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. Just drawing your attention to the usual disclaimer on forward-looking statements. Let me just talk to you quickly about how today's going to go. Rakesh is going to start with some key messages and some discussion around RB 2.0. Then you'll have Adrian giving his normal financials and then a quick update on the plumbing, as I call it, around RB 2.0. Then you're going to hear from a couple of new faces in this forum. I say new faces, they've actually been at the company since I think they left school. But from Adi Sehgal, who's our CEO of Health, and from Rob de Groot, who's our President of Hygiene Home.
Then we're going to have a couple of messages from the Chairman, who will then take some brief Q&A before handing over for the normal management Q&A session. Without any further ado, I will hand over to Rakesh.
Thank you, Richard. I think you already pointed out to the fact that today is like no other full year presentation we had because we have some new stars that we are going to display on the podium. 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, well, actually what we did in RB in 2018 was RB 2.0. I wanted to remind you all of what I said about RB 2.0 same time last year. We said that there are three things that I wanted to achieve in RB 2.0, the first one of them was to transform RB.
We are seeing transformation around the world in how we do business and how we compete and how we actually innovate. I wanted to make sure that RB was right to be able to compete and outperform in that world. RB 2.0, first and foremost, was about transforming RB. There were a couple of other objectives I laid out at that time. The second one was we were just acquiring, or 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. We wanted to make sure that we turned around that performance, but also used that as a catalyst to create a consumer health leader.
That's what I wanted to do 12 months ago when we came and talked about this. The final point was with such fantastic brands that we all grown up with in many ways, Vanish and Finish and Air Wick and Lysol, I wanted to make sure that the performance of these brands, which was over a compound annual period before that, 2011-2017, was 1%, was unleashed to perform against the potential of the market, which is obviously bigger. These are the three things I talked about. I wanted to take in turn some of where we think we are 12 months in this journey.
The first thing is about the transformation of RB, I wouldn't call the creation of two business units to great momentum and therefore how we finish the year with 4% like for like, both in Health and Hygiene Home, really transformation. Really it is definitely a signal of improved momentum that we are seeing in the business from where we were 12, 18 months ago. Clearly, having upgraded our targets for the year in half year to the upper end of 2%-3%, and the upper end of In fact, increased the targets from 13% to 14% to 15%, we delivered at the upper end of these targets at the end of the year.
Like I said, RB 2.0 was also about how we innovate and innovation, moving away from one size fits all to innovation that was right and tailored for different consumers, different segment needs and different markets. I'm very pleased to say that in the first 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 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 Neuriva to enter a new category that we are almost creating called brain health. This is very exciting. 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. You could argue that you don't need it and I do, we still want you to go through this experience. New channels and new benefits and new consumers. Again, there's fantastic examples in the pipeline for this and new channels. There are channel-specific innovations being launched, and very sizable still. You will see examples of that. I'm 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 as human beings, as people, we are actually shopping differently.
We are engaging with brands differently. We know that. Everyone knows that. Knowing that and doing something about it is quite different. I'm very happy that actually the investments that we are making, the resources that we are creating, the capabilities we are building in this area is very good. Just between 2017 and 2019, we would have tripled the amount of resource that we are deploying on e-commerce and digital. In the company tripled. I don't know whether we are spelling out the numbers, et cetera, more granularly, but this is absolutely very interesting. E-commerce grew by 40%. In fact, on Health, it's now 9% of the business. It's really, you can see very tangible examples of this already in the company, and I'm very excited about that.
I do believe that this would not have been unleashed within RB 1.0. The final bit, of course, that all of you know, we wanted to do was to create what we call strategic flexibility. Let's call it structural independence of the business with separate legal entities and all the stuff that goes around that. We are absolutely, fully on track to achieve that, as we've said, by mid-2020. Really one year in, just one 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 with Mead Johnson. It allowed us to do that.
It doubled our consumer health footprint in many ways, actually. I wanted to give you somehow a snapshot of what that is. I genuinely say it with humility that eight years ago, if I asked people something about healthcare or whatever, they would've said OTC. OTC was the definition that everyone, maybe still to an extent, people use when they describe Health. 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 that was in prescription, which became over-the-counter, self-cure. That itself is a pretty sizable market, GBP 100 billion estimated, growing at 2%-4%. What we saw actually was something more than that. It was something bigger, a GBP 300 billion market, which we call self-care.
People needing everyday solutions to look after their own health and wellbeing and to make sure that they can live better lives, not just longer lives. Obviously, this is a world which is very, very rich, very diverse, and very well growing. Expected to be 4%-6% growth. 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. 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 and early 2011, brands like personal health brands like Durex and Scholl and so on. 2012 and 2013, some of you would remember the rather controversial acquisition of VMS. Who would remember that year when I announced VMS?
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 K-Y, then, of course, the transformational acquisition we've made in 2017, but also some other in fills. 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 our private label actually in 2011, 2012, 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 the U.S.
Thereafter in this current decade, truly creating a global business. 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 one and a half categories in the last decade, building it up one by one, but then actually over this decade itself, spreading our wings, but with lot more to go. I do believe that while we have created a formidable structure, formidable business, which competes with the very best, there is obviously quite a lot more to go. Just as a snapshot where we are with our portfolio's transformation in 2011, just 20% of our business was healthcare, and today we have 60% of our business in healthcare.
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've 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 eight years ago that the world of consumer health is very fragmented, actually, the competitive landscape was 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 and precisely, but a lot of them, the big familiar ones, certainly on this page. As anticipated, step by step, people started to figure out that actually this was not the place they could be and should be.
Today, just 10 years thereafter, the consumer health field is actually 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. 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, or 100 years ago, paracetamol. It's about finding consumer innovation that are relevant. We've done that on Mucinex, sorry, Nurofen. You'll see a chart later from Adrian saying the same thing on Mucinex too.
In just 10 years, we created from number seven OTC brand in North America to number one OTC brand in North America, not discovering a single new molecule. Innovation, innovating every year with meaningful innovations that consumers wanted and resonated with, and producing this unbelievable growth rate. In that 10 years, all of this has changed, 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 of the total market. I do believe that this whole journey of moving from companies that are focused on 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 Mortein, and clearly, we were not doing as well as we wanted to. It's not something that we realized at the end of 2017 and just said, like, "Well, let's wake up and do something about it." It was just not possible to create RB 2.0 without Mead Johnson. We needed that infrastructure, the catalyst, the footprints, to be able to do that and create sustainable business units. 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.
Yet, when I think about where Hygiene Home is in its evolution, principally taking two axes, one of market share, the slice of the pie, and the other one being penetration, category penetration. Most, if not all of our Hygiene Home brands are still under-penetrated categories. They're still under-penetrated categories. I have somebody in the room, I'm looking at him right now. When I show this chart, the next one I'm going to show, know, Harold, the numbers have changed a bit, they have changed because penetration does go up from time to time. This is the latest penetration charts of automatic dishwash in both developed and emerging markets, a snapshot. Even in Germany, the automatic 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 are a larger, bigger company with health on the one side and Hygiene Home on the other side. I'm really, like I said, quite happy that in just 12 months, we've managed to convert a 1% CAGR for the previous five, six years to a 4%. I know it's flattered by some comps and some good things, I don't also want to take away from the fact that the team has done a very good job in creating this change. Therefore, in my opinion, just 12 months in, RB 2.0 is well on its way.
I said that I will introduce my stars one by one. As the retiring CEO, I would say that there is a rock in the company. Let me introduce the rock star, Adrian Hennah.
Thank you.
He looks also like a rock star. Can we give him a hand, please?
