Report Shows Global E Waste Generation Increases 8 Percent By Weight In Two Years

Reckitt Benckiser Group Plc (OTCPK:RBGPF) Q4 2017 Earnings Conference Call February 19, 2018 3:30 AM ET


Adrian Hennah - CFO and Executive Director

Rakesh Kapoor - CEO and Executive Director

Richard Joyce - SVP of IR, Communications & External Affairs


James Jones - RBC

Harold Thompson - Ash Park

Jeremy Fialko - Redburn

Martin Deboo - Jefferies

Richard Taylor - Morgan Stanley

Richard Joyce

Right, good morning. Welcome to RB's Full year 2017 Results Presentation. Before we start, I just want to do a couple of housekeeping points, including getting myself a clicker.

So first to draw your attention to the usual disclaimer about the forward-looking statements. Nothing new there. Right so just to run through the agenda today. We're going to split into a couple of parts. We're going to spend first 45 minutes talking about past, and then go to some Q&A. And then we'll take a quick comfort break, and then go on to talk you about the future. And then we'll do Q&A after that as well. So then without further ado I pass over to CEO Rakesh Kapoor.

Rakesh Kapoor

Thank you, Richard. Let me start with my three messages of the day. The first one is that in a tough year, we had a solid close to the year. The second message I have to say is that the Mead Johnson integration and transformation is from in place is fully on track. And the third method that I have for you is that the Mead Johnson acquisition is not going to only proved to be a good acquisition for RB and the shareholders, it has been a catalyst to transform RB into what he called insight the company RB 2.0. And I will spend some time about RB 2.0 later in the presentation in the second half impact.

So back to the performance and the results for '17, Q4 was I would say was the strong solid finish to the year with plus 2%. And actually, what was good about Q4 was that we had our growth once again health and hygiene there. Health had plus 5% hygiene was plus 2%. And as we will explain later in the day, the growth on health was quite broad based and across the portfolio so that was quite good.

Mead Johnson Q4 also a strong finish to the year, with plus 3% in the last quarter, now under two quarters of RB ownership of positive growth, we sort of reversed the 9 previous quarters of no growth. The margins in the second half again came in better. I know we flagged that the income margins of Mead Johnson was somewhat lower than we were expecting, although the top-line was in line with our expectation at that time, but we worked really hard in the second half to bring those margins into a shape that we believe will all go well for the future.

And finally, the cash conversion remains strong, and subject to shareholders approval. Our board will be recommending a total dividend of plus 7% for this year.

Now no presentation from my end, we'll be without pointing out to the virtue's earning model. And I will talk about it even though it looks less than perfect in 2017. And it starts as I said before, with gross margin improvement and gross margins actually what 20 basis points lower. So, we did not increase gross margins. And again, we will talk about that during the course of the day. We saw adverse price in the year but also the mix as you see from the results was not also favorable, and therefore growth at some adverse commodity headwinds already in '17. We didn't have any growth in the gross margin.

Now some of the other partials of P&L worked well actually. So, we did see some fixed cost improvements of 30 basis points. A number of things we continue to do, but on the other side obviously in a tough year, bonuses do not normally pay out and that also helps a bit something that we don’t want to see actually going forward because we want to perform.

In terms of BI, I mean although the track record over the number of years is very good but as I’ve lagged last time same time we will be taking away some of the investment support behind shore because of what we have said before and with outshore [ph] so actually investment in BI went up across the time portfolio. So that is also being a good thing and of course you know the like-for-like performance of the full year has been flat. Operating margins on the base business grew by 30 basis points to 28.1%. So that’s what has happened on our base business.

Turning to Mead Johnson, I just want to play on the slides that I’ve shown you at the time of Mead Johnson acquisition, perhaps the same time last year 12 months ago. And I’ve said that Mead Johnson for us is very strategically competitive, it’s made a lot of sense because its augments our consumer health focus and expertise. That’s the first thing.

We said this acquisition is not just about where we prove to be better owners but this is going to help us be a better company. It will make RB better, and this makes RB better not just because off the capabilities that we get of how do we reach moms with young babies, how do we actually build medical and scientific and regulatory capabilities across the world but also in terms of how we do business. So, I think that’s definitely there, but equally obviously we will be better owners because we bring the very best of RB into Mead Johnson and I’m going to talk about that too. And finally, we want to of course make strong value creation for shareholders, so that’s what we said.

What have we achieved in the last six months or so, the first thing is that the deal got completed in three months earlier than we expected and that actually has been an important achievement and it's an important achievement because it allowed us to do the other things on this chart much faster and better and during the course of the year. What it did allow us to do, it allowed us to work on the synergies faster, understand the business faster, get to work on the synergies faster and help us realize the margin ambition that we have for the business.

So, we achieved $25 million of synergies in the year, you know again ahead of schedule but equally it helped us understand the business to a point that we expect now synergies to touch $300 million in the next three years.

So that’s been one key part of having the deal done faster. The second part is knowing the business earlier and helping us make it a catalyst for RB 2.0 as I just planned. So that has been important as it has been important that we’ve got to work on the innovation pipeline.

You know it is eventually a gain where innovation has to be increased and we knew that innovation track record was not the way we want it to be and therefore that has been an important part of getting to work much earlier. And actually, although some people might have argued that Mead Johnson came at a bit of a surprise to people despite the fact that I’ve talked about why we believe that creating the start of life and making babies live longer and better for 142 years starts with nourishing the best start.

It did come as a surprise, but I think our first six months and there is a lot of work to be done I have to say, there is a lot of work to be done to make this wonderful. But the first six months gives us the confidence that the RB model on earnings on being better owners is being proven to be right again. And that’s quite important because when I show you what that model has looked like over the last six years or so, this is the start of the -- call it the consumer health focus 2012 January to now. We had a suggested [ph] six years, we grew gross margins 500 basis points, up, we invested behind our brands probably over this period of time, I cannot think of any other business that as invested behind this plan to the extent that we did. We obviously got fixed costs leverage, we grew our operating margins by 500 basis points.

And this is being done actually not just on our base business, but has is also being done on the organic parts that we’ve acquired over the period of time. And just a remind you what those inorganic parts look like, you know brands like Nurofen.

I think we have talked Nurofen and Strepsils a long time Mucinex. From nowhere to be the number one brand in North America. This is what Nurofen has achieved, a brand of that’s got you. And Durex and Scholl, again, under our ownership, including Scholl, we have a double basically in five-six years under our ownership of Durex. I cannot remember a year where it did not have high-single-digit or double-digit growth rates. All in categories which were 4 to 6% growth rate.

So, this has been the performance of the brand that is acquired, but I won’t still be enough a number of times what happened to Schiff. And there has been some questions around whether Schiff has been as good and acquisition as we’ve had for some of the other brands that required. So, let me just actually take a few moment and talk about shows. So actually, there is something in common between Schiff and in today, things I’m going to flag out another time. So, we brought Schiff in January, 13, December, 2012, January 2013. And then we bought, we thought these were two Schiff, which is, it is a large category with long-term growth characteristics, it’s not something that everyone was kind of, people saw this is a category, which is not hear to say, things happen and it does not have that kind of long-term structural growth characteristics associated with it. But we thought, we felt it irreversible. In fact, I ask in this room, how many people have started that use even more when I think today five years later. The number of people who are using VMS has gone up, particularly some of you are millennials.

So that’s the first thing, the second thing is said was our earnings can be applied. The ones that I’ve talked about already. And the third bid is that we can globalize brands. I mean, three about even Durex or Schiff, we had globalized these brands. So, we should be able to use global brand management model on Schiff. these are the three things we said. I have to point out that actually whenever we acquire consumer healthcare, loan for the last fine in our financial model. we don’t, all the growth that didn’t based on where the brands are in the geographies, and how we can right them with ratio and where our go-to-market expertise. We do not use the model on globalization generally speaking in our earnings model. But that is certainly one of the assumptions we make.

So, let’s see whether some of those assumptions are fully right or wrong. Because I think this is important time to be absolutely open, about what has happened. So, the first thing is about growth, VMS is a category and this is un-coding monitor, I don’t know better. But monitor things and I think these numbers are by and large right, $90 billion growing at 4% to 6% over the last five, six, seven years. This is the growth of this category. And you should not think about just the nearest supermarket, think about so many different avenues for VMS these days. And this is not just a category, where people who get on to a certain age demographic profile start to use it.

Now you see more and more millennials using it. One the hottest trends right now in VMS is products and innovations focused on millennials, did anyone hear of [indiscernible] has anyone heard of [indiscernible]? No? Okay, millennials do know it, I'm sorry I'm in, I thought there were with the millennials here. But clearly, not. And you can see upgrading these that these demographic is making up material part of the market now, and growing the category very well.

But just to remind you what we brought within this category, we did not really buy a commodity business really, I mean I went on record and say we are in the game of A B and C, we want to be in grands and we want to be grands that stands for something. So, for example MegaRed a brand we probably spoke about a number of times has become the poster boy in fact of our acquisition was for heart health. And Airborne which we haven't spoken much about is about immunity and Move Free is about movement and joint health and clearly the digestive advantage as the name suggests is about gut health. This is what we want, but we also had a 25% of this business was also serving private label under previous ownership and there was also some commodity part to it also. So that was the business we had in 2018.

What has happened since then? Really, what have we done? So, the innovation, the first thing we learned is that the innovation fact we have put these bands into is materially different to what you have to need in health ID on in the conventional sense.

Just as an example, although I am not going to talk about it today because we never have time to talk about every innovation we launched. We are going to launch 4 new products under just Move Free in China this year. So, the innovation track record that we put in place and the pace of innovation and the way we manage innovation is materially different and that's what we learned actually. That you want to manage innovation, you want to grow this category, you have to innovate differently. And that's what we are doing.

So that I think we are happy about synergies, I mean I don't have to remind you all. We have done always a very, very good job on synergies. And in fact, today this morning, I give you an example of that that's also true.

