Good morning, everyone, and welcome to Reckitt's Q3 trading update. Jeff, our CFO, is going to take you through a brief overview of our Q3 performance, and then we will move to Q&A. Before we do that, I'll hand over to our new CEO, Nicandro Durante, who will say a few words. Nicandro, over to you.
Thank you, Richard, and good morning to everyone who has dialed in. Before we go through our Q3 trading update, I want to take this opportunity to introduce myself and to provide you with a few messages. I have been at the board of Reckitt in a non-executive capacity for over eight years, so I already know the business very well. It has been a privilege to work closely with the board and executive team over this time to shape Reckitt's strategy as we deliver our purpose, which is to protect, heal, and nurture in the relentless pursuit of a cleaner, healthier world. It is a strategy that I fully endorse. Our brands can make an authentic and meaningful impact to the world while delivering an attractive growth and earnings model.
I am very happy to now step into the CEO role for a period of time as we seek a long-term successor. Since taking up my new role, I have made a conscious effort to focus my time out in the markets with our people, seeing firsthand how they execute in-store with our customers. I have visited a number of manufacturing sites and R&D centers and met many of our leaders. It has been a delight to see the energy and passion of our teams from around the world as they make our brands better and stronger every day. What I would say is our company is in great shape. We have strong momentum, and Reckitt is well positioned to compete and win in the market and to outperform our peers.
The continued execution of this strategy is therefore my priority to drive sustainable mid-single-digit% growth with adjusted operating margins in the mid-20s% by the mid-2020s. Our Q3 and year-to-date results are a testament to the strength and resilience of our business and the hard work and commitment of every one of our talented people. My focus will be on furthering the good momentum that the team has already built. In particular, invest and leverage our large innovations where the scale and returns are the greatest. Review where we can unlock barriers to higher growth. Drive the continuation of our productivity and efficiency programs, and drive improved execution in our markets. Despite very challenging market conditions, which you all have to navigate, we have a significant runway for long-term organic revenue and earnings growth from our existing portfolio of fantastic market-leading brands.
This will be the core focus of our organization. I look forward to catching up with many of you in November and discussing our progress with you all at our 2022 full year’s results early next year. Finally, I know that you are very interested in the CEO search. All I can tell you at this point is that a formal process is ongoing and will update you as and when appropriate. I will now hand over to Jeff to take you through our Q3 numbers in further detail. Jeff, over to you.
Well, thank you, Nicandro, and good morning, everyone. Our Q3 performance further demonstrates that our strategy is delivering broad-based growth across our portfolio of market-leading brands. We delivered a strong performance with like-for-like growth of 7.4% in the quarter, and that's 8.2% on a year-to-date basis. We also continue to see good market share momentum, with 63% of our core CMUs either growing or holding share on a year-to-date basis. Now, given the inflationary environment, growth in the quarter was more weighted to price and mix, a combination of both which was up 12% in the quarter. Actual consumer pricing was in the high single digits in the quarter, with the balance being driven by a positive mix, mainly related to IFCN and trade spend efficiencies, which have been across the group.
We continue to mitigate unprecedented cost of goods inflation with our best-in-class productivity program and implementing responsible pricing where appropriate. Volume was down 4.6% in the quarter. However, excluding the impact of Lysol volumes, overall volumes remained resilient across the business and were down 1% in the quarter. Overall, Q3 was another quarter of mid-single digit like-for-like net revenue growth for the 70% of our business, which has been less impacted by COVID. By the way, this is also true when excluding the positive impact of the competitive supply issues in our North American IFCN business. This is the 7th consecutive quarter of mid-single digit growth, demonstrating the underlying resilience and strength of our business. Now, this has only been made possible by the exceptional contribution from our colleagues across all of our regions in these challenging times.
Let me cover each of the GBUs in a quick way. In Hygiene, like-for-like net revenue declined 1.2% in the quarter. This reflects a 3.3% growth when excluding a mid-teens decline in Lysol. While Lysol was down in the quarter, this was driven by tough comparatives, where we saw a spike in consumption in August and September of last year due to the outbreak of the COVID Delta variant. The periodic decline in Lysol is an improvement versus the first two quarters of the year, and I'm pleased that we continue to see strong consumption around 50%-60% above pre-pandemic levels. Driving the increase in consumption, we continue to see increased hygiene habits among our core users and a strong contribution from our growth into adjacent categories.
For example, laundry sanitizers continue to perform very well with penetration levels in the U.S. now reaching over 10%. We expect year-on-year comparatives to continue to improve for Lysol into the fourth quarter. In the rest of Hygiene, we delivered robust growth. However, we're seeing some softness in more discretionary categories such as hair care. I'm particularly pleased, though, to see double-digit growth across our Finish franchise. This is a testament to the investment we're making in innovation, including the launch of our Finish Quantum All-in-One range. In Health, we delivered another quarter of growth and outperformance. Our OTC brands continue to lead the way with around 20% growth in the quarter due to strong consumption and market share gains.
