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Edited Transcript of RB.L earnings conference call or presentation 30-Jul-19 7:30am GMT

Half Year 2019 Reckitt Benckiser Group PLC Earnings Call

Slough Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Reckitt Benckiser Group PLC earnings conference call or presentation Tuesday, July 30, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aditya Sehgal

Reckitt Benckiser Group plc - COO of Health

* Adrian Nevil Hennah

Reckitt Benckiser Group plc - CFO & Executive Director

* Laxman Narasimhan

Reckitt Benckiser Group plc - Executive Director

* Rakesh Kapoor

Reckitt Benckiser Group plc - Group CEO & Executive Director

* Richard Joyce

Reckitt Benckiser Group plc - SVP of IR

* Robert de Groot

Reckitt Benckiser Group plc - President of Hygiene Home

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Conference Call Participants

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* Alan Erskine

Crédit Suisse AG, Research Division - Research Analyst

* Celine A.H. Pannuti

JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst

* David Hayes

Societe Generale Cross Asset Research - Equity Analyst

* Guillaume Gerard Vincent Delmas

BofA Merrill Lynch, Research Division - Director

* Iain Edward Simpson

Barclays Bank PLC, Research Division - Analyst

* Jeffrey Patrick Stent

Exane BNP Paribas, Research Division - Research Analyst

* Jeremy David Fialko

HSBC, Research Division - Head of Consumer Staples Research of Europe

* John Mark Ennis

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Karel Zoete

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Marion Boucheron

MainFirst Bank AG, Research Division - Research Analyst

* Martin John Deboo

Jefferies LLC, Research Division - Equity Analyst

* Richard Taylor

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you all for standing by, and welcome to today's RB Half Year Results 2019 Webcast. (Operator Instructions) I must advise you all that this conference is being recorded today, Tuesday, the 30th of July 2019.

And without any further delay, I would like to hand the conference over to the Senior Vice President, Investor Relations at RB, Mr. Richard Joyce. Please go ahead.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [2]

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Good morning, and welcome to RB's Half Year 2019 Results Presentation. Before we start, I'd just like to draw your attention to the usual disclaimers regarding forward-looking statements.

And now without further ado, I hand over to our CEO, Rakesh Kapoor.

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Rakesh Kapoor, Reckitt Benckiser Group plc - Group CEO & Executive Director [3]

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Thank you, Richard. Good morning, and welcome to RB's half 1 interim results presentation. Let me begin by introducing the RB team participating on this call today. We have Adrian Hennah, our CFO; Rob de Groot, President Hygiene Home; and Adi Sehgal, COO, Health. You've surely met or heard them before.

It is also my pleasure to introduce and welcome our CEO designate, Laxman Narasimhan. He has literally been in the company for 2 weeks and is here to say hello and to let you know that he will be focused -- what he will be focused on over the next 6 months. He will not be taking any questions at this point in time. Laxman, welcome to RB. I know just how much of a privilege it is to lead this great company, and we are delighted that you have decided to join RB.

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Laxman Narasimhan, Reckitt Benckiser Group plc - Executive Director [4]

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Thank you, Rakesh, and I'm indeed delighted and honored to join RB and to lead this great business into the next decade. As Rakesh mentioned, I've been with RB for 2 weeks only, and so I'm going to keep this brief.

I did, though, want to take this opportunity to talk about my top priorities and tell you how enthused I am to be taking on the role of Chief Executive from September 1. I come to this company from PepsiCo where my career covered running operations in developed and emerging markets and driving the global commercial functions. What has struck me in the short time that I've been at RB is the pride and passion for everything the company delivers, which is the lifeblood of this business. RB's products and people play a critical part in delivering our mission of improved health and hygiene for all people across the globe. I am honored to be taking over from Rakesh in September, and I'm looking forward to seeing the operations, meeting the wider team and building on the strengths that we have.

I will apply a laser-like focus on driving shareholder returns. To that end, I have 3 key priorities. Firstly, to deliver sustainable outperformance especially in the Health Business Unit. Consistent operational performance is clearly the immediate priority. Secondly, to drive RB2.0. Thirdly, to create a level of engagement with our employees, our suppliers, our customers, our consumers and you, our investors and wider stakeholders, which is open, transparent and dynamic. I will provide a fuller outlook in February along with the full year 2019 results. I look forward to meeting up with many of you along the way and hearing your perspectives.

I would like to thank Rakesh for his leadership. I look forward to meeting you all in due course. But for now, let me hand you back to Rakesh who, along with Adrian, Adi and Rob, will talk you through the Q2 results.

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Rakesh Kapoor, Reckitt Benckiser Group plc - Group CEO & Executive Director [5]

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Thank you, Laxman. Right, and before we get on with the detail of this presentation, let me kick off things by giving you some key messages around what we have done over the last 18 months in particular. You might remember, I wanted -- I'm actually showing you a slide, which I showed you around RB2.0 18 months ago. At that point in time, we outlined 3 key objectives: first, to create a consumer leader -- a global leader in consumer health; the second was to unleash the potential of our Hygiene Home Powerbrands; and thirdly was to create 2 structurally independent business units.

Let me take you through each of these in turn. On Health, it would be an understatement to say that I'm disappointed with our Q2 results. When I spoke to you during our Q1 trading update, we knew Q2 would continue to be tough. There are some pockets which have turned out to be somewhat tougher than we thought, like some of our developing markets for our Health BU particularly for brands such as Dettol and Durex.

However, there are some areas where our progress is quite encouraging. For example, our innovation pipeline for -- on Mucinex. We are launching Mucinex Night Shift, and Enfa with the launch of Enfagrow grass-fed in China. We are increasing our capabilities in medical sales, new city expansion, channel expansion, digital and e-commerce. Make no mistake, RB has created a global leader in consumer health. We have a relatively young history as a consumer health business. Just 8 years ago, 20% of our business was consumer health. And now, it is over 60%. The creation of a separate business unit focused on health and the integration of Mead Johnson in such a short period of time has been unprecedented and people have worked very hard during this time.

We have strong plans for the rest of the year and beyond. I do see some important green shoots and signs of better momentum returning. For example, the IFCN business is seeing strong share and growth momentum in the U.S. and the recovery in China, which Adi will talk you through, bodes well for the second half.

Our OTC Powerbrands are performing well. We expect a second half in Health which is strong and are further increasing our investment in brands and capabilities to support this growth.

The second objective of RB2.0 was to unleash the potential of our Hygiene Home brands. I'm very pleased that in the short space of time, this business is performing at the top end of our market medium-term expectations, and that, too, with consistency. I'm thrilled to see the passion for innovation and increased investments in this business and remain confident that it will continue to deliver a strong second half.

The third and final objective of RB2.0 was to create 2 structurally independent business units by mid-2020. And as we have stated in our release, we are fully on track.

Before handing over to Adrian, I'm pleased to say that important progress has also been made in reducing uncertainty. A leadership change always brings uncertainty and disruption in the business, and I'm delighted to have someone of the caliber of Laxman joining us. I've already spent a significant amount of time with him as part of the transition process and will continue to do so in order to make this as smooth as possible. Whilst he will be CEO from 1st September, I will, as I committed to you in January, be available to support him as he wants until the end of 2019.

And then I'm also pleased to say that we have drawn a line under the long-standing Indivior-related matters. Eight years ago, I said RB is not a prescription pharmaceutical business. The business is noncore, and this is why the board took the decision to demerge it in 2014.

With this, I'd like to hand over to Adrian to take you through the detailed financials. Adrian, over to you.

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [6]

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Thanks, Rakesh. And turning then to the first financial slide, Slide 9, these are the reported numbers for the group as a whole for the first half. In subsequent slides, we focus on the trading performance, in other words, the top 2 rows here for each business unit. We will deal here with a couple of the items lower in the P&L before turning to trading.

The adjusting items that you can see are the cost of integrating the Mead Johnson acquisition, the associated RB2.0 restructuring costs and the amortization of MJN intangibles. They are in line with guidance, and we have, as usual, included an analysis in the Appendices to this presentation.

The reduction in the net finance expense to GBP 144 million in half 2 reflects a change in mix of debt. We repaid $500 million in bonds in September '18 and $1.2 billion in term loans since June 2018. There are also about GBP 60 million in benefits in interest income mainly associated with RB2.0 restructuring, which we do not expect to be repeated in half 2. The ongoing cost of net debt remains in line with our guidance of about 3% excluding the tax-related component. We'll cover later the movement in net debt during the half and the composition of debt at the period end.

The tax rate on adjusted profit for the half year was 23%, our expected rate for the full year and in line with guidance. This is the same as the rate in half 1 last year. Discontinued net income includes the $1.5 billion cost of the Indivior settlement, describing our RNS of the 11th of July. The GBP 867 million charge represents the sterling equivalent value of the increase in the provision of $400 million. $750 million has already been paid, and we expect to pay a further $650 million during August.