Thank you, Rakesh, I think. Good morning, ladies and gentlemen. I'm turning to the first slide in the financial part of the presentation, if we can. There we go. 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 trade performance of each of the business units. 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 RB 2.0 restructuring costs. These are fully in line with guidance, and we have, as usual, included an analysis in the appendices to this presentation.
The reduction in net finance expense to GBP 152 million in half two reflects the reduction in 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 3%. We cover later the movement in net debt during the half and the composition of the debt at the period end. The tax rate on adjusted profit for the full year was 21% and for half two 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. 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% for the coming year, and we continue to see finance costs at around 3% of net debt.
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 one. 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. Turning to the next slide. Here we look at the half two 3% and full year 4% earnings growth as comprising the components we set out on this slide. We've got on the left-hand side half two, on the right-hand side the full year. Focusing on the full year, we can see that we get 3% growth from pro forma net revenue growth, the top row.
A small contribution from the 20 basis points positive pro forma margin improvement, which rounds to zero here. A rounded 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. A 1% net increase from the combined effects of acquiring Mead Johnson and selling the French's Food business. 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 two, and the actual and pro forma numbers for the full year. Like for like, net revenue grew at 4% in Q4 and 3% in the half, giving 3% for the full year.
Operating margin decreased by 30 basis points in half two. Following a pro forma 50 basis points operating margin increase in half one, 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 forma 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 price mix. For Q4, you can see that the 4% group growth comprised 1% volume and 3% price mix.
Volume growth was stronger than Q3 following the supply disruption in the earlier period. You can also see that after turning negative in half 2 2017, price mix has strengthened progressively during the year. Again, we return to the volume price mix 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 two. The net effect of a stronger pricing and Mead Johnson cross synergies, but also higher cost pressures and costs associated with the infant nutrition supply disruption in quarter three. BEI spend, brand equity investment spend, was lower by 100 basis points in half two. 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 develops and our business model evolves. 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&A costs increased by 60 basis points in half two. The net effect of Mead Johnson synergies, additional RB 2.0 costs, and normal trading costs. Following a 40 basis points pro forma reduction in half one, we signaled an increase in this area in half two, giving a pro forma reduction of 10 basis points in general admin costs for the full year. Again, we'll return to analysis of these margin movements by business unit in a second. Turning to the next slide and turning to the Health business unit.
Here we have set out the revenue and revenue growth for the three 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, Gaviscon, Strepsils, and so on, which accounts for just over a quarter of revenue. Other consumer health products, which account for 37%. This includes personal health products, in particular Dettol 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 four and 3% in the full year. Adi will give you more color on the dynamics behind these numbers in a moment. 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 expect the markets that this business unit serves to grow at 3%-5% in the medium term. We have seen market growth at the top of this range for much of 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. 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. Why is this? Well, as noted at the half year, we have come through a testing period operationally. 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 Scholl. 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.
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-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% price mix. Price mix was stronger in infant nutrition, but still positive in RB base health. The 4% Q4 growth was influenced, in particular, by the two factors we highlighted with the half one and Q3 numbers.
The supply of and demand for our infant nutrition products in China, following the supply disruption in Q3. Of course, the strength of the flu season. The IFCN business grew at 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 unable to satisfy all consumer demand due to empty shelves in a number of areas. Andy will cover this in more detail in a moment. Growth in the OTC segment was 2% lower than in recent quarters.
The 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 U.S. We saw a slightly lower incidence of flu than last year across much of North America and Europe until mid-December, then a significant double-digit % year-on-year reduction in the second half of December in the U.S., lapping a strong prior year. Mucinex revenue declined slightly in Q4 year-on-year. Nurofen 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 U.S. and also in China, where we are building Move Free as a predominantly online brand. Turning 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.
Nurofen 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 base brands was diluted by the flat performance of infant nutrition in China. We saw good growth in all the big markets, India, China base 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. We have set out here a quantification for the full year of each of the moving parts of margin, which we described in February and 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 arithmetical 160 basis points effect of consolidating the lower operating margin Mead Johnson business. This was clearly zero in half 2. Secondly, a 180 basis 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 RB 2.0 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. 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 Q3. 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 £103 million in half two for a total of GBP 178 million to the end of 2018, cumulatively, that is. This was ahead of our expectations on timing. We are still on track for $300 million in total, and therefore have a lower tailwind from synergies to come in 2019. What does all this mean for our expectations of health margin in 2019 and beyond? We expect the bulk of the remaining £45 million MJN cost synergies to be delivered in 2019. We were close to the expected ongoing run rate for the additional RB 2.0 costs by year end, 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 to deliver both resilience and growth. We consider the 2018 health trading margin to be at a balanced and sustainable level. Turning to the Hygiene Home business unit, on the next slide, Rob, who runs this business, will give you more color in a moment. 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%-3% expected medium-term growth. Europe remains a particularly tough market at present, and it is our largest geographical market in Hygiene Home. With the sharper RB 2.0 focus and a good stream of innovation, we reversed the share decline of the previous years during 2018.
Still, an underlying cadence of around 3% in the HyHo business at present, therefore. You can see here a reported 4% growth rate in Q4, the same rate as for the other three 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 cyberattack. The Q4 growth rate comprised 1% volume and 3% price mix. The stronger price environment, which we saw in Q3, has continued, though Europe continued to be tough. Growth was broad-based across the brand portfolio. The five largest brands, Finish, Air Wick, Lysol, Vanish, and Harpic, all grew. 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% 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 two largest markets for HyHo, Brazil and India, both performing really well. Turning to the next slide, we have set out here 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 RB 2.0 changes. 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&A spend broadly flat as a proportion of revenue. On the next slide, further on the Hygiene Home margins. 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 RB 2.0 operating costs net of synergies and 120 basis points reinvestment in the business.
We see this adjustment as essentially done and the 2018 margin to be at a balanced and sustainable level. Turning back to the group from the business units, on this next slide, the margins for the group as a whole. I 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 RB 2.0 cost than we had expected, a combined benefit of around 60 basis points.
This benefit has been offset by some costs associated with the IFCN and supply disruption, 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 the further MJN cost synergies and RB 2.0 spend to be broadly equal, 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. On 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 that it is the balanced, sustainable margin in the medium term. No decrease in margin, experienced or expected, continued RB energy and focus on spending efficiently, and sensible investment in new capabilities. Turning then from P&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 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, 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 RB 2.0, which reduced conversion by 9%, and the signaled increase in capital spend, which reduced conversion by 6%. Capital expenditure increased to 3.3% of revenue in the year, in line with guidance given. The historic rate of 2%-2.5% in base RB is reflected in the depreciation charge. We expect capital expenditure to continue at around 3%-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 GBP 0.3 billion in half two.
The GBP 1.1 billion of free cash flow generation was offset by GBP 0.5 billion for the interim dividend and GBP 0.3 billion of adverse currency movements. We have set out an analysis of the movement in net debt in the appendices. Turning to the last slide in this financial part of the presentation, and a few words on the progress of RB 2.0. This slide you're seeing here was actually taken from last July's presentation. The program that we described then in some detail, and is reflected here in this summary slide, at the half year is fully on track. The seven work streams we described, and indeed are shown here, are moving very fast. We're 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-2020. With that, I'll hand back to Rakesh to cover our 2019 targets.
Thank you, Adrian. 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%-4%. As Adrian has already mentioned, do not expect this band to be true in every quarter of the year. We have taken into consideration everything that has been said so far in the setting of these targets. That's on top line growth rate, and on operating margins, we expect 2019 to be flat operating margins, to maintain our operating margins. With that, before I take Q&As at the end, I wanted to invite Adi to come and speak about the Health business unit.
Thanks, Rakesh. Good morning. That's a tough act to follow after Adrian. My name is Adi Sehgal, 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., U.K. I've had experience in developing markets, and Europe. All of these markets have had an impact on who I am. All of these markets shaped me. They taught me. No market was as transformational for me as China.
