DNA of treating each penny like it is our own. We do not fly around in private jets. We make sure that we spend our money where we should. If you think about, support for our brands, brand equity investment, we are not a very large company as these things go globally.
But we are one of the top 10 investors in media in the world. And that is something that most people do not understand about RB, how a company of £12, what,000,000,000 can be a top 10 media investor in the world on TV and also on digital. So we do try and make sure that this high gross margin translates into the right operating margin because we try and keep a tight ship and we try and spend the money where it makes the most difference. But why is our gross margin so high? And the reason is that we have carefully constructed our business around some very structural drivers of our gross margin.
The first is the right category mix. We then have the right segment mix. Then we offer superior value and We are driven by innovation. Like I told you, we are one of the we are the only company who has innovation right there in its DNA, and this innovation is a key driver of margin accretive innovation. I'm going to explain these 1 by 1.
So let's start with the right category mix. We already know that consumer health has higher margins than most categories. And RB has a higher exposure to consumer health than appears. If you think about segment mix, We operate in a category where the key currency is actually trust. So this is something which you are consuming for your health.
You're giving to your child for their health. So it's very important that you trust the brand you trust the product, and it's very important that the brand never breaks that trust, and it also has all the right credentials. When we think about premiumness, and how expensive things are and think about price increase, we should consider the pickup prices of health care products. So if you buy a packet of NeuroFend, you're going to spend a few pound. This is not something that is really the cost of an iPhone.
Right? These are not very high ticket items. These are items which are quite affordable in the view of daily life. And people want to make sure that they have the best products for the children, for their health. And that's very important to remember.
That's the reason why when you look at these categories, the premium end of the categories in the last 2 years has grown faster Then the value end by 4x, four times as fast. So our categories are growing more in the premium end, and RB is disproportionately indexed towards the premium end of the category. Now Why is that? Why can RB play sustainably in the premium segment? Why can we maintain that 900 basis point of gap against the average on how much of a portfolio is premium.
Part of the answer is premium brand equity. Part of the answer is trust which is built over years years years of hard work and promises delivered by the brand's performance. And there's also something else. And that is we are premium, but we are value. Now this sounds like a contradiction, right?
This sounds like how can you beat premium How can you have value? And RB for many years, another special thing about RB, and today, I'm telling you all the special things 1, 1 by 1, but this is truly special, RB is a company that, for many years, has fought against the tyranny, the tyranny of the ore. You can have growth, or you can have margins, high growth or high margins. But RB has always been, no, no, no. Let's find a way for growth and margins.
So when we are confronted with these challenges, the DNA in the company tries to find solutions for the virtuous and rather than the not not virtuous or. So we've really focused on trying to find a way to say premium and great value. How do we achieve premium and great value? How do we achieve superior value even when it looks like higher price? So let me give you some examples of how we see this.
So let's start with an example of Gaviscon. So Gaviscon is the one on the left here, and you've got an ordinary anti set, anti set on the right. The way the ordinary anti set works is by neutralizing the pH of your stomach acid. And that works quite well. The way Gabicom double action works is by doing the same.
And then on top, what Gabicom does if it creates this raft, this white raft that you see on top, this raft comes from a very special ingredient known as Alginate. Alginate comes from algae, which is like seaweed, seaweed kind of floats on the top of water. This is highly concentrated, very well sourced product product with great secret sauce and how we make it, which actually floats on the top of your stomach acid. This means that you'll neutralize the acid, but it also stops any chance of of it coming back into the ease of ease of figures. So Gaviscon has 2 actions.
It lasts for twice as long as the ordinary anti set. So 2x modefaction, 2x duration, only 1.5x price. Therefore, great value here at premium. Let me show you another example. Mucinex.
So one type of Mucinex lasts for 12 hours. That's the same as thrice the duration of relief with the liquid syrup, 4 hour syrups that people use to take. Here you're talking about 3x the duration at 1.6x the price. Again, great value, yet premium. Give me one more.
If you look at Neurofin, and this is Neuromall. Neuromall is a unique product because it has ibuprofen and paracetamol together in a unique combination. And you can see the pain relief outcomes on that chart. You can see that Neuromole outperforms two tablets of paracetamol and also to standard ibuprofen tablets. So when you look at the benefit, essentially we've got 2 X, the active ingredients, it's 1.7x, the price of a standard ibuprofen plus paracetamort.
Again, great value, yet premium. So this idea of great value yet premium is something that we've driven again and again through innovation. So we try and ensure each of our innovations is great value yet premium. So let me show you some examples on Neurofin. So you saw this chart, a chart similar to this earlier on Mucinex from Rakesh, and I'm sure you've seen this chat before.
And you've read about our approach of focusing on moms, not just on molecules. This shows how RB's innovation engine drives relentless consumer improvements. And as I showed you earlier, each innovation adds value and functionality. So it is premium led yet great value. Another way of looking at the chart is this.
So we started with basic neurofen at 17p a dose. Then we launched Neurofin Express, which worked twice as fast. Sorry. The price was not double. The price was 26 people.
We then launched, thank you, a new format for teenagers. And this format for teenagers is quite special because you don't need water. It's a self dissolving thing that you just pour on your tongue and it just vanishes, right? And this one was now priced at 54p. And this is not just in one category.
RBDNN drives these kinds of innovation programs that drive this premium jet value. Outcome in category after category after category. And this is something that is not only new from RB2.0. This is how RB has been growing its categories for years, and we've honed and sharpened it and built these drivers of gross margin into our DNA. And this translate to our operating margin.
So higher gross margins lead us to the ability to invest higher amounts into capabilities and brands. As we continue on the path to be one of the best consumer health companies and the biggest in the world, we move into a more regulated world. And this is a world of increasing responsibility. This means we have to have much better systems, quality, infrastructure than we did in the past when we had to be a household company. So between 2018 2019, the 1st 2 years of RB2.0, we are investing over £100,000,000 in R&D Innovation Centers Clinical supply resilience, quality, safety, and systems.
As I told you before, our RB DNA make sure we run a tight ship, Always focus on ROI and ways of making our money stretch further. So we are working to make these investments in brands and capabilities, but to fund them internally so that we can deliver sustainable margins. We have worked hard to build these drivers of gross margin into our DNA, and this translates to our operating margin. So RB2.0 has set us up for sustainable growth by driving a mission of innovative solutions to put health in your hands. We have built a very strong platform for the future.