Dettol like-for-like net revenue remains well above pre-pandemic levels, and although Q3 revenue was slightly down year-on-year, we continue to expect low single-digit growth for the full year at around 40% above pre-pandemic levels. Our Intimate Wellness portfolio delivered double-digit growth in the quarter, driven by strong growth in many European markets, resulting from improved execution and distribution gains. China revenues were lower in the quarter due to the ongoing COVID-related lockdowns. Within Nutrition, we see the trends from the first half of the year continuing. We continue to see a good turnaround in our ASEAN and LATAM businesses, with strong market share performances across both regions. In the U.S., we delivered revenue growth of over 40% in the quarter. This included, obviously, the temporary competitor supply.
The benefit from the temporary competitor supply issues, which added approximately 20% to our total Nutrition business growth in Q3 and 18% on a year-to-date basis. Looking ahead to the fourth quarter, as you will likely be aware, the competitor supply issues are starting to normalize, and we therefore expect the market dynamics in the U.S. infant formula to return to normal by the end of this year. Stepping back and looking at the current macroeconomic environment, we clearly have challenging times ahead. With continued high inflation, we do expect some impact in more discretionary categories, as I mentioned, such as hair care. It's also clear that with higher energy costs, it will be a tough winter for consumers, especially in Europe. However, it's important to remember that we operate in categories where trust and efficacy are of high importance.
Consequently, elasticities have been relatively low for the majority of our portfolio of brands. Now moving to the full year targets, we remain on track to deliver against expectations from the year. On net revenue, we've raised the lower end of our range, and we now expect to deliver between 6% and 8% like-for-like net revenue growth for the full year. On margins, we reiterate our target of growth in adjusted operating profit margins for the year. As I previously detailed at the half year, second half margins will reflect higher inflation, more normalized margins in our Nutrition business, and higher levels of investment versus the first half of the year. To summarize, our business remains resilient, delivering a further quarter of broad-based growth and market share momentum.
We've now seen seven quarters of mid-single-digit growth with the 70% of our business less impacted by COVID, and that's also true adjusting for the temporary uplift in our US IFCN business. While market conditions are challenging, particularly in Europe in the near term, however, our performance here today gives us confidence that we'll deliver our 2022 revenue margin targets. As Nicandro said, we remain fully focused on executing on our strategy, and we remain firmly on track to deliver our medium-term targets of mid-single-digit like-for-like net revenue growth and the mid-20s margins by the mid-2020s. With that, we're now happy to take any questions you might have. Thank you.
As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two, and please ensure you're unmuted when speaking.
Thanks, Jordan. Okay, we've got a list of questions waiting. First one on the line is Guillaume Delmas from UBS. Go ahead, Guillaume.
Thanks, Richard. Morning, Nicandro and Jeff. Two questions for me, please. The first one is on Hygiene, because excluding Lysol, the division's like-for-like sales growth significantly decelerated sequentially. I think we were nearly at 9% in Q2, and it was 3.3% in this third quarter. Wondering if you could highlight the main reasons behind this slowdown above and beyond Air Wick. Also curious to hear if you have seen some down trading changes in private label market share development, maybe some delisting in hygiene in Western Europe in particular. My second question for Nicandro is on the group's strategy.
Because Nicandro, you mentioned you were focused on continuing to execute on Reckitt's strategic path, so delivering that mid-single digit like-for-like sales growth in the mid-twenties margin by the mid-twenties. Should we interpret this as a clear signal that the board and of course the leadership team are backing the group's current strategy? Maybe for the next few years, I mean, until we get to the mid-twenties, we should not anticipate major changes to the group's strategy. Thank you.
Why don't you take the first question first, and I'll come back to the hygiene.
Let me talk a little bit about the strategy. Listen, this strategy was lined up around 2-3 years ago with full endorsement from the board, and I fully endorse the strategy. As I said at the beginning of my speech, I think that we need to focus more and more on delivering the strategy through innovations through fantastic execution with our talented people. I think that should be the focus of the company in the years to come. I see no reason for changing that. I think that we are in a stage in the company that's all about great execution with our powerful brands through our pipeline of innovation. We have a great pipeline of innovation coming to 2023. I'm pretty optimistic that we can deliver our targets mid long term.
Yeah, just coming back to Guillaume, your question on Hygiene. The data I have is that if you look at ex-Lysol in the quarter, we mentioned the Hygiene like-for-like ex-Lysol was 3.3%. If I look on a year-to-date basis, it's 5.3%. There is a little bit of a slowdown there, but it is largely related to the Air Wick and the hair care category, really. It's not really a market share issue so much as a category slowdown. It's not quite as dramatic as you pointed out. It is from, you know, 3.3% down from a year-to-date number of 5.3%.
That obviously was higher in the first half, slightly higher in the first half. You know, I'm not particularly worried. We've seen good performances, for example, in Finish, where we mentioned a double-digit growth in the quarter, like-for-like revenue growth in the quarter. A strong performance on Finish, strong performance in Harpic, and also in Vanish in the quarter. All in all, the Lysol number, we can talk about ex-Lysol because the trends in Lysol are still normalizing. The Lysol number was significantly improved sequentially from around -30% to -15%, and we expect that sequential improvement in Lysol to continue in the fourth quarter, as we normalize the business.
Can I add something about the down trading? Because you raised the point of down trading here. In general, we are not seeing any material down trading by consumers in our categories. You should not forget that consumers in general, they value, they want value for money and effective products, not just low price products. We haven't seen any material down trading.
Yeah. Thank you, guys. Thanks, Nicandro. Now.
Thank you.