The third thing is international expansion. And I have to say that 12 months of acquisition, we came here January 2014, February 2014 I was very gung ho, that like 12 months from launch, here we are taking into 25 markets. I mean I was I felt very good actually I have to say that. So, it's really good in 12 months from launch, we took it into 25 markets. What happened it was and so on, it didn't work. And we know it didn't work, and 3 years after that, we understand we learnt and I have to say that was a good lesson very, very good lesson in how do we actually manage an international expansion. So, the next time we tried it which is Move Free was a different approach. It was a different approach. And I think Move Free whatever we've taken it, like China has become a success. But we haven't gone the conventional go-to-market way. And there is going to be maybe some time to talk about that. But we did learn a lot actually in this last five years of how to actually drive value in VMS, which is a big different to what hygiene, health and maybe home brands are? But we did well. We learned and we did well.

Firstly, we crossed we took out the private label part. It's no different to what we have done in January 2012 when I shut shop on private label. I said here at that moment that we are Appliance Company, although we have a paradoxical relationship with private label we are not a private label manufacturer. We are a brands company so we shut basically private label.

So, I’m going to talk to you about brands and in the years of our ownership that branded business that I showed you grew on a compounded annual growth rate of 9%. It should have been more always, but do you see it was less far less. I think you did, I think you thought that we haven’t done well enough but actually we did very well, we did very well. What did we do with gross margins, well the famous earnings model comes to place. From the time we bought this business, the gross margins were way below the company average way below. Now the gross margins of this group of brands that I just showed you which are the business is accretive to the company. You know my company margins they are accretive to company margins.

What happened to the rest of P&L, well I don’t have to tell you when the topline is there and the gross margin this question doesn’t really need to be asked. So how do I feel about the ship business we bought, the first thing is that five years has been fantastic and I’m absolutely thrilled that we have this business. It’s a high growth, high margin business that helps us also innovate in a way that is useful for the company as a whole. We’ve grown this business, we want to make this business an interesting part of RB and it has created value for shareholders. Even though, we’re still not 100% globalized these brands and maybe there is a different approach to building a global business in VMS anyway.

So, I think when I look back and I know that this question has got asked couple of times on the road and you know I keep hearing from my people why don’t you ever address this because you know people keep thinking but the way you don’t talk about it that it’s not a good enough thing to do. Actually, I said something which I’m going to repeat today. I said we haven’t been able to transform the VMS market. And therefore, on the higher value set ourselves on the high expectations you have. We have not fulfilled, what we have fulfilled is five years of ownership as shown that we can create value. And this is very interesting strategy and this is a strategy which is here to stay. It is one of the single largest strategies in house and we need to find a way as we go forward of figuring out how to become a material player in this market.

So, I would share that with you, I also said actually that there was something in common between you know Schiff and the commonality. The commonality is this, that in Q4 of 2012 when we decided to make this very public bid for VMS, we knew that we’re going to hire a new CFO and the CFO is right here on the podium and I called him and said like Adrian, we are just about to make a public offer and how you can put to this because this is going to come from nowhere and you know we’ve got him actually also in the board meeting, I still remember in November 2012 and we were discussing Schiff. And it is quite interesting that we are here five years later talking about Schiff and how it’s done. And maybe Adrian 5 years from now, maybe we’ll talk about other wonderful things, too, from your side particularly. So, can I just invite Adrian at this moment and talk about his 5 years, but maybe his last year.

Adrian Hennah

Thank you, Rakesh. That was totally unrehearsed, that little few lines. So, thank you Rakesh and good morning ladies and gentlemen. For the last one year, is we were going to talk about now. So firstly, tuning to slide, wherever this is, 19. These are the aggregate reported numbers for the second half and full year, that you’ve seen in our release. The numbers include, of course, the contribution of the acquired MJ business in the second half months that in the transaction closing and the year-end. The discontinued net growth row includes the results for the food business prior to its disposal, a gain on that disposal and the provision made in half one in respect to the demerged Indivior business.

In the coming slides, we will go through separately, the various elements making up these numbers. Specifically, we will cover the numbers of the base RB business, pro forma MJ numbers and a summary of the debt taken on the fund of the transactions. The increase in net finance expense to £238 million, reflects a quarter to borrowing taken on the finance of the acquisition including £35 million of fees associated with bridge financing. We cover later, the composition of the debt at the year-end. Also included in net finance expenses £30 million of the tax charge now required to be included in this line as a result of an IFRIC interpretation of IAS 12 on income taxes towards the end of last year.

This item is hard to estimate and is likely to be quite volatile. In order to assist investor understanding, we have included this item within the tax charge in our adjusted numbers. The substantial tax credit of £894 million for the year includes a net one-off credit of £1.4 billion in respect to the U.S. Tax Cuts and Jobs Act. This comprises a non-cash release of deferred tax in respect of the substantial intangible assets held in U.S. entities and the charge of around £200 million in respect of tax on principally Mead Johnson accumulated undistributed profit outside the USA payable over 8 years.

The tax rate excluding adjusting items and including the element of tax now shown in finance cost was 23% in line with our guidance for the year. Growth in total adjusted earnings per share in the full year was 7%. This has of course several components. Continuing adjusted earnings per share growth was 10%. Diluted from the disposal of the food business accounts for this business. The contribution from the base RB business in constant exchange rate terms was broadly flat. The increase in the underlying tax rate reduced earnings per share by 2%, remember the 2016 benefited from a UK deferred tax reduction. Mead Johnson acquisition net of associated financing costs increased earnings per share by 6% and affected translational ForEx was to increase earnings per share by a further 6%.

Looking forward, on the tax rate. We do benefit from the reduction in the federal corporate tax rate in the United States. We do so ever from a number of the other changes in the U.S. tax rules and we are working for the details on this. And continue to be of course changes in tax legislation in a number of other countries. We currently expect the tax rate around 23% excluding adjusting items and including a component now reported in the next finance cost line.

And one of the 2018 point before getting into the detail of 2017. If the exchange rates at any January were to continue to end 2018, the next translational impact of currency movements would be a minus 7% headwind. This headwind will be strongest at the start of the year with a Q1 headwind of around 10%.

So, turning now to the next slide. This slide shows the RB summary of RB Base numbers and the Mead Johnson numbers in pro forma format down to operating profit. The RB base numbers do not include food as this is now treated as a discontinued item. The MJ numbers pro forma numbers including a period before the acquisition closed. We include them in this format as we believe the health inform investors on the shape of the business. At half one, we showed MJ pro forma numbers in U.S. GAAP. They are now in IFRS, the differences are very small. On this pro forma basis, the like-for-like net revenue of a combined group increased 1% in half two. Gross margin decreased by 90 basis points and operating margin by 30 basis points. We will clearly see the drivers of these movements in more detail in a moment.

Turning to the next slide, here we showed the Q4 and prior quarter revenue growth rates on the same pro forma basis as in the previous slide. Importantly, you can see the expected improvement in the growth rates of both the MJ and the RB base business materializing in Q4, and again we're returned to the drivers of this in a moment.

Turning then to the next slide and focusing on the RB base business. As we have just seen, revenue for Q4 was £2.58 billion a like-for-like increase of 2%. We noted in our Q3 trading update that we thought that the underlying growth rate of the business was about 2%, this is indeed stayed true in Q4. Revenue for half two was $5.1 billion, flat on a like-for-like basis. And in the full year we also saw flat revenue in line with the guidance at Q3. We set out with an analysis of the impact of the currency movements and disposals in the appendices to this presentation and of course in the release.

Gross margin declined by 40 basis points in half two, we'll cover the price mix and cost drivers behind this in a moment. We will also cover the 80-basis points reduction in SG&A, together these delivered a 40 basis points increase in operating margin. The more analytical among you might be asking yourself, our 50 basis points increase in operating margin in half one but the 40 basis points increase in half two delivered the 30 basis points increase in the full year. I can see you smiling. The answer is in large part of Brexit sterling devaluation in mid-2016. The reduced value of sterling boosted the weight of the seasonally higher margin half two in 2016 and conversely the seasonally lower margin half one in 2017.

Turning to the next slide. And analysis of revenue growth rates by business segment by quarter. Firstly, on the price and volume changes for the RB base business. The 2% growth for Q4 comprised a return to volume growth at 3% after the disruptions of the last quarter. And a continuation of the decline in price mix seen in Q3 at minus 1%.

For the year as a whole, volume and price mix were both broadly flat. Volume improved during the year as we work through the Korea Show and cyber issues. Price declined as trading conditions tightened in the manner we described in particular at Q3. Unit sales grew by 1% in Q4, the sales growth in North America of 2% benefited only slightly from an increase in incidence of cold and flu towards the end of the quarter as there was a lag in customer reordering. The impact of private label competition on the Mucinex brand was also slightly lower than expected. It appears due to some supply issues. Sales in the rest of EMEA grew by 1%, growth in Russia, Germany and Italy was strong as a result of good in market performance and in part also weaker sales last year. Sales in France, Spain and Australia were weaker. Across ENA, the structural pressures on many modern trade customers continued to be evident. I can what you mean about this. Anyway, and growth in e-commerce channels continue to build.

We delivered a 3% quarterly growth rate at Key-4 slightly weaker than we had expected. Growth in India and China was strong and encouraging. In India, it was assisted by the effects of demonetization in the comparative quarter but strong in underlying terms too. And in China growth in Dettol online and offline was particularly encouraging. Growth in these markets wheresoever offset by declines in the Middle East and in Brazil. In the Middle East which is a material region for the group, the market contraction accelerated and was compounded by material retail destocking.

In Brazil, a weak market was compounded by competitive pressures. We expect that stronger China and India but also the weaker Middle East and Brazil dynamics to continue into the current year. We have included in the release and as an appendix again a reconciliation of the reported for the like-for-like numbers shown in this slide.

Turning to the next slide, an analysis of our revenue growth rates by our principle product categories. Firstly health, revenue increased by 5% in Q4 after four quarters of declining or flat revenue. Show remained negative in the quarter as the device revenue moved to a sustainable level but is now much reduced headwind. Mucinex, Nurofen, Strepsils, Durex all performed well.