We integrated Mead Johnson. We are very on the digital and e commerce capabilities to deliver our products and solutions into people's hands. What's happening in China will happen everywhere. It's no longer west to east. This is the age of east to west.
With that, I'd like to hand over to Rob to take you through the Hygiene Home business. Thank you
Good morning. It seems the health care season is starting, Eddie. That's, that's very good. And there's also something else that I learned to actually And I just realized that Rakesh has announced that it's 32 years that he has worked for RB. And then Eddie stands up and he says, like, is 25 years.
And then I start to realize that it's actually 3 decades ago that I joined this company. And wow. I see all of you looking right now, like, that can not be true, but it was act actually true. I, you know, I came out of, puberty directly into this company, and I never really thought about it, until today. I never really thought about it because, yeah, why would you care about time if you have, you know, so much joy in what you do every day?
And with this group of people that, you know, Part b is also in the audience and at this table and back home, if you want, is really fun. And also if you look at the brands that Adi presented and that I'm also going to tell you about in a second, I think you can understand a little bit the excitement. But the real reason for being like 30 years, you know, with this company is James. And I think the agility of change that this company has is absolutely amazing. Like every 3 to 4 years, something dramatic is changing, either in the way that we operate or the way that we change our focus, and that keeps you fresh.
And it gives you a new and gives you a v energy, if that's English word, of how you look at a business, and that's what RB2.0 is about. RB2.0 is not about splitting the business. RB2.0 is really about outperformance in the end. It's about outperforming in health, and I think Adi did a wonderful, selection of presentation, I feel, conveying that for you. And I'm going to try to do exactly the same for Hygiene Home or High Ho in our own language.
And if there's one thing that I would really like you to remember of the, maybe next 20 minutes, is this chart, is that hygiene home is all about potential, high growth, high margin categories, purpose because our brands are uniquely positioned to have a greater purpose in life and third, performance. And that's really the DNA of this company for all of those years that R and B have been together. Let me start with potential. And I'm gonna start with the brands. The beauty of this portfolio is that it's extremely focused.
It is 7 brands that actually make 80% of the net revenue. 7 brands, how many companies have 7 brands that do 80% of your portfolio? Then these brands are, you know, the historical brands. They have a long, history of, technology and bringing better solutions to consumers. They're also number 1 or number 2 in the world.
You can see this, you know, brands on the page, you know, vanish, finished, Airwick, in case you had forgotten about them, Harpic, Lysol, Mortin, and V Asia, which is a brand that is largely in Brazil. But these brands are not just, historical brands. These brands are actually future brands because this chart, as Rakesh was also, mentioning already, shows the penetration potential and the share potential that these categories have. And this is for all brands, gonna demonstrate this a little bit, to you. And I start, and I'll do this on 3 categories.
And I start with the 1st country, which is the UK. Now in the UK, the penetration of detergents, laundry detergents, is obviously quite high. 91% of consumers are buying every year, laundry detergent. Fabric treatment where vanish competes has a penetration of 45%. If I go to auto this or I go to this, Handace is bought in 86% of the occasions.
In the UK, 1 out of 2 consumers does not have a dishwasher. Now project yourself 50 years ahead from now. Do you still think that people are going to do by hand, while there are these solutions, which are so much superior than doing the dishes by hand. Not only from a cleaning perspective, but also from a sustainability perspective. But you don't only have to compare, hand this between and machine this.
Can also go within the category, take a category like air care. Air care, the ins, the, aerosol that everybody will have in the bathroom, as a high penetration. Yet captive systems like phasmatic or like oils, electrical oils, have a much lower penetration. So it's not only a category play, it's also within the category, which segments you decide to play, is very relevant here. Now this is the UK, which is obviously a developed market.
Or is it? The developed markets. This is the debate that we have continuously. Is Europe a developing market or a developed market? Because actually the penetration potential is also in Europe, is not just in developing markets.
Obviously, in developing markets is super clear that there's more potential to be had. Fabric treatments penetration, 30% detergent 100. This was in Brazil, only, Otidys was only 3% penetration and this 95% and captive systems have not yet been developed, yet Brazilians love fragrance. India, all of our top markets, and you can see the penetration potential of the categories of the future. And the beauty of this potential is that it's actually it's coming towards us.
It's coming towards us because you have a rise of the middle class. And once disposable income goes up, categories develop, And this is an example of, what we call an s curve of what happens to fabric treatments. When you start doing laundry and you don't have a lot of disposable income, you probably have a soap bar and you do the laundry that way. Then you move up, to laundry powder. At a certain point of time, you realize that the stains don't go out.
So you use another product that you have in a household on top, which is bleach. But then you realize that there's actually a better solution as well, which is not only, you know, bleaching, but is also safe to use for your clothes. And you trade up to fabric treatments. So this whole movement of when disposable income goes up our categories develop. With a growing middle class is actually the result of our business, of the business coming to us rather than, we have to go out and hunt that business.
That's the beauty about the portfolio choices. And that also results in our, in our portfolio. And this is very similar. Obviously, you're going to see similarities between the health portfolio principles and the hygiene home, principles because there's only one here that we have 2 business units and the principles of the business are very, very valid. So also here, you see that the premium segment is growing much faster than value.
And the overrepresentation that we have in the premium segment on Hygiene Home, is even more than what we saw in the health care part. And how that comes to life, for example, on air care, is that each time that consumer benefits are increasing, there are better solutions being brought to consumers at higher price points. So from an aerosol to an automatic aerosol to actually the essential mist, which is not only, automatic but is also, filled with essential oils, and they actually create moods. So they actually, work on your narrow systems, and they therefore can determine if your mood is going to be on the relaxing side or in the uplifting side, depending on the fragrance that you're using. These innovations and these, decisions of what segments you play they also have an impact on the margin.
So the margin difference between Venice fabric treatment and our laundry detergent powder is more than 2000 basis points. The difference between Finnish, monodose and our hand to us is more than 2000 basis points. And also within segments, if I take the product that I was just talking about, the essential mist and I compare this with base aerosol, The margin difference is more than 2000 basis points. So where you play, which caribis, which segments, which innovations, decide about the margin. And therefore, we are very selective in deciding where we play, and how we play.