Total adjusted EPS growth at actual rates was 4% in the half year. On the next slide, we set out the sources of this EPS growth. If the exchange rate end June was to continue to end 2019, the net translational impact on currency movements would be a 2% tailwind for the full year and also a 2% tailwind in quarter 3.

So turning then to the next slide. The half 1 4% adjusted earnings growth comprises the components set out on this next slide. As you can see, 1% from net revenue growth, a negative percent decrease for the 10 basis points decline in margin, a 2% increase to the lower interest cost, we expect about 1% benefit from normal operational degearing. This high number is due to the temporary benefits noted on the previous slide, which we do not expect to recur. There's no effect obviously from the flat tax rate and a 2% foreign exchange tailwind.

So turning then to the next slide. This slide shows the revenue, gross margin and adjusted operating profit numbers for half 1 and the revenue numbers for quarter 2 for the group as a whole. Like-for-like net revenue was flat in Q2 and grew 1% in the half. Gross margin declined 20 basis points in half 1. Operating margin declined 10 basis points. BEI spend for the group increased 10 basis points as a percent of revenue. Total SG&A spend was aided by a reduction in variable pay expense due to the weak performance this year. We expect this to last for the full year.

We'll return to the business unit operating margins and to a closer look at the drivers of margin change in a moment.

Turning then to the next slide and now looking at just the Health Business Unit. In headline terms, you can see that the Health business had a poor quarter, declining by 1%. Adi will give you more color on the dynamics behind these numbers in a moment, but a few comments and a few more numbers from me first. The flat Q2 revenue in IFCN comprised continued strong growth in the United States with continued incremental execution improvement, a flat position in China as supply issues were largely resolved and a focused return to securing new consumers including to replace those lost during the supply outages and declines in Latin America and ASEAN.

The 1% Q2 growth in OTC reflected a return to growth for Mucinex during the low seasonally weighted quarter. Solid growth by all the OTC Powerbrands despite the strong comparative, but a slower performance by the smaller OTC brands.

The disappointing 3% Q2 decline in Other Health reflected increased competitive pressure in Dettol and Durex and the continued rebalancing of the Scholl portfolio.

And turning then to the next slide and the price/mix and volume data for Health. Across the business unit in Q2, the negative 1% growth -- 1% decline comprised a 5% volume reduction and a 4% price/mix increase. This is, of course, not the balance between volume and price mix that we target. We do not see real price increase as any part of sustainable growth. And Adi will cover in a moment the reasons for this temporary imbalance.

On the next slide, you can see the geographic progress of Health revenue. The 4% Q2 growth in North America reflects the strong infant nutrition and improved Mucinex revenue performance mentioned a minute ago. In Europe, revenue declined by 2%, strong Nurofen and Gaviscon sales offset by weaker local OTC brands and the Scholl refocus.

Within DvM, revenue declined by 3%. The flat IFCN revenue in China and decline in LATAM and ASEAN weighed negatively. And DvM's next 2 largest brands, Dettol and Durex, both faced a more competitive phase.

Turning to the next slide. We have set out here a quantification of each of the moving parts of the 120 basis points margin reduction in Health in half 1. Firstly, a 140 basis points gain as most of the rest of the Mead Johnson cost synergies were delivered. We have delivered these cost synergies faster than originally planned, and we'll return to this briefly in a moment.

Secondly, an additional 30 basis points cost of the RB2.0 changes. We see here the expected full year effect of the RB2.0 costs, which were largely fully in place by the end of 2018.

And thirdly, the trading margin change. This was a net 230 basis points reduction, and there were a number of factors determining this reduction. Firstly, investment in increased production capacity, R&D, systems infrastructure and very much channel capabilities in China. And somewhat this total -- this totaled in somewhat over 100 basis points. An increase in BEI spend of 30 basis points. Extra freight costs in resolving the China IFCN supply position, we estimated around 50 basis points. The negative leverage from lower volumes going through the factories and lower revenue and some negative mix also around 50 basis points. An increase in input costs, some specific to ingredients in products in our portfolio, exceeding the benefit of price increases also around 50 basis points, offset by around a 50 basis points reduction in variable pay expense.

Then if we turn to the next slide, here, we show progress on achieving the Mead Johnson cost synergies. You can see that we achieved an incremental GBP 55 million in half 1 for a total of GBP 233 million to the 30th of June. We have, therefore, slightly exceeded our original target synergies ahead of the planned timing. We expect to realize a small number of further synergies, which we will reinvest in the business.

So what does all this mean for our expectations for Health margin in the full year 2019? Well, some, but not all of the categories, of the negative seen in half 1 margin will continue for the full year. We expect capacity and capability investments to remain a headwind for a while. We expect the extra freight costs to end and the volume deleverage to diminish. We expect the net input cost headwinds to diminish. We expect the benefit on margin of lower variable pay to be sustained during 2019, but to be a headwind in 2020. We expect higher efficiency improvement in half 2. And importantly, in half 2, Health will be lapping the costs of the supply disruption to infant nutrition last year.

And a couple more general points on the health performance. We continue to expect the markets that this business unit serves to grow at 3% to 5% in the medium term. We saw market growth toward the top of this range for much of 2018. Growth has declined to the middle of the range this year due principally to slow in China infant nutrition demand as the number of new births declined and by the weaker flu season in the northern hemisphere, but nothing to change our medium-term expectations. However, our performance against the market has been disappointing, and we are losing share. It is our medium-term expectation to outperform the market. We have built a synergistic set of consumer health brands and capabilities to which we are applying the usual RB energy and drive and an evolving operating model. We are clearly seeing substantial progress in improving the business, which we would not have seen if the same management teams were still covering all brands from Mucinex to Vanish. And you will hear from Adi in a moment a lot of specific initiatives which are moving the business in the right direction. We expect half 2 to be stronger. Accelerating this progress and improving performance is the #1 priority of the group.

Turning to the next slide and focusing now on the Hygiene Home business unit. Rob who runs -- of course, runs the Hygiene Home business will give you more color in a moment, but a few comments from our financial wins. We see the markets served by this business unit as continuing to grow in the top half of the 2% to 3% expected medium-term growth. The sharper RB2.0 focus and a good stream of innovation reversed the share decline of the previous years during 2018, though we have seen some tough competitive battles this year. The current underlying cadence is in line with our medium-term base goal of the upper half of 2% to 3%. You will hear from Rob that we have a good stream of innovation in the pipeline to grow the business strongly into the future.

You can see here the reported 3% growth rate in Q2, the same rate as in Q1. Growth was broad-based across the brand portfolio. The 5 largest brands, Finish, Air Wick, Lysol, Vanish and Harpic, all grew in quarter 2.

Turning to the next slide and the price/mix and volume data for Hygiene Home. The Q2 growth rate comprised a 1% reduction in volume, a 4% price/mix increase, the same pattern as in Q1 and for the same reason. Half 1 last year, as you can see from this chart, had strong volume and weak price growth, which HyHo is lapping in half 1. The 2-year picture, therefore, shows the balanced volume and price/mix position that we target.

On the next slide, we have set out a geographical summary of the revenue in this business unit. Revenue grew by 3% in Europe, stronger than in recent quarters, but it remains a tough market. Growth in North America was 2%. Growth in DvM was 3%. This is lower than in recent quarters as a tough Middle East market and a weaker LATAM performance held back continued good progress in India.

Turning then to the next slide. We have set out here for the Hygiene Home business unit a quantification for half 1 of the moving parts of the 190 basis points margin increase. Firstly, the additional 40 basis points cost of the RB2.0 changes, a similar absolute number to Health, but with a slightly higher margin impact. And then the trading margin change. The next 230 basis points improvement comprises an increase in gross margin reflecting the price/mix increase; catching up for increasing input cost and continuing good cost control; investment in innovation; a small reduction in BEI, which is planned to reverse in half 2; and delivery of a program's optimized cross-region costs especially in Europe. We expect this margin increase to reverse in half 2. We expect the balance of price and input cost to revert to a more normal pattern, and we are planning to increase BEI. Our view on medium-term HyHo margins remains unchanged.

Turning to the next slide and looking very briefly at margins for the group as a whole with some, of course, at the margin progress of the 2 businesses that you have seen. We guided in February to maintain margins for the year, the net of the remaining Mead Johnson synergies, the remaining RB2.0 costs lapping the costs associated with the IFCN supply difficulties and the cost of investment in capacity and capabilities. Margin in half 1 has been a little stronger than we expected in aggregate. Stronger in HyHo, weaker in Health. Part of this is phasing between the halves, and we had a tailwind from lower variable pay that we had not expected. Our view on full year margin for the group has not changed.