Next on the line is Iain from Barclays. Iain, go ahead.
Morning. Couple of questions from me, please. I just wondered if we could dive a little bit into Finish. Clearly you're sort of happy with the performance there. Just looking at the Nielsen data that it seems to suggest that in Europe and the U.S., you underperformed the category pretty meaningfully, but that doesn't appear to match with your own comments around double-digit growth and how happy you are with the brand. I just wondered if there was an explanation there in terms of, you know, channel shift within Finish or anything like that, or whether it's just patchy Nielsen data and we shouldn't pay it too much attention.
Secondly, in terms of CEO recruitment, I understand that you're a little bit limited as to what you can say, but I wondered if you could give us any idea of timeline, and when you thought you might have a little bit more for us, in terms of CEO and just wondering how long that process would take. Thank you very much.
Let me start with Finish. It's, you know, Finish revenue was strong in the quarter, as we said, and that's largely on the back of the innovation that we've been making with the thermoform technology that we've been rolling out. We've been replacing our hard press tablets with thermoform product, and that's evident in the Quantum All-in-One range. That's clearly a superior product. It's premium now in the category, and we're very pleased with the overall performance. Now, having said that, market share in the U.S. is not where we want it to be. We are down in terms of market share in the U.S. against an incredibly strong brand. But we have plans in place. It's early in the relaunch of the innovation.
We have strong plans in place, and we believe that we will make good progress as we continue to innovate and continue to drive the thermoform technology. We're happy with the performance to date. There's more to be done, especially in market share in the U.S. If you look at Europe, we had some issues with one or two customers as we put through price increases, and that affected temporary market share issues. Overall, we're very pleased with our market shares in Europe, and also with our total revenue. You're not wrong, the market share isn't perfect. We have some room to go, especially in the U.S., and I think that's a key battleground for us.
Iain, I'm not sure whether Nielsen picks up Australia, New Zealand, emerging markets, Eastern Europe, so it's obviously we're looking at the total picture there. Sorry, Nicandro, CEO.
Regarding the CEO, the process is underway. We are reviewing internal candidates and benchmarking with external candidates. We'll provide a further update when it's appropriate, but I cannot provide you a specific timeline because the process will take time. I'm here in order to give the board and the company the timing to find the right person to run the company. I think that the Chairman has mentioned before that the process may take 9-12 months, but we don't have any timing for that. We'll take the time that's necessary to find the right person to steer the company for the future.
Yeah. Okay.
Thank you.
Thanks, Ian. Right, next on the line we've got Bruno Monteyne from Bernstein. Go ahead, Bruno.
Hi. Good morning. My first question is on those numbers you quoted about Lysol and Dettol versus pre-COVID. I think you said about 50% higher for Lysol, 30%-40% for Dettol. Can you just clarify, does it include the benefit of pricing, or is that really a consumption volume, weighted number? And on that, I think from quarter one already, you talked about normalization, stabilization in these, you know, Lysol and Dettol related brands. If I take pricing out, and it's just Lysol that's down materially still this quarter, but Dettol and volume certainly materially down as well. If you were to define normalization or stabilization as stable volumes, you know, when do you see. When do you expect you'll be closer to that, you know, if we use that?
The second one, I think, you just said before, you don't see any signs of down trading, and I sort of agree, the price increases don't look too bad. Surely there ought to be some places. If I just look at Nielsen Europe, I know it doesn't include Australia, Richard, but clearly there still seem to be market share losses to private label as private label is gaining. If you were willing to really scratch hard, where do you start seeing potentially some signs of down trading by consumers to private label or other cheaper brands? Thank you.
Hey, Bruno. Thanks a lot for your questions. First of all, let me take Dettol, 'cause Lysol and Dettol are in slightly different phases of their normalization. Let me take Dettol first. We said in September 2021 that we saw Dettol stabilizing at around 40% revenue over the pre-pandemic levels. That is a revenue number that we've never really discussed the volume position. We continue to see those types of levels around 40%. We expect to finish this year around 40% up versus 2019. I think considering we gave that guidance in September, that's pretty consistent. What we also said at the time is we expect Dettol to start growing in 2022, and we've had a few mixed quarters. We were down in Q1, up in Q2, down in Q3.
Net-net, we still can see Dettol growing in net revenues in terms of the full year 2022. That's also always been a net revenue discussion. Next, we said that Lysol has been consistently performing at around 50%-60% in the U.S. at point of sales increase versus our pre-pandemic levels. We continue to see that performance. Obviously, as we work through the peaks from 2021, we're starting to normalize versus last year. As I mentioned on the call, down 30% in the first half, around 15% in Q3, and we expect that progression to be closer to back to flat by Q4, that type of area. We're very pleased with that overall performance. Now within that, there are some areas winning and losing.
I mean, Lysol wipes in the U.S., for example, has been soft in terms of shares. We had a major competitor which had patchy on-shelf performance in 2021. It's also a category which is a bit more commoditized with private label. Overall, we see strong share gains on the most important parts of the category like laundry, LDS, laundry, Lysol Disinfectant Spray. Into the new areas of the brand that we're moving it, Laundry Sanitizer, we're very pleased with the performance. All in all, those have been revenue targets. We're not gonna
I'm not gonna dissect those by volume, but we do see Lysol and Dettol normalizing, and we expect 2023 to be a relatively normal year, where we won't be talking about the peaks and troughs of prior years, but we'll be back onto a consistent basis where we can talk about underlying performance. In terms of downtrading, you're right to pick out European Hygiene as one area where there have been some market share gains. Generally, that's been more against the commoditized type of categories like laundry detergent and fabric softeners. In markets like Spain, which are very strong private label markets, we do see a slight shift in European Hygiene to a few basis points to private label. Equally, we see private label losing share in the U.S., for example.