For the full year, all health power brands except that Scholl, that is Durex, Gaviscon, Mucinex, Nurofen, Strepsils and the shift in DNS portfolio all grew and the total health portfolio excluding Scholl– grew in the middle of or view of the 4 to 6% medium term market range notwithstanding the supplies used in the middle of the year. We are clearly pleased that the year-on-year effects of a down phase of the Scholl device experienced are moving behind us.

In hygiene we delivered 3% growth in Q4, 1% for the full year. A strong growth in India, increased growth in this category but was offset by the weakness in the Middle East and Brazil both of which are markets with a strong orientation to hygiene products.

In home, revenue declined by 3% in Q4 and by 3% for the full year. In half one, the category with disproportionate impacted by the loss of sales in Korea. In half two we have seen weakness in Vanish now the focus of particular attention within the hygiene home business unit. Portfolio sales were down 15% in Q4 and down 9% for the full year. We expect these to continue to be volatile. They are of course now really quite small.

Turning then to the next slide under an analysis of RB based margins. We delivered 40 basis points operating margin improvement in half two again of the 50 basis points in half 1 which is 30 basis points for the full year. Gross margins declined by 40 basis points in half two, we signaled a year ago and at half one that we were at the end of the long period of very substantial gross margin improvement. We expected then and still expect now a gradual trend mix benefit overtime but was half-by-half movements around that trend driven by other factors.

Mix in half two was slightly negative, in particular, as a result of weaker performance in some higher-margin geographies. We saw tougher commodity cost segments and as we noted we saw a continuing tougher pricing environment and net negative 1% price reductions in Q3 and Q4.

BEI spend was lower by 10 basis points in half two and by 20 basis points in the full year. We remain broadly content with the level of BEI as a proportion of revenue.

Other SG&A costs decrease by 70 basis points. This was the result of introduction of GST in India, which moves certain taxes from SG&A to revenue, the last phase of the Supercharge program, and as Rakesh has already alluded to frankly lower annual incentive remuneration in a year where delivery was not at the level we targeted.

Turning then to the next slide, here we go. Turning to next slide, this shows an analysis of operating margin by business segment of half 1 and half two. Within ENA, we saw modest margin reduction, a 50 basis points decrease in half two. Positive drivers in cost of sales were offset by price headwinds and maintained expenditure on BEI. In DvM, we achieved a 220 basis points increase in half two margins, gross margin declined result of commodity cost pressure and some mix deterioration, especially at geographic level, this was more than offset by reductions in SG&A including the GST effect.

So, turning then to the next slide, the pro forma P&L for the acquired MJN business. in half two the infant formula and child nutrition, the IFCN segment of the RB group. Rakesh will give an update on the encouraging progress we made last year in bringing MJN into the RB Group. And I’ll making now an integrating Mead Johnson into RB’s Health business. Set out here and in the next couple of slides is a summary of the Q4 half two and full year MJN revenue and P&L. As you’ve see revenue for Q4 was £709 million a like-for-like increase of 3%. Revenue for half two was $1.43 billion a like-for-like increase of 2%. This growth was slightly better than we expected MJN to deliver at this stage when we announced the acquisition of last February.

Gross margin in half two reduced by 270 basis points, adjusted operating profit in the half was £310 million, this was a 21.7% margin a 270-basis points reduction on a comparative period. This margin is lower than we had expected at this stage, when we announced the acquisition in February last year. As you know, we had expected a full and margin in half 1 try to closing of the transaction. But not one as large is a 500 basis points for that occur. The half two trajectory in a material improvement and we are very confident that we will be able to take the margin to the level we expected, which is the 2016 margin a little bit below 25% plus the targeted of synergies of £200 million targeted in the announcement. And to do so within the acquisition planning horizon. We return to the driver of these margin improvements in a second.

Turning to next slide on the pro forma Mead Johnson like-for-like revenue growth. First, on their pricing volume. The 3% growth in Q4 revenue comprised a volume decline of 1% and a price mix increase of 4%. This is a material improvement in volume performance during the year after a 7% full and half 1 prior to closing. We saw volume growth in China but not yet in the other main geographies. Asia comprises mainly China and the countries of Southeast Asia were Mead Johnson has a substantial presence. Within Greater China, the forward drivers we described in February, in last February and so early Q3 numbers continue to play through. Sales of locally manufactured products and physical cross border freight in Hong Kong continue to decline and sales of imported product and ecommerce cross border freight in Hong Kong continue to grow strongly. In addition, marketing growth have increased, a combination of volume from the increase in births and a continued desire of the part of the Chinese models to see the best available product for their babies.

In Southeast Asia progress has been less encouraging to date, the heavy market and operational challenges as well as good progress in some areas. In North America and Europe, the largest part of which is the U.S., the 1% Q4 decline is in line with our own expectation at this stage. The headwinds in the large WIC renewal in California in midyear has materially higher discount and some of the exchanges will continue into mid this year. The material share loss in non-Wilkinson business through 2016 and early 2017 has however been much reduced. They're not yet convincingly reversed. Canada performed very well with LATAM growth is quite strong in the quarter, however the growth in the component countries remains quite variable and quite changeable.

Turning to the next slide, and an analysis of Mead Johnson margins. Firstly, a technical point, the total half one margin reduction of 500 basis points turning to stable if the same as we showed in the half one numbers. The analysis between gross margin BEI and some other SG&A is however slightly different. This is because the numbers we showed at half one was in U.S. GAAP and using Mead Johnson accounting policies. The numbers in this stage are on IFRS and using RB accounting policies.

As noted, the operating margin declined 270 basis points in half two compared to 500 basis points in half one. This comprised on a negative side a large reduction in gross margin by 270 basis points also reduction in the BEI of the 100 basis points and an increase in other SG&A of 100 basis points. There were two main drivers of the increase to gross margin decline both signaled the half one. Firstly, the increase on some dairy costs which impacted half two more strongly given the timing lag between moves and the spot price and the impact on profit. Spot price picked n around midyear.

Secondly, the large WIC contract exchange effect earlier in half two. The channel and sourcing shift in China described when we announced the acquisition have continue to involve material margin dilution. The WIC pricing impact will clearly run into Q3, we expect a China channel shift and diary price purchase to decrease as we move through 2018.

The increase in BEI in 2016 under MJ leadership described in the time of acquisition and necessary recovery from a period of underinvestment. And this continued in half one of this year. the 100-basis points reduction in BEI in half two does not of course reflect any reduction and focus on BEI. It reflects annualizing a heavy period of spend in MJN and reflects an increased focus on efficiency, which we are together bringing.

The increase in other SG&A by 100 basis points was an improvement in the trajectory in half one where it increased by 170 basis points. The improvement was a result of the cost synergy program. This program is very firmly on track. We delivered the savings we expected to deliver in 2017, while IFCN was on a standalone division about $25 million. And as we integrate the businesses within our health business unit, we are finding significantly more synergy opportunities than we included in our original target.

What does this mean for our acquisition model, the model is very much intact, it's included a smaller reduction in margin to this point, but we remain confident based on the experience and work and results to date that we will be able to find additional cost synergies and other parts of the earnings model to deliver the acquisition model margins.

Turning now to the group as a whole on margin. As with last year we are not giving quantified year margin guidance. We are continuing to strive our view of the medium-term trend and the specific drivers we see impacting the coming year. Let me take you through these in a reasonably granular way.

Looking firstly at the margin trend in the business within the trading of the business, both x for RB and x for MJN. Consistent with our view over several years now, we expect overtime to see further moderate mix benefits on margin as health growth returns to term levels and Mead Johnson cost synergies are delivered. Also consistent with this established view, we expect variations around this trend each year and half year as a result of other drivers. And we expect 2018 to be a year with some negative drives to this trend.

Specifically, we are promising some commodity cost headwinds, we do not expect these to improve materially in aggregate in the short-term notwithstanding the comments specifically on dairy costs a couple of moments ago. And we are also in a phase of tougher price pressure with our established retail customers facing substantial structural change. We absolutely do not see this as a long-term pressure but we also do not see going away in the very short term. We do not expect our internal efficiency programs to be able to offset fully these commodity cost on price pressures in 2018.

Secondly, looking at the effects on margins from the Mead Johnson acquisition and the creation of the two business units. We have a full year effect from consolidating the lower margin Mead Johnson business. Incorporating a roughly 20% margin run rate in Mead Johnson reduced group margin by a 100 basis points in 2017 before cost synergies. And there will be a 70-basis point reduction before cost synergies in 2018.

We have also of course cost synergies from the Mead Johnson acquisition. We expect to deliver cost synergies ahead of the targets we set out on announcement both in 2018 as well as in aggregate. We expect the Mead Johnson cost synergies in 2018 to exceed slightly the cost dis-synergies from the Croatian, business units structure which referred to at Q3. And we expect around one half of the available Mead Johnson cost synergies to be delivered by the end of 2018.

Turning to the next and the summary of the group’s networking capital position, we’ve set out actual group networking capital numbers at N-2016 and then 2017 and also the proforma N-2017 and the ratios. As this Mead Johnson was already the part of the group at the start of the year. You can see that strong overall position continues, we saw some increase in inventory reflecting mainly the higher inventory levels in the infant nutrition supply model. We saw some pressures in receivables levels with days receivables in some cases being exchanged for changes in ordering patterns and other logistical arrangements which reduced cost with our customers.

We continue to focus strongly on payable terms of as part of our procurement activity and we have made good progress in bringing Mead Johnson within this framework. The period in numbers are of course a point in time and subject to some variation. These numbers do benefit from some variation and are slightly above our medium-term target level. We continue to target negative networking capital of minus 9%.

Turning then to the cash flow statement on the next slide, as you can see for the full year, the group had another satisfactory year of cash generation. Cash conversion measured as free cash flow as a percent of adjusted continuing net income was 94%. This was below 100% due largely to the exceptional cash spend. Past due cash flow was £0.9 billion only 64% of adjusted net income. This was partly to the growth of the phasing of working capital movement around the half year. You may recall that the sideway disruption is at an abnormally high reported free cash flow in half 1 as we pulled out in July.