Turning then to the next slide and the balance sheet. We show here the usual slide on net working capital. We continue to run the business with negative net working capital slightly better than our negative 9% target. We have seen further pressures on receivables in developed markets, and we have some -- seen some increase in inventory from our focus on enhancing service levels. We have largely offset these pressures with payables efficiencies.

So turning to the next slide on free cash flow. Free cash flow remains strong, but free cash conversion at 90% fell below the 100% we target. This was principally due to the exceptional spend on the integration in RB2.0, which reduced conversion by 11 basis points or simply 11%.

Capital expenditure at GBP 152 million in half 1 was 2.4% of revenue. We continue to expect capital expenditure of around 3% to 3.5% in the full year and in the medium term.

Turning to the last slide in this part of the presentation on net debt. Net debt reduced by GBP 200 million in half 1. The GBP 900 million of free cash flow generation was largely offset by GBP 700 million from the prior year final dividend. We pay out about 60% of the full year dividend in half 1. We have set out an analysis of the movement in net debt in the Appendices. We will have paid the $1.4 billion under the settlement of the -- with the DOJ in the U.S.A. during Q3. We are funding this from cash flow and from additional commercial paper borrowing. We have increased our revolving credit facility to GBP 5.5 billion.

And with that, I'll hand over to Rob to take us through progress in HyHo.

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Robert de Groot, Reckitt Benckiser Group plc - President of Hygiene Home [7]

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Thank you very much, Adrian, and good morning to all. I'm glad to share the half year 1 results of the HyHo business with you. But first, I want to bring us back to February 2019 when I explained what sets apart the HyHo business. First, potential. We are a business with enormous potential, operating in premium, high-margin categories with lots of opportunity to grow penetration in both emerging and developed markets. Second, purpose. We have strong brands with purpose at the core that are uniquely positioned to deliver value for our business while creating a cleaner world. Third, performance. We are a business with a performance culture. We strive to deliver competitive growth at best-in-class margins.

Today, I will be focused on the last box and give you some color on the first half performance. We've had a strong start this year delivering net revenue growth in the first 2 quarters of 2019 at 3%. This growth rate is in line with the markets in which we operate, which are highly concentrated in Europe and North America.

On margin, we saw margin expansion of 190 basis points versus the first half of 2018 driven by strong pricing and cost management. For the second half, we expect a rebalancing of this, mostly driven by further investment behind our numerous 2019 initiatives. We expect margin for the full year to be broadly flat.

Our growth over the first -- over the past 6 quarters has been consistent and broad-based. I should call out that, last year, half 1 was buoyed by a particularly strong cold and flu season in the U.S., and also the creation of separate legal entities and SAP implementation cause us sometimes some quarterly deviations. Hence, I prefer to adjust the half year performance for the areas as a whole. In the half year, regions grew in net revenue: developing markets at 6%, North America at 2% and Europe at 1%. And in half year 1, not only were all geographies growing but the growth was driven by our Powerbrands. I remind you that 80% of our net revenue is driven by the 7 Powerbrands that you can see on this chart, and we saw the growth in half year 1 in 5 out of 7 of these Powerbrands.

And I would like to give some perspective on the volume and price relationship since the formation of HyHo from 2018 as it gives context to our long-term composition. As you can see by the right-hand side of this slide, which details the growth between price/mix and volume, growth over the past 18 months has been well balanced between volume and price/mix. We did balance more volume, less growth in 2018 with a stronger price/mix impact in half year 2019.

In February, I discussed our 3 key drivers of growth: innovation, emerging markets and e-business. And I'd like to give you some updates on each of these.

For innovation. Innovation is the engine of our growth and earnings model. As I said in February, the pipeline of initiatives for 2019 is 50% bigger than 2 years ago, and we are on track to deliver this.

Emerging markets. Although they currently account for 25% of our revenue, emerging markets comprise 50% of our total growth. We continue to build our capability and go-to-market in key geographies.

And third, e-business, which I want to point out is an evolution from e-commerce. We see this as an opportunity to drive expansion to new consumers and geographies leveraging new products, digital capabilities, partnerships and different business models. In half year 1 2019, our e-business has grown more than 40% versus last year. And I want to take a moment to focus on our e-business growth and share with you what we have done. A dedicated organization has been established to focus on e-business. This group operates in hubs in priority geographies: Europe, China, India, U.S.A., and have full P&L responsibility and end-to-end capabilities from brand innovation, supply, commercial, marketing, distribution, and of course, data analytics. This team is generating results. In our e-hub regions, we saw impressive growth ranging from 25% to 75% net revenue growth in the first half.

Whitespace expansion to hyper targeting. Digital enables us to hyper target new consumers in new geographies. In India, for example, premium solutions like our Air Wick Essential Mist or Vanish are targeted to high-income consumers both in digital media and in digital distribution channels. This type of digital-first hyper targeting allows us to surpass the traditional retail-focused, scale-led type of traditional brand-building using a more focused, future-fit e-business model. This will be a key way we will continue to unlock whitespace potential across markets.

And now I would like to share with you our focus for the second half of 2019 by highlighting some of our initiatives. Firstly, in February, we unveiled some innovation highlights that we were very proud of like in developing markets where we launched specific dishwasher Powerball tablets in China. We also innovated to deliver superior solutions on our big brands like Air Wick Mist diffuser and Vanish. And I'll point your attention to Finish Quantum Ultimate, a superior technology product. And in half year 2, we will be rolling out this exciting new Finish product to, of course, more European markets. These big launches will be fueled with incremental investments in half year 2.

But in half year 2, we will complement these launches with more dedicated launches. So we launched, specifically for developing markets, Lizol in India. In India, where a significant proportion of the population has cement floors, we're launching a new specialist surface cleaner for cement with superior tough stain removal and Vanish Oxi Action All in One. Vanish is one of our global Powerbrands that consumers love and trust for the stain removal. And we're adapting this product to meet consumer needs in developing markets, particularly the Asian markets, to simultaneously remove stains, eliminate bad odors, whiten and brighten colors in one wash. Also, SBP in Brazil and Harpic in Indonesia are launching market-relevant innovations.

And of course, we continue to innovate with superior solutions on our big brands. Vanish Oxi Action Crystal White. Now consumers can truly experience the joy of whites by reviving their dull whites to 10 shades whiter in just one wash. For Air Wick Seasonal, we're launching a decorative range of Air Wick devices in the U.S. to bring some seasonal fun into the home. Lysol Laundry Sanitizer Sport is specifically designed to break down body sweat malodors in clothes at the molecular level. This contains 0% bleach, it is gentle on fabrics and works even in cold water.

But innovation is not just about products, it's also about our vision as a company, what our brands stand behind. In February, I talked to you about our purpose and our vision for the future, creating a cleaner world. And what does this mean? It means superior solutions through the products we serve to consumers. It means accelerating hygiene standards across the world, and it means deliver sustainable outperformance.

We achieved this vision of creating a cleaner world using a differentiating purpose model, whether it's preventing the spread of germs in flu season or protecting families from mosquito-borne illness or supporting access to sanitation, our brands are in a unique place to make a positive impact on the world. And by tying our brands to powerful social cause, we create superior solutions that carry a premium price and margin.

And there will be another time to go more in detail on all the programs for our brands, but I just want to reassure that more brands and more countries are activating the purpose agenda on which we have embarked. We're extremely excited about how far we've come, but we realize we're also only at the start of an exciting journey.

So as I did in February, I want to close with where I started. This is who we are as a business. We are a business with enormous potential, a strong set of brands, which are uniquely positioned to have a greater purpose for consumers and a unique performance culture, geared towards delivering consistent broad-based performance.

Thank you, and I now hand over to Adi Sehgal to talk about Health.

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Aditya Sehgal, Reckitt Benckiser Group plc - COO of Health [8]

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Thank you very much, Rob. Good morning, everybody. Today, I'm going to talk to you briefly about the half 1 trading performance in Health, but more importantly, I am also going to take you through our plans to return RB Health to growth in the second half of the year, show you where we are investing for both growth and resilience and run through a selection of our exciting new product pipeline for the second half.

Rakesh had mentioned that we had expected our growth to be half 2 weighted in 2019. Against this backdrop, our Health business declined minus 1% in half 1 driven by a disappointing performance in Q2 of also minus 1%. There were a number of expected components of the performance in Q2 and half 1. Our IFCN business delivered our expectations. We had seasonal declines in our OTC business in the U.S.A. and Europe in quarter 1 driven by the weak flu season, and we saw our OTC business come back to growth in quarter 2. But the disappointing performance in Q2 was mainly in our Other Health business in developing markets.