We've been gaining share versus private label in the U.S. Net-net, as Nicandro Durante said, there's no major gap relative to private label. We're holding ground relative to private label.
Thank you, Jeff. If I just may follow up, I understand the guidance was always on a nominal basis, but if you say sort of Lysol is still declining at mid-teens, let me make that -15%, you probably have 10% pricing if it's the same order. I would still suggest -25% volumes in there and similarly then for Dettol. Surely the volume picture matters as much. I understand the top line, and surely when you're in double-digit volume declines, that may suggest that kind of normalization of hygiene habits still has a long way to go. Would you not agree with me on that?
I don't agree that the normalization has a long way to go. I think when you look at the new initiatives, when you look at the stickiness of the hygiene habits with our core users, and I mean, only time will tell if we are able to stabilize these two brands. We are in an exceptional time in terms of cost of goods inflation and pricing. Clearly, you know, I said at the beginning of this year that the growth would be more price driven than volume driven in 2022, but I think that's a temporary thing. I don't think volumes are in decline. I think we have a temporary issue where price is gonna be a bigger constituent part of the growth than volume.
That's a temporary thing which, you know, we need to demonstrate during the course of the next 12 months that we can see both of those brands growing, and I think we will demonstrate that. You know, and I think that's all we can do in terms of answering that question.
Thank you, Jeff.
Cool, thanks.
Thanks, Bruno Monteyne.
Right, next on the line we've got Fulvio Cazzol from Berenberg. Go ahead, Fulvio.
Hey, good morning, everyone, and thank you for taking my two questions. The first one is on input cost headwinds. So you're guiding to high teens for this year, and I was just wondering if that was a subtle change to the H1 results when you expected 20% inflation in H2 versus 10% in H1. I'm just trying to understand if cost inflation will be closer to 25% or so in H2 rather than the 20% you indicated at the H1 result. My second one is on nutrition. You stated in the release that you expect to exit the year with normalized sales volumes and margins. I was just wondering if you can clarify what you mean by normalized.
I guess I'm trying to understand how much of the 18% benefit that you realized on the divisional growth, from the competitor issue, how much of that you expect to retain, you know, by the end of the year and into 2023? Thank you.
Well, hi. First of all, on input costs, I hope there's no misunderstanding 'cause we haven't changed our commentary at all. It should be totally consistent with the half year and what we said at the half year and what we're repeating is that for the full year, we see high teens commodity cost inflation. The number we quoted at the half year was 15% for the first half, which implies closer to 20% for the second half. That's exactly in line with what we're seeing, and by the time we entered the second half, we had something like 80% of our costs pretty much fixed through forward buying contracts or hedging. So that hasn't changed at all.
What I also said is I expect the second half of 2022 to be the peak of commodity inflation, and I think based on prices we're looking at into 2023, that's true. That's not to say 2023 is gonna get easy. Prices are still high, much higher than if you go back to 2021 or 2020. The peak of the inflation I would say seems to be in the second half of this year. The other challenge for 2023 as we look forward to it is that CPI inflation, labor inflation has yet really to come through the system, so we expect that to be more impacted in 2023.
In regard to the input costs, we've tried to be consistent, high teens% for the year, slightly higher in the second half than it was in the first half. In terms of how we see Nutrition coming out, maybe Nicandro Durante can-
Yeah. I can say a few words about that. We expect that we see already on the shelves in the US, competitors brand coming back. We expect to be normalized by the end of the year. We think that there will be. The assumption that we have today is that there will be full supply from the competition at the end of the year. When we say next year is gonna be a normalized year, it's gonna be normal competition. Regarding your question about retention, well, we'll do our best to retain as many as possible consumers to our brands. Our brand is quite a strong position nowadays. It's number one.
Brand choice by the physicians in the United States nowadays, which is a great place to be. You know, generally, when a mother already has this baby with a certain brand, they stick with the product. We expect to retain. I mean, I cannot give you any guidance for next year about the retention rates, but we expect to be stronger than we were before the out of stock situation happened in the United States. How strong? Well, we will be as strong as possible. We are gonna work very hard to keep our brand with the leading position that we have nowadays. I know as well that the competition is gonna work very hard on the other side, so we have to wait and see.
I expect to be next year in a much stronger position than we were before the out of stock situation with the competitor happened.
Great. Thank you so much for that.
Thanks a lot.
Right. Next on the line we've got Jeremy Fialko from HSBC. Jeremy, all yours.
Hi, morning. A couple of questions from my side. First of all, can you talk about pricing and kind of like where you are in the process of actually putting the price rises that you need in order to restore the margin structure of the business? Or you know, roughly how much more do you think you need to put through, when you think that process might end based on where costs are at the moment? And then secondly, can you just talk a little bit more about the growth of your IMF business, ex the U.S.? I mean, mid-single digit doesn't seem such a rapid rate of growth given the fact there's still plenty of pricing around.