I spent seven years in China between 2008 and 2015. That really made a difference in 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 a global category organization for healthcare and also of running Mead Johnson after we acquired it till the point where it was integrated into RB Health. I'm excited to share my perspective on RB Health in 2018, 2019, and also beyond. 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. The mission of RB Health is to create innovative solutions to put health in your hands.
If you think of the world of today, we live in a multipolar world. We have markets like the U.S., where 20% of the GDP of the country goes into healthcare expenditure. In the U.K. as well, there's a very high level of expenditure on the NHS. If we think about other markets on the extreme, you think about Africa, you think about India, you also have markets which are at 1% of GDP, sometimes even less. There is this huge diversity. We also live in a world where the pressures on these healthcare systems are becoming more and more acute. More of us are living longer. As we live longer, our needs of healthcare 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 parts of the world. We also live in discontinuous times in terms of technology, there is a lot of progress in technology that is coming up, which enable people to take care of themselves, self-care, and also, where appropriate, self-cure. That's why RB 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 total healthcare industry in the world, including insurance and so on, it's over GBP 7 trillion. We know that more and more procedures and more and more of this is moving towards self-care. If 2% of this GBP 7 trillion were to move over through innovative solutions into the area of self-care or self-cure, the OTC industry at GBP 100 billion would more than double.
There is a massive commercial opportunity here. The beautiful thing that makes us unique is when we do good, we also do well. When we do well, we also do good. That is something that's quite unique about how we are seeing the world of tomorrow. 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. You're talking about lifetime values that become extremely significant when driven across a whole portfolio, across a whole lifetime.
RB has a consumer-centric vision of health, this gives us a tremendous amount of space to expand. While we have been deliberately building this portfolio and organization for 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 RB 2.0, we built the RB Health organization, we integrated Mead Johnson, we have now created the platform that is going to lead us from performance to outperformance in future. We announced RB 2.0 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 the two business units in RB, 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 25,000 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. 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. 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 IFCN in China as well. I'm going to show you this in a later chart, 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 Scholl. In the second half, as Adrian explained, we had slow market growth and a weak flu season in Europe. This was further impacted with gradual de-stocking 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. There is a lot of work to be done in Europe. 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. First of all, VMS, vitamins, had a very strong season, both in the U.S. and also in China. This delivered a double-digit growth. In IFCN, our Enfamil brand performed very strongly. 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. Between them, VMS 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. 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 who have now integrated with the business. They are really very talented. RB 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. The team has always been very passionate about doing good in the world. Mead Johnson's purpose was to nourish the world's children for the best start in life.
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, thereby turbocharging the speed of that mission, thereby doing some good to the world. Mead Johnson also helped bring even more strength to our scientific, medical, clinical, and quality practices. These are very important as we go forward to become the leading consumer healthcare 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 first six months till we integrated it.
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 am going to show you that in a minute. In the midterm, we do expect a 3%-5% market growth globally, and we do expect to perform at the top end of this market. As you have heard, we delivered our synergy savings ahead of plan. As you will see, you may have seen with some innovation that we have announced and also with innovation that will come through in the succeeding quarters, that we have more than doubled the innovation pipeline for Mead Johnson. 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 nine quarters. After we acquired Mead Johnson, the first quarter, it grew 1%, then it grew 3%, 6%, 9%. We were hit by a supply disruption and had a minus 6, which was not very nice. In the last quarter, we bounced back with a plus 5, even though we still had some supply shortages in China. 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 the world, the U.S.A., China, Southeast Asia, and LATAM, all grew in a year for Mead Johnson. This has not happened for a very long time in that company.
Even in the past when the growth was coming, a lot of it may have been driven by one region or the other, but I am really proud of how this has come through across the regions. You can see the blip there in the IFCN 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. The outlook for China. In China, we expect mid-single-digit growth. We know that births are declining. After the big increase, after the one-child policy was relaxed, there was a bump, and that started to come down, and there is 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.
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. There remain very large pockets of opportunity in China, and for us, our key priority is to focus on and win these opportunities. To do that, we want to apply the RB DNA 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 Derrimut in Australia coming on stream. We have set up a dedicated e-commerce business applying RB learnings, and I will show you some of these learnings later. 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 have entered into a whole series of partnerships. Some of these are with technology companies like JD.com 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. 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 remains a fragmented market, and even as growth slows down, there is lots of opportunity.
To summarize, our organization is in place. We integrated Mead Johnson, RB is ready to unleash the magic of innovation and performance management. 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 am 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 will find that RB is unique. Normally, they sound very much like each other, but RB's does not. That is because RB is the only company that has innovation in its mission statement. Check it out.
It's completely missing in the mission statement DNA of many of our peers. I'm going to talk about how we designed RB 2.0 to bring innovation even more to our core. We made major investments in capability. To name a few, we talked about over GBP 100 million invested in our new R&D center in the U.K., which comes alive in middle 2019. We've more than tripled our clinical spend. We've doubled our external partnerships, and we've re-engineered 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.
The way to engage with outside partners is very important going forward, and we've really worked on that in RB 2.0. 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 RB 2.0 is to equip ourselves to compete on equal footing in that world. We've created six new local innovation centers in the U.S.A., in U.K., India, China, and Mexico. These innovation centers are focused on our local hero equities, which are very iconic in their local markets, and also on taking our power brands and really using local insights to turbocharge some of this. I'm going to show you some examples.
When we designed our structure in RB 2.0, 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. 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. You saw our portfolio earlier. Oops. Yeah. 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 Neuriva. I'd just like to show you a little video that explains what Neuriva 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. What if that mind were a little sharper? A little faster on the draw? What if you could get that in an all-natural pill? See where we're going with this? The brain health segment is exploding, but no true market leader has emerged as the science wasn't there until now. Say hello to Neuriva. From the Greek word for brain and the Latin word for life, Neuriva is a new brain supplement clinically proven to help all brains brain better. Clinically proven, that's the difference. Neuriva combines the best of science and nature to deliver results no one else has. The secret? NeuroFactor, a coffee berry extract proven to increase the neuroprotein BDNF, which is critical for promoting focus, accuracy, concentration, you know, brain stuff.
Neuriva is more than a supplement. 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 how Neuriva helps all brains be the best they can be. You know what brains love? Summaries. Let's sum it up. Nature made it, science proved it, brains love it. Introducing Neuriva. Get ready to brain better in April 2019.
Like I said, this is not just a product, it's a full suite of solutions. There is a bunch of products, but there also are apps, there are training programs. There are all kinds of things with this launch. Neuriva is the first brand that offers a holistic ecosystem that supports brain performance and is clinically proven with two natural ingredients that help improve focus, accuracy, memory, learning, and concentration, which are the five indicators of healthy brain performance. As Rakesh said, there are some samples of Neuriva in your goodie bags, and I hope you enjoy them. Coming on to Enfamil. We launched NeuroPro last year, and NeuroPro is the first formula that has a breakthrough MFGM, milk fat globule 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 of the formula with MFGM 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. Dettol 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 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 germ kill and efficacy and protection that Dettol is known for. It's not just that. We've also been working very hard on products that are great for consumers and also great for the environment. We are just about to launch a new wipe, a new Dettol multi-surface wipe, which is made from 100% biodegradable plant fibers, and these wipes will kill 99.9% of bacteria, and they are plastic-free. Moving on to Durex. We started a global multi-year partnership with and with celebrities like Zara Larsson and with Bono to fight for safe sex and an HIV-free generation. This is accompanied by a lot of work that we're doing on the ground in places like South Africa.
