Hello and welcome to Reckitt's Q1 2022 results call. My name is Lauren, and I will be coordinating your call today. There'll be an opportunity for questions at the end of the presentation. If you would like to ask a question, please press star followed by 1 on your telephone keypad. I will now hand you over to your host, Richard Joyce, Investor Relations Director to begin. Richard, please go ahead.
Thanks, Lauren. Good morning, everyone, and welcome to Reckitt's Q1 trading update. We will, we'll follow the usual protocol by starting with some prepared remarks, and then we'll follow with some Q&A. Without any further ado, I'll hand over to our CEO, Laxman Narasimhan.
Thank you, Richard, and good morning to everyone dialled in. Welcome to our Q1 trading update. I will say a few prepared remarks, and then Jeff and I will be happy to take your questions. This is a trading update only, so I will keep the comments brief. We have started the year with strong momentum across all of our GBUs, delivering 5.6% like-for-like growth in the quarter. While we performed better than our ingoing expectations, the drivers of our performance were as expected. The performance of our brands less impacted by COVID grew high single digits. Excluding the positive impact of the infant formula business in the U.S., these brands continued to grow at mid-single digits. Health delivered a very strong performance led by our OTC business and our Intimate Wellness portfolio. Growth was price led, but with good underlying volumes.
Our price mix was +5.3% and volume was +0.3%. Excluding the Lysol volume decline and the positive benefit from the US IFCN business, volumes for the group grew by around 7%. Our market share performance on the whole continues to show strong momentum with 76% of our core category market units gaining or holding share. I will quickly walk you through some of the highlights of each of our global business units. In hygiene, we declined -9% on a like-for-like basis due to our tough comparators, where we saw 28% like-for-like growth in Q1 last year. The underlying performance was strong, however, with growth of around 4% if we exclude Lysol. Growth was broad-based across our brands, driven by a combination of innovation such as our Finish Quantum product and penetration-building initiatives, particularly in Harpic.
Lysol declined by around 30% in the quarter. This is fully in line with our expectations as we lap a 17% growth comparator in Q1 last year, which was our peak quarter. Revenue in the quarter was 75% above pre-COVID levels as we continue to grow share in our core disinfection spray business and broaden the shoulders of Lysol through our recently launched laundry sanitizer business and entry into a number of newer markets. In health, we delivered a very strong performance of just over 20% like-for-like growth in the quarter. This was led by our OTC brands, which grew by over 60%. I'm very pleased to say that all of our core OTC brands grew market share in the quarter.
This, combined with the cold and flu season, which lapped a weak comparator, plus some benefit from Omicron, meant that Mucinex, Strepsils, and Nurofen all delivered outstanding growth in the quarter. Our Intimate Wellness portfolio grew high single digits. In India, we continue to drive increased distribution, and we also saw good growth in China behind our latest polyurethane innovation. Dettol continues to sell significantly above pre-pandemic levels. The result this quarter is well within our expectations, and with improving market share trends, shifts in distribution, and a strong H2 innovation pipeline, we are on track to deliver low single-digit growth for the year as initially targeted. I am pleased to see some strong mid-teens growth in our VMS portfolio as we make further progress in China with both Move Free and our Neuriva cognitive health brand.
Our brands are doing extremely well digitally as we see strong sell-out through e-commerce. In nutrition, we had an outstanding quarter with broad-based growth across all geographies. Latin America and ASEAN both grew mid-single digits as our focus on improving execution and further growing our specialty and adult segments gained traction. In the US, we delivered growth of over 30%. The team in the US has done an exceptional job in some very unfortunate circumstances. We will continue to work with our suppliers and customers to manufacture and provide as much product as possible until these temporary competitive supply issues are resolved in the coming months. Our expectations are the market conditions will normalize in the coming months. Our performance in e-commerce was strong, with double-digit growth in the quarter. E-commerce now represents 12% of group net revenue. On to the full year.
As we look towards the rest of the year, and following a strong start, we now expect like-for-like net revenue growth towards the upper end of our guidance of 1%-4%. This is driven by stronger than expected performances in our OTC business and nutrition, which will likely normalize in the coming months. Our disinfectants are performing in line with expectations, and the rest of the business is on track to grow mid-single digits as originally targeted. While this is a trading update, the significantly worsening inflationary environment we have seen over the last couple of months since we announced our initial targets warrants an update. We told you on the 17th of February that we expect COGS inflation to be in the region of low teens.