Our IFCN business grew 2% in half 1 with plus 5% in quarter 1 and a flat performance in Q2, which lapped a 9% growth in the same quarter in 2018 pre supply disruption. We delivered strong growth in U.S.A. behind our NeuroPro innovation and increased focus on e-commerce and medical channels. We gained significant share, and with our plan for half 2, I expect to continue this strong outperformance in the second half. This was balanced by a flat performance in China as we came back from our supply disruption in the second half of last year. I expect a strong half 2 with a tailwind of GBP 70 million in China as we lap our supply disruption and with strong innovation and distribution programs.

In other markets, performance has been mixed with weak performances in some markets in ASEAN and LATAM. Now that we are back on track in the U.S.A. and China, I expect to personally spend more time in these markets and for us to roll out a successful learning from China and from the U.S. I will talk later about the first of these being rolled out in Latin America.

Pre-acquisition, Mead Johnson had been losing market share for a long time. We have reversed this trend, and I am pleased to say that for the first time since the acquisition, we saw positive share gain globally on IFCN in June 2019, which is a clear signal of progress.

On China, the market is in line with our projections. It slowed due to lower birth rate as the onetime baby bump caused by the relaxation of the 1-child policy in 2016/'17 works its way through the system progressively stage by stage, leading to a more normal growth rate in the future. At the same time, we see premiumization continue in China as mothers look for the very best products for their children. We continue to see strong growth in pockets like e-commerce, super high premium, specialty products and mom-and-baby stores. We have worked hard to position our business to win in these specific areas.

On our brands, we did lose a cohort of mothers after our supply disruption in the second half of 2018. But we ensured that we kept the equity of our brand strong by continuing to invest in BEI through this period of disruption, and I am pleased that we are now at the same level of users as we were before the supply disruption with a normalized supply situation in the second half of 2019. I expect an improved performance in half 2 as we lap our supply disruption, but also start seeing the benefit of our improved go-to-market.

We have announced a partnership with JD.com last year. We have now built availability in over 500 cities, and we expect to leverage this with the launch of our exciting, new grass-fed innovation in this channel later in the year.

On OTC, we delivered a decline of minus 5% in the first half. As you know, quarter 1 was severely impacted by the poor flu season in the northern hemisphere. As expected, in quarter 2, we returned to growth. We saw good mid single-digit growth on Mucinex. While we are not yet in share growth, our share losses are progressively reducing as we successfully lap the reentry of the private label completely in quarter 3.

Our other major Powerbrands like Nurofen, Strepsils and Gaviscon also had a good quarter and are all gaining share in the latest read. So why was growth only 1% for the OTC portfolio in the quarter? Well, it was a weak quarter for some of our local brands particularly in LATAM, India and Europe impacted by heightened local competition, seasonality and stock movements. Overall, we expect to be in strong growth in half 2 with a strong innovation in Mucinex, which I will shortly talk about, a weak flu season in the base and more normal performance from our local brands in the second half.

With that, let's turn to Other Health, which is our performance came in below expectations in Q2. Our Other Health business declined minus 1% in the first half with a flat performance in quarter 1 and minus 3% in Q2. Dettol is our largest brand in Other Health and our second largest brand overall. The brand had a long history of outperformance, but it was impacted in Q2 by intense competitive and pricing activity in some of its largest markets: Africa, Middle East, India and ASEAN. The brand remains strong, and we have adjusted our competitiveness in a number of these markets towards the end of quarter 2. I expect the performance to improve in half 2 as the interventions take effect in market.

Turning now to Durex. We have driven continuous value creation in Durex since we acquired the business in 2010. It is the world's leading condom brand and has a long track record of innovation-lead growth. We did, however, have an unusually weak quarter as we saw a step-up in competitive pressure in China in particular. We expect the performance to improve over the next 18 months as our planned innovations come to market.

On Scholl, we discussed this extensively on our quarter 1 call. We continue to refocus the brand onto foot aid and problem solution products. We expect volatility as we go through this refocus and expect it to have less impact on our Health performance in half 2 and as we go forward.

On VMS, we returned to growth in the quarter. We saw encouraging early results on our new brand, Neuriva, both from consumers and customers.

So that is a summary of our Health performance in the quarter by segment. Disappointing in aggregate, but not at all a reflection of the huge work done by our people. As we enter half 2 in February, we had said we expected growth to be half 2 weighted. One of the key factors driving better performance in half 2 are some very exciting innovations in our biggest category market unit, IFCN in China and Mucinex U.S.A.

We are launching a new version of Enfagrow in China designed especially for Chinese babies. It is made from milk sourced from 100% grass-fed cows and brings benefits in naturally enabled good digestion plus the brain-building heritage of Enfa. This is a launch specially focused on mother-and-baby stores channels and will be driven by our new go deep distribution infrastructure and partnerships.

I talked earlier about how we focused our innovation energies first on China and the U.S.A. post the acquisition of Mead Johnson. We are now rolling out our successful U.S.A. innovation, NeuroPro, to more markets with the Pro Mental launch in Latin America.

Moving to another exciting innovation. For Mucinex, I am excited to share our big innovation for the coming season, Mucinex Night Shift. There is a well-established category for nighttime cold and flu and sinus relief. The way these products work is that some of the ingredients that provide relief from cold and flu symptoms can also make you sleepy. Some of these ingredients are still highly active in your body after 8 hours, and therefore, you wake up still drowsy. Mucinex Night Shift delivers the powerful performance that people expect from Mucinex to fight cold and flu. On top, it also has a different ingredient that, in addition to being an antihistamine, is known to make people sleepy at night. However, this ingredient is metabolized faster, so you can get the relief you need to sleep well and wake up refreshed and ready to go. We acquired this brand 10 years ago, and this is one more example of meaningful innovation, which has fueled the brand to be the #1 OTC brand in the U.S.A.

On Dettol, we just launched a new range of personal wash products in India. Dettol partnered with models on how we make soaps, what we make them with and how we communicate with mothers. We cocreated new products with 0 talc, 0 harsh residues, 100% natural oils and essences for fragrance and with the same Dettol protection that families trust and love. It was launched in the end of quarter 2 with an innovative social campaign driven by celebrity moms, which is making big impact in India. We expect this to be a big builder of Dettol's equity and connection to the new generation of moms.

Continuing on the theme of launching products that have historical trusted benefits but in line with the times, we are upgrading our Durex Fetherlite range in China. China is a market which demands the very best products and experiences. We are relaunching our Durex Fetherlite range with the same great protection from Durex, but now reducing the thickness of the condom to 48 microns to give the same safety but further improved experience for our consumers.

Over 1/5 of our global Durex business is online. Our online consumers have additional needs versus our off-line consumers. First, they want to ensure that the product and packaging is discreet even though they tend to buy bigger sizes than off-line consumers. Second, they want more variety and the ability to mix and match the products they want. We have reworked our consumer experience and product delivery for this new paradigm. Consumers can now mix and match various condoms or Durex products and receive their order in a discrete, customized package. Of course, it also helps us with better shipping costs since the packaging is now letterbox-size and e-commerce-friendly. E-commerce continues to be a key focus for us globally, and we continue to see strong progress here.

Our e-commerce business in Health is now over 11% of net revenue and if it were a country, it would be our #3 country behind the U.S.A. and China with over GBP 1 billion of retail sales value based on the half 1 sales annualized. I have previously talked about the investments we are making and our plan on e-commerce. These are on track, and we expect to have over 1,000 people working in e-commerce by end 2019. We currently have 32 direct-to-consumer sites globally, up from 14 last year. We now have strong e-commerce businesses, not just in China and the U.S.A., but across most of our markets around the world.

But it is not just about e-commerce sales. To be competitive in future, we are reinventing how we do business and marketing in a digital-first world. We need to win both in lower funnel conversion for e-commerce but also upper funnel demand generation for our brands. And as we do this, we need to set ourselves up so that we are as advantaged in the digital-first world of today where over 40% of our marketing spend is already online globally as much as we used to be in the TV-first world of yesterday.

To embed this new way of marketing, which we call 21st century marketing into the company at all levels, we have already retrained all our brand marketers and then enabled them with the right tools and skills. Our brands live in a world of data, and we are in the process of creating AI-driven tools that help to identify better consumer insights faster and to strengthen our communications planning. We are creating 10 agile in-house content studios so our teams have access to more agile and realtime content. We have also built 1 tech stack that works across our company, fully integrated with e-commerce. This enabled us to move from the world of mass media to more highly customized and personalized one-on-one relationships.