This campaign includes specific products with money that goes to , massive on-ground activation and social campaigns. This campaign, in the last three months alone, has been seen by more than one billion people. It's massive. On Scholl. Over the last couple of years, this has been a big talking point, both outside the company as well as you can imagine, inside the company as well. We have worked very hard on Scholl to restructure our innovation and portfolio away from the instant gratification of devices, more into the core area of Scholl, which is providing therapeutic problem solution benefits for people who have issues with their feet. 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 removes the source of fungus and works in a week. We are also launching an athlete's foot cream, which actually gets rid of the issue and the itchiness in a week. Last year, Rakesh had shown you the launch of the Nurofen plaster. This is indeed a 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. There is a massive opportunity here for helping people and treatment. This is the world's first clinically proven 24-hour patch, which is based on ibuprofen. The great thing about it is not just the 24 hours, but how it is designed because it stays where you put it for 24 hours, and that is 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 U.K., Ireland, and Belgium. It has done better than we expected. In fact, 3x better than we expected, 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 have worked on VMS and really made a difference in VMS since the acquisition. 2018 was another year of double-digit growth. In China, Move Free was now the number 2 brand on Alibaba on the 11/11 festival, which for those of you who know it, is the biggest shopping festival in the world. Fantastic results there. We are now launching 7 new SKUs in the U.S. 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. You can see some examples there. There is a brand called Lemsip, which some of you will know in the U.K. There is a launch called Lemlift, which works off Lemsip. As you can see, there is lots and lots of innovation. I am 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 do not say we are about innovative products only. We say we are about innovative solutions.
The next solution I am going to show you is the result of a special partnership.
I'm overwhelmed by thinking about the cost.
I don't even always have the time to even take the time off.
As the most trusted health information brand, our participation in the initiative will drive improved access to healthcare 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.
Working with partners like Walmart, Google, WebMD, and the Live Better Alliance to bring Health for All to all of America. This is very core to what I said our mission is, which is innovative solutions to put health in people's hands. This is all about how we put health in their hands. It is a major program that helps us to serve people with products and solutions that help them to take care of themselves better. We talked a little bit about innovative solutions, and now I am going to talk about how RB 2.0 is designed to put these innovations in consumers' hands. Today, consumers' hands are in many places. If you actually go into the subway in the U.K. now, you will find that about 90% of hands are holding a mobile phone.
Mobile phones are used for many things, but more and more even in a place like the U.K. for shopping. Now, if you go back four or five years, when I moved from China to the U.K., I used to be quite surprised because I used to go into these trains and about 60% of people still had newspapers. 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. Today when you go to China, what surprises me, you go to a subway in China, 60% of people do not have one mobile phone, they have two mobile phones. It is just crazy how that economy is transforming and in my opinion, is leading the world in what is happening in digital and e-commerce.
I was super fortunate to be in China at a time when it all happened and it all exploded, and to learn from China. 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 continued 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 is closer to 60% e-commerce already. We achieved this, as you can see, steadily year on year, and we now have an eight or nine-year experience curve on how to do this in China.
We took these learnings from China as we designed RB 2.0, and we built them into how we were looking at creating the RB 2.0 model. The first thing we learned in China is that e-commerce 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 two 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 do not have a choice to do it like you used to sequentially. You have to do it in parallel. We have all kinds of channels and models, things that you have not heard about.
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, S2B2C. 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. Based on these learnings from China, last year, we built a global organization 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 and 2019, from just over 300 to over 1,000 full-time people only on e-commerce. Building on the success of our U.S. 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. One of the rules we learned in China is no market is an exception. We also learned no brand is an exception. We went to every market in the world, and we built deep partnerships with the key e-commerce players. We have these partnerships ranging from Argentina and Colombia to China and the U.S. to Pakistan and Bangladesh. In every market, we have an ambition, we have an organization, and we have the partnerships.
These partnerships are really important because between these partnerships and these models, we have a very broad-based multi-channel 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. In 11/11 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 11/11 across all of Southeast Asia.
Clearly, it's a model that was born in China, has clearly been very successful for us in China, but we've found a way, and we are finding more and more ways to take these learnings and actually make it successful everywhere else. I have found that the RB values and the DNA of ownership, entrepreneurship, partnership are key in e-commerce, and agility that RB has, is a major advantage. 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, we are really poised to scale on e-commerce. I talked about sustainable growth, I talked about how RB 2.0 has set us up so that we can deliver and drive sustainable growth. For a great company, I am sure you will agree with this, it is not enough to have sustainable growth, we need to have sustainable margins as well. There's been a lot of talk and discussions about our margins and the sustainability of those margins. Today, I'm going to explain to you exactly why our margins are sustainable. Let's first take a look at our operating margin. Essentially, we have a best-in-class operating margin compared to our peers. This really comes from a higher gross margin than our peers.
This gross margin that we have is the central reason for our strong operating margin performance. Of course, we have tight operations, of course, we try and manage our costs. 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, we are one of the top 10 investors in media in the world. That is something that most people do not understand about RB, how a company of GBP 12 odd billion can be a top 10 media investor in the world on TV and also on digital.
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, we try and spend the money where it makes the most difference. Why is our gross margin so high? 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 have the right segment mix. We offer superior value, we are driven by innovation. Like I told you, we are the only company who has innovation right there in its DNA, this innovation is a key driver of margin-accretive innovation. Now I'm going to explain these one by one. Let's start with the right category mix.
We already know that consumer health has higher margins than most categories, RB has a higher exposure to consumer health than our peers. If you think about segment mix, we operate in a category where the key currency is actually trust. This is something which you are consuming for your health, you are giving to your child for their health. It's very important that you trust the brand, you trust the product, it's very important that the brand never breaks that trust, 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 healthcare products. If you buy a packet of Nurofen, you are going to spend a few GBP. 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. People want to make sure that they have the best products for their children, for their health. 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 two years has grown faster than the value end by 4x, four times as fast. Our categories are growing more in the premium end, and RB is disproportionately indexed towards the premium end of the category. Why is that? Why can RB play sustainably in a premium segment? Why can we maintain that 900 basis point of gap against the average on how much of our portfolio is premium? Part of the answer is premium brand equity.
Part of the answer is trust, which is built over years and years and years of hard work and promises delivered by the brand's performance. There's also something else. That is, we are premium. We are value. This sounds like a contradiction, right? This sounds like, how can you be premium? How can you have value? RB, for many years, another special thing about RB. Today I'm telling you all the special things one by one, but this is truly special. RB is a company that for many years has fought against the tyranny of the or. You can have growth or you can have margins. High growth or high margins. RB has always been, "No, no.
Let's find a way for growth and margins." When we are confronted with these challenges, the DNA in the company tries to find solutions for the virtuous and rather than the not virtuous or. 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? Let me give you some examples of how we see this. Let's start with an example of Gaviscon. Gaviscon is the one on the left here. You've got an ordinary antacid on the right. The way the ordinary antacid works is by neutralizing the pH of your stomach acid. That works quite well. The way Gaviscon Double Action works is by doing the same.
Then on top, what Gaviscon does is 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 with great secret sauce in how we make it, which actually floats on the top of your stomach acid. This means that you neutralize the acid, but it also stops any chance of it coming back into the esophagus. Gaviscon has two actions. It lasts for twice as long as the ordinary antacid. 2x mode of action, 2x duration, only 1.5x price. Therefore, great value, yet premium. Let me show you another example. Mucinex. One tab of Mucinex lasts for 12 hours.
That's the same as thrice the duration of relief with the liquid syrup, four-hour syrups that people used to take. Here you're talking about 3x the duration at 1.6x the price. Again, great value, yet premium. Give you one more. If you look at Nurofen and this is NuroMol. NuroMol is a unique product because it has ibuprofen and paracetamol together in a unique combination. You can see the pain relief outcomes on that chart. You can see that NuroMol outperforms two tablets of paracetamol and also two standard ibuprofen tablets. When you look at the benefit, essentially we've got 2x the active ingredients. It's 1.7x the price of a standard ibuprofen plus paracetamol. Again, great value, yet premium. This idea of great value yet premium is something that we've driven again and again through innovation.