Since then, due to the war in Ukraine, there have been further increases in a number of key commodities we use in our manufacturing process, such as oil derivatives, surfactants, soap noodles, tinplate, and dairy. We're now facing inflation of close to high teens%, which is around GBP 1 billion of COGS inflation versus last year. We entered the year as a stronger business. We have a strong portfolio of brands that have been invested in. This has enabled us to take pricing responsibly while growing volume. We have taken pricing in the quarter and will take further pricing actions as required. We will benefit from favourable product mix this year. Our productivity initiatives are delivering ahead of plan, and we will see a reduction in finite life transformation costs.
The benefits from favourable mix, productivity initiatives ahead of plan, and pricing give us the confidence to expect adjusted operating margins in line with both the prior and current market expectations, while continuing to invest in the long-term growth of our brands. The inflationary environment may well change as we further progress through the year, as well as our mitigation measures, and we will keep you updated accordingly. Finally, in respect of Russia and Ukraine, you will have seen our announcement that we have begun a process aimed at transferring ownership of our Russian business, which may include a transfer to a third party or to our local employees or both. This action builds on the previously announced decision to freeze capital investments, advertising, sponsorships, and promotions in Russia. We will update you on progress as soon as we have more information to share. For now, our guidance includes Russia.
To summarize, we have strong momentum across all our Global Business Units and geographies, delivering +5.6% like-for-like growth in the quarter. We continue to grow market share with 76% of our core CMUs gaining or holding share. Our brands less impacted by COVID grew at high single digits. Excluding the positive impact of US IFCN, these brands continued to grow at mid-single digits. Health delivered a very strong performance led by our OTC business and our Intimate Wellness portfolio. Our disinfection brands, including Dettol and Lysol, performed in line with our expectations, and we have significantly broadened the shoulders of these brands over the last 2 years. Nutrition performed exceptionally well, especially in the US, but I'm heartened by the broad-based performance of the business across geographies.
Our strong start to the year gives us confidence that we will deliver LFL net revenue growth towards the upper end of our guidance and maintain our adjusted operating margins for the year. This quarter further illustrates the progress we are making on our transformation journey, the return on our investments, and the strength of our underlying business. We remain well on track to deliver our medium-term targets of returning the business to mid-single digit LFL net revenue growth and mid-twenties margins. With that, Jeff and I will be happy to take your questions.
Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure your phone is unmuted locally. I will now hand you over to Richard Joyce for the Q&A session.
Thanks, Lauren. Right, the first question we have is from Iain Simpson at Barclays. Go ahead, Iain.
Thank you very much. Couple of questions from me if I could. Firstly, can you talk a little bit about
The innovation phasing of this year. You've talked quite a lot about how this year was the year that you really expected a big step up in the pipeline. Have we seen some of that in the Q1 ? Should we expect the phasing of innovation launches to continue to build as the year progresses? And secondly, your comments around U.S. infant formula and how you expect the competitor supply situation to resolve itself in the coming months.
Would I be correct therefore in assuming that your guidance is basically based on the assumption, that there is a normalization and a return to the pre-disruption situation, in US infant formula in the next few months, and that you don't really have anything in your guidance, for continued strength in, your US infant formula business in the H2 ? Thank you very much.
Thank you, Iain. On your first question, on innovation, we expect further innovation over the course of this year. I think we will see some new products being launched in the Q2 , but there's a lot of innovation that is actually scheduled for the back half of this year. It is building as we go through the year. We've given examples, for example, on Dettol, as well as on some of our Intimate Wellness portfolio, as 2 examples of new innovation that we can see, and it's very similar in hygiene as well. On your question on the US infant formula business, we do expect that the supply situation will normalize in the next couple of months.
The U.S. infant formula business has grown at mid-single digits% for several years, and we feel good about the overall performance of this business, and we expect it to continue to perform so as it normalizes.
Okay, thanks, Iain. The next question is from Guillaume Delmas of UBS. Go ahead, Guillaume.