But once we play, we actually play very hard. And you can see the results here, and these are our share positions in the markets where we operate. So there's still many markets where we do not operate, and we're going to talk about that in a second. But once we operate, these are the share positions that we have. And that selective portfolio thinking is then leading very much to the higher gross margin that we have relative to the industry.
Now that portfolio thinking is combined with 2 other factors. One, innovations. Innovations is not just to drive growth. Innovations is also so crucial for the earnings model. 1, because they have higher, margin, the 2018 margin profile of our innovations was higher than the average margin.
Second, is the whole culture of the company. And I have here, a little P and L model, and it's obviously not my my desire to lecture you on how a P and L works and where growth starts and where it should be driven. Because you know, much better. But I want to highlight this gross margin part because this, gross margin part is something that is not only you that know this, but is also very much inside the company. This is quite unique.
It's not unique for people that, that you see today, but it's quite unique for key accounters or for brand managers or for supply people to understand that the P and L start gross margin. And even more so that they know how they can actually impact the gross margin in a P and L. And that's quite unique. That's quite unique. So the debates that we have are not now they don't start at the top line.
They start at the margin. And started the margin that creates the space to drive the top line afterwards. Also as an evidence of that is we had in all areas profitable growth last year, and 6 out of the 7 power brands that I showed earlier also had profitable growth. So it's something that is not just in one area present, it is across the whole company. And that then leads to the operating margin, which is also far superior to, to the relative peers.
And here, what we took is the parts of the peers that is operating in home care or hygiene products. But when we get together as a leadership team for Hai Ho, about 18 months ago, we said, okay, there's all this potential and there's this high growth, high margin categories and has been a very successful strategy and there's massive potential yet. What are we going to do differently? And the one thing that came, out of that very quickly is purpose. And we have a beautiful company purpose, which is healthier lives and happier homes.
But does that mean we are the happier homes part of it? And how can we make that a bit more clear to our key stakeholders, our consumers, our employees, and also our shareholders. And therefore, we started working on, on a vision, a vision that supports that purpose, that company purpose. And this is that vision. It's created cleaner world.
Now I hear you think that also create a cleaner world is, kind of a nice marketing sentence. And you're right. You're actually right. Because it comes only to life, once you really understand the 3 missions that are underneath on this page. And I want to take you a little bit through because I'm really passionate about it, and so is my business unit.
It starts with the one in the middle. Wish us about the products. In these, years that we were so focused, RB1, RB1.0. On driving our consumer health credentials. And I was part of it.
I've been super proud of it. You know, running Europe and North America for the RB 1.1.0. But in those 5 years, maybe we lost a little bit the shine ourselves and the pride on these products. So the number one thing that I wanted eight months ago for, you know, this business unit, you know, to be very clear, is that our products are so superior in the solutions that we drive, they need to be superior. That's the heart of everything in fast moving consumer goods.
So maybe this obsession comes out of dishwash. I'm sure that you all have this moment when you open the dishwasher and you have that brilliant result, you know, I'm looking at you. The result that you absolutely want because you're not going to eat or drink for something, which is still a bit dirty, even if there's like one little spot, you will not drink from it. So this obsession of for perfection in the products that we have is coming out of these type of categories or liso you know, the way that we study germs and how they travel over the world and from animals into humans is, you know, is absolutely amazing is being built over decades, but it actually helps us identify what is the flu virus that is hitting the world, and in particular, the U. S.
And therefore, we can actually test our products, validate them, go to the EPA validate with them and make sure that we can guide consumers through the flu season, which is what we did in 2018 very much. So it's eliminating dirt, pest, germs, odors that impact your health and your happiness. But then if you have this beautiful product portfolio, what else can you do with that? And that brings me to the 2nd mission, which is to accelerate the Hygiene Foundation across the world. Our brands can mean so much more.
I give you an example, Harpic Hartpeak is our toilet cleaning brands and is the leading toilet cleaning brand in India. And, what we have created there is something that goes far beyond, just cleaning toilets. Did you realize that 1 out of 3 consumers in the world do not have access to a toilet? 1 out of 3. Now I know we've been busy for quite some time already, but realized that there's no toilet.
And that, I, obviously, leads to things like open defecation, but that not only that because, it's obviously quite embarrassing, in particular for women, So women go early in the morning to do their open defecation, and then know that women are going in groups to do this before, while it's still dark. And therefore, leads to all kinds of other social problems. Kids not going to school because they cannot contain and themselves, and therefore, leading to missing out school. So just providing a toilet does so much, it's not just in India where we're doing this. We're doing this in Nigeria.
We're doing this in Indonesia. We're doing this in Bangladesh. And we provide not only hygiene, but also dignity to that population. Now that's, obviously also beautiful if you are if you have a very, very high share in toilet cleaning because at the same time that you create a market, of installing toilets, which is the big program that done in India. We installed 18,000,000 toilets with, 18,000,000 toilets in India.
Together with partners with the government and with partners. Accelerating hygiene foundations. And the 3rd mission is about delivering sustainable outperformance. And outperformance is something that, I think it will not be a surprise. Sustainable is, obviously, a beautiful English word that has a double meaning that says that, and you have to do it every time, but at the same time, you also have to do it in a way that takes care of this world and makes it a more sustainable place.
So how we do that is obviously with innovative solutions, and we want to bring them to 1 out of 3 homes across the world. And one more time, I want to reiterate, how we do this, for example, on LISO, There's this powerful social cause, like we want to fight flu and stop people dying from flu in 2018, eighty thousand people died in the USA from flu, not just elderly people, but also people that are young and teenagers, so it's a very big social course. And then the brand has this really as a mission, and deliver superior solutions to make sure
Brazil, a giant country by nature, but striked by a tiny mosquito, the 80s ship tie. The veteran of several diseases all over the country. In the beginning, it was only banking, but the problem has evolved. And today, other viruses appeared. SVP got together with the London School of Hygiene And Tropical Medicine.
The world's biggest specialist in infectious diseases. And with the Brazilian Red Cross, the world's biggest humanitarian organization. The brand developed the SVP protection model. Its objective is to eradicate the mosquito proliferation focus in communities. Through various interventions, such as cleaning efforts, use of products, and education of adults and children.
SVP's vision is to eradicate the Squito born diseases in Brazil by 2025. Let's go together against the mosquito.