We try and ensure each of our innovations is great value, yet premium. Let me show you some examples on Nurofen. You saw this chart, a chart similar to this earlier on Mucinex from Rakesh. I'm sure you've seen this chart 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. As I showed you earlier, each innovation adds value and functionality, it is premium-led, yet great value. Another way of looking at the chart is this. We started with basic Nurofen at GBP 0.17 a dose. We launched Nurofen Express, which worked twice as fast. Sorry. The price was not double. The price was GBP 0.26 per dose.
We then launched 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? This one was now priced at GBP 0.54. This is not just in one category. RB DNA drives these kinds of innovation programs that drive this premium yet value outcome in category, after category, after category. This is something that is not only new from RB 2.0. 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 these translate to our operating margin. 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. 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. Between 2018 and 2019, the first two years of RB 2.0, we are investing over GBP 100 million in R&D, innovation centers, clinical supply resilience, quality, safety, and systems. As I told you before, our RB DNA makes sure we run a tight ship, always focus on ROI and ways of making our money stretch further. 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. RB 2.0 has set us up for sustainable growth by driving our 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 focused 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 healthcare season is starting, Adrian. That's very good. There's also something else that I learned, actually. I just realized that Rakesh has announced that it's 32 years that he has worked for RB, then Adrian stands up and he says like his 25 years. Then I start to realize that it's actually three decades ago that I joined this company. Wow, I see all of you looking right now like that cannot be true, but it was actually true. 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 why would you care about time if you have so much joy in what you do every day?
With this group of people that, part is also in the audience and at this table and back home, if you want, is really fun. Also if you look at the brands that Adrian presented and that I'm also going to tell you about in a second, I think you can understand a little bit the excitement. The real reason for being 30 years with this company is change. I think the agility of change that this company has is absolutely amazing. Every three to four 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. It keeps you new and gives you re-energy, if that's an English word, of how you look at a business. That's what RB 2.0 is about.
RB 2.0 is not about splitting the business. RB 2.0 is really about outperformance in the end. It's about outperforming in health and I think Adrian did a wonderful selection of presentation of conveying that to you. I'm going to try to do exactly the same for Hygiene Home or HyHo in our own language. 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. Third, performance. 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. I'm going to start with the brands.
The beauty of this portfolio is that it is extremely focused. It is seven brands that actually make 80% of the net revenue. Seven brands. How many companies have seven brands that do 80% of your portfolio? These brands are the historical brands. They have a long history of technology and bringing better solutions to consumers. They're also number one or number two in the world. You can see these brands on the page, Vanish, Finish, Air Wick, in case you had forgotten about them. Harpic, Lysol, Mortein, and Veja, which is a brand that is largely in Brazil. 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. This is for all brands.
I'm going to demonstrate this a little bit to you. I do this on 3 categories. I start with the first country, which is the U.K. Now in the U.K., the penetration of detergents, laundry detergents is obviously quite high. 91% of consumers are buying every year, laundry detergent. Fabric treatment, where Vanish competes, it has a penetration of 45%. If I go to auto dish or I go to hand dish, hand dish is bought in 86% of the occasions. In the U.K., one out of two consumers does not have a dishwasher. Now project yourself 50 years ahead from now. Do you still think that people are going to do the dishes 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.
You don't only have to compare hand dish between and machine dish. You can also go within a category. Take a category like hair care. Hair care, the aerosol that everybody will have in the bathroom, has a high penetration. Yet captive systems like Freshmatic or like oils, electrical oils, have a much lower penetration. 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 U.K., which is obviously a developed market. Or is it a developed market? This is a debate that we have continuously. Is Europe a developing market or a developed market? Because actually the penetration potential is also in Europe. It's not just in developing markets. Obviously, in developing markets, it's super clear that there's more potential to be had. Fabric treatment, penetration 30%, detergent 100%.
Auto dish was only 3% penetration, hand dish is 95%, and captive systems have not yet been developed. Brazilians love fragrance. India, one of our top markets, you can see the penetration potential of the categories of the future. The beauty of this potential is that it's coming towards us. It's coming towards us because you have a rise of the middle class. Once disposable income goes up, categories develop. This is an example of what we call an S-curve, of what happens to fabric treatment. 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. You move up to laundry powder.
You realize that the stains don't go out, you use another product that you have in the household on top, which is bleach. You realize that there's actually a better solution as well, which is not only bleaching, but is also safe to use for your clothes, and you trade up to fabric treatments. This whole movement of when disposable income goes up, our categories develop. With a growing middle class is actually the result 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. That also results 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 two business units and the principles of the business are very valid. Also here you see that the premium segment is growing much faster than value. The over-representation that we have in the premium segment on Hygiene Home is even more than what we saw on the healthcare part. 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. 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.
They actually work on your neural systems, and they therefore can determine if your mood is going to be on the relaxing side or on 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. The margin difference between Vanish fabric treatment and our laundry detergent powder is more than 2,000 basis points. The difference between Finish mono-dose and our hand dish is more than 2,000 basis points. 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 2,000 basis points. Where you play, which categories, which segments, which innovations decide about the margin.
Therefore, we are very selective in deciding where we play and how we play. Once we play, we actually play very hard. You can see the results here. These are our share positions in the markets where we operate. There's still many markets where we do not operate, and we're going to talk about that in a second. Once we operate, these are the share positions that we have. 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 two other factors. One, innovations. Innovations is not just to drive growth. Innovations is also so crucial for the Earn X model. One, 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. I have here a little P&L model, it's obviously not my desire to lecture you on how a P&L works and where growth starts and where it should be driven, because you know much better. I want to highlight this gross margin part, because this gross margin part is something that is not only you that know this, but it's also very much inside the company. It's quite unique. It's not unique for people that you see today, but it's quite unique for key accountants or for brand managers or for supply people to understand that the P&L starts with gross margin. Even more so that they know how they can actually impact the gross margin in a P&L. That's quite unique.
The debates that we have, they don't start at the top line, they start at the margin. They start at 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 six out of the seven power brands that I showed earlier, they also had profitable growth. It's something that is not just in one area present, it is across the whole company. That then leads to the operating margin, which is also far superior to the relative peers. Here, what we took is the parts of the peers that is operating in home care or hygiene products.
When we got together as a leadership team for HyHo, about 18 months ago, we said, "Okay, there's all this potential, there's these high growth, high margin categories, it's been a very successful strategy, there's massive potential yet. What are we going to do differently?" The one thing that came out of it very quickly is purpose. We have a beautiful company purpose, which is healthier lives and happier homes. Does that mean we are the happier homes part of it? How can we make that a bit more clear to our key stakeholders, our consumers, our employees, also our shareholders? Therefore, we started working on a vision. A vision that supports that purpose, that company purpose. This is that vision, is create a cleaner world.
I hear you think that also create a cleaner world is kind of a nice marketing sentence. You're right. You're actually right. It comes only to life once you really understand the three missions that are underneath on this page. 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, which is about the products. In these years that we were so focused, RB 1.0, on driving our consumer health credentials, and I was part of it. I've been super proud of it, running Europe and North America for the RB 1.0. In those five years, maybe we lost a little bit the shine ourselves and the pride on these products.
The number one thing that I wanted 18 months ago for this business unit, to be very clear, is that our products are so superior, and the solutions that we drive, they need to be superior. That's the heart of everything in fast-moving consumer goods. Maybe this obsession comes out of dishwasher. I'm sure that you all have this moment when you open a dishwasher, and you have that brilliant result 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 one little spot, you will not drink from it. This obsession for perfection in the products that we have is coming out of these type of categories, or Lysol.