Morning. Thank you, Richard. Morning, Laxman and Jeff. 2 questions for me, please. The first 1 is on your inflation guidance. You've increased it this morning from low teens to high teens. I was wondering, what is today the proportion of your key commodities that are now fully hedged for 2022? In other words, is there a significant risk of you having to further revise up your inflation outlook in 3 months from now? Or with all the hedges in place, you feel like high teens is conservative enough. My second question is on portfolio management. In the highly hypothetical scenario whereby you would be selling a relatively large asset, what would be the most likely use of the proceeds?
I mean, would you be looking in priority at returning the cash to shareholders, via a share buyback or a special dividend? Or would you be looking at making some acquisitions, and if so, in which areas, you know, geographies, categories, would be of greatest interest to Reckitt? Thank you.
Thank you, Guillaume. I'm going to turn to Jeff for the first question. I'll take on the second.
Well, look, Guillaume, for the year 2022, we had in total about 2-thirds of our cost of goods hedged 1 way or the other, either through fixed contracts or through hedging or inventory on hand. As we say in our outlook, you know, there is some sensitivity to future commodity price changes, but we are in a reasonably good position in terms of the hedging that we have in place.
On your second hypothetical question, as you know, no comment on speculation or on hypothetical situations. We're very shareholder value focused as a management team and as a board, and our intention very much is to ensure that we maximize our shareholder returns. We have laid out our capital allocation thoughts on several previous calls, and if you'd like, we can readdress them. As you can probably see, you know, our intention is to be incredibly shareholder value focused, and that's how we will be going forward. On your question on M&A, and you know, as you know, we sold our infant formula business in its last year in July.
We also sold our Sure brand, reuniting it with the owners of the Sure brand globally. You also know that, towards the end of the year, we announced a transaction to sell our E45 business, which we closed in this quarter. We also sold our Dettol brand, which is top brand in India, for obvious reasons there. I think so, those are the ones that we have done. We bought Biofreeze last year, and we integrated the business, and it continues to perform well. We clearly have a pipeline of things that we would look at, but it's too premature for us to speculate on M&A. As I said, we continue to remain completely focused on shareholder returns.
Thank you very much.
Thanks. Thanks, Jeff. Right. Next on the line is Celine Pannuti from JP Morgan. Go ahead, Celine.
Thank you. Good morning Laxman, Jeff, and Richard. My first question is on pricing versus mix. You did have quite a strong performance, but I would presume it was more mix driven. Can you talk about how much pricing have you seen so far in the Q1 ? And whether we should rightly expect to see that stepping up throughout the rest of the year. My second question is on the puts and takes since February on the cost inflation side. You guided from low-teen to high-teens. Can you talk as well about the benefits that you are getting in terms of better mix from the IF CN business, as well as OTC performing a bit better I believe.
You also mentioned Finish. Yeah, Jeff, maybe if you can go into those building blocks. As a result of what's the tailwind in H1, would there be a difference in terms of performance and margin H1 versus H2? Thank you.
Jeff?
Should I address the cost inflation first?
Yeah, sure.
Look, since February, we've seen about GBP 250 million extra costs in relation to inflation, obviously as a consequence of the war in Ukraine. You know, we are addressing that through various aspects. You didn't mention productivity, but our productivity program has really stepped up in 2022. Since we gave guidance, we think that we will beat our expectations in terms of productivity and possibly even getting close to last year's number in terms of the absolute delivery of that program. If you recall last year, we were at something like GBP 700 million in terms of productivity. These are real pounds saved, not just cost of volumes. They're measured, and they're checked. We're very pleased with the productivity program.
You know, mix is going to give us some favourability in the year, not least because of OTC and the fact that we have a stronger than average cold and flu season. As you know, that is generally a stronger higher margin performance. On the transformation cost, there's no real change from the update that we gave in February. There'll be a few, but it's really relative to GBP 1 billion of cost inflation, which we're now faced with. It's just really a few tens of millions which on a normal inflationary year could be important, but it's pretty much dwarfed by the inflationary environment that we set.
The billion, just so you know where I get that from, that's basically the high teens based on our total cost base, gets you to close to GBP 1 billion. I think holding margins flat faced with, you know, GBP 1 billion of cost inflation is a really credible performance. On pricing and mix, I guess, you know, first of all, I think that what you see coming through by each of the GBUs is just under 4% price mix on Hygiene, and that's mostly price, to be honest, a limited mix on that. We do think that will increase as we go through the year, and we will continue to look to seek further pricing actions in the H2 of the year.
