GlaxoSmithKline PLC at UBS Global Consumer & Retail Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : category growth, you estimate is going to be around 3 to 4. So my first question is, what are the factors that should be driving your outperformance relative to category growth. So that's 1.3, 1.5x the level of outperformance. And of your 3 segments, OTC, VMS, Oral Care, where do you see the biggest opportunity to grow in excess of category growth? Tobias Hestler Good. Thanks, Guillaume. So look, exciting to be here, fantastic time of being able to launch Haleon with the Capital Markets Day last week and being able to engage with all of you today. So thanks for having me here, I appreciate that. We -- let me just approach your question from 2 different angles. So one is we have significantly reshaped our portfolio. We've integrated the business. We've divested. So we've created, through the integration of Pfizer, a new company that has its portfolio reshaped, both from a geography and from a category perspective. And that allowed us to grow 4.4% over the last 2 years in a market that grew 2%. So we've outgrown the market about 2x. And we've done that, I think, bringing this model that we explained at the Capital Markets Day to life of investing into A&P ahead of sales growth, and we've done that over the last 2 years, and we started to see the momentum come from that. So I think that's the first thing. And by the way, we've done all that while integrating and separating. So there was, without a doubt, an internal focus, given the energy that needed to get the integration completed through a pandemic. So I think that gives me, I think, pretty good confidence around the 4% to 6% range because we're in that range, and we delivered in that range with all the other things that were going on around us. And then you asked around, I mean, the 3% to 4% is the average across the categories. We've given an outlook that says combined oral health and VMS will grow mid to high single digit and be about 50% of our revenue by 2025. Those are the 2 categories where we play that grow a bit more. They grow 3% to 4% and 4% to 5%, whereas OTC grows 2% to 3%. And then I think the overall 4% to 6% is, again, against the 3% to 4% across the categories we play in. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 09, 2022 / 4:00PM, GSK.L - GlaxoSmithKline PLC at UBS Global Consumer & Retail Conference (Virtual)

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : And if we were to zoom in on the -- your largest category, OTC, 55% of your sales last year, I was surprised to see that you expect 2% to 3% category growth for this segment. So it should be, in theory, the lowest growth in your portfolio. Why is that? When we think about all the mega trends of aging population, self-medication, more health-conscious consumers, even premiumization, one would think that OTC has stronger prospects as a category than that 2% to 3%. So what's holding back do you think the growth of that segment scope to see an acceleration potentially? Tobias Hestler So I think we've seen OTC category grow pretty consistently over a very, very long period of time. And the growth has been consistent. You didn't have rollercoasters in it. And the reason it's been pretty consistent is the regulatory hurdles you have, it's a regulated business. So you have to go -- innovation rates are slower. You need to get government in most of the countries in the world. You need to go through a formal approval process to get your products to the market, and that takes time. Of course, that gives a lot of stability and also quite some hurdles of entry into that category. So it's a long-term growth category, and it's driven by -- I mean, the underlying factors are all positive, but it just takes simply time to do that, and we don't see that dramatically changing. So I think a very stable but growing business and one where I think we very successfully built the business over a very, very long time. So look -- and then, yes, there is probably a part of the business that has some seasonality, cold and flu, allergy. But if you take those small movements out, long-term positive growth trends, and we have the capabilities to grow and grow ahead of the market.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : And when we think about the 3 subdivisions within OTC. So you've got pain relief, respiratory digestive. Do you see homogenous prospects for these 3 businesses? Or one maybe stands out more? Tobias Hestler Yes. So I think they grow over time. I think it depends on the amount of Rx OTC switches you get. If you get a bigger Rx OTC switch in a certain category or subcategory, then the growth gets bigger. Like, for example, introduced Voltaren, did a Voltaren switch in the U.S. about 2 years ago. That drives category growth, and that's where you get more growth, or you have a -- you bring a new innovation in place like here, Advil Dual Action, something -- a new development we did with an NDA approval in the U.S. That, I think, is -- the innovation is driving growth. Respiratory is a little bit more up and down because you have the seasonal elements in it. And then I think Digestive Health, we're the market leader. We've drawn strong innovation and growth. I mean TUMS, I think, 80-year-old brand, massive amount of innovation, new forms and keeping the brand alive. And then we also have businesses in smokers health and certain dermatology pharmacy brands that we play in. But I think growth is probably across all of them and then more driven by new innovations, which then impacted the growth rate in these categories. And then maybe slash couple a little bit with geographic expansion opportunities where you can do more in one country where you haven't rolled out a brand yet.