We also saw higher CapEx in half two including within the Mead Johnson business. We do not expect CapEx to continue at the 3.5% of revenue that it wasn’t half two. As signaled previously, we do expect it to increase from the about 2% level we have seen within RB in the past, and we expect it to be around 3% in 2018. After the peak net debt of £14.8 billion immediately after the Mead Johnson acquisition, we have reduced net debt to £10.7 billion as you can see at the year-end.

Turning then briefly to the next slide on the subject of debt, here we have set up a summary of the group’s gross and net debt at the 31st of December. As you can see, we held gross debt of £12.8 billion and cash of £2.1 billion. We clearly have some optimization work underway with this cash following the Mead Johnson acquisition and in the U.S. tax reform. We are happy with the maturity profile and the one-third floating two-thirds fixed balance of the debt. We hold about 90% of the debt economically in dollars and about 10% in euros.

We estimate the total current blended cost of our net debt of just over 3%. Our reported financing costs of £238 million comprises mainly of the cost this debt, but also of course the pension finance cost, the unwinding of some small future liabilities held in the balance sheet at present value on the IFRS and now a part of the tax charge.

And then lastly from my part of this presentation. Clearly, we changed the way we run the group from the 1st of January, and you can hear more about this from cash in a minute and this will across the affected in the way that we report numbers.

The two business units' health and Hygiene Home will be former segments for reporting. We will show revenue adjusted operating profit and so on for these units. We will also continue to show in addition the IFCN revenue separately. This is clearly important for investors to understand our progress within important acquisition and of course we will continue to report in our progress in delivering those cost synergies on that acquisition.

We will also show for the group as a whole revenue by geography distinguishing North America, the rest of ENA or develop markets, Greater China and the rest of developing markets. We include as an appendix for this presentation, a pro forma analysis by quarter for 2016 and 2017 of revenue by the new business units. We plan to include with the Q1 trading update, a similar analysis of 2017 adjusted operating profit by business unit. We hope this helps you with the development of your models in line with our future reporting.

Question-and-Answer Session


Q - James Jones

James Jones from RBC. A couple of questions, if I may. Rakesh, you had your fair share problems over the last 18 months I guess or RB has, not you personally. To what extent do you think these problems were unavoidable and to what extent could that have been managed better?

And secondly on the whole value volumes teen. Would you able to quantify what has happened to value ideally across your different categories and give me an indication of how important do you think that is for the various business model?

Rakesh Kapoor

Listen, I assume, it’s very easy to look at what happened in the last 18 months where of course we saw a series of challenges. Some of them actually materialized in 18 months ago. Although they were there for a very long period of time and I would call Korea as one of the challenges. Because as you know the first instance with Korea started in 2000, and was first reported in 2011. And then I think that just came to a disciplined moment in 2018. And so, I would say this is not just an it was there for a very, very long period of time.

And then I think I would say there were two probably things that you referred to. And they can happen at any time to anyone. I mean I always thought that the cyber issues, I mean happened to a large number of other companies too. I think we are living in a world where there are only two types of companies. One that have been bit by cyberattack, and the other that don't know that they'll been hit by a cyberattack. And I think one of the big lessons for us has been that some of the collateral challenges that we will have from cyberattacks cannot be prevented for forever. What we have to learn to do better is to get back faster and to maybe find other ways of detecting better. So, I see we have spent a lot of time in the last I would say, 6 to 8 months in enhancing our detection and our speed of recovery. But I think to be able to say that these things cannot happen to any company would be just missing the challenge we all see. Cyber was a collateral damage it was not somehow targeted at RB. It was targeted at some as you've just probably read last week, Russia was accused.

I think we talked about innovation. I think I'm very open to talk about RB's learnings as much as I'm willing to talk about RB's strengths if you want. And I reminded everyone of the MegaRed launch, because it was by the public launch. And it obviously comes across as something that therefore we haven't done well. And maybe there is an angle to it, but by and large we became a stronger better, VMS company. And I have to say that our track record at VMS has been very, very good.

Similarly, having learned something from the Scholl launch, yes, we have a lot. And I think it's going to make us better innovators. So, all the challenges that you've referred to are all actually about learning how to become a better company. And if you ask me 18 months later, RB is a more resilient and a better company than we were 18 months ago. And this has been my number one reflection for you.

Adrian Hennah

And probably across by category I think was a cyclical.

Rakesh Kapoor

Yeah would you like to take that?

Adrian Hennah

So, at the end, so there is no question, we see price pressure increasing over the last year. And in fact, when you sort of decompose the numbers and we talk about, and if you look through these one of the you're referring to volume is actually being quite constant I mean it's 3% this quarter. But if you take out the disruptions you were alluding to which were nearly volume related disruptions underlying volumes have been fairly flat all the way through. But price clearly has tailed off over this last year. And we called out both the Q3 and Q4 that we're seeing a 1% price mix headwind in our numbers. We believe principally as a result of the structural changes that are taking place in our channels, the big players are under a huge pressure and that shows the dynamic shows. We actually don't see this as a long-term dynamic, but we do see it as going out into next year. Where across our portfolio you asking in a different part of that portfolio are they impacting in different ways. Yes, we got to quantify in the way you’re asking for but yes directionally there is no doubt the pressure is what we think about portfolio is a spectrum that we showed with household at one end and health at other end. There is no doubt you feel those pressure to be bigger at the household end of the spectrum than you do in the health spectrum. All are the reasons about brand equity strength and so on. So yes, there is differences, we do see it across that spectrum but no we’re not going to pull them out in a quantitative way.

Harold Thompson

Harold Thompson from Ash Park. Just a couple of questions. In your press release, you said that online sales in China are now about 50% of your Chinese revenues. I mean this the shift to our line is creating a lot of debate. Can you just give us some extra insights in how RB success in online in China has been achieved and how profitability, brand management, brand building and so on and so forth is giving you extra insights and how that may apply to the rest of the online world as it develops further.

And then the other question is well as one of the skeptics Schiff, some good numbers there, well done. But you did say that maybe your, one of the -- to use the word failure that was to just develop the shelf via met shelf in the way you would like it to be. What is required for that to succeed and it you have a bigger share of that shelf, you’ve got more weight to manage it or is it something different for it to succeed. Is it achievable?

Rakesh Kapoor

Yeah, okay. Listen, how the first one is I’m going to give you up for the socket like for actually on the first one because we have business in China, 50% of that has become online. Actually, I use that as a target a few years ago, one or two years ago by 2020. I said like by 2020 I expect 50% of our business will come online in China and everyone thought it was staggeringly high number. Well here we are in 2018 and we have and I think if you ask me what is the principle reason why we have this in our business in turn, I would that that it is what I call the scarcity mentality of RB. We didn’t have a business in China when I took over actually and I’ve done many bad things of course, there are many things to learn but you know we had nothing. I mean I remember that one day I’m going to come and talk to you guys about China and hope that would come in my time.

And one of the things that we didn’t do, because we didn’t have a physical business, we didn’t have a mass go to market to compete with anyone. We decided actually that the only way we could create a meaningful business is to put all our effort and resources in the e-commerce channel and ride that wave out. So, this is really if you ask me why to the – we are at 50% it's not because our categories have higher propensity to be shopped online. It is just that RB for lack of resources if you ask me decided to actually leapfrog the market.

We’ve just acquired another business which has a nowhere close to its business online like this, why because they have all the infrastructure. We want to get behind it and I’m going to show some data around it. We will actually work very hard but I think it starts with the incumbency factor and I think the big difference if I see in my company also, the difference between those people who are leading unbelievably forward in this area versus those who still want to hedge themselves in based on incumbency.

And I do believe that our March, our March, RB’s March to e-commerce as a company is quite relentless and very top down and I have to say that every company knows that what we want to do is 10X in e-commerce. And at a certain point in time we will get that.

So, the second one, I think was about VMS. I think the number one thing, I have to say about VMS that we learnt was not just about shelf management I think. The number one thing if you ask me what we learned about VMS is that and I, again reflectively say that hardly any large company could do what we managed to achieve which is to really change the way we innovate. So, I think the change way we innovate on OTC, let’s say is very different to the way we innovate on Hygiene brands.

Actually, VMS is unlike these 2 and therefore a company brought up, innovating in a certain way and knowing the difference between in the 2, actually try to innovate it like these two or one of the two. But actually, the VMS innovation cycle, the way you go to drive it and how you get innovation is completely different. And this is the main learning I have, which is that, if you want to be successful in VMS, your company has to have entrepreneurship and agility to innovate in a way that is what consumers want and what customers want.

And if you can get that, you are going to be successful. If you behave like a large company, which is most often the case, you cannot be successful in VMS. And this is in my opinion, the principal reason why, most VMS companies, most are kind of this entrepreneurial smaller companies. But again, more philosophical answer to -- or more answer borne by my learning actually in how to be successful in these two areas, both e-commence as well as VMS. Yes? Jeremy, you want to go?

Jeremy Fialko

Good morning. It’s Jeremy Fialko of Redburn. So, two questions, the first one is on the Mead growth in 2018. Do you think that circa 3% that you were at Q4 is a kind of broadly reasonable run rate to be going at in 2018 or whether you think you might be able to better than that?

And then secondly on the benefits of your new organization in terms of the innovation and agility you hope that’s going to bring. Could you talk about how you think that’s going to manifesting itself in the numbers you report and how quickly and some of the changes from that?

Rakesh Kapoor

So, we are going to talk about our target for next year later in the second half. But let me just say, when we bought Mead Johnson, we said that we expect this category, the infant nutrition category to be growing at 3% to 5% in the medium term. And we said that although, we were far behind that curve, we were like I said negative or no growth for 9 quarters before. We said our ambition would be to progressively get to top end of the curve. And that is what we stick to, I’m not going to set targets by quarter or by even sector for ’18, we have a broad target for the company. But I don’t want you to either take 3% as ongoing run rate or benchmark or not to take it. It’s just overall -- I have an overall target for the company and that’s that what we will be pursuing. But I have to say that, you have to be confident to do things like what we did with Mead Johnson. And I know that, not everyone, but some people did think where it came from like I said. I have to say that six months or so into this acquisition we have seen an up to maybe better than we were expecting it to be. So, I think I can honestly tell you that we are in a -- we saw that this is going to require a lot of work and has required a lot of work. We have, and there is still more to do, but I have to say that we are in a better place than maybe we could have been. And that is a good thing, that's a good thing. Yeah.