On Health, we're at 5.1%. Again, it's mostly a price movement. The 1 thing I'd point out, on Health, most of the OTC pricing has gone through quite late in the year, you know, post the flu season, so there will be a slight increase in that as we go through the balance of the year as well. On Nutrition you see quite a high price mix, 11.5%. I must say that a significant part of that is mix, in relation to the mix of WIC versus fully funded revenues. Therefore the pricing is probably at more around 7%-8% and mixed around 4% on that breakdown in terms of Nutrition.
You know, all in all, we think we're being responsible on pricing. We do see some potential for pricing in the H2 of the year. Just finally on margins, we're not giving specific guidance on margin. I do think margins will be slightly lower in the H1 , which is what we guided to in February. I still think margins will be slightly lower in the H1 due to the fact that certain aspects of pricing won't kick in until you know, during the H1 of the year. For example, European pricing generally kicked in in March, April, by the time that the agreements were all put in place.
Margins will be slightly lower in the H1 , I think, and a bit higher in the H2 .
Thank you.
Thanks, Celine. Right. Next on the line, we've got Pinar from Morgan Stanley. Go ahead, Pinar.
Good morning. Thank you. When we look through the short-term noise, the top line performance seems to be very strong with volumes up 7%, excluding the US IFCN boost and the Lysol declines. Why are you not raising the 2022 top line guidance then? The second question is, you highlight some supply chain challenges in the press release. Can you please elaborate on those? Thank you.
Well, thank you, Pinar. I think that at this point in time, at the start of the year, we feel good about the guidance and what we have provided. We'll of course come back to it over the course of the rest of the year in our conversations. On your second question on supply chain, as you can well imagine, there are dislocations still underway, be it in logistics, be it in availability of certain raw materials, be it in the pricing of some of these raw materials.
I think that what the supply chain team has done admirably is rise to the occasion, because they're dealing with both cost increases, availability challenges, logistics, you know, all of the above, as well as in some markets, you know, you continue to see labor as a challenge, particularly for example, in North America. Given all of that, I think that, you know, we continue to work incredibly hard. The supply chain has been strengthened over the course of the last few years, but the external environment is highly volatile, and we just want to be cognizant of that as we respond to it.
Okay. Thanks. Thanks, Pinar. Right, now we've got Bruno Monteyne from Bernstein. Go ahead, Bruno.
Hi, good morning. Just a bit of follow-up on the kind of Abbott recall that benefit you have in the US. Given this WIC sort of mechanics in the US, the extra trade you get, is it better for your margins or worse for your margin, or actually overall neutral? I'm just a bit confused with those rebate claims. Also, what size would be the impact on your organic growth for like-for-like the ? Could you quantify it? My second question is around the measures that you quote for percentage of CMUs gaining or holding shares. Would you be able to give us the data without the holding shares? So if you look at gaining shares, do you have a rough estimate of what percentage of CMUs you are gaining without holding? Thank you.
I didn't get the second part of your question with the CMUs. No, the second part, the Abbott question. First of all, the extra sales we get is basically full revenue because clearly our WIC sales in the WIC markets we operate in are pretty much running at normal levels. What's happening is obviously we're supplying WIC sales in non-WIC markets, i.e. in Abbott markets, and we get fully compensated for that. Therefore, the incremental sales that we have, the +30% in the US or whatever, is at full revenue. Our overall proportion of non-WIC versus WIC has gone up, which is why we see a significant price mix improvement in nutrition.
I didn't get the second part about organic. What's the factor to the organic growth rates for the H1 ? Well, comparables. You know, we've been. As we've mentioned before, like for like, we've been running at mid-single digits in North America. We've been improving in LatAm and ASEAN. So in, you know, I think it's fair to say that we expected excluding Abbott, we expected to be in the mid-single digit range for 2022. On the question of. Go ahead. Sorry, just to finish on the WIC point. Given that you have this benefit rebate, is it fair to say that the incremental WIC related sales is actually margin enhancing for you? Would that be correct? Yes. That is, yeah, that absolutely is correct, yes. Okay.