Perhaps you could talk a bit about some of the dynamics in those sort of non-U.S. markets. Thanks.
Yeah. Let me start on pricing, Jeremy. You know, you'll have seen on our price mix numbers that our pricing has increased in the third quarter, and we were relatively low in quarter one with some acceleration in quarter two. We have had quite significant pricing come in through the course of the second and third quarter. Obviously that will help us get to the position we need to be by the end of the year. Now, because we've implemented that pricing in the course of the year, we'll get quite some significant carryover for that price into the start of next year. I'm not gonna get into what other pricing we're gonna do during the course of 2023.
I would just emphasize the fact that the first place we look is internally with our productivity program to make sure that we can do everything we can do to minimize the price increases to our consumers. That's pretty much the first thing we look at, and we have, I think, a best in class productivity program, which will keep our foot very much to the gas and continue to deliver against, which will allow us to be really responsible in terms of any pricing we might have to take in 2023. I mean, on IFCN, what I would just say is that our market shares are very, very strong.
In fact, in all of our significant geographies, we're gaining market share in Latin America and in ASEAN, with one exception, and that's in the Philippines, and we have a strong program to get the Philippines back on track. Therefore, I think the number we quote in the press release is well over 90% of our CMUs in nutrition are gaining or holding share. I think our share performance is very strong in those markets. You know, since Reckitt bought Mead Johnson, this is the first time we've really seen revenue growth in the Asian markets, and I'm very pleased with that.
The reason that we've been able to do that is the fact that we exited China, and it's given us the opportunity to really focus on building in the markets where we have strong share positions. In most of those Asian markets, we're in the 20%-30% market share positions, similarly in LatAm. The fact that we've now exited that China market where we had a weak market position has really allowed us to focus in those areas to build the brand and to see good performance. I'm very pleased with the performance. You know, mid-single digits may seem disappointing to you, but I'm quite pleased with mid-single digits.
Sure. Thanks, Jeremy. Right. We've now got David Hayes from Société Générale on the line. Go ahead, David.
Thanks, Richard Joyce. Good morning all. Hi Nicandro Durante. Good to see you back on one of these calls. Two for me, one on input cost inflation for next year and one on US nutrition. Just on the input cost inflation for next year, I'm picking up on a comment that I saw in the headlines, Jeff Carr, that you made, I think, in a media call this morning, that staff costs inflation would be the biggest element of inflation for next year, which I guess if you take staff costs as a base, assuming that could be up as much as 10 percentage points, that'd be about GBP 200 million sterling extra inflation.
If I apply that to cost of goods sold, that would imply that inflation outlook for cost of goods sold is maybe, you know, 3.5%, 4% tops. Is that the way that you're talking about it in terms of those absolute numbers? Just trying to understand that comment, you know, contextualized. The second question on U.S. infant formula. Congratulations on winning the Texas WIC contract. I think that started on the first of October that you took it over.
Just a question on that and whether you saw inventory building in that space as it switches from Abbott to you in September, whether that was part of the dynamic of the U.S. business. Whether there's more contracts that are being reviewed that you could flag that maybe you might win and gain from over the next quarter or so. Thanks so much.
Okay, David. Let me try and be a bit clearer on input costs for next year, and don't take what you read in the press too seriously, please. I think what I said is what I meant to say. I'll go back and check my exact wording, but what I meant to say is we haven't seen much staff cost inflation come through yet, so it will be a challenge for next year. I don't think I meant to imply it would be a bigger absolute cost inflation than commodities.
I think staff costs, we haven't really seen the inflation come through the system yet. I was flagging that while the commodity costs will be off their peaks, there will be other pressures such as staff costs starting to come through. I wasn't trying to get into a situation where I was comparing the absolute increase in staff costs to commodity costs. While commodities are coming down, the absolute levels are still elevated compared to 2021. We're tracking many commodities, including things like ocean freight, and they're coming off their peaks. That still is at a higher level than 2021.
Just to be clear, I was flagging that staff costs would and CPI would still be a driver of inflation next year, but not comparing the absolute numbers among the two. I don't have a lot to say on WIC contracts in terms of the Texas bidding. We're pleased to take that on board. There was no significant inventory impact in terms of our performance. I don't think that had any impact on the quarterly performance of IFCN in total. You know, in the normal course of business, WIC contracts come up and you know, we're keen to bid for them and we'll try and be competitive and hopefully win more than we lose.
Thank you.
Thanks, David. Right. Next on the line, Celine Pannuti from JPMorgan. Go ahead, Celine.
Thank you so much. Good morning, Nicandro Durante, Jeff Carr, and Richard Joyce. Thanks. My question is on you said you were firmly on track for your midterm targets of mid-single-digit% growth and mid-teens% margin by mid-2020s. I wanted to understand, when you look at that versus the challenges of the current environment, what sort of visibility you have in 2023? In other words, we know that in 2023 there will be the impact of the Nutrition normalization. If I put this aside, I mean, what's the visibility on 2023 versus the environment that you mentioned on some challenges, for instance, in hair care or maybe a bit of a softer demand, and the ability to deliver on that.
I presume that will be my second question that relates, if I think about the margin performance this year, which you say will be up and was strongly up in H1, how much of a drag from the tough comparison we should think about as we look into 2023? Thank you.