Jeremy Fialko

I don't get it. Because we have all these brand names. And then we look at the world economy. And so, 3.5% to 4%, that's probably where it is. And you're guiding for 2% to 3%. And I appreciate that there are a lot of moving parts, but what is the issue here? And is it VMS, is it home, is it Mead Johnson, or is it China? Why are you not growing?

Rakesh Kapoor

Yeah, why are we not guiding to more growth, actually yeah, exactly. So, I think as we said to you in our Q3 call. And we are going to sort of restate what we said, that the market that we compete in and I'm not talking with every market that might exists in the world, the markets we compete in are growing at or about 2%. And what we said is that -- we expect that this time do grow more or less in line with that market.

Jeremy Fialko

And then also I think Adrian you mentioned that you think price pressures are considered to be only of short-term nature. What makes you so confident of that?

Adrian Hennah

Well it's based I think on our understanding of what is driving them, which feels very much like structural change in the retailer channels. I mean there clearly are very, everyone in this room, very substantial players on those big players. And they're behaving in ways which are the way that always behave but stronger but on steroid if you like, is the way they conduct the relationship with us and other manufacturers. But when you then step back and say, this is clearly a structural change in that part of the market, and the way you go from the manufacturers' warehouse through to the consumers' country. There are clearly enormous structural changes taking place in that. But then you step back and you say, those that point to a change in the total profit that you expect to generate from our type of brands. We don't see why? Does it point to a different allocation of that profit between the manufacturer, the middle person and the consumer, we don't see why. So, when you take that sort of longer term view, it does feel like a fairly intense but short-term sort of adjustments, that's our logic.

Jeremy Fialko

We see the firstly isn't we, kind a profitability.

Adrian Hennah

Yeah, we don't get fairly prepared it yet. But price pressure that's leading to changes to for of while, and the profitability between the components in this value chain essentially. That’s the mechanism for shifting it.

Rakesh Kapoor

I would add couple of points, which is that, I think if you look at the last couple of years, not only have you seen some of the dramatic changes in channel shifts and how some key people have responded. But I also think that this is also been criticized [ph] by climate, which was quite benign from a commodity point of view. So, there was some money there. I think we expect to see a tougher commodity climate, and as a result of it I'm not sure whether the type of pricing that has been in the market over the last 12 to 18 months can sustain. So, will it turn dramatically and immediately, I cannot judge but I think if the commodity headwinds stay the way we see it today, I don’t see this negative pricing to be something that is going to play out for a long period of time. And that’s how I would see it, you know we have had also benign commodity environment over 18 to 24 months before.

Adrian Hennah

The last two questions are about the future surfing now, it’s a good time to start. If you come back to quarter to 10, we’ll talk about the future and there is more time for us after that. thanks.

Rakesh Kapoor

Second half, I’m going to basically talk to you about two things. One is really give me some color on Mead Johnson because Mead Johnson is not just an acquisition for RB as I said it is going to be a catalyst for RB. So, I’m going to before I talk About RB 2.0 just want to take you through Mead Johnson what we have done over the last six months or so and how we see that perform. So, this is the chart I showed you guys you know at the time of the Mead Johnson acquisition.

We said you know there are three things we want to do and in maybe in stages some time currently but in stages. First understand ISDN because it was a completely new category for us and how should be used Mead Johnson acquisition to get to a point which is best of both because clearly Mead Johnson is a strong 100-year company, strong heritage and of course RB has a fantastic track record and how do we actually get the best of both.

Second, we need to improve the operational vigor and performance because clearly it is not going in the right way and the final thing was we said we are going to learn about Mead Johnson and figure out how we are going to use this to create the right platform for growth and outperformance. Here is a chart from last year, okay.

So, the first part is best of both and I think the best of both actually in RB always starts with one thing which is the culture and I think it's very important to state upfront where we are, what is the RB culture, what is the RB magic and you’ve heard this before, I’ve spoken about and maybe once more reiterate basically how I talk about the culture and why it so special and unique. So, it starts with achievement orientation, you know achievement for us is not being happy with our VMS performance even when other people will think is spectacular. You know its achievement is that, the high bar that we set ourselves entrepreneurship is about being agile and nimble and doing things that take a long time for other companies to do we just talked about as referenced examples of China and also of how we use Mead Johnson the speed with which we got them and the speed by the way of getting RB 2.0 done I’ll talk about that.

Everyone on this company is an owner, we don’t behave like professionals. They are like owners of the company, that’s very important and partnership is this notion that we will only be successful when we work better than each other both inside but also outside of the company.

This is the very best, this is the magic of RB, magic of the culture of the company. Now we want to bring all this with Mead Johnson because it is fantastic but equally understood very quickly that when you’re serving moms and babies, when you’re actually dedicated to giving babies the best start in life, nourishing the best part in life, it comes with huge responsibilities. As I’ve said to you guys before, the first 1000 days define how the child grows up and you know 90% of the brain development actually takes place in the first 1000 days.

So, this comes with a huge responsibility and therefore we put responsibility as a new value. I mean this is the first new value I think we have brought to RB, there at a very long period of time and the responsibility for us is not just doing the right thing, is doing the right thing no matter how hard it is and to dedicate ourselves to serving consumers and customers and doing the right thing to do that. So, I think this is a very important new thing that we are adding as a part of our best of both. We see how the additional responsibility of Mead Johnson’s nutrition business means to RB. But equally we want to add the very best of magic of RB to turn around Mead Johnson.

So, let’s just talk about some of the aspects of how we think, we have come through in the last 6.5 odds months with Mead Johnson and what is shaping up thinking around, the turning around of Mead Johnson. So, first thing starts with very simple enhancing competitiveness and you see like what that really very mean and look like. I’m going to show you a photo basically of the Mead Johnson pack in China, which you might, China and even other parts of the world, which you might not be able to see, this is a very big brand in China. This is Mead Johnson’s premium product, but these are the normal products Mead Johnson against the normal product of another leading, you can see already on the chart what’s wrong, okay.

So, enhancing competitive is to actually turn this into an on-shelf competitiveness and superiority is not too difficult, but not so fast and that’s what we did. Just make sure, but you say okay, we increase the can height, that’s very easy and that’s very normal. Actually not. The real issue here with the left-hand side is there is no scoop in the cap. So, what happens is when you actually open the product, you have to put your hand right in and find the scoop. Moms have to go and put their hand right in to find the scoop. The scoop cannot be put automatically on the top layer of the pack.

In this pack or now in this, you can actually put the scoop right here, which means I fully take the can now, you don’t have to put and calling them maybe messy hands, and therefore, you offer consumers a secure, hygienic easy solution to make sure that they can feed the babies with the right quantity and the right way.

And that’s what actually improving and enhancing competitiveness really means. That’s what it means. So that’s one example, I think I’m going to give you. The second example again, might seem very trivial to you, but very important, we were losing share in one market. And we figured out basically they were seeing you have cut prices and because we were very expensive, we have to cut prices, we actually found out that a vast majority of the volume was now getting traded up to large volume packs which we didn’t have. We just didn’t have large sizes.

So, you might look like really, is that simple? Yes, it's that simple. Just introduce the large sizes and reverse the share trend. It just happened in two months actually. The story of really figuring out what was not looking, what was going wrong, put the right 4 Ps of rightsizing price. So that’s what competitiveness really, really means in granular terms. if you ask me, how does that show up is that’s what it means. So really figure out at a market level. What’s happening? What’s not working? How do we actually get this past? I once went to one market and say like we need to have these bigger cans. Same example of bigger cans, how long would it take 18 months? We actually got this done within six months.

So, I think that’s what really you bring the best of the culture to improve and bring urgency I would say speed and actually make that happen. So just examples of that, but actually enhancing competitiveness just doesn’t come from doing stuff like getting the rightsizing pricing, getting the right value proposition on shelf. It also means getting the right innovation in market as soon as possible. So, I think again we have brought, I’m going to talk about this is a very exciting new launch in the U.S. We are announcing that it's going to be in the market around March-April I would say. But really in break net speed, in record time, the team there has created this innovation. And I think this kind of urgency that we were able to bring to our Mead Johnson let's say colleagues and brands and business has been very, very good and very noticeable. I am going to come and describe this innovation to you, because it's quite an interesting innovation.

The second thing after basically competitiveness will turn around Mead Johnson, is something that I think somebody was asking maybe something for China example. And I think it is true that I do not see any reason why the instant nutrition category should not be materially bigger in ecommerce and online than it is just now. And I would say it's not because of consumer or shopper or whatever, it's all down to companies. I think companies can do a far better job in reaching consumers and shoppers in ways that they want, and therefore the onus is really on us.

So, what we have done is a very simple. We've actually galvanized this effort massively, and truly galvanized this effort. Two examples of that we've now opened our direct-to-consumer platform both in the U.S. and China. And I think just the numbers are still very small, so don't get very excited and even though I am very excited. But the numbers we have finished the run rate in 6 months or actually not say 3-4 months, I would say at 3-4X from where we started.

So, the runways are very good already on the B2C platform. And you know the law of mathematics works like it did for China. If you create a sizable business and you put a growth mechanic on it, it can be very valuable.

Give you another example a 11/11 something which is think a lot of you probably already know, it's become a big thing in China. We had we've doubled our 11/11 performance in just few months of getting there. And I think we have big plans of course for next year. So, I think driving this channel mix, which has been an opportunity but also a challenge in Mead Johnson is something we are addressing very fast and very hard. So, I think that, I can already see some big signs that that would become a nice interesting way of driving this business.

The third thing of course is bringing what you all know is simple operational rigor. Bringing this idea of what the P&L looks like and how do you actually drive the P&L and how do we drive gross margin and how do we drive the whole P&L? And I think just at education process and delivering that the rigor on performance management has been an important change in the process that we've undergone.