Our margins on nutrition are running positive in the year relative to where we expected them to be. On your question on category market units, I mean, just sorry to interrupt. Offsetting that, you know, like all of our business we've seen incredible inflation, including dairy and tin, which affects the IFCN business. But net organically, yes, we see a net benefit in terms of margin because of that. Sorry. We've been very responsible on pricing in this business as well given the situation. On the question on category market units, the vast majority of them are gaining. And so, the number on hold, which by the way is a plus or minus 20 basis points, is actually very small. This is all largely gain. Yeah, it's just mathematical.
It's because it's just +20, there's not a lot that fall in that count, and it's usually a pretty small proportion, single-digit percentages. Exactly. I don't know the exact percentage for the quarter, but it's usually pretty small. Thank you. Great. Thanks.
Thanks, Bruno. Right, next we've got Fulvio on the line from Berenberg. Go ahead, Fulvio.
Yes. Good morning, and thank you for taking my question. I've got 2 of them, please. So in terms of your latest margin guidance for this year and the fact that you've maintained your mid-20s EBIT margin by 2025, I guess very simplistically it implies an average of 70 basis points of annual EBIT margin improvements from next year. I was just wondering how you feel about, you know, this target obviously, because you've obviously reiterated it, but is it a realistic target in the absence of a downturn in commodity prices? My second question is in relation to the China lockdowns. Could you maybe just give some comments on the risk that you see to Durex and VMS in Q2 from the recent lockdowns there, please? Thank you.
Let me start on the margin. Yes, we do feel confident in the mid-20s by 2025. As you say, rightly so, that implies something in the region of 70 basis points annual development. Now, if you look at where that comes from, just the leverage we get from the growth that we will be delivering in terms of mid-single-digit growth gives us a significant chunk of that. Margin will come through just from that. As you know, we've got many other opportunities in terms of mix, in terms of revenue management processes that we're running through, which I'm very
I'm very excited about the opportunity to optimize how we manage our mix on shelf, how we manage our trade activities, and so forth, to also generate margin improvements. Our productivity program continues to run. Yes, I mean, it's difficult obviously at this point to project what's go ing to happen with commodities over the next 2 or 3 years. You know, the economists will have their views. Generally, we feel comfortable in the target of mid-twenties by 2025.
If I could add to this, with a little bit more, detail on a couple of areas. 1 is our productivity program. As Jeff mentioned, we feel very good about the progress we are making. It is, significantly ahead of plan. We feel there's even further upside to what we can do there, and I think our teams are working very hard. The muscle has been built inside the organization. I think what we're seeing both bottom up as well as top down, are ideas, that can help us, you know, further enhance productivity. I know we've given a target of GBP 2 billion over. If we added a year and added GBP 2 billion.
The reality is, if we just look at where we are this year, you know, we're going to significantly perform better than the numbers that we have set out for GBP 1.6 billion. You know, as we said, we're go ing to be significantly ahead of that. I feel good about how that's going to play itself out going forward. Jeff talked about the volume and the leverage that we get the growth. Furthermore, on revenue management, we're 18 months through a process of strengthening our capabilities of revenue management. We feel very good about the investments we've made over the last 18 months in that capability. In a lot of ways, it has helped us as we entered this period of very difficult operating conditions.
In my view, we are less than half of our way in terms of the level of sophistication that I think we can get to over time. The investments we are making in capabilities, in what we're doing with digital analytics, the work we're doing in execution, particularly in the area of revenue management, both in offline channels as online channels, continues to give us the confidence that we can in fact deal with some of the commodity pressures, but also deal with some of the productivity opportunities we have. That gives us confidence, as Jeff said, to continue to grow margins in the medium term in order to get to our medium-term goals. We feel good about the medium-term guidance and, you know, and that's the reason we have actually reiterated it.
China lockdown.
On the China lockdown, clearly as you know, there are parts of China that are going through lockdowns, including the Shanghai area, Shenzhen and a few others. We have not yet seen an impact in terms of supply, particularly as, you know, we manufacture in China for China and many of the commodities there. But we fully expect that, you know, if this continues over a period of time, there might be some challenges there, but we feel very good about the resilience of the team, what we have built, the inventory we have in the system, and we believe that, you know, we can navigate that well.
Thank you.