The way that we study germs and how they travel over the world and from animals into humans is absolutely amazing. It's been built over decades. It actually helps us identify what is the flu virus that is hitting the world, and in particular, the U.S. 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. It's eliminating dirt, pest, germs, odors that impact your health and your happiness. If you have this beautiful product portfolio, what else can you do with that? That brings me to the second mission, which is to accelerate the hygiene foundations across the world. Our brands can mean so much more. I give you an example. Harpic.
Harpic is our toilet cleaning brand, and is the leading toilet cleaning brand in India. What we have created there is something that goes far beyond just cleaning toilets. Did you realize that one out of three consumers in the world do not have access to a toilet? One out of three. Now, I know we've been busy for quite some time already, but realize that there's no toilet. That obviously leads to things like open defecation, but not only that, because it's obviously quite embarrassing, in particular for women. Women go early in the morning to do their open defecation. Men know that women are going in groups to do this while it's still dark. It leads to all kinds of other social problems, kids not going to school because they cannot contain themselves, and therefore leading to missing out school.
Just providing a toilet does so much for that economy. 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. We provide not only hygiene, but also dignity to that population. Now that's obviously also beautiful 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 we've done in India. We installed 80 million toilets in India, together with partners, with the government and with partners. Accelerating hygiene foundations. The third mission is about delivering sustainable outperformance. 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.
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. How we do that is obviously with innovative solutions, and we want to bring them to one out of three homes across the world. One more time, want to reiterate how we do this. For example, on Lysol, there's this powerful social cause, like we want to fight flu and stop people dying from flu. In 2018, 80,000 people died in the U.S.A. from flu. Not just elderly people, but also people that are young and teenagers. It's a very big social cause. Then the brand has this really as a mission and delivers superior solutions to make sure that the flu does not spread.
Brazil, a giant country by nature, striked by a tiny mosquito, the Aedes aegypti, the vector of several diseases all over the country. In the beginning, it was only dengue, the problem has evolved, today other viruses appeared. SBP got together with the London School of Hygiene & Tropical Medicine, the world's biggest specialist in infectious diseases, and with the Brazilian Red Cross, the world's biggest humanitarian organization. With their support, the brand developed the SBP 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. SBP's vision is to eradicate mosquito-borne diseases in Brazil by 2025. Let's go together against the mosquito.
Another example that we're super excited about to really stop diseases that are borne by mosquitoes, this is a Brazil example. You can see this purpose coming to life on multiple brands, Lysol, Harpic, SBP, across the world and taking a meaning social cause. What this does, it also engages very much the organization. The HyHo organization, we asked people like, "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 frontline?" Not going to talk too much to you about the way that we've organized ourselves, our Amsterdam headquarters is very, very small when it comes to people and also to surface. It's really about enabling at the frontline and making decisions at the frontline and being so insightful, as we said.
The organization is engaged about creating a cleaner world, it's not just the organization is engaged, also consumers are seeing this difference. On these two examples, in Harpic India, over the last two years, we've grown our penetration with 900 basis points. SBP in Brazil, behind this program, has gained more consumers in the franchise. While we do good, we create a business, while we create a business, we do good at the same time. I mean, that's at the heart of this purpose sign. 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. We're in the top tier of the industry of our peers right now with the 4% that we had in 2018.
I am also very happy that we are returned to consistent growth, 4, 4. And clearly has been versus weaker comparators the previous year, and there are some pluses and minuses in the base, but it is 4, 4. It is also broad-based growth. All areas have expanded their growth. Developing Markets went from a -4 to a +9. North America, from a flat to a +6. And Europe went from a -1 to a zero. And obviously Europe is still want to do better, but is also progress from -1 to zero. six out of the seven power brands are growing in market sales. And then what we have done is we have also defined country brand combinations, in total 40, and that is our pure focus. And out of those 40, we actually got 95% of the result.
95% of the 4% that you have seen is driven by these 40 country brands combination. The growth is also balanced when it comes to volume and price mix. You can see that for the full year, there is 3% volume growth, there is 1% pricing. Pricing accelerating both by real pricing and by the pickup of innovations in the second half, delivering the 4% on the consistent level. Then I want to talk about the growth drivers. There are three growth drivers, and the first two I combine. The first one is about e-commerce. Over the last two years, albeit this business less developed on the e-commerce, we have shown 60% growth in both years. It is less developed than the Health 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 is like 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. Where in 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 is 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 fish knows what it does. And that is a mentality that we really have in unlocking the Emerging Markets.
How we do that is one, is hyper targeting consumers. Today's technology really gives you that possibility that you can target very dedicated parts of the population. Like some of these innovation on this page, where we target specifically Indian top SAC consumers or unlocking complete new markets like China. I guess worth pointing out that there is 1% penetration on dishwash in China. Massive potential, and the digital platform enables us to put the full flats organization in that digital world, because we do not need to go to all the stores with 1% penetration. We are launching new brands therefore, like Finish, but also Vanish in China. We are 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 three years. In China, this is four times. It's four times, it's not three times as the call-out says. The last point is about innovation. Obviously, fast-moving consumer goods, this is the heart of fast-moving consumer goods, accelerating innovation. I'm pleased to inform you that in 2018, we have grown our innovation contribution by 50%. Big driver of the results are the innovations. That leads me to the end, which is to share a little bit with you the 2019 innovations. I 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 curves are moving up.
Let's start with China, where together with the partners, we are now seriously building the penetration of dishwash in China. There's also different machines. There's tabletops, there's Fotiles , which are like in-sink dishwashers, and there are different stains, and there's different cutlery and pots and pans going into the dishwasher. All of that expertise we've brought together, and therefore, together with our partners, we are launching a completely new powerful Finish tablet. There's Asia and Brazil, where in Brazil, surface care is very much about cocktailing in a bucket, and this is a pre-cocktail for Brazilian consumers. 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 Vanish 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. What we're doing now as consumers is we're washing at lower temperatures, which is very good, and we're not using a laundry detergent that has any bleach power. Here, Vanish kicks in. Now in your favorite form, which is the liquid, you also have the Oxy Action power to add to your laundry detergent. All your bleachable stains like coffee, tea, wine comes out. We're also serving new needs. New needs like consumers want to have absence of harshness. Absence of harsh ingredients.
Both the brands Vanish and Finish are launching a lineup of 0% unnecessary ingredients while they have 100% performance. Last, definitely not least, we're continuing our journey on the purpose. We're continuing the journey and to transform more communities on SBP in Brazil, to place more toilets into India. Actually, maybe in the next speech, we 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 these 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. Last, the performance culture of RB is really at play, which hopefully showed a little bit in the results that we had in 2018. Thank you.
All right. Before I invite the chairman, I just want to give you one simple message. RB 2.0 does not sit on PowerPoints. It sits in the passion and drive of our people, and I hope you all had some view of that. 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 day of financial performance and any other questions that you might have. Chris.
Well, thank you, Rakesh, and good morning, everybody. Delighted to have a chance to address this group and make a few remarks. 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. I haven't been given 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 RB 2.0, 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.
I'm referring, of course, to the planned retirement of our CEO, Rakesh. Those questions have been pretty broad-based, whether it be our investor community, whether it be the media, or many of you. 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. There are really three that stand out to me, and it starts with RB 2.0. 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 pretty universally is how about your margin structure? Clearly, you have premium margins.
Is it sustainable? Are we looking at a major margin reset once we get a new CEO? 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? What I want to do is touch on each of these fairly quickly just to give you the perspective of the board. 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. I want to add my voice and that of the board to both of those. Let's start with RB 2.0.