Let me take those, and first of all say I'm not gonna get into specific guidance on 2023. The reason I can say that we're firmly on track is that we have a lot of levers that we can pull in order to develop our margins back to the levels. We're confident on the resilience of the business overall. Hair care is a category where we see some softness, but generally, as I look across our categories such as OTC, such as Finish, for example, and Automatic Dishwashing, I see really resilient brands.
When I spoke in September 2021 about the path to the mid-20s% margins, what I pointed out at that time was that most of that comes from developing our top line and the leverage that we get on our fixed costs. We invested in fixed costs in 2020 and 2021, and that brought our margins down. The fact that we're now growing on the top line, we'll get that leverage and that will be part of the way to driving us to those midterm targets. Of course, in addition to that, I'm very pleased with the outperformance that we've had on our productivity program as well, and that remains a key part of the program. I mean, there is still significant efficiency opportunities that I see here at Reckitt to improve performance and drive productivity.
The combination of those, I feel very confident that we are on track for those mid-20s targets. Of course, no one's denying that we're gonna face challenging times. These are incredibly challenging times for all businesses. We just need to continue to perform and outperform our peers and deliver in line with the external environments. I think we can continue to do that and have good performance over the next several years. In terms of the 2022 margins, the best way that you can look at it is if you just take. I'll leave it for you to do the calculation.
If you take the average margins of Nutrition from 2021 and look at the margins that we're gonna deliver in 2022, take the delta, that's the best way that you can estimate the upside that we've enjoyed from the fact that although we haven't put pricing through in Nutrition in the U.S. The fact our margins have grown is purely due to the leverage of the extra volume that we've been selling and the extra performance that we've had whilst that competitor's been off the shelf. That's the best way that you can do that calculation and come up with an estimate of the normalization. Maybe I'll get more specific on that with the year-end results and give more guidance to that.
Cool. Thanks. Thanks, Celine Pannuti. Right. If we move on now, we've got Tom Sykes from Deutsche Bank. Go ahead, Tom.
Just firstly, could you make some comments perhaps on your outlook for the flu season, how that started off for you, inventory building, and where your own capacity is to supply the market during cold and flu, please. Just to come back onto the volume aspect, given the volumes in by region, when you look at them in Europe and the developing markets have seen a sort of 7%-9% swing quarter to quarter, and obviously the developing markets number is down by 7% in volume terms. I know you reference in the report Lysol and Dettol, but you know, the price mix is the same in developing markets in Q3 versus Q2, but your volumes have had an 8% sort of swing in terms of the year-on-year growth.
Are you happy with the price elasticity you're seeing, if you like, outside of North America? Have we seen the lows in terms of the volume growth, or do you think that volumes could actually get worse? Thank you.
Let me start on the flu question. In terms of our own capability, we've been investing in our supply chain significantly over the last two and a half years. You've seen our OTC numbers were up significantly over the last three quarters, and I expect that we'll be able to meet demand. In terms of what sort of flu season we expect, we've seen basically strong flu season in Australia. Sometimes we take that as an indicator of what to expect in North America. Consumption of our cold and flu medications remains very strong. I don't see any reason not to believe that there's gonna be a fairly strong cold and flu season, and we're ready for it.
Obviously that includes selling in over the September-October period for the readiness for that, which tends to peak in, you know, January, February time frames. We haven't seen massive changes in inventory. So there's been no significant movement in trade inventories. If you're looking into our numbers in Q3, pre-Q3, post Q3, I don't think the inventory, trade inventory numbers have had a big impact on that. I think coming to the developing markets and volumes, again, I think you just have to not get carried away with one quarter's performance. Are we particularly worried about price elasticity? No.
I think generally when we look at our overall performance and look at the full year performance, our volumes on a year to date basis remain pretty strong and positive for ex-Lysol and ex-US IFCN impact. Obviously, we did have a tougher period in Q3, for example, Dettol in Asia, and we're addressing that. We have specific plans in place to address that. As we mentioned, Durex in China, we had a tougher period partly due to the continued COVID effects. In the longer term, I don't see particularly concerning around price elasticity. Our brands are generally in premium categories with strong margins.
You know, they're highly efficacious brands, which as we see recessions, as we've learned from recessions in the past, majority of our brands remain very resilient, and we expect that to continue.
Thank you.
Thanks, Tom. Right. Next on the line, we've got Martin Deboo from Jefferies. Go ahead, Martin.
Yeah. Morning, everybody. Just a quick build on Tom's question about cold and flu and just some of your commentary, Jeff. You're clearly a very strong result in Q3 and OTC ahead 20%, and you seem to suggest that's market growth and market share related. The Nielsen in the U.S. seems to be showing offtake as sort of pretty flat year-on-year. Can I just sort of ask the question again, how much of that 20% performance in Q3 was sell in versus sell out? That would be the specific I would want to ask. Thanks.
Based on the numbers I'm looking at, very little. I think, if I look at our total cold and flu performance, it remains very strong across all the brands. I'll go through brand by brand. Strepsils, Mucinex, you know, if I look right across Nurofen, if I look right across the brands, we see strong offtake both in Europe and in the U.S. I'm a little surprised if you're saying you don't see point of sales data, which supports that. By the way, our market shares for Mucinex very high levels, which is usually the case. We gain market share when there is a real cold and flu issue because we know our brand is more efficacious than the competition.