Okay. On demand side, just so you know, you obviously have offsetting demand pressures there, right? We've got on the 1 side, you know, Dettol as a business benefiting from Omicron and some of the lockdowns there. We haven't seen really any negative impact on Durex yet.
Thanks again.
Thanks.
Thank you. Now I've got John Ennis from Goldman Sachs on the line. Go ahead, John.
Hi. Good morning, everyone. A few quick ones from me. The first is coming back to US Infant Formula again. I just wondered if you could help in quantifying the margin difference between your WIC and non-WIC sales. The second is on just inventory levels across the portfolio, but particularly in OTC. Following a very strong start to the year, is there anything to be aware of in terms of phasing or would you describe inventory levels as relatively normal? If I can sneakily put in a third, can you just comment a little bit on brand investment levels and where you're expecting to be for the year? That would be very much appreciated. Thank you.
I think I'll take the first 1. On WIC and non-WIC. I mean, we don't really talk about the margin differential, but obviously, the WIC margins are significantly low. I don't think that's a trade secret. There is a significant difference in margin, but we don't get into anything specific on that.
Let me take on the other.
Okay, understood.
On inventory. Yeah. On inventory, our position in the health business is normal. Including in OTC, it's normal. Our inventory position with distributors, retailers across the world in the health business, you know, there's nothing really concerning. I mean, it's just normal. If I look at the inventory position in hygiene, it's also, you know, normal. I mean, the inventory position in infant formula, particularly in the US, is light. Through the entire chain. That's where we will be in terms of inventory. On your question of brand investment levels, we are managing the business for the long term. We will continue to invest in our brands, and we're comfortable with the brand investment levels we currently have.
Which is roughly in line with.
Which is roughly in line with what I said.
Yeah.
Don't have to. Yeah.
Great. Thanks.
Okay. Brilliant. Thank you.
Now we've got David Hayes from Jefferies on the line. David, go ahead.
Thanks, guys. Good morning also. 2 from me, 1 on the productivity offset and 1 on the math, if you can mark my math homework. On the first 1, it feels like what you said, you know, 200 basis points or GBP 20 million of extra headwinds, which is go ing to be offset by the uplift in productivity activity. I guess the question around that is how comfortable are you that you're doing the right things at the right time. Stepping up productivity when supply chain is disrupted, et cetera, is there not a risk that in the H2 , in particular, you start to fail on both sides of that, if you like, 'cause there's so much going on that you're trying to do too much.
I guess related to that medium term, it feels like that this investment program to drive top-line opportunity feels like it's switching much more back to a net productivity gain, like a cost saving program or model. You know, would you push back on that and say, that's not fair? You know, there's not a shift in that sense. The second question on my math homework, so, 70% of sales non-COVID growing high single digits, which kind of suggests that 30% COVID-related is kind of flattish in the quarter to get to 5.6 for the group. Is that right? But then if Lysol's down 30, well, what's offsetting that in terms of that 30% being almost flat? I'm not sure what. I'm not quite adding up the numbers there.
Thanks so much.
Let me take that on. First, on productivity, your question. We have built this muscle over the course of the last couple of years. If you look at the full year and what we had talked about, there were 14,000 different projects that actually led into this productivity program. It's built into the teams, built into the muscle of this company, and you have people executing against that. This is not a shift from a growth investment program to a cost management program. I think that's an unfair characterization, and I would push back on that strongly.
In your question around the 30% and, you know, where we are, if you look at the brands in that 30%, they include, on the 1 hand, brands like Dettol and Lysol, but on the other hand, they also include brands like Mucinex and Strepsils, Delsym. What you see the offset there, I think your math there is correct in terms of being relatively flat. What you're seeing is the offset you're getting from the decline in Lysol essentially being offset by the growth you have in Mucinex and others. That's why you see the flattish number.
Thank you.
Okay. Thanks, David. Right now we've got Tom Sykes from Deutsche Bank. Go ahead, Tom.
Yeah. Thanks, Richard. Morning, everybody. Just on the phasing of the productivity and indeed when you see the highest level of COGS increases this year, how at what point in the year, as you stand at the moment, do you see the worst of the pain, and when do you see the highest level of productivity gains? Because obviously you've got mixed benefits in the H1 , but you're calling the margin down, and you're therefore by implication, calling the margin up a little in the H2 of the year. Then just you've obviously continued to invest where-
Yes.