I would tell you that this has been a conversation going on between management, Rakesh in particular, and the board for the last two and a half years. 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 RB 2.0 a lot more effective. As these folks have articulated, we're now well underway to executing it. There's a lot more work to be done. We call it the plumbing. Certainly, by the middle of 2020, we would expect to have two separable businesses. I don't want to 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.
I think we're starting to see the results of that, and hopefully you saw it. Obviously, as we get to the end of the pipe, we see a chance with two separable businesses to have a lot more options strategically. That continues to be a priority for all of us. If there are any doubts about whether we're committed to RB 2.0, whether we're on the track that we're on, certainly from my perspective, nothing has changed and nothing is likely to change in the 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 cost, it talks to pricing, and ultimately it talks to consumer value.
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. At this point, we're very comfortable. I think we have a sustainable platform. We feel good about it. Going forward, I think they've got their focus on the top line, which is absolutely right. We think the margin structure is good and is sustainable. 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.
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. 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 Rakesh and some of the other talent. We clearly want a major consumer transformational leader. We're also highly sensitive to the culture of RB. Whoever we select ultimately will have to be able to nurture and develop and drive that culture. That is a key litmus test from our standpoint.
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, but I think these are probably the principal issues on the table. Yes.
How soon would you estimate that you'll be able to make a decision?
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 that covered. Anything else? All right. Well, thank you very much. Look, we'll be obviously keeping you posted as things evolve over the next few months. Meanwhile, let me turn it back to the management. Thanks a lot.
Right. Okay. Listen, we have about 25 minutes more to go. Would like to take questions right away. Yes, go ahead.
Thank you. It's Pinar from UBS. You've spent 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, thank you for that. I've noticed that you've dropped the medium-term guidance of moderate margin expansion from your press release. Today, there was very little mention of margin progression beyond 2019. Just to confirm, do you still see moderate margin expansion beyond 2019 for each of the business units? Or are you suggesting that flat margins are a more realistic assumption going forward? If it's the latter, what's driven the change in your medium-term thinking? Thank you.
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 2018, but also before, in building the right capabilities, in building the resilience, in building our brands and innovation. RB 2.0 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 RB 1.0 and Mead Johnson integrated. I can assure you, we would have had more margin expansion for a while. I would say that the fundamental reason I created RB 2.0 was to create a culture where RB continues to outperform.
Outperformance for us is driving the top line ahead of the markets. The fact of the matter is, that has not happened in the 18 months before that is what we are striving to. I think the first focus of RB 2.0 is to get that outperformance culture back. 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 2019, our guidances, our targets rather, I don't believe in guidance. Our targets are very specific anyway. I don't know whether there's anything more to add from you.
I'm sure.
Okay, cool. Richard.
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 GBP 50 million over and above what was done before. Secondly, what your guidance is implying for the investment in the business for 2019, again, we think it's a similar level. That's the first question. Secondly, obviously the Chinese birth rate hasn't quite gone the way you'd have all liked it to. I think I'm right in remembering that you were hoping it to be around 19 million in 2020. Clearly, 15.3 million leaves quite a big gap for 2018. Maybe you can talk around that a little bit, how you can still reach
Yeah
the model that you had before the acquisition with that lower birthrate.
Right. Okay. Listen, let me talk to the second one, 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 birthrates. I can assure you that. Neither could I control the Chinese birthrates. It was based on getting, I tried, but you know. So did Xi Jinping, I trust Xi Jinping, by the way. He is going to get it back. 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 channels, all the stuff that had to happen. That's why we targeted progressively from a minus culture to a 3-5, going towards the top end of 3-5. I believe we are on track.
I believe we are going to get there, it's not predicated on the Chinese birthrate. Even if the Chinese birthrate now bounce back after the Year of the Dog to the Year of the Pig, who can argue and who can judge? There's plenty of other drivers in place to help us achieve that kind of progression. That is what I would say. The model is on 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. 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.
On margins, Richard, I think your calculations are broadly correct. Just to repeat what we said earlier, we delivered the margin in 2018, we delivered the synergies faster and the RB 2.0 additional cost a little slower. The net effect of which was 50 or 60 basis points, not a million miles from your numbers. That was replaced by the investment in capacity and clinical trials and so on, as Rakesh was saying. Then as you look forward, we will have the tailwind next year from hopefully not having anything like the supply cost we had in Q3. Conversely, you've got year-on-year effects of those investments. You are, without giving precise numbers, your model or Zanet's model is probably pretty accurate.
Yes, Celine.
Celine Pannuti, J.P. Morgan. My first question is on consumer health. Thank you for an energizing presentation about innovation and digital, but still with the growth that you're doing, you're still underperforming your market. What it takes, how long does it take for you to go beyond the growth rate that you have done in 2018? That's my first question. My second question is on HyHo. 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. Does it mean that HyHo could face maybe a more difficult and challenging competitive, whatever year in 2019?
Right. Let me just add a very sharp perspective on each of these. I'm going to actually ask these guys to actually chip in. The first thing is our ambition with consumer health is absolutely fundamentally clear and intrinsic to RB 2.0. I think 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, should set trends rather than 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. Adrian said that the market is actually at the higher end of that growth.
That is one major reason. It's 50% of RB. You can see 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, clearly not where we want it to be. The other aspects, I would say a couple of other aspects. One has been a sure drag, particularly in the first half of the year. Secondly, Mucinex. I don't want to give all these reasons because they kill me, actually. I would rather not think about these reasons and leave it to my wonderful people to really show that we can and will, as we did indeed between 2011 and 2016, more of that success, outperform by a lot the consumer's expectation.
On Hygiene Home also, I have a point, too. I like to give it both to Adi and Rob to add their perspective.
Awesome.
Yeah. Like Rakesh said, what we've said is that we expect the consumer health market to grow 3%-5%, and we expect to be at the top end or indeed outperform that in the mid to long term. 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 in new roles. We've been working on ERPs in the backdrop. There's the integration of Mead Johnson. There are lots of things that we've been doing. Also we've been hit with things like the flu season. We've been hit with the issues we had in supply. Going forward, we expect that things will get better as we go forward, and we will start seeing outperformance.
It's still going to take time because organizations have to be built step by step, brick by brick. These are not immediate changes that happen, but we would expect ourselves or try to hold ourselves to a higher standard in the midterm.
For high-low, our view on the market is 2%-3%. Our ambition is to be at the upper end of that 2%-3% ratio. Obviously, we've shown a consistent 4%. 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. I also want to reiterate that if you look at our portfolio relative to some of the other players in the market, it's a quite unique portfolio. The overlap that we have in the business is not that great. Therefore, it's really what we are making out of this category rather than there's a competitor that is going to define very much what is happening to our results. Mike?
It's James Edwardes Jones from RBC. Two questions, if I may. The Q3 supply disruption, obviously that 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 has that been affected? Second, I guess for Adi and Rob, what benefit do the two 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 entity?
Do you want to take the first one maybe, Rob?
Yeah, sure. Okay. The IFCN. Yes, IFCN in China in particular. You're absolutely right. There have been two drivers unsurprisingly playing out through Q4 supply and demand. As I think you know from our explanation of what happened in the supply disruption, 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. We didn't magically come back from the end of that to have abundant supply. We reverted when we cut supply back to normal to still very tight supply. What's played out through Q4 is that we have been able to sell all the product we could make from, unsurprisingly, all the product we could make from the European factory into China.
The net result of that was a small increase in inventory in the channel only during quarter four. What also happened in quarter four was there was loss of consumer demand. There were shelves, at times over 25% of shelves, which did not have the Enfinitas product on the shelves. The result of that was obviously an immediate demand loss. The mother, at that point in time, went typically to another premium brand. 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. As we look through into the first couple of quarters of the coming year, you've heard a slightly cautious tone from Adi in terms of the progression through the first couple of quarters.