Another example that we're super excited about, you know, to really stop diseases that are borne by mosquitoes. And this is a Brazil example. So you can see this purpose coming to life, you know, on multiple brands, Lysol, Harpic, SPP across the world and taking a meaning social course. And what this does It also engages very much the organization. The High Ho organization, we ask people like, do you see, do you want, are you excited to be part of Hygiene Home?
Are you confident that we can create a cleaner world? Are we actually faster and more entrepreneurial and are we at the front line? Not going to talk too much to you about the way that we've organized ourselves, but our Amsterdam headquarters is very, very small when it comes to people. And also to surface. When it's really about enabling at the front line and making decisions at the front line and being so insightful as we said.
So the organization is engaged about creating a cleaner world, but it's not just that the organization is engaged, also consumers are seeing this difference. On these two examples, in Harpic India, over the last 2 years, we've grown our penetration with 900 basis points. SBP in Brazil behind this program has gained more consumers in the franchise. So while we do good, we create a business and while we create a business, we do good at the same time. And that's at the heart of this purpose.
And that leads me into the last section, which is the performance part. I'm very glad, as Rakesh already mentioned, that we're back to competitive growth. When the top tier of the industry of our peers right now with the 4% that we had in 2018. I'm also very happy that we are returning to consistent growth, 4444. I know clearly it's been versus weaker comparators, the previous year, and there's some pluses and minuses in the base.
But is 4, 4, 4, 4. 4. It's also broad based growth. All areas have, expanded their growth. Developing markets went from a minus 4 to a plus 9.
North America from a flat to a plus 6. And Europe went from a minus 1 to a 0. And obviously, Europe is still, you know, want to do better. But is also progress for minus 1 to 0. 6 out of the 7 power brands are growing in market sales.
And then what we've done is we've also defined country brand combinations in total 40, and that's our pure focus. And out of those 40, we actually got 95% of the results. So 95% of the 4% that you have seen is driven by these 40 country brands combination. The growth is also balanced You can see that for the full year, there's 3% volume growth, there's 1% pricing, pricing accelerating, both by real pricing, and by the pickup of innovations in the second half, delivering the 4% on a consistent level. And then I want to, I want to talk about the growth drivers.
So there's 3 growth drivers, and the first 2 I combined. So the first one is about e Commerce. Over the last 2 years, albeit this business less developed on the e commerce, we've shown 60% growth in both years. Is less developed, than the health care business, and therefore also has much more opportunity. I combine this together with unlocking emerging markets.
As you saw from the portfolio, emerging markets for us is a smaller part of the business. It's like 25% or 27%, 28% And this part of the business is actually the part that is super interesting because the rules of fast moving consumer goods have changed. When the past, it was about putting big sales forces together and going to the stores. Now the digital technology both at the Consumer Communication part as well as the transaction part from a channel perspective, opens up completely new opportunities. There's this theme that small fish eat big fish right now.
We are actually a small fish in many of these markets. Yet we have the capability on the brands and on the products, that we can use to make sure that the small phase knows what it does. And that's our mentality that we really have in unlocking the emerging markets. And how we do that, is one is hyper targeting consumers. Today's technology really gives you that possibility that you can target, you know, very dedicated parts of the population.
Like some of these innovation on this space where we target, you know, specifically indian top SAC consumers or unlocking complete new markets like China, And I guess what's pointing out that there's 1% penetration on this was in China. Massive potential and the digital platform enables us to put the full fledged organization in that digital world. Because we don't need to go to all the stores with 1% penetration. We're launching new brands, therefore, like Finnish, but also vanish in China. And we've been doing that with a dedicated organization.
With a dedicated organization that is cut out of the normal go to market, so that the expertise is really traveling across the world. Some of the results In the U. S, actually, our share online is higher than offline. In India, we have 10 times the e commerce growth over the last 3 years. And in China, this is four times.
It's four times, it's not three times as the call outs says. And the last point is about innovation. Obviously, fast moving consumer goods, this is the heart of fast moving consumer goods. Accelerating innovation. And I'm pleased to inform you that in 2018, we've grown our innovation contribution by 50%.
So big driver of the results are the innovations. And that leads me to the end. Which is to share a little bit with you the 2019 innovations. And let's start with Developing Markets. Because in developing markets, we put over proportional focus to make sure that we have a pipeline for better solutions as the inflection periods are moving up.
So let's start with China, where together with the partners, we are now, seriously building the penetration of this was in China, But there's also different machines. There's tabletops. There's flow tiles, which are like in sync dishwashers. And there are different stains, and there's different cutlery and pots and pans going into the dishwasher. So all of that expertise we brought together And therefore, together with our partners, we have we are launching a completely new, powerful finish, tablet.
There's a visa in Brazil, where in Brazil, surface care is very much about corktailing in a bucket, and this is a pre cocktail for Brazilian consumers. But also our big brands have bigger innovation in 2019. And some of them are displayed here, so you can have a look later. These are our large brands, and I want to pick out one, which is vanish. The Venice, gel with OXY Action is quite a revolution in today's world.
I'm not sure you've realized, but your laundry detergent has removed all of the bleachable actives, out of the ingredients. So what we're doing now as consumers is we're investing at lower temperatures, which is very good, and we're not using a laundry detergent that has any bleeds, powder. Power. And here, Venice kicks in. And now in your favorite form, which is the liquid, you also have the Oxy Action Powder, power, to add to your laundry detergent.
So all your bleachable stains like coffee, tea, wine comes out. But also serving new needs, new needs, like consumers want to have, absence of harshness. Absence of harsh ingredients. So both the brand's vanish and finish are launching a lineup of 0% unnecessary ingredients, while they have 100% performance. And last, definitely not least, we're continuing our journey on the purpose.
We're continuing the journey and to, you know, to, to transport money more communities on SPP in Brazil, to place more toilets into India and actually So maybe in the next speech, we'll talk about more activities that we do in India, about building a whole toilet economy. I end with the only thing that I want you to remember is that the potential in this high growth, high margin categories is yet to be tapped. Combining this with purpose with a set of brands that are so much about being purposeful, is a massive opportunity. And last, the performance culture of RB is really at play which hopefully showed a little bit in the results that we had in 2018.
Before I invite the chairman, I just want to give you one simple message. RB2.0 does not sit on power points. It sits in the passion and and drive of our people. And I hope you have had some some view of that. So like my pleasure to invite Chris, who has a few messages for you and maybe take a couple of questions so that then we can return to the questions of, the, of the, of the day of, of financial performance and any other questions that you might have.
