Infant formula growing pains hurt Reckitt Benckiser sales

LONDON (Reuters) - A manufacturing glitch at a Dutch factory producing baby milk hurt Reckitt Benckiser's RB.L third-quarter sales, the latest in a string of problems to hit the British consumer goods group, this time, in the formula business it bought last year for $17 billion (13.3 billion pounds).

FILE PHOTO: Products produced by Reckitt Benckiser; Vanish, Finish, Dettol and Harpic, are seen in London February 12, 2008. REUTERS/Stephen Hird

The setback comes as the maker of Durex condoms and Enfamil infant formula had begun to gather momentum after two years of disappointing results caused by a failed product launch, a cyber attack and a safety scandal in South Korea.

Shares in Reckitt Benckiser were down 5.3 percent in London at 1326 GMT.

“RB has been plagued by ‘one-off’ items in the last 2 years, and to suffer another one, precisely when we all expected that the bad news was (finally) in the back-mirror, is very disappointing,” Bernstein analyst Andrew Wood said.

Still, Reckitt stood by its targets for the full year, predicting an uptick in the fourth quarter as retail customers stock up again after the disruption.

Like bigger peers Nestle NESN.S and Unilever ULVR.LUNc.AS, Reckitt predicted more price increases in coming quarters, helped by higher commodity costs.

“We should see ... modest price increases in the market going forward, which we saw evidence of in Q3,” Chief Executive Rakesh Kapoor said.

Like-for-like sales rose 2 percent in the quarter, ended in September, missing analysts’ average estimate of 4 percent, according to a company-supplied consensus.

Reported sales fell 2 percent to 3.12 billion pounds ($3.98 billion), also hurt by currency fluctuations.

Reckitt said its baby formula factory in the Netherlands, which supplies Europe and Asia, including the key Chinese market, experienced a technical engineering issue that temporarily prevented it from supplying retailers with formula in the third quarter, during a period of unusually high market growth.

It said the issue, which is now resolved, led to a 70 million pound sales shortfall and a like-for-like decline of 6 percent in the infant nutrition unit, compared with expectations for growth of 5.3 percent.

On Aug. 1st, the same factory - in Nijmegen - had a minor ammonia leak that prompted a brief evacuation, but production resumed the same day with no safety issues. The company said that episode was completely unrelated to the technical issue that hurt sales.

Reckitt did not detail the exact nature of the technical problem, but executives said it was not due to cost-cutting since it bought the Mead Johnson formula business last year. By contrast, Reckitt has been investing to expand capacity as it seeks to turn around its performance.

Reckitt expects the effects of the disruption to linger in the current quarter and into 2019.

“There are likely new mothers, who once they have moved to a new brand will stay with the new brand,” Chief Financial Officer Adrian Hennah told reporters.

The company said underlying infant nutrition trends remained strong, though market growth is moderating in China due to the reduction in birth rates.

Reckitt still expects 2018 net revenue growth of 14 to 15 percent at constant currency rates and like-for-like growth at the upper end of the 2 to 3 percent range.

It said its broad view on the profit margin for the year also had not changed.

“This latest issue is clearly of RB’s own making and the company will need to convince investors that they have fixed this and that there is nothing else on the horizon,” said portfolio manager Steve Clayton, manager of the Hargreaves Lansdown Select funds, which hold Reckitt stock.

Reckitt’s other businesses - health products such as Nurofen pain relief tablets and hygiene and household brands including Lysol spray and Dettol - saw better-than-expected growth of 4 percent. That level was slightly ahead of Nestle and Unilever.

Reporting by Martinne Geller; Editing by Keith Weir and Louise Heavens