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : Oral care is the land of giants. This is where you compete against the likes of Procter & Gamble, Colgate, Unilever. Increasingly, they're noticing the success of Sensodyne and the faster growth of this niche therapeutic oral health. Are you concerned about these larger companies increasingly going after this segment? And would you see an increased cost of doing business as a result? Tobias Hestler So I think from where I sit, if I look at, we've successfully competed with the giants for 10-plus years, right? I mean it's -- we've been successful in Sensodyne, been successful in Parodontax. We don't take this lightly. But I think we have the capability, we have the resources, we have the skills. And this is -- I mean, this has been an industry that is pretty consolidated, and we've always had these competitors. And with, I think, the model I explained earlier, I think we have the ability to continue to win there. And I think we see much more penetration opportunities. And look, we've also -- when some of the -- some players came and they moved more into therapeutic, we still gained share because there's a huge penetration opportunity. And for Sensodyne, it's pretty -- it's very big because about 1/3 of the world's population has sensitive teeth, but only about 1/3 of people do something about it by using a sensitivity toothpaste. So there is a huge penetration potential there that you can grow. And I think we believe we can grow above the market by bringing more people into the category and solving the needs.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : You mentioned COVID. So that's a perfect transition to talk about VMS. It's been the fastest-growing business for you in the past few years. You did mention last week that COVID had positive sales on category growth. So first question, big picture on VMS, what underpins your confidence that this is a category that can grow 4% to 5%, that we're not going to see imminently some kind of normalization as we hopefully get out of COVID? Tobias Hestler Yes. So let me take maybe the very big step back on VMS. So VMS, I don't know, 20-plus years ago was single letter of the alphabet vitamins. Then it moved to multivitamins, then the multivitamins evolved to multivitamins for a certain age group. And then from there on, now it moves to what REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 09, 2022 / 4:00PM, GSK.L - GlaxoSmithKline PLC at UBS Global Consumer & Retail Conference (Virtual) is called benefit-focused VMS. So there has been a huge amount of innovation in the VMS space. And I think we have the right brands. I mean, there's a -- you talked about the market, let me do the market first. So we believe that trend will continue by maybe also bringing natural ingredients in it that solve a benefit in addition to the vitamin. So I think -- and we see this as a trend that will continue. What we have seen through COVID now is in '20, there was a significant growth in the category. The category grew more than 10%, about 22% in the U.S. We have data, more consumers coming in the category. We thought actually some of them will leave. So we thought the category is going to take a dip in '21 and then it grows again. It didn't. The category grew on top of the 10 another, I think, low single digit, and we grew 19, and then mid-single digit on top of that. Now where we've seen a bit of more of a rollercoaster is on emergency immunity claim. Category grew strong double digit, but we nearly doubled the business. That business declined a bit in '21, but now we're growing off that base again. Whereas in Centrum actually, people went to -- there was a small dip in '20, and now more people moving back to the offerings that Centrum has. So we feel overall good about the longer-term growth in VMS to continue the portfolio we have. Yes.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : And similarly, when I was asking about competition in oral care, I mean, VMS, what we are seeing, it's almost the other way around, the giants entering VMS recently. We've heard deals from Nestle, Unilever, Procter & Gamble, so growing interest from traditional food and HPC companies REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 09, 2022 / 4:00PM, GSK.L - GlaxoSmithKline PLC at UBS Global Consumer & Retail Conference (Virtual) for the VMS segment. What do you think the impact will be? Is it going to be positive because it's such a fragmented space, they're going to bring consolidation, penetration, premiumization? Or do you also see that as a potential threat for your established franchise there? Tobias Hestler Yes. So I think not too concerned about it because I think it's so highly fragmented. I mean we have -- we're the largest players, we have a 3 share. So there is an enormous -- there is enormous growth potential. And also the players also come a little bit from different directions, right? We come from the, I would say, core of VMS with vitamins and pills. I think Nestle comes from the food side and adding vitamins and mineral and supplement solutions to it. And I think the space is also not -- the lines aren't clear on that space, right, where OTC is very clearly defined. Oral health is very clearly defined. On VMS, the boundaries to food, nutrition, drinks are much more fluid. And that's why I think there is a lot of potential for all the players. And look, we've competed with -- very successfully in oral health for many years. We talked about it before. So I think, confidently, we can and will compete, and I think we have very strong plans on Centrum, on Caltrate and on emergency as well.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : If I were to compare that, and maybe it's an unfair comparison, but traditional food and HPC companies... Tobias Hestler Are higher.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : So moving on from top line to margins, starting with your gross margin, which last year, stood at 63%. Your ambition over the medium term is to expand your operating margin in a sustainable, moderate way. But it seems that in your margin expansion algorithm, you will rely on gross margin improvement. So my first question on that is what is driving this gross margin improvement? Tobias Hestler Yes. So 3 things that drive the margin improvement. One is this healthy balance between volume, mix and price. So the ability to take and continue to take price, given the premium -- maintaining our premium positioning in the products. And then mix, where we introduce innovations, when you bring innovation to the category, that also allows you to take price indirectly. So continuing on that. Secondly, higher share of power brands. So our larger brands grow ahead of the sales growth of the group overall. And power brands have a higher margin, just given the economies of scale and the size they have. So -- and then thirdly, further optimization potential in our supply chain, so in our footprint, but also optimizing the factories. And don't forget, we just integrated last year to hold the Pfizer footprint. We did that at the end of the integration because it took us a bit more time doing that through COVID. And in order to optimize manufacturing, more in-sourcing, shifting products from one factory to the other, that is usually a several-year process because most of the products we make are regulated. So there is more to come from a from an optimization point of view. And as a combination of these activities, we believe, and we target gross margins over time to increase.