Well, thank you, Rakesh, and, good morning, everybody. Delighted to have a chance to address this group and, make a few remarks And as Rakesh said, I'll be happy to take a few questions at the end, but we'd like to leave the bulk of the time on the business. So, I haven't been given a a big window of time, but hopefully we have enough to address anything that's on your mind. No question, Certainly, from our perspective, this has been a transformational year, for RB, with the integration of Mead Johnson execution against RB2.0, a lot of innovation, a lot of displacement of management, we have covered a lot of territory, and I hope you would agree, have done a pretty good job of delivering, in a tough environment. Now in addition to being a transformative year, it also ended, with an announcement that's raised some questions.
And I'm referring, of course, to the planned retirement of our CEO, Rakesh. And those questions have been pretty broad based, whether it be our investor community, whether it be the media, or many of you. And once you kind of get beyond the obvious ones, which were Is there something wrong here? Is the business busted? Have we got a breach between management and the board?
You get to sort of a more fundamental set of questions that I think permeate across, most of the universe. And they're really 3 that, stand out, to me. And, it starts with RB2.0. And what we hear a lot is, well, with this impending change, are we committed to stay the course? And to execute against, this key priority of the company.
Second question that comes up, per universally is how about your margin structure? Clearly, you have premium margins. Is it sustainable? Or are we looking at a major margin reset once we get a new CEO? And then finally, not surprisingly.
There's been a lot of questions about what are you looking for in the succession process? What are the key qualities and sort of what are we doing about replacing, our CEO. So what I want to do is, is touch on each of these fairly quickly just give you the perspective of the board. I mean, you spent the whole morning hearing from management, and I think they've done a pretty nice job of addressing some of the top two, key questions. But I wanna add my voice and that of the board, to both of those.
So let's start with RB2.0. And I would tell you that this has been a conversation going on between management and Rakesh in particular and the board for the last two, two and a half years. And it's one that we've all moved pretty much lockstep with. We had the opportunity with the acquisition of Mead Johnson to start to scale the business and actually make RB2.0 a lot more effective. And as these, folks have articulated, we're now well underway to executing it.
And there's a lot more work to be done. We call it the plumbing, but certainly by the middle of 2020, we would expect to have 2 separable businesses. But I don't wanna lose the fact that the fundamental reason we did this was to get better performance out of both business sectors and the capability to be closer, more innovative, more responsive, and that sort of thing. And I think we're starting to see the results of that, and hopefully you saw it. But obviously, as we get to the end of the pipe, we see a chance with 2 separable businesses to have a lot more options strategically.
And that continues to be a priority for all of us. So if there are any doubts about whether we're committed to RB2.0, whether we're on the track that we're on, certainly from my perspective, nothing has changed and nothing is likely to change, in a foreseeable future. Now as to margins, Again, I think they've done a pretty nice job of articulating why we have superior margins. A lot has to do with portfolio decisions, segment decisions, but it also has to do with the mentality of running this business for high performance. That talks to costs.
It talks to pricing. And ultimately, it talks to consumer value. So I think they're hopefully sending a message that we feel good about where we are with our margins We understand where we are with them. I can tell you from the board's standpoint, we address this subject almost every meeting to sort of test where we are, how the business segments are performing and so forth. And at this point, we're very comfortable I think we have a sustainable platform.
We feel good about it. And going forward, I think they've got their focus on the top line. Which is absolutely right, but we think the margin structure is good and, is sustainable. And finally, on the search process, and I've been pretty public and clear on this, Look, we have an opportunity here to make sure that we find the absolute best talent to take this company to the next level. And as a board, we want it to be a comprehensive process.
We want to look internally and externally to make sure when we make the decision that we have the best possible candidate we can get. We have some terrific talent internally, And I can tell you there's a lot of very good talent externally. So, you know, we're on that game plan. We're pretty well into the process. The characteristics we're looking for wouldn't be hugely dissimilar to what's sitting here on the podium in in Rakesh and some of the other talent.
We clearly want a major consumer transformational leader, but we're also highly sensitive to the culture of RB. So whoever we select ultimately, we'll have to be able to nurture and develop and drive that culture. And that is a key litmus test. From our standpoint. So with that as sort of a brief setup, I think I'd be happy to take any questions and anything else you want to address I think these are probably the principal issues on the table.
Yes. Well, it's always a little bit of a difficult question because there's a lot of variables in it. But I'm hopeful that sometime around the middle of the year at the AGM or whatever we'd at least have reached a, selection, and then the question is always timing after that.
Sounds like we've got
the coverage. Anything else? Alright. Well, thank you very much. Look, we'll be, obviously keeping you posted as things evolve over the next few months.
And, meanwhile, Let me turn it back to the management. Thanks a lot.
Right. Okay. Listen. We have about 25 minutes more to go. I would like to take questions right away.
Thank you. It's Pinar from UBS. UBS some time talking about why the profit margins of each of the business units are balanced and sustainable and how the focus is on the top line. So thank you for that. But I've noticed that you've dropped the medium term guidance of moderate margin expansion from your press release.
And today, there was very little mention of margin progression beyond 2019. So just to confirm, do you still see moderate margin expansion beyond 20 nineteen for each of the business units? Or are you suggesting that flat margins are more realistic assumption going forward? And if the latter than what's driven the change in your medium term thinking? Thank you.
Yeah. Let me I'll listen. I'm going to answer this question and maybe ask Adrian if he has something to add. The first thing I'd like to say is that as you've seen, our focus has been on top line growth rate. We have been investing behind the business, not just in 'eighteen, but also before.
In building the right capabilities, in building the resilience, in building our brands and innovation. RB2.0 has been also an incremental investment for this business. If the focus had been purely on margins and not on anything else, I do believe that the easiest way to do that would have been RB1.2 and Mead Johnson integrated. I can assure you we would have had more margin expansion for a while. But I would and outperformance for us is driving the top line ahead of the markets.
And the fact of the matter is that has not happened in the 18 years 18 months before that, and that is what we are striving to. So I think the first focus of RB2.0 is to get that outperformance culture back. And as that turns into the momentum that we expect to see, all the other things should be, in my personal opinion, will fall into place. For 'nineteen, our guidance is our targets rather. I don't believe in guidance.
Our targets are very specific anyway. Don't know if there's anything more to add from you.