We still remain with that supply constraint out of Europe until the Australian plant is fully up and running. Even then, it's not a perfect switch for brands because of regulatory reasons, but it's coming and helping. Secondly, of course, we've got to win back those moms, the moms 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. Therefore, we are a little bit cautious, and we will not perform fully to the growth trajectory we were previously on in China in the first half. That's where we are. Beyond that, we still feel extremely confident. Back to you two guys. What you get from each other?
What 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. We should not forget that there's still many things that we do together. If I think about the logistic operation, the supply service part, 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. These are things that, of course, we have to consider.
Sharing of best practices.
Sharing best practices, learnings.
E-commerce
E-commerce, yeah.
Yes, cool. Yeah, Martin.
Thank you. I was just going to ask a question about cash flow. I guess you've talked a lot about growth and margins today, but the third leg of the value creation stool has always been cash generation. Just sort of pondering the implications of what's been said today, CapEx is going 3% to 3.5% of sales. Used to be two point something over the long run. Net working capital this year was you were investing. 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 free cash flow as a percent of adjusted net income was in the mid-80s, which is not where we expect it to be. The two things that bring it down from 100% are, as you highlighted, one is exceptional spend. Well, that's very much focused on the RB 2.0 cost and Mead Johnson integration. That will pass. We are obviously spending in line with that. 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, frankly, we've been quite open, a slight correction from what we learnt in the supply disruptions in 2017.
Obviously, that percentage will play into margin in time, because if you 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 all five of us, excuse me, with the Chairman, too, talk about the balance and sustainable nature of margins. Clearly, we have to make space for that to come in. Working capital, it's essentially flat. 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 into pushing that further. We have got benefits from Mead Johnson. Certainly, their own working capital levels, particularly in payables, have improved substantially. Essentially, it's broadly flat. It's not a drain.
One year to the next, it'll go slightly up and down, particularly when you look at year-end numbers. Average numbers, which is what we target, is essentially flat. You shouldn't look at that as a drain. Actually, of course, because when the company grows and you have a negative working capital, it's a slight tailwind. That's where we are. We remain highly cash generative. You've got those two very visible drags to 100%, frankly, they will both pass.
Okay, Harold first. Harold, go on.
Hi. Yeah, thank you. Harold Thompson. Just two questions, please. The first one is on, I think you used plumbing. In a way, I'm surprised how much change has taken place, that not more things have gone wrong. From a risk perspective, how far are we in the dangerous parts of the separation or integration, or however you want to call it? Therefore, the risk for plumbing issues to appear kind of reduces. I'm just thinking about the accident proneness here. 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. Is therefore RB 2.0 basically saying, we've just got too big and we've got to go back to the RB of 1999, smaller, nimbler, more independent, more decisions?
Is it more an organizational question where although you had the focus, it wasn't clearly identified enough for it to work? Is it just trying to create two small companies, a bit like you were in 1999, and off we go again? 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 equivalent of a small business?
Right.
Slightly confusing.
I understand. It's a bit complex, the question itself. The answer will be maybe very simple. I think it's all of the above, actually. Which is we wanted to create a nimbler organization. We wanted to create more focus. 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. Actually creating a focus competitive set, too, makes a big difference. 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 meet a general manager, he gives me a presentation over two days maybe.
The fact is, by the time you finish the first three, it's difficult to pin it down to. I think now we don't have that issue. We have people who are accountable for, if I go to the U.S., for example, big market, accountable for Lysol, Air Wick and Finish, just to take three names. Not losing it to Mucinex and Nurofen. I was very concerned that as we brought Nurofen, Nutramigen, the new baby to be figurative and literal, we will get all the excitement and passion, we will still go back on some of the things that we still need to do. There were all these ideas. Therefore, your question is important, but it's all of the above. Right, you wanted something about-
On the plumbing, yeah
plumbing.
Yes. Well, first of all, you're right, there's lots of plumbing going on. Indeed, we're at peak speed at the moment. If that sort of mixes metaphor, but there's peak speed in terms of this program. There is risk. There's no question. We are dealing with very fundamental aspects of how the company works and the whole seven work streams you saw. There's no doubt about that. A big program going at great speed. It's going extremely well, and the reason it's going extremely well is, A, we 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's trying to do. There is very deep commitment from these two gentlemen and their teams.
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. As a team, we have got the energy of the company behind it, therefore when things do begin to go a little bit awry, as everything does in a program this scale, the pressures come to put it back. It is very central and very important to the company that we deliver this by mid-2020, therefore it is on track. It is going okay.
Celine?
Two follow-up question, one strategic. In consumer health, you said that it was a category with big competitors and two of your competitors are getting together and getting bigger. That's Pfizer and GSK. Does that mean that in terms of the size you are, what does it mean for You were looking at Pfizer, you said that publicly last year. Does that basically put you in a corner? How do you think that consumer health stands versus bigger peers? My second question is a bit more short-term in nature. You said that Q1 and Q2 will be a bit slower, if I understood properly, because of consumer health. Should we expect that they would be in the not 3%-4% bracket? Does that mean as well there is any timing or difference in terms of margin H1 versus H2?
Right. Celine, let me take the second one first. When we give a narrow range, like 3%-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. I don't want to go quarter by quarter because that's not something I've done, and I don't want to do it in my last year. You should say everything has been baked in the full-year target that we've set of 3% to 4%. After that, we've given you enough indications of where we see what is happening now with cold and flu and stocking and infant nutrition, you heard something, but also the soft comps in Q3 and so on. All of that should be baked into, and it has been baked into 3%-4%.
In terms of margin guidance, again, I don't think we should be too worried about the margin between first half, second half. I think in the grand scheme of things, we are very confident about our margin guidance of flat margins, and I wouldn't ask you to worry too much about 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 about competition. I don't think the interface between the competitor that you talked about, and RB is very high. If you think about the categories and markets and say, "How much do we interface with each other?" The answer would be very little.
I think the answer is down to the fact that we are still living in a consumer health market where the largest companies are GBP 8 billion, GBP 10 billion, and they are, by the very nature of the fragmentation in the market, the interfaces are very small. Okay? Yeah, let's go.
Rosie Edwards from Berenberg. Just two quick questions. The launch of Neuriva, I am not sure whether you said geographically where that is. I am assuming U.S. initially?
Yeah.
Okay. 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, if we can establish a very strong presence, that would be a very good start.
Secondly, just on Mucinex, 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 two 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 two spoonfuls, you can take one tablet and be done with this. That is the reason why Mucinex has such a phenomenal rating from consumers on how it works. It's got one of the best consumer satisfaction ratings of them all. One task that we have is to basically convince people that we are so much better than taking three times, four, two teaspoons full a day. Of course, we have this competitor.
We model all that, and I have to say that it is actually really very much on predictive grounds. Therefore, we feel very comfortable as we go into 2019 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 that one, and then maybe, Richard, are you okay? Yeah, last one. Cool.
Hi, Fred Lave . Just on the OTC, you're talking about the private label competition, Mucinex. Are you seeing any other private label impact in any of the other areas you have in OTC? That's the first question. 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. I don't think there's any material, we called out Mucinex 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 Mucinex because that fact will go away from a 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 multi-channel world where multiple people are innovating on new models and new solutions. 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 U.S.? People would say, any guesses? Fortnite. The answer is something called TikTok. If you look at the last eight months, six months, the number one downloaded app is something called TikTok. It's from a company called ByteDance in China. We've been working with ByteDance in China for the last year, trying to find models that are viral on video.
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 U.S. who are leading the field. The answer here is small teams, which are massively parallel processing and bringing the learnings back. 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.