Where, sort of excluding the businesses, where there's rebound and the mixed benefits, where you've expanded into white spaces, are you happy that you're getting the level of profit growth from that revenue growth at the moment? I mean, obviously COGS increase is there, but is there scale benefits to come from some of that white space expansion, and is that part of the improvement we should expect in margin increase?
Look, thanks a lot. On the phasing of productivity and the overall phasing of the margin, I've said earlier that margins will be slightly higher in the H2 relative to the H1 , and that's partly because of the phasing of pricing, but it's also related to the phasing of productivity. So clearly we have had some benefits from leverage in Q1, not least in the IFCN, which I mentioned earlier. You know, when we look at the full pricing effects of our first round of pricing coming through, they won't all be through in the H1 of the year. I think the H1 will be a bit, a little bit more challenged on margin than the H2 .
I would like to say on productivity, coming back to the general question of cost versus growth. I think the vast majority of our productivity program really is not about cost cutting, it's about driving efficiency throughout the business. It's about better buying, it's about driving efficiency in our manufacturing facilities and our distribution and our logistics and supply chain. In that way, I really think when I look at the productivity program, I'm looking at it benefiting the company by becoming a better company, a more efficient operation, and not cutting costs. We've actually invested significant costs in key areas like R&D, and we're not backtracking on those areas.
I look at our productivity program, and I call it best in class because it really is about driving efficiency in the organization, doing things better and getting more for less. I think that's a key element. If it was just purely cost cutting back to the bone in key areas, then it would not be the sort of program which matches with the transformation project that we're undertaking. I think that's a real distinction of how I look at the productivity program. Part of our market share gains is also driven by just the enhancements we've made in execution in sales.
If you look at the investments we've made in sales excellence, the investments we've made in our customer teams, you look at the feedback we're getting from customers, the scores we're getting in terms of our, you know, our performance with customers, the fact that we're bringing growth ideas, the fact that our joint business plans are actually driving real results with customers.
areas we have invested in, and that's just 1 area that I'm pointing out. In addition to what we've invested in terms of R&D and the pipeline of innovations that we see over the course of the next couple of years that actually come from that investment. We're entirely focused on growth. We realize that's the value overall that we have to drive, but we also recognize that we're operating in a challenging condition, and we have to do everything we can to be as efficient as we can be in order for us to continue to progress margins, as we have said we will over the course of the next few years.
I think about white spaces, we went into quite some detail in February on the percentage of the growth from Dettol and Lysol that's coming from new spaces, new places, which is quite high. You can see from that that overall the investment into the new locations as well as broadening the shoulders of our brands is driving a significant part of our growth. Of course, not every single country that we enter into with new brands makes the return you expect. Some do better, some do slightly worse. I think in general, we're pleased with the investments that we're making into the new spaces.
Okay. Cool. Thank you.
Thanks, Tom.
Right. 2 more questions. The next 1 is from Alicia Forry at Investec. Go ahead, Alicia.
Thanks, Richard, and good morning Laxman and Jeff. 2 questions from me. First 1 is on developing markets volumes. They started to decline slightly 60 basis points in the quarter. I was just wondering if you could dig into that a bit more. Was it price elasticity? Was it Lysol driving that? My second question is on market share gains, specifically in nutrition and OTC, both areas where you say you've gained some significant market share across your portfolio. In nutrition, typically volumes are pretty sticky when companies gain share because parents are unwilling to switch. You don't seem to be necessarily giving us that message, however.
In OTC, would you expect those share gains that you mentioned that are significant to be maintained, absent any major external developments into the next flu season? Would you expect to give back some of those share gains? Thank you very much.
I think on your question of developing markets, I think if I look overall at the consumer and how the consumer has reacted to some of the price increases, as I said earlier, you know, we go through a logical process of setting productivity first, revenue management next, and then, you know, and then of course, you know, revenue management is about ensuring consumers have a range of different price points, from which they can actually participate and, you know, buy our products. And then the last is of course, you know, price increase all the time. I think in the developed markets, what you see, and I think it's particularly relevant in the US, where the strength of balance sheets are still strong with consumers.