Good morning, Richard Taylor from Morgan Stanley. Just two questions from me. I'd like a little bit more color on the investment that was made in 2018, we estimate it's around 1,000,000 over and above what was done before. And then secondly, what your guidance is applying for the investment in the business for 2019. Again, we think it's a similar level.
So that's the first question. And then secondly, obviously, the Chinese birth rate hasn't quite gone the way. You'd have all liked it too. I think I'm right in remembering that you were hoping it to be around 1,000,000 in 2020, clearly 1,000,000 leaves quite a big gap for 2018. So maybe you can talk around that a little bit, how you can still reach the model that you had before the acquisition with that lower birth rate?
Right. Okay. Listen, let me talk through the second one. And the first one, I think maybe Adrian has some to add On the first one, I think our acquisition model was not just based on Chinese birth rates. I can assure you that.
And neither could I control the Chinese birth rates? It was based on getting I tried, but, you know, it's not but slowly, Xi Jinping, and I I trust Xi Jinping, by the way. So he is going to get it back. But it was predicated on a number of changes that we wanted to bring in terms of getting innovation culture back, performance management, getting into the right channel, all the stuff that had to happen. And that's why we targeted progressively from a minus culture to a 3 to 5 going towards the top end of 3 to 5.
I believe we are on track. I believe we are going to get there, and I mean, it's not predicated on the Chinese birth rate. And even if the Chinese birth rates now bounce back after the year of the dog to the year of the pig, who can argue and who can judge, but there's plenty of other drivers in place to help us achieve that kind of progression. So that is what I would say. The models are actually quite the reverse, I would say 18 months of Mead Johnson ownership of Mead Johnson confirms our hypothesis.
That there is plenty of value we can add, and we are bringing, actually. Sadly, what has happened in Q3 is not something that makes me proud or happy at all. Because we were really on a, I would say, let me call it on a roll, but I do believe nothing has changed when it comes to still looking at that momentum and seeing how to actually bring, this is a fantastically exciting business.
Yes, on margins, Richard, yeah, I think calculations are broadly correct and just to repeat what we said earlier, the, we have, we delivered the margin in 2018, and we were we delivered the synergies faster and the RB2. Costs, RB2.0 additional costs a little slower. The net effect of which was 50 or 60 basis points, so not 1,000,000 miles from your numbers. And that was replaced by the investment in capacity and and clinical trials and so on as Rakesh was saying. And then as you look forward, we will have the tailwind next year from hopefully not having anything like the supply costs we had in Q3.
But conversely, you've got year on year effects of those investments. So you are, without giving precise numbers, your model will stand out to model is, is probably pretty accurate.
Yeah. Absolutely.
My first question is on Consumer Health. So thank you for an advertising presentation about innovation and digital, but still, with the growth that you're doing, you're still underperforming your market. So what it takes, how long does tech for you to go beyond the growth rate that you have done in 2018? That's my first question. And my second question is on IO.
4%, is that a sustainable rate of growth as well, there are a lot of competitors, one from Germany that are going to reinvest in order to get market share back. So does it mean that IO could face maybe a more difficult and challenging competitive whatever year in 2019? Right.
I I let me
just add a very sharp perspective on each of these, and then I'm going to actually ask these these guys to actually chip in. So the first thing is, our ambition in consumer health is absolutely fundamentally clear and intrinsic to RB2.0. And I think, we I see this business as the absolute leader in consumer health in everything we do. I want to be the best innovator. I want to be the best growth.
I want it to be the best, should set trends rather than and we are not happy. Clearly, there are some factors happening. One is we have a large infant nutrition business, which is not performing at the 3% to 5% range. It is performing at the 3% range. You just saw that.
And Adrian said that the market is actually at the higher end of that have that growth. So that is one major reason. It's 50% of RB, you know, and you can see, you know, our ambition would be to inch that growth forward from the 3% that we delivered in 2018. It's not bad considering it was negative before, but clearly not where we want it to be. And the other aspects, I would say, a couple of other aspects.
1 has been a sure drag, particularly in the first half of the year, and then secondly, Mucinex. I don't want to give all these reasons because they don't they kill me, actually. And I would rather, you know, not think about these reasons and and leave it to my wonderful people to really show that we can and will, as we did indeed, between 20112016, more of that outperformed by by a lot, the consumer's expectation on Hygiene Home also, I have a point too, but like to give it both to Ari and and Rob to add their perspective.
Awesome. Yeah. So like like Rakesh said, what we've said is that we expect the consumer health market to grow 3% to 5% and we expect to be at the top end or indeed outperform that in the mid to long term. Now as I said in my, presentation, the year of 2018 has been a foundational year where we've dealt with a lot of change. We've built this new organization.
We've got all these new people, new salespeople, new roles. We've been working on ERPs in the backdrop the integration of Mead Johnson, there are lots of things that we've been doing. And also we've been hit with, things like the flu season we've been hit with, the issues we had in supply. So going forward, we expect that things will get better as we go forward, and we will start seeing outperformance. However, going to take time because organizations have to be built step by step, brick by brick.
And these are not immediate changes that happen, but we wouldn't expect ourselves or try to hold ourselves to a higher standard in the mid.
Hi, ho. Our view on the market is 2% to 3%. And our ambition is to be at the upper end of that 2% to 3% ratio. Obviously, we've shown a consistent 4%, but we should not forget that that was also driven by the softer comparator that we had in the year before. On the positive side, therefore, there is the potential that I've been sharing.
And also want to reiterate that if you look at our portfolio relative to some of the other players in the market, is a quite unique portfolio. The overlap that we have in the business is not that great. And therefore, it's really what we are making out of this at it be about it, then there's a competitor that is going to define very much what is happening to our results.
Right. It's James Edmonds Jones from RBC. Two questions
I may. The Q3 supply disruption, obviously, there was a bit of a bounce back in Q4 as you had to effectively refill the pipeline. Can you say a bit about what's happened to consumer offtake, in Q4 and also into Q1? How, how has that been affected? And second, I guess, for Adi and Rob, what benefit do the 2 of you feel there is in being part of a larger group with each other's business units under the same ownership and part of the same part of the same entity.
So do
you want to take the first one, Adrian?
Yes, sure. Okay. The IFCN. The, yes, so IFCN China in particular, the, and you're absolutely right. I mean, there have been 2 two drivers unsurprisingly playing out through Q4 supply and demand.