So before I hand you back to Adrian, let me summarize. We expected growth to be half 2-weighted, and that is exactly how the year has unfolded so far. While IFCN is in line with expectations, we are behind where we wanted to be in OTC and in Other Health. This is largely due to the weak flu season in quarter 1 in OTC and due to our heightened competition in Other Health. This is disappointing. We are, however, well poised to deliver a strong second half and have clear visibility of the key building blocks, which are, first, a strong innovation pipeline focused on some of our biggest businesses including Mucinex Night Shift and Enfagrow grass-fed; second, I expect the actions that we have already taken on Dettol will drive the business into growth in the second half; third, a less material contribution of Scholl to our results; fourth, we continue to see progress on e-commerce and digital with our e-commerce contribution increasing every quarter; fifth, the lapping of our IFCN supply issue from last year, which gives us a GBP 70 million tailwind; and sixth, a weak flu season in the base. And very importantly, we are increasing investments behind our brands and go-to-market capabilities both in half 1, but also in half 2 2019 as we continue on our journey of building a global consumer health business that is both resilient and fit to compete in the rapidly changing consumer landscape.

And with that I'd like to hand you back to Adrian.

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [9]

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Thank you, Adi. And turning to penultimate slide, a few words on the progress with RB2.0. This slide is taken from the investor presentation of July last year. The program that we described in some detail then is on track. The 7 work streams we described and are set out on this chart are moving fast. Countries covering around 80% of revenue have had the core RB2.0 implementation. That is distinct legal entities in place under their business unit top co incorporated into their BU's trading arrangements and into their own BU shared service arrangements and with their IT applications logically separated. We are on schedule to deliver project Gemini, as we call it, for each BU by mid-2020.

And then turning to the last slide, 2019 guidance. As you know, we targeted in February like-for-like net revenue growth of 3% to 4% for 2019. The Hygiene Home business has progressed in line with our expectations. The Health business has made slower progress towards our medium-term goal of growing at the top end of the market growing 3% to 5% than we had expected. We are reflecting this weaker half and the slower progress towards delivering the potential of the Health business as well as the expected improvements in half 2 by reducing the targeted revenue growth for the group for this year to 2% to 3%. We continue to expect to maintain the 2018 level of adjusted operating margin in 2019.

And with that, we will now hand over to Q&A and you, Richard.

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Questions and Answers

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [1]

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Yes. Thanks, Adrian. Right. So we got a list of people on the line. The first is Richard Taylor from Morgan Stanley.

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Richard Taylor, Morgan Stanley, Research Division - Equity Analyst [2]

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First, I wanted to give a very warm welcome to Laxman and also wish Rakesh very well for the future. So on to questions. Back in February, you collectively spent quite a bit of time at the presentation, explaining why margins are sustainable in both business units. Roll forward to today, and it looks like you have more pronounced price elasticity issues in some parts of the business than, perhaps, you were expecting. I'm very interested to hear Laxman outlining his first priority as focusing on sustainable outperformance. It seems very similar to the line one of your competitors used ahead of resetting earlier this year. So my 3 questions. And in light of the price elasticity issues, are margins still sustainable? If not, why didn't you reset the margins today? And then finally, how much of a lag do you assume for investment in Health to drive a growth response?

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [3]

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Well, listen, Richard, I suppose a couple of things. One I think let's go back to the February presentation that you were referring to. And of course, among the presenters there was our Chairman. And the Chairman was expressing the view of the Board and hence sort of a continuity through a CEO change, about the Board's comfort with the balance of margins in this company and there's nothing that's changed about that. Yes, certainly we've seen, actually, the margin in the first half slightly higher than we were expecting, as we signaled. So nothing fundamental has changed since that statement by the Chairman in February last year. That said, we clearly have a new chief executive, and as you heard Laxman very briefly say in his introductory remarks, he has agreed to look over the next 6 months deeply into the business and if in the course of that he comes up with a view that's more investment -- will deliver more value for the company, then we'll hear about that in February. But as we stand now, there is no change on the view about margins in the business, Richard.

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Richard Taylor, Morgan Stanley, Research Division - Equity Analyst [4]

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Okay. And then on the investment in Health driving a growth response?

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [5]

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Well, yes. It is very clear. I know -- call it margin reset, call it what you will, but that more investment has gone in particular to Health, but not just into the Health business, also the Hygiene Home business since RB2.0. You've seen that progressively over the last 18 months. And we were calling out again today and explaining the margin movement in Health. That was -- it was 100 basis points-ish of reinvestment in a variety of things, from capacity, the factory through to R&D through to underlying systems and very much go-to-market in China. So those things are coming through. I mean, clearly different types of investments have different lags and lead times. And I think, importantly, Richard, this is all happening in the course of a tremendous amount of change in Health. And you'll see -- heard us saying over last 18 months, an awful lot of people moving to an awful lot of roles in integrating Mead Johnson alongside the RB base Health business. An awful lot of change. And frankly, that has had a somewhat bigger impact on the Health business over the last 18 months than we expected. And therefore, I think in terms of when you get return on investment, that's something that realistically has to be taken into account.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [6]

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Thanks, Richard. Okay, moving on to the next question. It's Marion Boucheron from MainFirst.

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Marion Boucheron, MainFirst Bank AG, Research Division - Research Analyst [7]

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So first question will be on RB HyHo. How do you look at H2? I mean volumes have quite fallen in H1 and you'll be lapping a bit of your price/mix, so where are you expecting the division to go from on the other half of the year? And then just going to margin also. But it seems like the synergies are now done for the Mead Johnson integration. How should we look at RB2.0 incremental costs for the remaining of the year?

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Robert de Groot, Reckitt Benckiser Group plc - President of Hygiene Home [8]

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So on the HyHo expectation for the second half price/mix and volume, what I've explained is that in the first 18 months, you actually had 2 different periods. The first period of 2018 was largely volume-driven, 5% in the first half and minus 1% on the pricing. And that's the index that we are seeing now in the first half, where it's actually the reverse. So if you do the aggregate of that period, actually, we come to a very balanced growth between volume and price, which is also in line with our guidance and our strategy to have a nice balance between price/mix and volume. So as you've rightly seen in the second half, there was already a pricing effort in 2018. So we also expect a more balanced mix between volume and price/mix.

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Marion Boucheron, MainFirst Bank AG, Research Division - Research Analyst [9]

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And where should volume pick up? Where would you expect it to pick up? Is it just the easier comp or the innovation launches? Or...

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Robert de Groot, Reckitt Benckiser Group plc - President of Hygiene Home [10]

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It's a combination of these things. It's the combination of these things. And definitely, the innovations will play a significant role and the penetration strategies that we have behind our purpose programs.

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [11]

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And, Marion, your question on margins. Yes, the synergies are done, I mean there'll be a little bit more coming through, but we'll wrap that into the normal margin reporting. The -- and on the RB2.0 incremental cost, yes, I mean, essentially, these were in place at the end of last year and what you're seeing in the first half of this year is a year-on-year effect, so that will tail off to nothing.

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Marion Boucheron, MainFirst Bank AG, Research Division - Research Analyst [12]

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Okay. So now it's just normal business related to margin movement?

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [13]

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That's right.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [14]

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Thanks, Marion. Now we've got Iain Simpson from Barclays.

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Iain Edward Simpson, Barclays Bank PLC, Research Division - Analyst [15]

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Second quarter was clearly significantly weaker than you've expected and more generally you have cut guidance quite a few times in recent years. Is there a reason that you just don't seem to have much operational visibility in your business? Is there a case that you need to reexamine your infrastructure cost base or how you do your planning, perhaps put back in some of those overhead costs you took out with Project Supercharge? I'm just trying to drill down to why the numbers in the guidance seem to bounce around from quarter-to-quarter a lot.

And then, secondly, hopefully a slightly more cheerful question. Are there particular learnings that you can take from U.S. IFCN, the share gain there, the recent recovery in Mucinex? What have you done right with those brands? What can you roll out across the rest of Health?

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Rakesh Kapoor, Reckitt Benckiser Group plc - Group CEO & Executive Director [16]

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Iain, let me take the less cheerful question first. And I would say to you the first thing is that when we stood in front of you all in February together we pointed to a growth profile for this year, which is going to be second half-weighted. Our Q2 has come in weaker than expected but not materially weaker, as we just said. In fact, back in Q1, I have said -- in the Q1 reporting, I've said we should expect Q2 to be of similar nature to Q1. So if you can configure Q2 towards Q1 results, it is not materially weaker, it is somewhat weaker. So I don't believe that we are materially worse off than we expected to be. We already expected growth to be second half-weighted for the factors that both -- particularly Adi has described to you why we expect it to be like this. It's a combination of a stronger pipeline and the phasing of that pipeline towards the second half of the year with Mucinex, Enfa, et cetera. Therefore, an increase in investment behind the second half, that's something to do with the comps of the previous year, where we had a softer flu season last year, but also a supply disruption, which were material, GBP 70 million; you can do the math of how much they add to the growth over the balance half. So there were a number of reasons why we knew back in February that the growth is going to be second half-weighted. And Q2 has fallen short of our ingoing expectations, not materially, but they are definitely short, and this is the reason why we have revised our guidance downwards. So that's the first one.