We have really, really been preaching and showing how we can actually drive better results with simple performance management. And I think Adrian and I have both alluded to the fact that when we took over Mead Johnson, we found the op margins to be minus 500 basis points in the first half, lower than what we expected. We did expect operating margins to be lower, we did expect it, but they were lower than that. And what we have done in the second half of the year is brought back to the right trend and trajectory, the operating margin performance. So, this is going to be an important part of basically how we do it. And some of that clearly is going to play out in our growth model, which I have said I think I did say just before the break, that we expect medium term trends on this category to be 3% to 5%. Our performance need to be at the upper end, and that's what we are going for and the synergies now already are being targeted at the region of $300 million or so.

So, I think this has been the 6.5 months or so have been a good 6.5 months. I am absolutely happy with where we are although we know that we have a lot more work to do here. But the trends are good, the momentum, we have created, the urgency is good but also equally now we found a new way of managing Mead Johnson which is where the catalyst comes in. And I think the catalyst is an important part, because how do we actually use Mead Johnson as a platform but equally how to give Mead Johnson a platform to do better is both achieved by what we call RB 2.0.

Now the next slide I’m going to show you is something also that I’ve shown you before. I’ve shown you that actually the portfolio of RB is a coherent portfolio, if not a portfolio which has a no basis that it somehow disconnected. It might have been the case if I may say so when we are full it was disconnected portfolio. This is a connected portfolio, it is a portfolio on a continuum, we have health relief, we have problem solution brands here. You know you have a cold, you can take a Mucinex you have a pain of liver you take Nurofen.

And then you have brands in the area of nutrition you know to make you keep you healthy whether it's the first 1000 days with Enfamil or Nutramigen or just to keep you healthy if you are, if you need immunity, a boost of immunity or many of the other brands.

And then we have wellness, sexual wellness is an important issue for people. I mean I can give you a lot of stats about how many people are satisfied with their sex lives but how do we actually serve those people who want to have sexual happiness and wellness.

So, this is another part of continuum and then it goes to an area which we call health hygiene, health hygiene because when you come with to Nigeria or India or markets like that, Dettol is about hygiene it’s about health hygiene. You know you have a brown liquid which is about, it’s an antiseptic liquid, you fall down, you get hurt you don’t want to have septic, you don’t want to have infection, you apply Dettol. And you know it’s very much a health hygiene brand or whether its skin hygiene with Clearasil. So, we call this health hygiene and then you have home hygiene, brands that are giving you hygiene at home, Lizol is a big example of that but also Harpic with toilet hygiene and so on.

So, you’ve got home hygiene and then you’ve got home care. This is a category continuum of RB but clearly you can see it is quite a wide stretch portfolio and we did talk about how do we actually do the right thing for this portfolio. How do we actually create the condition for this portfolio because this portfolio has materially changed in just five to six years. It has changed because I showed you the chart, this chart in 2012 and you might remember 65% of our business was in health hygiene, 65% at that time. And we had a materially larger home business and portfolio business, some of you remember this maybe on the left-hand side. The right-hand side looks quite materially changed. I mean again in our industry to move from 65 to 85 or so is quite significant and then the health part, sorry the health part really moving from 23 to 50.

So, this has happened but beyond this happening actually what has also happened is that while we have done quite well I have to say quite well on the health side, this is the 6th year compounded annual growth rate on the health portfolio. Six years, so this includes last year fiscal 2017. So, in the last six years or so we’ve grown our health business by compounded annual growth rate of 7% but on hygiene home just one. Not happy, and with Mead Johnson coming in just what’s going to happen. The same kind of issue could play out in the future. So, RB 2.0 is providing the right home for Mead Johnson. So that we can lose the RB Health capability and platform to do a better job in our health business, including Mead Johnson but also to find a way of driving growth in brands that are really wonderful brands. They are fantastic brands even if we haven’t done a fantastic job on those brands. Just as a reminder, what are these brands actually? These brands basically are item number 1 or 2 in the world, 80% of the net revenue of Hygiene Home, 80% of the net revenue for Hygiene Home comes from number 1, 2 brands, it does.

So, I think the first point on RB 2.0 is, are we doing a good enough job? Can we do better? And how should we think about getting the right focus, the right accountability and the right, I would say people to do a good job here and that’s what RB 2.0 is all about, basically is to give two platforms with two business units, two accountable focused management teams to make sure we can execute very well. That’s where it is going to be, so this from here to the Hygiene Home part is going to be handled by Health and the Hygiene Home part. And there are 2 substantial businesses like they are scaled platform. It’s £5 billion is quite larger and I would say that many companies do not have a £5 billion Hygiene Home business.

So that is a significant and material size business with lots of interesting opportunities and then of course our health, consumer health part at 8 billion is already one of the large consumer health business in the world. So that’s what we’ve managed to create.

So, the question then is how does it effect, I think one of the questions came from the room, was what does it mean in terms of growth rates and so on and so on. So, let’s just look at the growth algorithm that we have talked to previously about RB, let's call it, RB 1.0 language. This is what you’re seeing before, I think we showed it you in one of our Investor Day long time ago, we never had many Investor Days, but certainly one in my lifetime, and we showed you this.

We said, we expect healthcare’s not OTC, it’s consumer health, consumer health to be a 4 to 6% growth category. And we said why it will be a 46% growth category. We said there are structural reasons why. There are demographics which are driving this. There are economic reasons that are driving it. There are social actually factors that are driving it. And this part, since I said it’s 5, 6 years ago and we want to said it again. So, you don’t need to hear it now back from me because everyone has said why consumer health is one of the structurally attractive categories. And its structurally effective one more reason that we are not maybe so openly talked about, which is when I think about the modes around businesses, when we think about, there was also an illusion on pricing et cetera. When we think about moats around businesses, I have found that consumer has is probably one of the strongest moats that I've seen in the consumer industry, they're the strongest moats. And the reason is very simple. When you have a pain, and headache, you are going to buy a pill which is 10P. And 10P is nothing for a headache. If somebody had a headache and I'd say your headache can go away at 10P, I will get this money right away in the room. Pricing does not matter, getting well matters. And brands have stronger moats around them when it comes to consumer health. So, I do expect consumer health to be a strong steady growth category.

But what does it really look like in the new RB 2.0 environment? So, this consumer health which is what we had, has two more components basically. The first one is IFCN, okay? And that is a 3% to 5% growth category I said that. And you can do the maths here, population growth but also other pluses and minuses that I have talked about at the time of the acquisition. 3 to 5, our goal is to be at the upper end of 3 to 5 that’s what I've said so no change.

And then the hygiene health. This is a hygiene health part of the market. And this also is a 3% to 5% growth market and our ambition are still to be at the upper end here. Back from the health hygiene part, okay? When you combine all these, the sizes of these categories, and when you combine this, this is the algorithm. The algorithm here is this new RB Health in RB 2.0 is a 3% to 5% category, this £8 billion worth that you saw, it's 3% to 5% and we are going to target upper end plus growth in the medium term, okay? So, so far on RB health.

What is in RB 2.0 going to be the hygiene home site? So, let's remind ourselves, what I said about hygiene home. When you take away the large Dettol personal care and all these other stuff, with soup et cetera just to remind you, so large category. When you take that out of the hygiene home side, the hygiene side it is a 2% to 4% growth, it's a 2% to 4% growth category. And our ambition here is going to be upper end in line with what our ambition was on hygiene so no change here too.

And then you got our home business, which is 1% to 2% growth. Our ambition to be in line. So, what's it means in terms of hygiene home, because somebody did ask me this question what is your ambition on hygiene home? Now, remember, we've grown on a compound annual basis at 1% over the last 6 years, that's what the growth has been. So, our ambition for hygiene home here is a category growth rate of 2% to 3%, that's what we expect the category growth rate in the medium term to be and our ambition is to be either in line or to the upper end. That's where we want to be.

Now we all want to get there in January. But if you can't make it in January, can you please make it Q1. And if you really can't make it in Q1, I'm sure you're going to make it in 2018. I would love all these statements to be true. I would love all these statements to be true. But actually, I cannot say because we are ready, we are ready with RB 2.0, but it will need more work. Just the way Mead Johnson needs work. And we are going to be on this trajectory, this is where we want to be but it's not going to happen in January, maybe it will but maybe not. And we will see how quickly we can get there, our ambition is right on this page and it's no different we have said before. Okay, so that’s the new algorithm on RB 2.0 and I thought I’d spend some time to explain how the genesis is.

Now where are we with RB 2.0, so actually a lot faster than earlier than we thought we could be or anyone thought we could be. So already actually we announced RB 2.0 with our Q3 results mid-October, right. January 1, we had everyone in the two business units already in place. So, if you come with me to see a market visit you’ll have a team one health and team one in home, they know what they are doing. They have their targets, they’re going to get going about it and we have the organization in place. And I have the say in 2.5 months if you find another company which can do it, bring them in. Bring them in and ask them how did you ever manage to do it. It is a fantastic achievement and if I may say so to take a half a second once again a reminder of RB’s culture and can-do spirit. And I have to tell you that although 2017 could not be rebound but the motivation level, the mood, the optimism in the company in January 2018 has been absolutely fantastic.

So, this is a really new thing that everyone is going after, so that has happened. Half 1 we are working in the process of going to different customers and making that happen with customers and this whole new operating model will be embedded in and then of course there is some infrastructure works to done. You know legal entities and stuff like that, which will take place over the next couple of years. So that’s really what RB 2.0 journey looks like where from let’s call it the operational side we are there but from the technical side will be a journey.

What should you expect in due course from RB 2.0 in the hygiene home side faster innovation, better innovation, more investment, leaner structures closer to customers and consumers and beginning their own virtuous cycle. And having that accountability that now we will also have a lens, they will also have to show up basically. And then just one part of the business is not going to carry the whole company, so that’s very cool. On health, as I said to you, you should expect all these things. you should expect Mead Johnson to get better over time so that we can achieve our ambition to be at the upper end of the spectrum.