I don't see any softness in terms of offtake. Right across our cold and flu brands, we are performing well in terms of consumption. I expect that will continue. Now, the comps, of course, OTC, we were quoting plus 60% in the first half of the year. The comps will get less because clearly we have a pretty much we're up against fairly strong comps in the second half. Certainly in the fourth quarter, we had fairly strong comps in terms of OTC. The comps will certainly soften as we go on because we are going against tougher comparatives. The first half of the year, as you recall, there was practically no cold and flu season.
We had a pretty good second half of the year, and we had a pretty strong fourth quarter in terms of OTC, so we'll be comping that in the fourth quarter this year. But inventory builds, we measure, and we look at very carefully. We haven't seen any significant inventory build.
Okay. Thanks, Martin.
Okay. Very useful. Thank you.
Thanks, Martin. Moving quickly on, we've got Chris Pitcher from Redburn. Go ahead, Chris.
Color on the contribution.
Chris, you're on mute.
Hello? Can you hear me?
Yeah. Chris, can you start again? Yeah, thanks.
Yep, sure. Couple of questions, please. Could you give a bit more color on the contribution to Lysol sales from the Global Business Services division and new markets, whether that contribution is up on what it was last year? And then secondly, on the U.S. infant nutrition, are you able to give a split of year to date what has been rebated and non-rebated? Certainly my understanding is a lot of the supply disruption has obviously been on a non-rebated basis, which has obviously helped you on price and margin. Whether if those sales are retained next year, they remain on that attractive margin. I'm trying to understand what you think the mix of business likely next year will be between the two different subgroups. Thanks.
Yeah, look, we have developed a strong GBS, global business services. Sorry, professional business, which is focused not just on Lysol, but on Dettol and other brands. The sales contribution to growth this year is not positive, and that's largely because of the volume that we put through in the U.S. with the peaks at the beginning of 2021 and during the Delta variant in 2021. The volumes in 2021, especially in the professional business, were very strong and we've come off that. We still have a much bigger business than we started in 2019, and we still see growth going forward into 2023.
For this year, it's negative, but that's largely because of the fact that the COVID peaks in the early part of 2021 and August, September with the Delta variant in the U.S. was so strong, and that drove very strong sales in 2021. In terms of IFCN, yeah, we have gained both in our in the WIC business but also in the non-WIC business. Clearly, where our competitor hasn't been able to supply WIC in their WIC markets, we have filled that gap and been fully rebated for it. Now, we will lose that business quite quickly once the competitor's able to supply into those markets, and that will be a significant margin impact, which is why I've said we've had.
It's one of the key drivers why we've had beneficial margins in 2022 because we've been fully refunded for that WIC business that we've been selling into markets which are not our WIC markets. We will lose that, and I think our competitors said they will supply, they will address the WIC markets quickly. That'll be one of their priorities, and we expect we will lose that more quickly. Now there's still, you've still got the issue of mothers not necessarily wanting to switch. If they don't want to switch in those markets and they're a WIC customer, they'll have to go to a fully priced product which will be difficult for them. There'll be some challenges there. I'll go back to what Nicandro was saying.
When we measure our market shares, we measure the non-WIC market shares, and we expect, you know, to continue to be strong. We're in a better place than we started this. As Nicandro said, we now have the number one doctor-recommended brand in the U.S. That's an important KPI for us. You know, there's gonna be a significant battle coming up where the competitor looks to get back their market shares. We're up for that and we expect to perform well in 2023, albeit we won't be comping the numbers that we had this year. Clearly, we'll give some of that back on revenue and margin.
Thank you.
I was just gonna say, can you confirm that Nutrition is ongoing part of the strategy? I know there was some conjecture earlier in the year about a potential divestment, but that seemed to have been put to one side. Looking forward to next year, it's very much part of your planning. I'm mindful of what you can say, but
Well, I would just say we have three GBUs, three global business units, and they're all core to our strategy, yeah.
Thank you.
I don't know, Nicandro, do you wanna add anything?
No, I'm saying we are running the business, and we are gonna run the business the most possible way. We don't talk about those things for the future. You know, we have good business units, as Jeff rightly said, and we are trying to get the most of it.
Okay. Cool. Thanks. That's right, we've got five minutes and three more questions. Next question is from Pinar Ergun from Morgan Stanley.
Hi. Thanks for taking my questions.
Go ahead, I'm sorry.
I have three quick follow-ups to the debate so far. The first one is, can you please share with us what the volume decline would've been if you also adjusted it to exclude the U.S. IFCN benefit in addition to Lysol, and what are some of the areas driving this volume decline? For example, do you have anything to call out in Nutrition? The second follow-up is, which categories other than air care would you categorize as discretionary? And what gives you comfort that demand for those products rather than market shares, but demand for the products will stay resilient in the months ahead as the cost of living continues to bite?
If I can squeeze a really quick third one, small one on the financing costs, I believe, around 20%-25% of your financing is in floating rate. How should we think about that, as we head into 2023? Thank you.