In terms of the second question, I think, in aggregate, when I look at 2 years of infant nutrition and not just one quarter or the second quarter, but I look at in 2 years, what have we achieved? This business was declining at minus 3% when we took over, and it was plus 3% last year, it is plus 2% for first half. And again, in the first half, we still see the carryover effect of the supply disruption. But quite importantly, actually, an amount of work has been done on bringing innovation in a 2-year period, but also expanding into 500 new cities in China, completely changing our e-commerce profile on these brands. And then I think -- when I think about the work that has been done to improve our U.S. business, but also the Chinese business, it's quite significant. It's true that the U.S. business has turned from very negative growth rates in terms of both revenue and market share to both positive in both sides.

We are, as Adi pointed out, taking on many of these learnings and applying them in many other parts of the world. It sometimes does not happen overnight, simply because of the way the product registrations work and innovation pipelines work. And also, of course, I -- to be very open, our own focus has been on our 2 biggest markets, which we have definitely improved materially versus 2 years ago. And as Adi said, he will focus progressively much more on the second half. So I think it is indeed the case that the IFCN business is a very, very different business than we had 2 years ago.

On Mucinex, actually, the first half/second half is also to do with a normal season in the second half -- second quarter versus a very, very bad season in the first quarter. So I think you are seeing Mucinex is not just a victim of competitive issues, it's also there is a seasonality index. Over the last, I mean, if I go back to '17, Mucinex had a good year, a very, very good year, actually. '18 was tempered by private label and, in aggregate, was okay. And I do expect at the end of this year Mucinex to have a much more normal good year, both as a result of this very, very, very interesting innovation that is being rolled out now, but also this indexing out or this reentry of private label, which happened progressively towards last year and I think will go off progressively towards the end of this year.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [17]

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Okay. Thanks, Iain. Right, moving on to the next question, we've got David Hayes from SocGen.

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David Hayes, Societe Generale Cross Asset Research - Equity Analyst [18]

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So 2 areas. I mean maybe one Durex and one on Dettol (inaudible). Durex, maybe you can give a bit little more detail about the intensified competition in China? Is that coming from Ansell under the (inaudible)? And I guess related to that, in the release you talk about a new portfolio of brand being launched in 2020. Is that quick enough for a business that is trying to be agile and you hear of your competitors going to market much quicker? What kind of delays that launch for another circa 6 months?

And then secondly on dental, you obviously talked about the pricing up and then having to turn back those prices. Is that a symptom do you think of a company that's too focused on gross margin, margin delivery and not so much about -- or not so much in touch as it could be with competition? And does that mean that there's enough brands that maybe doesn't to rebase [all their] prices to make sure that they're aligned and competitive and therefore that volume growth steps back up?

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Aditya Sehgal, Reckitt Benckiser Group plc - COO of Health [19]

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Thank you very much for the questions. So let me start with Durex. Our Durex business globally and in China has a very long and steady history of growth, which is driven by both execution, but also by very strong innovation historically. What is happening in China is that we have a whole bunch of competition, most of which is local, which is launching interesting new products and there is a lot of competitive pressure. Durex as a brand stands for durability, reliability and excellence. And one of the things about Durex is that we hold ourselves from a quality point of view as the #1 brand in the world which really stands on those 3 pillars to a higher standard than even the regulations require. And this means that as we bring our innovations out to market, we want to make sure that these are fully tested, in many cases clinically tested. And this therefore means that we are not going to roll out innovations until we have fully, fully made sure that they are fully on our brand footprint and deliver the level of safety and the level of performance and the level of security that our consumers need. And this means that, sometimes, there is a trade-off between speed and perfection. And in the case of Durex, we really are very much focused on perfection and trying to get it right absolutely. And if this means that the innovation pipeline rolls out over the next 12 months to 18 months, that's what it means, but we are absolutely going to get the product right.

As far as the question on Dettol. So Dettol is also a brand that has had -- it's a love brand, it's a brand that is fully part of the fabric of the societies that it operates in. It's been there for dozens of years in most of these markets and people have grown up through their lives with Dettol. People -- it's an iconic brand with iconic markets, like the smell and the bloom and so on. Now what has happened with Dettol is that Dettol has always been a premium brand and Dettol has always maintained a very significant premium against most competitors. And in spite of that premium, Dettol has a strong history of gaining share and gaining share consistently over the years. In this case, there have been incidents of heightened competitive activity over the quarter, which actually perhaps caught the price and the level of premium a bit out of whack from the premium that we would normally expect. So we have taken note of that and we have actually addressed it within the quarter.

In the markets where we addressed it first, we can already see the brand coming back. So I would not be so conscious -- in the long life and the long history of a brand like Dettol, I would not necessarily worry about one quarter. And I'm sure this is something that we will see coming back in the second half because we have already made the corrections in market.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [20]

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Thanks, David. Right, now we move on to John Ennis at Goldman Sachs.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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A couple of questions from me. The first is on infant formula. You said you expected the China performance to improve in the second half of the year. I wondered if you could better explain the drivers here, split between market growth, market share or whether it's predominantly driven by the GBP 70 million tailwind that you referenced?

And then my second question is coming back to, I guess, the prior conversation on the Other Health business. I guess, what makes you confident that growth can improve here for the second half of the year, given that the comp becomes more challenging? Competition, by the sounds of your answer to the previous question, remains elevated and a number of the new launches are more focused on 2020. I just wanted to get better clarity on why you think 2H will be better.

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Rakesh Kapoor, Reckitt Benckiser Group plc - Group CEO & Executive Director [22]

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I can answer the second one really quickly, I don't think we are going to give a guidance by sub segment, by business unit. I think our overall targets for the year are reflected in the second half of the year, too. We said there are some favorable comps in some areas. And maybe, as you point out, maybe less favorable comp in others. And I think our overall guidance incorporates the favorable comps, for example, in IFCN, because of the disruption or a flu comp, et cetera, with the less favorable comps that you describe and therefore that guidance is an aggregate on the business as a whole. Adi, do you want to take the first one?

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Aditya Sehgal, Reckitt Benckiser Group plc - COO of Health [23]

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Yes, so talking about China and IFCN. So let me start with the market. First, the growth in the market is exactly what we expected at this point of time and is completely in line with our model. So as I said earlier, there was a bump in the market as the one-child policy was relaxed. And as those cohorts move out of the system, the market is going to move to more normal growth in the future. And right now, it is exactly where we thought it would be. In general, there is a -- the market in China is driven by premiumization, and that compensates for the weakness in volume in the overall market at this point of time.

Now when you think about what we have done in China, I think we have made tremendous progress in a number of areas. We have really strengthened the equity of the brands that we inherited from Mead Johnson. We have focused on driving Enfinitas, even through the period where we had a supply disruption, and kept strengthening that equity. We are focused on rebuilding the cohorts that we lost through our supply disruption, and I'm happy to say that, at this point of time, we are back at broadly the same level of users that we had before we faced the supply disruption. We are focused on rebuilding our supply capabilities and, over the first half of the year, we have actually normalized our supply as we build those cohorts up.

We have also built up significant capabilities in e-commerce. I had mentioned in the last call that our e-commerce contribution in China is up significantly since the time when we did the acquisition. We have built go-to-market capabilities where we are now in 500 new cities. And cumulatively, when you look at the market share situation in China, in the latest period, we actually see actually very good progress in market share. And relative to -- let's -- our international peers, I would say we are in a good place in terms of market share at this point of time.

So as we enter into the second half, we've entered -- we are entering in a situation where our supply disruption is over. We have a very strong innovation, which is going to go into the most important channel, which is the MBS channel. We have our e-commerce platform fully set, and so I really expect that, between innovation and execution, we will drive strong growth in the second half. And of course, we are also helped by the tailwind from the supply disruption that we had last year.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [24]

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Right. Thanks, John. Right. Now we move to Guillaume Delmas at Bank of America Merrill Lynch.

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Guillaume Gerard Vincent Delmas, BofA Merrill Lynch, Research Division - Director [25]

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Two questions for me. The first one is on portfolio management in Health and whether you think you might be spreading yourself a little bit too thin there, particularly since the acquisition of Mead Johnson. Because it seemed that every quarter, the list of underperforming sales keeps on expanding. It used to be just Scholl, now we've got Dettol, Durex, some small brands in OTC. So my question here is do you think your portfolio of brands in Health is optimal? Or are they opportunities for some divestments in order to help unleash the full potential of the division?

