July 30 (Bloomberg) -- Reckitt Benckiser Group Plc, the maker of French’s mustard and Nurofen painkillers, reported a 2 percent gain in first-half profit as deteriorating business in southern Europe largely eclipsed growth in emerging markets.
Adjusted net income rose to 818 million pounds ($1.29 billion), the Slough, England-based company said today, compared with the 810 million-pound median analyst estimate.
Conditions in European nations such as Spain and Italy are “significantly worse” than elsewhere, Chief Executive Officer Rakesh Kapoor said on a conference call today. Reckitt Benckiser gets 55 percent of revenue from Europe and North America, where weakening economies are crimping consumption, offsetting gains in regions such as Russia, the Middle East and Africa.
“Southern Europe has been very weak for them for a while now,” said Graham Jones, an analyst at Panmure Gordon in London. “That’s why we prefer Unilever over Reckitt, because Unilever has a higher percentage of sales in emerging markets.”
Unilever, the maker of Persil laundry detergent, gets about 56 percent of revenue from the developing regions.
Reckitt Benckiser fell as much as 1.9 percent to 3,475 pence in London trading and was down 1.3 percent at 10 a.m., the second-biggest decline in the U.K. benchmark FTSE 100 Index.
The company reiterated its February forecast for growth of 3 percent to 4 percent in non-pharmaceutical revenue this year at constant exchange rates, and unchanged operating profit margins, on an adjusted basis. In the first half, adjusted operating margin widened to 24 percent of sales. Excluding an unexpected 30 million-pound gain from the sale of businesses, margins would have narrowed, Jones said.
“Their headline says margins were up, but they are not,” Jones said. “It does make their commitment to maintaining margins this year a weaker one.”
Non-pharmaceutical revenue in the second quarter rose 4 percent on a so-called like-for-like basis, maintaining the first quarter’s pace of growth and meeting the average estimate of seven analysts. Shipments of products rose about 2 percent in the quarter, Reckitt Benckiser said.
First-half like-for-like revenue fell 1 percent in the Europe and North America region, according to the maker of Lysol cleaners. Unilever said July 25 that underlying European sales rose 1.1 percent in its first half. Procter & Gamble, the world’s biggest consumer-products company, cut its profit forecast last month in part on declining prospects in Europe.
Latin America, Asia
Kapoor said conditions in southern Europe had “flattened” out during the second quarter. Profit margins in the Europe and North American unit narrowed to 20.4 percent from 21.4 percent in last year’s first six months, due mostly to rising costs for ingredients, the company said.
Reckitt Benckiser’s sales rose 12 percent in Latin America and Asia at constant exchange rates, fueled by brands such as Durex condoms and Dettol cleaners. Revenue increased 9 percent in Russia, the Middle East and Africa, helped by consumers buying more Nurofen painkillers and Air Wick air sanitizers.
“Europe and North America was weaker than expected, and in emerging markets, growth was mixed,” Darren Shirley, an analyst at Shore Capital, said in a note to clients today.
Revenue at the pharmaceuticals division, which Reckitt Benckiser considers a “non-core” activity, rose 6 percent. The company has said it could lose as much as 90 percent of U.S. tablet revenue as generic drugs enter the market to compete with the Suboxone heroin-dependency treatment. Analysts at Panmure Gordon and Bernstein & Co. have recently pushed back from July to January their estimated arrival of a generic competitor, of which Reckitt Benckiser expects there to be at least three.
The company said a film-strip version of Suboxone that dissolves under the tongue has now captured a 56 percent volume share in the U.S., up from 48 percent at the end of 2011.
Total sales rose 3 percent to 2.31 billion pounds in the quarter, excluding the impact of currency fluctuations. To lift sales, Reckitt Benckiser is investing an additional 100 million pounds in main brands such as Harpic cleaners, and shifting more of its marketing spending from television ads to digital media and consumer education campaigns.
“In the scheme of beats at other consumer staples companies, the Reckitt Benckiser numbers may seem disappointing even though they are in line with annual targets,” Pablo Zuanic, an analyst at Liberum Capital, said in a note.
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