The, and as I think, you know, from our explanation of what happened in the supply disruption we were we had a very tight supply chain for the products that were growing well in China, even before the disruption. The disruption clearly caused problems to that. But we didn't magically come back from the end of that to have abundant supply. We wouldn't revert it when we had supply back to normal to still very tight supply. And so what's played out through, Q4 is that we have been able to sell all the products we could make from, unsurprisingly all the product we could make from the European factory into China.
And the net result of that was a small increase in inventory in the channel only during quarter 4. But what also happened in quarter 4 was there was loss consumer demand. There were shells at times over 25% of shells, which did not have the Infinitas product, on the shelves. And the result of that was obviously an immediate demand loss. The mother at that point in time went typically to another premium brand, but what is also now playing out is there is a repeat effect the mother that went to another brand, if they were satisfied with it, we have to fight back.
So as we look through into the 1st couple of quarters of the coming year, You've heard a slightly cautious tone from Adi in terms of the progressions for the 1st couple of quarters. We still remain with that supply constraint out of Europe until the Australian plant is fully up and running. And even then, it's not a perfect switch for brands because of regulatory reasons, but it, but it's coming and helping. And then secondly, of course, we've got to win back those months. Lums we've lost and the next cohort of moms.
Things are going very well. You heard from Adi a lot about the efforts within the channels and the new initiatives, but that will take time. So therefore, are a little bit cautious and we are, we will not perform fully to the growth trajectory. We were previously all in China in the first half. That's where we are.
But beyond that, we still remain extremely confident. Back to you 2 guys. What do you get from each other?
All I get from you. Listen, I think it's very clear that the agility that both business units can operate with right now is a massive advantage. But we should not forget that there's still many things that we do together. If I think about the logistic operation, the supply service parts, it is obviously still one warehouse, one shipment, and there's a lot of, synergies still being achieved there. Similar like on the procurement side, if it's media or if it's raw materials, obviously being part of a larger operation still has those benefits that we're capturing.
Yeah. We also get some benefits of scale, which come from things like, amortization, like you saw, of the global costs. We have benefits in terms of media scale because a lot of the negotiations happen together still. But these are things that, of course, we have to consider.
I'm sharing what's best practice sharing our practices, learnings e Commerce. Yeah.
Thank you. I was just going to answer, ask a question about the cash flow. I guess you've talked a lot about growth and margins today, but the 3rd leg of the value creation still has always been cash generation, but just sort of pondering the implications of what's being said today, CapEx is going 3% to 3.5% of sales used to be 2 point something over the long run. Net working capital this year was you were investing. So just paralleling Pinar's questions on the margins, what does the medium term cash conversion profile look like under the new algorithm?
Well, Martin, you're quite right. The free cash flow conversion as we measure it. So of free cash flow as a percent of adjusted net income was in the mid-80s, which is not where we expected to be. And the two things that bring it down from 100% are, as you highlighted, And one well, she didn't highlight, but one is exceptional spend. Well, that's very much focused on the RB2.0 cost and Mead Johnson integration.
That will pass. I mean, we're obviously spending in line with that. And then secondly, the uptick in CapEx, you are quite right. There is roughly a percent shift going up over the last couple of years, partly bringing in a higher CapEx Mead Johnson partly. You know, frankly, we've been quite open to slight correction from what we learned in the supply disruptions in 2017.
Obviously, that percent will play into margin in time because if you're up the CapEx, it comes over time into margin. That is very much in our thinking, as you've heard us, all four of us Indeed or 5 of us, excuse me, with the chairman to talk about the balance of sustainable nature of margins. Clearly, you know, we have to make space for that for that to come in. Working capital, it's essentially flat. You know, we have over the last few years pushed it up a bit.
It has been our view as we've had an awful lot to do in the last couple of years. It wasn't the time to put incremental organization energy and they're pushing that further. We have got benefits from Mead Johnson, certainly their own, working capital levels, particularly in payables, have improved substantially. But essentially it's broadly flat. It's not a drain.
I mean, 1 year to the next, it'll go slightly up and down, particularly when you look at year end numbers, but average numbers, which is what we target, is essentially flat. So you shouldn't look at that as a drain. Actually, of course, it's a slight because when the company grows and you have a negative working capital, it's a slight tailwind. So that's where we are. We remain highly cash generative.
You've got those very visible drags to 100%. But frankly, they will both pass.
Okay, Hal. First, I will go.
Yes, thank you. Harold Thompson. Just two questions, please. The first one is on, I think you used plumbing. I'm surprised how much change has taken place that not more things have gone wrong.
So from a risk perspective, How far are we in the dangerous parts of the separation or integration, however you want to call it, and therefore, the risk for plumbing issues to appear, kind of reduces. I'm just thinking about the accident proneness here. And then the next one is on scale. Many FMCG companies are clearly struggling with the scale issues and the fragmentation of the channels and all of the above. And is therefore RB2.0 basically saying, like, we've just got too big and we've got to go back to the RB of 99 smaller, nimbler, more independent, more decisions, or is it more an organizational question where although you had the focus, it wasn't clearly identified enough for it to work.
So is it just trying to create 2 small companies a bit like you were in 99 and off we go again, or is it actually well the focus wasn't quite there, therefore it wasn't quite working, but we think we can continue at our current scale to operate at the equivalent of a small business, slightly confusing.
I understand, but it's a bit complex the question itself and the answer will be, maybe very simple. I think it's all of the above, actually. So we which is we wanted to clear a create Nimbler Organization, we wanted to create more focus. And focus is not just on our portfolio, but the fact is we are practically competing in some shape or form with every consumer goods company in the world, and actually creating a focus competitive set too makes a big difference. So it is about agility.
It is about creating nimbler business units, but also it's about creating focused business units and also more accountable business units. This is also about accountability. You go to a market, I go to a meter general manager. It gives gives me a presentation over, you know, over 2 days, maybe. And the fact is, you know, by the time you finish the first three, it's it's difficult to pin it down to.
And, and I think now we don't have that issue. You know, we have people were accountable for if I go to the U. S, for example, big market, accountable for Lysol, Air Wick and, and finish just to take 3 names. And not losing it to Mucinex and N5. And I was very concerned that as we brought N5 and Nutramigen, you know, the new baby to be, figurative and literal, we'll get all the excitement and passion, and we will still go back on some of the things that we still need to do.