And then my second question is on RB2.0. When you announced it in October 2017, Health had good momentum, HyHo was clearly lagging behind. You fast-forward 2 years later and we have the exact opposite picture, with HyHo quite strong and Health, to quote you, "being disappointing." So my question on this is doesn't this contrasted development is evidence of the benefits of diversification and of having these 2 businesses under one single roof? In other words, would it be fair to say that having 2 separate businesses by mid-2020 looks now less critical than it was 2 years ago?

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [26]

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Okay. Let me take the first one, Guillaume. The -- I mean the way we look at it is that this business has been on a trajectory towards consumer health for a very long period of time and has been assembling a set of brands which we believe is a fantastic set of brands for a consumer health business. Mead Johnson was the latest step in that, clearly a very big step in that. So in aggregate, we believe that the set of brands we've got is a fantastic core set of brands for a leading consumer health company in the world. So that is a sort of a broad answer to your question.

There is no doubt, and this perhaps more -- talks in a more particular way to your question, that the diversity across our range of consumer health brands is more than the diversity across the household brands. So one of the challenges in getting the consumer health business to operate optimally is to manage that complexity, is to have the appropriate operating model and the appropriate cadence. And there is no doubt that has taken somewhat longer than we expected when we put these businesses together. And that is essentially the reason for the diverging performance that you're highlighting also in your second question. Is that to say that, in the long term, every brand we've got is perfect? That's not what we're saying. But in the round, we believe we've got an excellent portfolio of consumer health brands.

In terms of your second question, the -- where are we in RB2.0? We are where we said we'd be, which is to deliver by the middle of 2020 2 structurally independent business units and strategic optionality. And as you can imagine, with a new chief executive coming in the Board, he's putting his mind how to use that optionality and your observations are noted, Guillaume. Thank you.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [27]

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Thanks, Guillaume. Right. Moving now to Martin Deboo with Jefferies.

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Martin John Deboo, Jefferies LLC, Research Division - Equity Analyst [28]

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Martin Deboo at Jefferies. The question is around the moving parts of Health margins. Adrian, thank you very much for your very forensic discussion on the bridge chart, which was very helpful. But the question is -- the relationship of mix on the top line to mix on the margin line. You had 4% price/mix in Health in H1 and Q2, i.e., strongly positive. And I would imagine that there has to be a material mix component of that price/mix. And yet mix on the trading margin line was a negative factor. So the question is how do I reconcile and understand that?

And a separate question, just a very technical one, is can I just understand how price/mix and volume is measured in the business? Is your volume measured tonnage or is it something more sophisticated? That would also help to understand that.

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [29]

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The -- I'm not sure I fully understood your first question, Martin, because, in fact, within the Health business, mix was negative in the half. Why? Because of the Mucinex being -- which is a relatively high-margin product, being materially lower in the -- so I'm not sure I do fully understand. Maybe if you want a really technical question on mix, we can take it offline because I think there's a danger of going into a morass there.

In terms of how we technically measure volume, yes, we are actually -- actually, we're in a transition. We have, for many years, had a stack cases-based approach, i.e., setting a standard for each of the type of product. But essentially weight different things in volume according to things that are broadly comparable. We are moving that to have a measure that is in line with our market research provider, which is essentially dose-related, but it replaces a value-based stack cases with a sort of usage base, and we are in that transition. But either way, saying that weighting SKUs so they have a broadly similar or broadly sensible weighting when you look at volume.

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Martin John Deboo, Jefferies LLC, Research Division - Equity Analyst [30]

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Okay, that's helpful. I'll take the mix offline maybe then. But thank you for the second answer. That was really useful.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [31]

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Thanks, Martin. Okay, next question from Alan Erskine at Crédit Suisse.

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Alan Erskine, Crédit Suisse AG, Research Division - Research Analyst [32]

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Just 3 very quick questions for me. One is with -- on infant formula, China was flat in Q2; North America, strongly up. Could you maybe just go into a little bit more detail about what happened in the other bucket?

My second question is, if memory serves me, a lot of the GBP 70 million sales loss in Q3 came back in Q4, I think 70%. So is -- what is the actual easy comp in H2?

And then, thirdly, go back to February, I mean it wasn't just the Chairman who was talking about margin sustainability. I think, Adi, you said that the reason the gross margin was so high that it was built around some very structural drivers. But we've heard a lot today about some price resets, under-recovered raw material prices, higher BEI. Are you still as confident that your gross margin is structural?

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Rakesh Kapoor, Reckitt Benckiser Group plc - Group CEO & Executive Director [33]

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So you do the first one, Adi, and I'll do the second piece.

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Aditya Sehgal, Reckitt Benckiser Group plc - COO of Health [34]

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So since we've acquired the Mead Johnson business, like I said, we focused very much on our businesses, first in the U.S.A. and China, to get these businesses back on growth and to also, frankly, generate the right models, which can then be taken onto the other market. And as you rightly said, we had a strong performance in North America and Europe where innovation continues to do well. And also, in China, given that we were coming back from a supply disruption, delivering a flat performance this quarter on the basis -- on the back of a 9% growth in the base last year was also in line with how we wanted to grow.

But like you rightly said, the performance in some markets in Latin America and also in Southeast Asia have been mixed, so while we've had some markets that are growing, we also had challenges in some markets. And as we go forward, we are focused on taking the learnings that we have from the U.S.A. and China so that we apply these learnings in those markets. And as you can see, we are starting with the Pro Mental launch in Latin America, which is taking the NeuroPro learning from the U.S. into these markets. We are strengthening our medical sales force, and this is again a learning that we got very much from the U.S., which is being rolled out to the rest of the world.

So as we go forward, like I said in my statement earlier, I intend to personally spend a bit more time in some of the important markets here to make sure that these learnings are well embedded and we get these markets back to growth as well.

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [35]

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And then in terms of your question on lapping last year, so you may recall last year we did have a GBP 70 million hit, which we called out in Q3. What happened in Q4 is we were essentially living hand to mouth. We were able to get from the supply chain into China the equivalent, essentially, of what was being consumed. So there was no recovery, if you like, of the loss that was there, the GBP 70 million. So the GBP 70 million, we then did in Q1 have some recovery of that, which is one of the reasons that the Q1 China number was quite strong, and then in Q2 we're essentially seeing demand pull-through now in China. So the short answer to that is, yes, we do in half 2 have a GBP 70 million [pull], if you like, to lap to our benefit.

In terms of your question on margin, and it wasn't just the Chairman in February, although you're right, it wasn't just the Chairman in February and I -- you heard both Rob and Adi and indeed all of us pointing out the sort of gross margin underpinning of our operating margin. Nothing changes in that, we do believe we have -- we do not have -- not just have, we have, have had and will continue to have, because it is our model, structurally advantaged gross margin, advantage products, there's nothing changing in Q2. Obviously, there are challenges always, so there are always competitive challenges. But there's absolutely nothing structurally happening that alters that position.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [36]

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Okay. Thanks, Alan. Moving now on to Jeremy Fialko from HSBC.

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Jeremy David Fialko, HSBC, Research Division - Head of Consumer Staples Research of Europe [37]

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Jeremy Fialko, HSBC here. A couple of questions. So the first one is just on the, I'd say, organizational capabilities. So, clearly, you are bringing more capacity in, you've got the separate infrastructure for Health and Hygiene Home, you're trying to, I guess, up-skill the employees. So could you talk a little bit about, I'd say, how far along that journey do you think you are at the moment to having your organizational capabilities and the capacity that you think is appropriate?

And then the second much smaller question, within the OTC part of the business, the Powerbrands did very well, but then some of the smaller brands did less well, so if you could just talk about that in a bit more detail and what the outlook for those in the second half is.

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Rakesh Kapoor, Reckitt Benckiser Group plc - Group CEO & Executive Director [38]

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Let me just take the first one, Jeremy. A bit -- and then maybe hand over to Adrian and Adi to fill in some of these. So I think over the last -- if you look at since the inception of RB2.0, we've been investing in the business even more so. For example, investing in creating true end-to-end focused agile business unit comes with, I think, broadly defined as the incremental investment of about 100 basis points in margin terms.

We've also invested actually, beyond this, in incremental capabilities in e-commerce on both sides of the business. I mean, we call them e-commerce, but actually inside the company, we call them e-business units because they are more than just e-commerce. It's about creating digital capabilities, it's about creating new business models, which e-commerce brings to you, and that is not just by marketing, training and digital tech stacks and infrastructure, but also about getting the right skill sets and people.

And then, of course, we have invested behind innovation. You've seen innovation capabilities being built up across both these business units, particularly in the IFCN side in Health, I would say, and the Hygiene Home side in aggregate.