You should expect us to drive the same kind of digital and e-commerce disruption that we’ve done on a number of our places. And of course, continue to outperform here on health. And RB 2.0 I would say for some people already happened, its what’s new and I think you know somebody asked me this question in the break and I think I’m going to about that somebody asked be are you not going to be more stressed in RB 2.0 because you have to be the CEO and head of health and I will say but earlier I was the CEO and the head of the company. So, it's the same actually but even smaller because I have a fully dedicated accountable management team which is looking after hygiene home and they are a bit more empowered than otherwise would have been. But equally they have a more demanding basically environment to be under. So, I think I honestly say that October to December was a tough period from a work point of view. I think we are in a much better place, when it comes to how we see ourselves from now.

So that’s RB 2.0. Want to just take you through our innovation pipeline and I thought as a departure from the past, I should start the innovation pipeline with Hygiene Home and not from health maybe as a sigh of times to come, like why not started with Hygiene Home? So, let’s start with finish. This is a first actually big format change on Finish after a very long period of time. So, we used to have Finish Quantum's, right? This is the new Finish, let’s call it Quantum and better product, better cleaning and as thermoforming 3-chamber technology. The Powerball, a very cool, it’s a gel, power gel, power cap. So, it’s very good, it’s going into the U.S. with very good description I would say so far from the phase. So that’s what is happening and then progressively get into other part of the world.

The second one actually is quite topical, I would say, because we know and I think you know that safety to the going concern amongst moms and particularly when you have young families around you. And I would say Lysol is probably the brand that protects you from germs without any trade-offs. And what we are launching under Lysol with wipes and in figure is a new product, which has not harsh chemicals. It has just 3 ingredients actually water, salt and hypochlorous acid which is a chemical found in your body to fight bacteria.

So, it has no chemical residues and as a result of which actually you can use this product, you can use this product where your children eat and on countertops and high chairs and so on and so forth. So, this is a range going in they excited about as we speak.

Moving onto Harpic. I think the Harpic one is also in the goody bag if you would choose to, actually, this is also in the goody bag I think. The Harpic 1 is in the goody bag if you choose to. This one is not only does it give you, these toilets are we all know tough to clean, but not only does it give you a clean, but it gives you a visible clean in the sense that the water will be colored with any of the colors you choose to be. So, I think in between use of cleaning, you can see your toilets should be cleaner, cooler look actually. So, this is going in under Harpic, called Harpic Color Power Actions 6. Lots of interesting new things here.

On Vanish, we are launching Vanish Gold with yet another torture stain and that torture stain is body marks. Now what happens is interesting. Body marks are a combination of built up sweat sebum, that settles into your fabric and attracts actually dust and pollution that’s what makes it more difficult to remove. So, if you have sweaty armpits, they’re more difficult to remove, because the difficult to remove, because the way the sweat and sebum attracts basically pollution, dirt, et cetera, et cetera. And very tough to remove with first time clean. This is where Vanish comes in not only takes your sweaty stains out first time, but you don’t have to takes your sweaty stains out first time, but you don’t have to scrub. Your fabrics are safer, and therefore, with Vanish, you get what it stands for, amazing stain removal and yet safe.

So, have you given it to them, Richard? Or please buy it then. It’s good, we should not give everything away. I think this thing that again was hinting at, Adrian this isn't going to do very well. So, I know it because you don't like it, because if you don’t like hair care products I'm cool with it, because it's going to do very well.

Adrian Hennah

I don't like it, put it here Rakesh.

Rakesh Kapoor

Now you're saying, so okay. Listen, what is happening, this is a vaporizer. And this is a vaporizer without water. So that is different. And I think they have a 30 second ad, maybe we should show it, and then I can explain what it is.

[Audio-Video Presentation]

So, it's going into a number of countries. Actually, I have to say that the innovation rate on Air Wick has been dialed up despite let's say maybe not having the same kind of focus before. But we have dialed up the innovation rate on Air Wick. And this one basically comes with multiple settings as you might be able to see. And if you can customize your fragrance experience it is battery operated, you can put it anyway you want, including a bit away from you if you don't want it.

So, moving to health, okay, cool. Let's talk about Enfa. And I did tell you that we have put a new innovation in the market, but I want to talk to you about the science first actually. And there is a lot of things to admire about Mead Johnson. It's a company from 100 years or something and that something that that dedicated to science. Mead Johnson was the first company to launch DHA, which became the benchmark for brain health.

And actually, after so many decades after they've launched, they have discovered MFGM. It's a milk fat globule membrane, which is the biggest breakthrough in the formula. It is a nutrient rich compound found in human milk, and have important outcome benefits. Let me say, so the meat and MFGM formula have been clinically shown to help close the gap in cognitive development between formula fed and breast-fed milk.

So, if you just follow the simple chart, other studied formula without MFGM this is MFGM in cognitive health and this is breast milk. So, it is seen as the most significant advancement. We did not, RB did not discover it was there. What we have done is we've launched it in the U.S. with very fast speed as a first formula with DHA and MFGM. It is going to be a -- it has also -- we are also creating a platform for clinical research on this MFGM so that we can actually solidify this as an ongoing opportunity going forward. And we should be in the stores like I said in March April time in the U.S. so very, very interesting and exciting. Now we know that U.S. our U.S. business does need innovation because it has had tough time. And therefore, we are hopeful that some of this will playout, could be a positive fact for the U.S. business.

Okay, moving from here to show. Because I need to confront and be sure all the time. Because that's what we've always done. Now, let me give you the good news. This is not coming at a price premium over the previous gadget. Even though it has more benefits, and the more benefits are apart from removing your hard skin, we know that people also exfoliate. One of the things that you talk to people what do with your hard skin remover and that people can use by distinctly replacing the head with the hard skin refill and get let’s call it a 2-in-1 benefit of not just hard skin removal but a very nice exfoliating benefit also going to a large number of markets in Q1 this year.

Okay. So that’s what is happening on Scholl, on Durex anyone want to talk about this one? No, okay because it seems like light my fire and be my sweet addiction. So, and its actually for people who are awkward in talking about sex and actually most of them are first time people. Now I’m not saying that is the case here but it is for people who actually have their first moments and they find it very awkward and we know that Durex wants to bring in people into their first time with safe sex, why because we know that SDI are on the rise and unwanted pregnancy is on the rise. So apart from this being something fun, it's also very serious topic for RB. We want to take care of that serious topic and therefore what we wanted to do was bring a range of Durex products which have how people the new language of millennial and emojis, send each other emojis rather than send messages. And we just put something funny there so that some people can actually so what you do you buy Durex pack, you get a special emoji and you can put that emoji and use that to communicate basically your awkward moment. And I think we thought it was a crazy idea we launched it in Europe, Russia last year it did extraordinary well and taking everywhere basically now.

So that’s Durex emoji and just to prove the point on VMS I want to talk to you about two VMS innovations although I’ve said that we are launching four products, four innovations Move Free itself I did this year but this one is just one of them and this is a Move Free 2-in-1 and what is happening is that a group of [indiscernible] from writing is in some quarters not seen as the most let’s call it the latest generation of joint health. So, what we are launching here is not seen as the most let’s call it the latest generation of joint health. So, what we are launching here is something better and it has a patency combination of calcium fluoroborate that improves joint comfort in as little as you might think it's not a long earlier as little as seven days and then keeps getting better for longer you use it and we’ve measured this on a 90-day study. So, it is maybe the first and the best proven joint care product which is being launched in the US but also of course in some other markets too.

Moving on from here to digestive advantage, and here we are launching an innovation which I think is also first. There is something first here too it's not just a probiotic which a number of people have but it also has a prebiotic and a prebiotic actually helps your probiotic feed it feeds your probiotic. So, probiotic is good bacteria and it feeds your good bacteria, so it becomes more effective.

So, there is the first one is prebiotic fiber and the probiotic also is a superior probiotic, it has a compound called UC-30 which is basically again special patented compound which has I think 100x performance over normal prebiotics. So, this is quite a different innovation the 100x better prebiotics. So again, very exciting launching in a new format called gummies which are doing quite well actually as a format and we are happy about that.

Moving from Schiff/VMS brands, let’s talk about Nurofen and I think this is also very interesting because for the very first time we have a Nurofen patch and you know that some people particularly those who suffer from chronic pain, people those who suffer from chronic pain do not like to take systemic analgesics, don’t want to pop pills day after day and therefore use topical products. The problem with topical products are sometimes, they’re messy and not easy and they don’t last long enough. This one is a first ibuprofen 24-hour patch. So, this has been a long time making I have to say that, there was a lot of clinical work here and this is going to be quite a breakthrough in terms of topical relief for 24 hours.

So, we are very excited about that is going progressively as we get the regulatory approvals is going to go through all the key markets going forward. Again, I don’t think this is in the goody bag. Not allowed to. There you go, not allowed to.

I think I’m going to finish actually talking about health with not an innovation actually, if you choose to call this not as an innovation. Now as I said that Mucinex is the number one OTC brand in North America, which is a phenomenal thing to do. But this is the first RB brand ever to get into Super Bowl. We never used Super Bowl. It’s too expensive $5 million a spot by the way. So, we feel how do we actually spend less money and get as much. So that is another starting point. And yet, of course, we know Super Bowl happened at a time when, there is a full season, right.

So, we came to this idea, all those people who are from America probably can visualize this. The number one day where people calling sick in the full year is the Monday after the Super Bowl, okay? There are no RB people who call in sick, but I know banks generally have people who call in sick. Bankers generally call in in sick. RB people come to work. Now this is the simple insight. We called it SuperSickMonday. So, what we did was we showed 2 commercials. The first one as a teaser and the second one just as Super Bowl finished, just the first one, a lot that’s expensive, but very, very right.

And as you know, Super Bowl is not just a theatre of game and show. They’ll also lot of big commercials get launched that day and then they get talk about and I mean I was there on the next morning, actually I was in America and they were talking about all the commercials and which ones were good and which is not good, I have to say this was one of the top commercials in Super Bowl. So, let me just show the first teaser that we had. So, let’s play the first one.