In the developed markets, we don't quite necessarily see the kind of elasticity 1 would have expected in the past. The consumers, you know, taking the price increase as well. In some of the emerging markets in Latin America, particularly being 1, you know, we have seen a decline in volume as we have taken pricing, but it is a smaller proportion of our overall business. That's why you see the sort of mixed difference there as well for us. Again, in those markets, what we expect over time is that it'll normalize. It's very important for us to ensure that the earnings model doesn't necessarily get lost. We do take pricing, but again, take it in an appropriate manner while we're looking at risk and price points.
Over time, you know, we expect the volume to normalize over time. I think that's the way I see the developing markets question. We are seeing some price elasticity there. On your question on market share, you know, traditionally 30% of the infant formula business is a switch business, and it tends to be 1 where the baby hasn't responded to things well, and then they switch. I think or in this case, particularly with supply shortages, you might see a higher percentage of that switch. Normally a parent wouldn't necessarily want to change their brands if the baby has responded to the brands well.
you know, it's too early for us to comment on all of that, particularly as we expect, you know, the supply situation in North America to normalize in the coming months. In the case of OTC, I think, what you're seeing there is, you see the market share gains, and it's not just in the cold business, it's actually pretty much across the board. We have seen some of the market share gains, and I think I feel good about that. Underpinning it is innovation and execution, and, I think, you know, we'll see how things play out over the course of next year. I feel good about the way the team is executing, the plan we have for OTC.
Good. Thanks. Thanks, Alicia. Right, final question from Iain Simpson, part 2. Go ahead, Iain.
Thanks. Thanks very much for allowing me to follow up. I appreciate it. I just want to talk a little bit about US infant formula, if that's okay. I appreciate your commentary that you expect things to normalize there, in the next month or 2 as your competitor sorts out its supply chain. But could you talk a little bit about your own supply chain in terms of, firstly, how you've coped with that uplift and US infant formula up 30%, given that the disruption took place halfway through the quarter? That presumably means that US infant formula is running at something like up 50% for you guys, and that's what Nielsen seems to suggest.
You know, I'm guessing you don't have enough spare capacity lying around to sustain up 50% indefinitely, but could you comment on how much spare capacity you have and, you know, what sort of uplift you feel that you could meet, in the hypothetical scenario that your competitor took a little bit longer to sort the supply chain out or for that matter, that consumers were a bit stickier and then didn't want to switch back having kind of experienced your brand. Anything you can give around that, and also at what point, if the consumer switch became sustained, would you start to think about perhaps what steps you could take to increase your own capacity, bearing in mind the desire not to be left with stranded assets? Thank you very much.
Thank you, Iain. The primary focus of manufacturing and the supply chain in our infant formula business is quality. We want to be sure that what we are producing is something that we feel comfortable with, you know, that we feel good about supplying into the market. The most important measure in anything that we think of is quality. It is possible to raise volume levels, but it has to be done incredibly carefully. It isn't like manufacturing something else, where you can just add shifts and do things differently, et cetera. You have to be very cautious and careful about how you think about raising volumes in the business that you're operating in.
Clearly there's an inventory in the system that has, you know, that you see in the scan data, that has found its way clearly into consumers' hands. I think that my focus with the team is that we view this as an important commitment to the U.S., to the U.S. consumer, and we have to do the right thing always in terms of how we operate this business. You know, we are not going to be driven by, just, you know, mathematical equations around, "Hey, you could do this or you could do that." We have to do it the right way. The team completely understands that. We have the right level of investments in order to do it. We have capacity from the standpoint of raising it.
It's all a question of how we do this the right way.
Thank you.
Okay. Thanks. Thanks, Iain. Aspen, did you want to wrap up with some final comments? Sure. Well, thank you, Richard. As I mentioned at the beginning of the call, we have made a strong start to the year. We are well-placed to deliver at the upper end of our revenue guidance and remain on track to deliver our medium-term targets. Clearly, what you're seeing here is the transformation coming together in the kind of result that you're seeing and the expectations that we're setting. Before we wrap up, a quick word on our investor seminar series. The next session will be held on the 6th of May and will focus on ESG, a topic central to everything we do here at Reckitt. This will mark the anniversary of the publication of our 2030 sustainability targets and a social impact report.
The team will give you an update on the progress we are making and provide some insights to the journey that we are on. With that, I would like to thank you all for joining this call, and I look forward to speaking to you again soon. Thanks, everyone. Have a great day.