Business description: Reckitt Benckiser Plc (RB) is one of the world’s largest household products companies. Reckitt Benckiser owns a range of popular household brands and was formed in December 1999 from the merger of Reckitt & Colman plc and Benckiser N.V. The Company’s product portfolio is centered around 5 areas: fabric care, surface care, dishwashing, home care and health & personal care. In 2008 they recorded annual sales of £6.6 billion; their products are sold in more than 170 countries. For a detailed account of Reckitt Benckiser and its history check out this link.
Thesis: Since the formation of Reckitt Benckiser in 1999 it has been transformed from a good company to a world-class company in the household products space. It owns a collection of 17 exceptionally strong brands and can boast of enviable gross & operating margins that meet or exceed many competitors. The following are the key reasons it is a high-quality business:
High-quality traits:
17 power brands = 1 big anchor
The core strength of RB is centered on what they refer to as their ‘Powerbrands’. According to RB’s 2008 Annual report Powerbrands are, “the flagship brands in the Company’s five major categories and on which the Company focuses the majority of its efforts and investment.” It is important to note that of those 17 Powerbrands, 15 of them hold a #1 or #2 position globally. Included within Powerbrands are such well-known products of Lysol, Clearisil, Woolite and French’s mustard. Financially the Powerbrands accounted for 62% of net revenue in 2008. Having such a deep portfolio of popular products results in a strong degree of sales stability and the advantage of being established in the marketplace as one of the dominant players.
Savvy management
Going back and studying the history of Reckitt Benckiser takes us down two roads. The first is the financial history of Reckitt & Colman, the second is the financial history of Benckiser N.V. Studying parts of the past 20 years of Reckitt & Colman and Benkiser, N.V., aka the legacy companies, is very interesting and suggests that current success of RB was due primarily to the result of smart management who optimized their business.
Benckiser: In the 1990’s Benckiser was a business centered around two main categories: household products and cosmetics. It completed a number of acquisitions during the 1990’s for both segments of the business. Around 1996/1997 the cosmetics portion of the business would be separated and spun-off entirely from Benckiser and the remaining household products business would be taken public in 1997. Here is an abstract of their operating margins, as sourced from Moody’s manuals:
1992: 8.7% EBIT margin
1993: 7.0% EBIT margin
1994: 6.7% EBIT margin
1995: 10.7% EBIT margin
1996: 11.4% EBIT margin
1997: 10.3% EBIT margin
1998: 11.3% EBIT margin
Reckitt Colman: Beginning in the early 1980’s Reckitt Colman began to streamline its company in order to optimize operations while also expanding its businesses. The process included launching of new products (a dual purpose toothpaste, Bully bathroom cleaner), acquiring promising brands (Air Wick, Gold Seal) and selling its unprofitable U.S. leisure industry business and olive, cherry & caper business. Here is an abstract of the relevant operating margins from the early 1980’s, as sourced from Moody’s manuals:
1980: 9.3% EBIT margin
1981: 9.5% EBIT margin
1982: 8.8% EBIT margin
1983: 9.3% EBIT margin
1984: 9.4% EBIT margin
1985: 9.9% EBIT margin
Over the next 6 years R&C would expand into the personal care field, continue to grow its household products portfolio via an acquisition strategy and dispose of a majority of its food operations. Additionally management began to specifically focus on core lines that held #1 or #2 positions in their category. Operating results would see a marked improvement as a result.
1992: 15.1% EBIT margin
1993: 15.0% EBIT margin
1994: 14.8% EBIT margin
1995: 15.1% EBIT margin
1996: 16.2% EBIT margin
1997: 16.8% EBIT margin
1998: 13.1% EBIT margin
In 1998 Reckitt & Colman would suffer from a reduction in profitability due to a combination of rising costs and economic turmoil from Asia/Latin America. As a result its CEO would resign in February 1999 and restructuring efforts began immediately thereafter. At that time it was thought of Reckitt & Colman that despite owning a strong product portfolio it did not have capable management; conversely at Benckiser management was considered to be very smart but its underlying brands were not as highly regarded. Arguably being a natural fit Reckitt & Colman sought a merger with Benckiser which was ultimately completed in December 1999.
By 2001 RB began to dispose of products that fell outside its 5 main areas of focus (surface care, fabric care, dishwashing, home care and personal care) while simultaneously seeking complimentary acquisitions. In 2002 management began focusing on cutting costs by standardizing & economizing product packaging, streamlining other areas of its operations and began growing what would become a highly profitable pharmaceutical segment. Increasing profits and cost cutting enabled management to increase media spending in newly launched & existing products (e.g., in 2001 marketing costs were 10.9% of revenue and increased to 12.4% in 2008), and make further acquisitions (e.g., Boots Group in 2006). Additionally as reported from market research conducted by Euromonitor International, “Reckitt’s consistency in product innovation has always been one of the company’s core competencies, enabling it to maintain its market share and compete with rival household care giants P&G and Unilever”. The results clearly show a big margin improvement from all of these efforts:
2002: 16.7% EBIT margin
2003: 18.3% EBIT margin (17.3% excl Pharma)
2004: 19.6% EBIT margin (18.8% excl Pharma)
2005: 20.1% EBIT margin (19.0% excl Pharma)
2006: 18.5% EBIT margin (17.3% excl Pharma)
2007: 23.4% EBIT margin (22.0% excl Pharma)
2008: 22.9% EBIT margin (21.1% excl Pharma)
Sales CAGR during 2002-2008 was 11.3% (10.3% excl Pharma).
Sizing up the competition:
Reckit Benckiser has managed to put together a remarkable track record over the past 10 years. Comparing their recent 5 year performance against the competition only further illustrates how profitable their business at both the Gross Margin and EBIT margin level is. Follow this link for a summary comparison of Reckitt Benckiser against other companies competing in household cleaning products. The results mostly speak for themselves as RB is clearly a top performer.
Key Risks:
In my opinion RB has 2 large risks that should be called out; I have described below at a very high level the gist of those key risks.
(1) First a material portion of it profitability (~13-15% of EBIT) is being driven by U.S. sales of Suboxone, which is a treatment for opiate dependence, and is scheduled to go off patent protection in the US in October 2009. The Company has warned that 80% of profits associated with this drug could cease beginning in late 2009.
(2) As reported in the footnotes of the Company’s 2008 annual, RB “is involved in the early stages of a number inquires from competitive authorities”. At present it is unclear but likely this relates in part, if not wholly, to issues surrounding Gaviscon, a stomach medicine produced by RB. Information is limited but according to this article the BBC alleges that regarding Gaviscon, “Reckitt Benckiser executives schemed to create obstacles to block rival manufacturers from selling cheap generic copies.” which effectively, “maintained an effective monopoly on the market for years after the stomach medicine came off patent”. It is important to note that any potential liability is not quantifiable and thus RB has made no provisions in their accounts as of yet.
Conclusion:
Despite the above mentioned risks the primary business of selling popular household & personal care products remains strong and appears well poised to maintain its market position; as a result the future continues to look bright for Reckitt Benckiser and it should continue to be a wonderful business.
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