[Audio/Video Presentation]

So, this not the day of Super Bowl. We actually launched this to create this idea of SuperSickMonday and got a lot of, obviously, so we talk about social media and digital media. this is it. You became part of the pop culture. You talk about something which everyone is talking about and we got that. The spot I’m going to show you is the one we showed just as Super Bowl was finished. The final whistle blew, and this spot came on.

[Audio/Video Presentation]

And I have to say that, it’s this type of brilliance and innovation that you want to see in this company. It costs still a lot of money but achieved 4-weeks' worth of advertising with the number of social media and other engagements we got. So, if this is not an innovation, then what it is?

So, with that, I think I just want to come in to the targets for 2018, which I think everyone has gone through, must've been probably the first thing to looked at. So, let me just remind you all that what we are setting is actually total revenue targets of 13% to 14% which implies 2% to 3% like-for-like. Because after first 5.5 months, we'll become total revenue. And let's face it, our company everyone in the company target to achieve total revenue. They don't always understand like-for-like, but I want to make sure that you have that clarification. And then the operating guidance as Adrian has elaborated rather exhaustively I would say is moderate margin expansion in the medium term.

And with that I'm happy to take, and Adrian is happy to take the next round of Q&As. Yes, who want to go first?

Unidentified Analyst

I just had a question on your RB 2.0. In the light of speculation around Pfizer or some other kind of health assets. How do you think about that evolving?

Rakesh Kapoor

Well, first of all, I cannot comment on any speculation. Because as you've rightly say, it's speculation. all I would comment to you is that we have been very disciplined in looking at M&A. I mean I know that ones we do always come and get talked about. The ones we walk away from some publicly actually and some not publicly never get spoken about. In all the M&As we've done we've applied three very simple criteria. Strategically comparing we need to be better owners, and in some case make us also better actually, and finally, of course it has to have value for shareholders. And we are shareholders also ourselves as you know and we need to see value.

Now that's the criteria we've applied. And for every major acquisition we've done so far at my lifetime and before. All these three things have been proven before. That shows that not by accident it is by discipline. And to be, to know when to enter and when to walk away. So, I think we will be very disciplined in any future M&A that we may do at whatever point in time. All I would say is RB 2.0 is a great platform, because it does enable us to manage not just our health business which is of course is very precious and we want to, but also our healthy hygiene home business, which I have to say has underperformed its potential. Because it never got the focus. But now it does. Now we have a dedicated team. So, I feel much better actually about our ability to have broad based growth which is what we want. Because there are some very large brands sitting in the hygiene home side, some people call them billion-dollar brands. And there are billion-dollar brands sitting on the other side of the equation. And we want to see that go back. And I think RB 2.0 is better for that, because theoretically, I mean it's just theoretically if we make any acquisition large or small, it does not impact the whole company the way otherwise it would be. So, I think that is the good thing about the platform. Martin?

Martin Deboo

Thank you, Martin Deboo, Jefferies. Rakesh at the core of the guidance I think is the just 4 to 6% in OTC health and you think you’ve factored it back in that rate in Q4. I mean the other big five players seems to me to be sort of growing roughly 3% so the influence is you’re taking share both at the moment in OTC but you’re anticipating your resumption about the market taking share going forward and can you confirm I’m understanding that correctly and could you give some color around where you feel you are taking share. It looks from the release as if Durex was keen to be Q4 but any color you can give at the catching level just help us understand the dynamics of that guidance.

Rakesh Kapoor

Yeah, I think first of all most companies will talk about OTC when they talk about growth and I think OTC has characteristics which have their own growth algorithm but our definition of consumer health is broader than that, I’ve always said that and when you include I mean for example VMS is not OTC. VMS at 4 to 6% of a very large category mathematically changes the growth rate of consumer.

This is not just about VMS the other categories that we have which are to us consumer health, sexual health is consumer health preventing AIDS and SCI is consumer health. So, you know when we talk about 4 to 6, we talk about that.

Second thing I want to say is that we didn’t say that it will be 4 to 6% in every quarter and every year. Because it will not be because what happens is that you can have one big innovation or set of innovations or switches or things that actually move markets materially higher and some areas and could also be seen actually by the way, could be seasonality.

So, I think we nothing I’ve seen actually makes me believe that the 4 to 6% algorithm on consumer health should change but when we bring ISVN and other things of course there is a different algorithm but it should not change. And actually, I know we documented quite well the impact of Scholl probably in the release as well and you know that is also okay to actually acknowledge but our health brands and portfolio has performed really quite well throughout the year and throughout before and yes, some brands and that we’ve never shown before. So, we feel that 4 to 6% is the kind of growth rate we should still see but it will not be in every category and maybe not in OTC.

Unidentified Analyst

Hi, Charles from Asset management. Just a question on foot care, what confidence you have that you can return to sort of historical growth rates and from the past where is the area where private label is now becoming more important?

Rakesh Kapoor

Yeah, actually footcare has a lot of components, there is a core what we call core 8 business which is problem solution business. You know have corn, you have fungal nail and that kind of products. And we have a range for all those problem solution 8 products, then there is another range what we call comfort range you know you need sometimes you will need in stores to improve their gate and the way they walk and sometimes what I should tell you that, that range is let’s call it the comfort range and also the compression hosiery is part of the comfort range. Then there are some special areas that we’ve actually created and this is the new space for hard skin removal and the gadgets. If I look at these the same thing, I would say the AIDS segment is still an important segment for ourselves and important one where greater education both into consumers and in store is an important reason. Because a lot people still don’t treat their corn and your fungal nails and verrucae sometimes.

And therefore, greater awareness, greater education is an important driver and we see that as a growth part, although it’s just one part. Then there’s the wellness part like I just described, insole and compression. And its early days for us in this area, because this is very much something that we have created over the last two or three years. But we had a comparison business in Japan, which is very successful and we’re trying to learn from that and see how that can be improved. But compression hosiery again, is something that is about health, if you are on your fleet all day long, you are going to have swollen feet, legs. And one of the ways, one of the reasons why is because your blood flow and circulation is not as good. Compression hosiery helps do that. I know that some people, some women actually in Japan sleep in compression hosiery, because they want to see their swollen legs come back to normal and look better. So that is a new part. And again, a lot of work to be done there.

And then there is a third part, which has been, if you ask me the greatest peak and trough, if you want call it the greatest delta in Scholl. So, I still see Scholl as a very exciting category. I see it as a very important brand. I cannot think of one brand in foot health or foot care which is so global in nature, so it’s quite a unique category for us and therefore we need to just move out of some of the challenges we’ve seen, although there are some peaks before that make it a more sustainable growth category.

So that’s the journey we are on and I feel as interested to do that as I was before. Despite the fact that some innovations will always not work as well. I mean, I’ve just launched all these innovations. Very openly, some will do far better than I expect and some people will not do as well as I expect, that’s the nature of the industry, but you move on, you get on. And that’s what we plan to do for Scholl, too. Yes, Richard?

Richard Taylor

Good morning. Richard Taylor here from Morgan Stanley. Three questions for me. The first one is on incentives for the two different businesses. Will you have different incentive structures for the different businesses? And do you expect the cultures to diverge at all? So that’s question one.

Two, thank you for the color on Schiff. Are we very interested what you see is the ROIC metrics on that Schiff business looking back now versus perhaps versus what some analysts were expecting the time?

And then lastly, I was a bit surprised in the quarter of the impact from Scholl still, and also, I guess the lack of impact from flu. So, a couple of questions on that, how big is the devices business now for Scholl? And how big was the flu impact in Q4? Did weakness in one offset the strength from the other?

Rakesh Kapoor

Okay. Listen, I think there is too much detail that you are looking for and I think I’m not going to give you all that detail. All I would say is that the importance of Scholl gadgets is coming down over a period of time mathematically and you know that. Q4, the reason you called out was because, it’s not like any other quarter, you said distinct quarter and Scholl had a big gifting thing last year and that’s why I think the CFO called out of the gifting part. But today as we sit, it's materially lower than what it used to be. So therefore, the impact if any is going to be materially lower or better depending on how it is.

On flu, I think there is something to be, well, flu is basically the incidence of flu and the sales related to flu are not in exact sync. Never, actually what happens typically is retailers' buy. And they're prepared for a certain season depending on how they feel. And then at the end of the year, or at some of point in time they realize whether or not they need to get another big order in or a smaller order in or not at all actually. And that happens during the flu season which starts maybe in October and finishes maybe in Feb or March depending on and sometimes a bit later, but that’s it. So, I think order and reorder patterns decide whether or not you see it in your numbers, the incidence of flu have been high. Everyone knows this you don’t need my need to say that. But what he was alluding towards although there has been an impact in Q4 of that, it is not so material to actually call it out as a big factor because a lot of our healthcare brands did well, they are not seasonal and not flu related.

Then I think you had another question incentivize actually. I have to say that in RB, you can incentivize for what you control. You don't incentivize on things that you have no control over. So, for example, in the past, if you were in Europe and North America, you would be incentivized on the performance of Europe and North America in the year. And if you were in developing markets, the health, I'm talking about the health, but also flu in India for example in Indian performance. Nothing to do with what happened with Germany. So, the EMEA performance is incentivize on what you control.

In the long term the long-term incentives are company performance. And as you know the more senior you are the more of your weight is on long term performance so that you have ownership guidelines too. So, we have both ownership guidelines and vested on the long-term performance of the company so that the people behave the right way not getting incentivize to do the short term. So that's the philosophy I think you are very aware of.

And that's the philosophy going to be followed. So, I don't think anything is changing in the way we incentivize people, although for '18 just in France currently, everyone will be on common objective. Which mean that if you're in UK, you looking after RB Health, or RB Home, you're able to have one common incentive for UK as a whole which will be Schiff. Because the last thing I want in this year is for people to spend too much time inside the company much better do it outside. But the by enlarge the philosophy is the same.

Richard Taylor

And the ROIC.

Rakesh Kapoor

Yes. And I don't think that I going to give you ROIC for any acquisition we've made. All I would say is have good acquisition for shareholders.

Adrian Hennah

And there are earnings today more than its cost of capital.

Rakesh Kapoor

Done, okay last one. Cool I think we've geared up. Thank you very much. Thank you for coming.

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