I mean, there are all these ideas and therefore, your answer is, you know, important, you know, question important is all of the above. Like, you wanted something about On the plumbing. Yeah. Plumbing. Well,
first of all, you're right. There's lots of plumbing going on, and indeed, we're at peak speed at the moment for sort of mixed metaphor, but there's peak peak speed in terms of this program. Anna, there is risk. There's no question we are dealing with very fundamental aspects of how the company works in the whole world work streams you saw. So there's no doubt about that, a big program going at great speed.
What is going, it's going extremely well, And the reason it's going extremely well is, A, we've devoted some very good people to running it. This is not something that's being done on the side. It's absolutely central to what the company is trying to do. And there is very deep commitment from these two gentlemen and their teams. And at times, of course, it's deeply annoying when you've got a business to run, but you've got to go off and do these seemingly distractive things.
But as a team, we have got the energy of the company behind it. And therefore, when things do begin to go a little bit awry as everything does in a program, this style the pressures come to put it back. It is very central and very important to the company that we deliver this by mid-twenty 20 and therefore it is being it is on track. It is going okay.
2 follow-up questions. One strategic. So in Consumer Health, you said that It was a category with big competitors, and 1 of your 2 of our competitors are getting together and getting bigger, that's Pfizer and GSK, does that mean that in terms of the size you are, I mean, what does it mean for you are looking at Pfizer? You said that publicly last year, So does that basically put you in a corner? How do you think that consumer health stands versus bigger peers?
And my second question is a bit more short term in nature. You said that so Q1 and Q2 will be a bit lower if I understood properly because of Consumer Health. So should we expect that they would be in the not 3 to 4 bracket. And does that mean as well there is any timing or difference in terms of margin H1 versus H2
Right.
So, Seline, let me take the second 1 first. When we give a narrow range, like 3 to 4 is a narrow range, unlike other companies which give a wider range, it's very normal. To expect that some quarters will be different to that narrow range. And I don't want to go quarter by water because that's not something I've done, and I don't want to do it in my last year. But you should say everything has been baked in in the full year target that we've set.
Of 3% to 4% after that. And we've given you enough indications of where where we see, what has happened, what is happening now with the cold influence talking and infant nutrition, you heard something, but also the soft comps in Q3 and so on and so forth. All of that should be baked into, and it has been baked into 3 to 4. In terms of margin guidance, again, I don't think we should be too worried about the margin between first half, second half. It, I think in the grand scheme of things, we are very very confident about our margin guidance of flat margins.
And I wouldn't ask you to worry too much about, you know, any changes between one half and the other, we have very good visibility of these margins. I think there was another strategic question about consumer health. I'm going to make a bold statement, to say that consumer health is not a competitive category. It is not a compare. It is not about competition.
And, and I don't think the interface between, that you talked about, competitor you talked about, and RB is very high. So if you think about the categories and markets and what categories and markets and say, how much do we interface with each other The answer would be very little. And I think the answer is down to the fact that we are still living in a consumer health market where the largest companies are £810,000,000,000, and they are by the very nature of the fragmentation in the market, you know, they are the interfaces are very small.
Okay.
Yeah. Well, let's let's
Rosie Edwards from Berenberg. Just quick questions. The launch of Neuriva, I'm not sure whether you said geographically where that is, I'm assuming, U. S. Initially.
Yes. Okay. And then potentially broader
Well, at this point in time, we are very excited about the U S. It is the largest VMS market by a very long distance. And if you can establish a very strong presence, that would be a very good start. Okay.
And secondly, just on Resynix, do you have an estimate of, the overall impact to the brand in terms of share losses from the private label in 2018?
Very expected grounds. We had an algorithm of how much private label will come and take market share away. While we were also let's face it, Mucinex has 2 tasks to do. First, as you saw, in a slightly different way, the fact that Mucinex is the most superior solution for consumers. Instead of taking three times, you know, a 22 spoonfuls, you can take one tablet and be done with this.
And that is the reason why Mucinex has such a phenomenal rating from consumers on on how it works. So it's got one of the best consumer satisfaction ratings of them all. So one task that we have is to basically convince people that we are so much better than, taking three times for for 2 teaspoons of a day. And then of course, we have this competitor. So we model all that and I have to say that we are it is actually really, very much on predicted grounds.
And therefore, we feel very comfortable as we go into 'nineteen in terms of what we expect the impact to be. And it's all, again, baked into the targets. Having said that, Mucinex has and will produce innovation to keep making sure that every consumer is confident that the choice they make when they choose Mucinex is the very best choice in terms of innovative solutions. I think there was one more question with someone. Yeah.
Sorry, let's take this 1 and then maybe Richard, are you okay? Yes, last one.
Fred, I have 2. Just on the OTC, I mean, you're talking about the private label, competition Musinix. Are you seeing any other private label impact in any other early areas you have in OTC? That's the first question. And then secondly, I think, Adi, you spoke about digital and how you believe you have a digital lead.
Can you kind of flesh out how you think you can sustain that digital lead?
Right. So I don't think there's any material. I mean, we called out nuisance private label because it came in. It was a new event, actually. Otherwise, in a normal year, we don't talk about And I don't see any material changes in private label, shares or trends in consumer health, in 2018 or even before.
I would just say that I think the reason why we're talking a bit more and maybe a year or so, we will not talk about private label of Mucinex because that fact will go away from, comparative, performance.
Talking about digital and e Commerce and how we want to sustain the lead. It's very much about what I said first. We operate in a multichannel world where multiple people are innovating on new models and new solutions, and we have built small agile teams that are interfacing with each of these pockets of innovation to build learnings which we are then taking globally. Let me give you an example. Do you know which is the number one downloaded social media app in the US?
People would say, any guesses? Fortnight. Okay? Well, the answer is something called TikTok. Look at the last 8 months, 6 months, The number one downloaded app is something called TikTok.
It's from a company called BiteDance in China. Now we've been working with white Tans in China for the last year trying to find models that are viral on video. And as these models now roll out to the rest of the world, we therefore have a head start. Similarly, we're also working with innovative companies in the US who are leading the field. So the answer here is small teams, which are massively parallel processing and bringing the learnings back, and then we scale up depending on what the learnings are.
Right. Thank you so much for coming and joining today. And all the very best for 2019 to you too.