Okay. I'll try and answer quickly, but the volume we talked about ex Lysol is down 1%. If you took out the benefits of IFCN, it would be probably down around 2% in the quarter. Still positive on a year to date basis. I would just say on the idea that some categories are discretionary and others aren't, it's not black and white. I think we need to sort of bear that in mind. Where we have air care we mentioned, I could also mention VMS as a category which has softened as a consequence of consumers being a little bit more conscious about how much money they're spending. Our challenge and what we're up for is to make sure we innovate into those categories to get growth. That's what we'll be doing.
We have a strong innovation pipeline both for VMS and air care, which should allow us to gain market share and to grow. Ultimately, the key measure is how we perform versus our peers, and that means winning in each of our key categories. Market share becomes important in these times. I'm pleased to see that the number of CMUs gaining and holding shares grown in the third quarter versus where it was at the half year. Finally, on financing costs, you're right to say that we have about 20% of our debt, which is floating, and about 80%, which is fixed. I think that's a good strategic position to have in this as a treasury policy.
Clearly that means that, as interest costs go up, that 20% floating will incur greater charges. 20% of around GBP 8 billion debt is still quite a lot of debt. Now, that won't affect 2022 because, we're still operating within the guidance we gave for interest costs in 2022. Clearly it'll be a challenge for 2023. I think, you know, most of our peers as well will see increased financing costs, which we'll have to manage as part of one of the levers that we manage as we develop our earnings per share expectations. You know, those costs will go up, and we need to manage that.
Cool. Thanks, Pinar. Right, on to Karel Zoete from Kepler Cheuvreux. Go ahead, Karel.
Yeah. Good morning. Thanks for taking the question. I have two quick follow-ups. The first one is on the innovation agenda for next year. You already mentioned a couple of times strong agenda. Most of the time your innovations are rather premium. Is that still going to be the case in 2023, or you'll also be willing to look at some more value innovations, particularly for difficult markets as Europe? And the other thing I spotted was e-commerce growth was just 5% in the quarter. Is there a specific reason behind that? Is that, for example, China lockdowns? Yeah, just looked quite light actually. Thank you.
Well, the first question about innovation. Yes, we are looking at innovation in different price points for next year. There are products, for example, the air care that we are coming at the beginning of next year. The whole concept is to bring new innovation and premium position, and then you can drive down the innovation that's in the market in different price points. It's gonna be the strategy to meet consumer demand and consumer needs in different price points, no doubt about that. That's necessary. Regarding e-commerce, listen, it's very difficult to be hung up in a specific quarter to look at the position of e-commerce. Of course, the lockdown in China had an effect because e-commerce is quite an important tool in China and had an effect in our numbers.
If you look at nine months, the results are extremely solid, and I don't see this is slowing down. I think that we'll continue this path of very good performance for the year, for next year. We are very optimistic about our e-commerce performance.
Okay. Thanks, Karel.
Thank you.
Our final question, we've got Iain Simpson back again. Iain Simpson, go ahead for the final question.
Thank you. Thank you very much for taking another question from me. I wondered if you could talk a little bit about capital structure. I think on my numbers you're gonna finish this year below 2 turns net debt over EBITDA for the first time in 6 years. I wondered if you could give any indication as to at which point you might consider capital returns.
To be appropriate. I just wondered if you could talk a little bit about how retailers are responding to price increases and how that's changing. I think some of your competitors have commented that, you know, while taking pricing in the first half of this year was pretty easy, it was getting successively harder as the year went on. You've talked about how raw material costs are peaking in the second half of this year, but non-raw material input cost pressures are building. I'm just wondering how we should think about the pricing dynamics through the next 6-12 months, I guess. Thank you very much.
Well look, Iain, very much quickly on the pricing and retailers. It's never easy to take pricing and we try everything we can to make sure that we look at every other option in terms of driving productivity to avoid taking pricing. We have taken pricing during the course of this year. Some of that will roll into next year because majority of our pricing was taken later in the year. I'm not gonna therefore get into discussions about further pricing that may or may not be necessary in any markets. But what I would say is that it's never easy to have pricing discussions with retailers. We both have the same goal, which is to give our consumers great offers and therefore pricing is never an easy decision.
On capital returns, let me just say, I'm pleased with the overall cash generation and performance that we've had, which has been driving down our net debt. The fact that we're bringing our net debt down starts giving us more options. However, I think you have to be cautious about the expectations for the end of this year, because with the dollar at the level it is, we have a significant portion of our debt in dollars, so therefore, we have more debt dollar denominated than we have earnings dollar denominated, and that will therefore have a negative effect on our net debt to EBITDA base versus where it would have been on a constant rate. That will have an adverse effect on the net debt to EBITDA due to FX.
Overall, we continue to generate cash and get our balance sheet in a better shape. As we get our balance sheet in a better shape, it gives us more options. It's a bit early to talk about capital returns, but that's obviously we'll keep an efficient balance sheet when the time is right. If we don't see good acquisition opportunities, we have an efficient balance sheet. We're comfortable that capital returns in the future will become part of the discussion, but it's a bit early for that now.
Thank you very much.
Thanks.
If I could just squeeze in one follow-up. You talked about efficient.
No, I don't think so. I think you have plenty of chances, Iain.
All right. All right.
Welcome back.
I had to try.
Okay. Give Richard a call after this call, maybe. Thanks very much. Thanks, everyone. Have a good day. Bye-bye.