And I would say, finally, you -- we saw investments in the go-to-market also. You'll hear again much more so in some pockets, like China where we felt that our go-to-market capability, particularly addressing major channels and emerging channels, like mom-and-baby stores was weak. And here we found innovative partnerships with companies like, but not limited, to JD.com to transcend the normal time it takes to build new cities to a very, very short frame of time of about 18 months in 500 new cities. So I think the investment has been broad-based across these kind of pillars.

And I would say the last point I would say was supply because we learned actually in '17, actually, in the half 2, that there were areas that, in supply itself, we had to -- in '17 and '18 both, we had to enhance our capacity planning, diversify our supply chain even more. And in infant formula, we knew this from day 1, with the in-stream of the Australian facility, but also on base health.

So I think if I look at the amount of investment made in creating these 2 business units, plus also infrastructure-related supply, go-to-market, e-commerce and digital, we have been on this journey for quite some time, and I don't believe that we have short-circuited this in any one way.

As we approach the second half, some of these are continuing and also actually to support our brand in the first half also, actually we put more BEI behind the brand in aggregate. And the second half, you will see further investment in BEI versus the previous year to make sure that we continue to get our brand in good shape and with the right momentum as we approach the end of the year and beyond.

So I mean I think it is quite a broad-based effort. It's been quite an effort across the various pillars, and we have not once blinked at the idea of investing where we felt it was absolutely the right thing to do.

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Aditya Sehgal, Reckitt Benckiser Group plc - COO of Health [39]

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The second part of the question was regarding OTC. So, again, on OTC, like Rakesh said, we have a long history of performance. We had, essentially across our portfolio, broad-based growth over a number of years. And yes, as we've had seasonal ups and downs, for example in quarter 1 this year, the numbers in Mucinex can go a bit up and down, and as we know, one year's headwind could be another year's tailwind at some point.

We also have had issue of private label in Mucinex in the U.S. and that's something that we expect to lap. So we really think that our overall Powerbrands and Mucinex and all of the others, like Nurofen, Gaviscon, et cetera, are doing relatively well.

Now as far as the local brand is concerned, we did have a quarter of weakness in a number of markets, and there are localized reasons in different markets. But I wouldn't really focus too much about one quarter and I would just look at the long-term trajectory of these brands, which is extremely positive. We do expect our OTC portfolio to be back in growth in the second half for the reasons that we talked about before, and that's what I would focus on.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [40]

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Thanks, Jeremy. Moving on now to Celine Pannuti from JPMorgan.

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Celine A.H. Pannuti, JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst [41]

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Yes. My first question is trying to come back on the outlook. So you revised your outlook down on top line, by and large because you were disappointed with Q2. We had a weak Q1 season in OTC, and this has a high mix impact. You didn't -- this doesn't seem to have an impact in -- on the margin, so how do I reconciliate that or what has done better, so to speak, for you, for the year to affect this shortfall in top line and the shortfall in profit?

And with that as well, could you give us a bit of an idea of how raw material is panning out? Because I was surprised to see that gross margin, even with the mix, was subdued or seemed to be subdued in HyHo.

And then my second question, just coming back on China. Thank you for all of the details you've given. You said that premiumization is driving this market. Could you give us a bit more detail about how much of your business is in premium versus ultra premium? I presume the new innovation is going to be in ultra-premium. And also, could you give us an idea of how much is in e-com and mom-and-baby stores as a percentage of the total?

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [42]

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Celine, I'm afraid I didn't understand your first question. Could you start over?

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Celine A.H. Pannuti, JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst [43]

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Yes. I mean -- yes, sorry. I'll repeat. So basically, you lowered the top line. You don't lower the margin. So on the top line, you have shortfall on total sales, but as well because the mix should be negatively hit by the fact that it was OTC-driven. So it seems that you're still happy to deliver the margin. I just want to understand what has done a bit better so that you don't think that you have to lower the margin guidance?

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [44]

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I see. So how can you overcome a negative leverage from a lower top line and still have the same flat margin on the bottom line?

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Celine A.H. Pannuti, JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst [45]

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Yes.

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [46]

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I mean I think we did give quite a lot of detail of the drivers of margin, Celine, and there are a lot of them and they do go up and down. And I think it's a question of the net of them that gives us comfort because there are -- within what has given us a better margin position at the half year than we expected, there are a number of items, some negative, such as the negative -- the volume leverage; some positive, such as the lower variable pay, frankly. So I think it's a net of those when you look through to the full year. It's hard to call out any one.

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Rakesh Kapoor, Reckitt Benckiser Group plc - Group CEO & Executive Director [47]

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And on the second question, Celine, I would just say that back in mid-2017 when we took over the Mead Johnson business, our China business was not doing very well. And part of the reason was that we had failed -- apart from innovation, we had failed to capture the massive changes in channels that were happening, particularly in e-commerce and mom-and-baby stores, and the Mead Johnson business was just behind the curve on those.

Over the last 2 years, we've -- I would say at this point in time, I would modestly say we have caught up on mom-and-baby stores. So our business in mom and baby stores is roughly the same as what the market is, but it's not over -- it's not over index, but we were behind the index and now we are at the index.

On e-commerce, frankly, we have also -- it was I think around 10%, I might be -- Adi can correct me if I'm completely wrong, but that was around 10% of our business was e-commerce. And as we said last time we were there, we said more than 25% or 1/4 of our business in e-commerce. So, clearly, we've invested, like I said, in making sure that we were where the consumers were, and that was not the case. And we are obviously not going to disclose very much what we plan to do in the future, but -- in terms of being very specific and for very competitive reasons. But I'm quite happy with the fact that where we've focused, we've actually made very rapid and important progress.

In terms of premiumization, by and large, Mead Johnson is at the premium end of the market. But within the premium tier, we clearly have ultra or what you call super premium and premium. And I'm not again going to disclose to you the exact ratios there and how our plans evolve. But clearly, we want to make sure that whatever we launch addresses consumer needs and consumer preferences. And consumers want the best quality and they want the best product and ingredients with trust and authority, but also at the right price.

So we are going to make sure that with the grass-fed formulation also, which comes at a premium versus the previous one, we have the very best product, 100% grass-fed sourced versus some corn-fed sourced products, natural but also at the right price. So I don't want to more disclose in greater detail than this, again for commercial reasons. But we are very pleased with our channel developments, although more needs to be done, and we want to make sure that, that happens, but also our innovation focused on the right tiers of the consumer segmentation.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [48]

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Thanks, Celine. Okay. Next question from Karel Zoete from Kepler.

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Karel Zoete, Kepler Cheuvreux, Research Division - Equity Research Analyst [49]

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Yes. Two quick follow-up ones. The first is with regards to Dettol. You've highlighted more intense competition and you're lowering prices. Which markets are particularly more competitive and who? Are the international players or local players better? That's the first question there.

And the second question is with regard to infant formula. In the U.S. market, you've been gaining share now or doing quite well for some time, partly driven by the Enfagrow innovation, which you will start to lap. What feasibility do we have on continued good momentum in your North American market? Yes, those are the 2 questions.

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Aditya Sehgal, Reckitt Benckiser Group plc - COO of Health [50]

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Okay. Let me take the second one first. We have, as I've said earlier, we have clarity and we've said that we expect our good performance in the U.S. to continue in the second half of the year. And I think you should not read more into that, so the second half is clear at the moment.

Then moving on to Dettol. In terms of -- again, I'm not going to get into specific competitors by specific markets, but in general, let me just say that there may be different competitors in different markets. It's a number of markets.

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [51]

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It's a number of markets and a number of competitors, exactly.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [52]

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Okay. Thanks, Karel.

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [53]

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Last question, Richard. We'll take just one here.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [54]

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Okay. Last question, all right. It's Jeff Stent of Exane. There we go. Just start again, Jeff, sorry, we didn't -- you've just come on now.

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Jeffrey Patrick Stent, Exane BNP Paribas, Research Division - Research Analyst [55]

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Anyway, just a very quick one. I see that you called out Argentina as being a growth driver for IFCN. Obviously, it's a relatively small part of the business, but clearly, the growth there could be very high. Are you able to quantify the contribution from Argentina to IFCN in the quarter?

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Adrian Nevil Hennah, Reckitt Benckiser Group plc - CFO & Executive Director [56]

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Jeff, what I can tell you is that if you took Argentina -- I mean I know it's a perfectly legitimate question. Because there's 50% inflation there, does this somehow distort your numbers? If you took Argentina out of our numbers, it would not change the rounded numbers that you've seen published. That's about what we can tell you on Argentina.

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Richard Joyce, Reckitt Benckiser Group plc - SVP of IR [57]

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Okay. Thank you very much, everyone. I think we'll end the call there. Bye.