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : And you've considerably reduced the number of manufacturing plants in the last few years. I think you had 41... Tobias Hestler 41, yes.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : So 63% gross margin, what do you think is the natural ceiling from a gross margin standpoint for your current portfolio? So as in -- would it be realistic to assume that you could get to a high 60s gross margin over time? Tobias Hestler So when you look at the model we've built, we don't have margin targets by line item. In our mind, I think for us, it comes down to the high gross margins we have and the positive mix and the optimization allows us -- frees up money to reinvest back into business in A&P and R&D, and that's what we're after. So we want to use the incremental funds we create to invest in the business in order to drive the 4% to 6% sales target. And I think that's the virtuous circle that we're driving and that we're after. And look and then we decide where we allocate those funds, yes? But in principle, gross margin will increase. And then it depends on, of course, which markets you enter, and I think how quickly that goes.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : And compared to traditional food HPC multinationals, how would you rate your marketing capabilities? Being part of a large pharmaceutical group, do you feel like there is still some catch-up to be done on the marketing front? Tobias Hestler So I don't think so because I think we've competed and are competing very, very successfully with the big players, especially in oral health and also in VMS. When I look at the talent that we have, the talent comes from all these names that you mentioned. We get very positive external recognition on the quality of our marketing and advertising. Now of course, it is staying agile, very, very alert on are there new things happening that you can learn. But I feel good about when I look at the talent and the people we get and also the interest of people wanting to work for us. So I think that this -- when I look at the CVs of people, this reads -- it's the CPG names that you mentioned as well. And then if this gets then externally recognized in awards, that's something apparently we're doing right. And of course, with all of that, if we're winning share, then I think we're doing the right things.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : So now moving on to -- I mean one quick question on your level of gearing. So after the demerger, in July, your net debt-to-EBITDA should be around 4x. Should we therefore assume that you're not going to be looking at making any large or medium-sized acquisitions until probably 2025

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : So for the last 8 minutes of this fireside chat, I thought we could touch on more like short-term priorities, challenges as well to 2022. I mean, I guess the first question I wanted to ask you was about your percentage of turnover derived from Russia and Ukraine. Also, if you've got manufacturing facilities there and what kind of direct and indirect impact this conflict could have on your 2022 financial performance? Tobias Hestler Yes. Look, I mean, the first thing to say is really, I mean, it's human catastrophe. And I think when I'm on calls with the team there, and then the first message is all our people are accounted for and alive, you really hold and hold your breath, right? I think that's sort of in the situation I've personally not been in, in my career. And I think that's, I think, that's where our first focus is on, ensuring the health and safety of our people, what can we do to help people leave the Ukraine, host them in other countries. So I think that's where the main effort of the business has been and is at the moment. And then to your question, Ukraine is a very small business for us. Russia is around 2% of revenue. We do not have manufacturing in the country. So relatively small percent of our business. But I think what we're now working through is really understanding the secondary and territory impact of raw material and other supply that is coming out of Russia, agricultural goods that are then going into raw materials that are needed, sorbitol, glycerin, et cetera, aluminum, which goes into aluminum foil. So I think really understanding those impact. So no direct impact from manufacturing or third-party manufacturer side there, but I think it's the wider repercussions that has on the business, but a very fluid situation.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : And as you are raising prices, what kind of price elasticity are you expecting this year? And of your 3 businesses, any major differences in terms of price elasticity? Tobias Hestler So if we give you an example, I mean, we did price increases in the mid- to high-single digits on about 50% of our portfolio in the U.S. in October. What we've seen, price increases went live in October, probably mid of November, December for all of them to hit the shelf. We've not seen any volume declines from that. Now situation right now is, of course, maybe a bit different than it was in the past because everybody is increasing prices. So there isn't -- you don't create a new disparity. More broadly, so if you leave sort of an inflationary environment where everybody increases prices away aside, we have usually seen very low price elasticity. So we have the ability to take price, and you lose very little volume in doing so. And the reason is predominantly, you're using our product for a therapeutic need. You have sensitive teeth. You want your teeth not to hurt when you eat an ice cream, and that makes you a little bit less price-sensitive. Of course, you can't price yourself out of the market and we're very mindful about price increases, looking at it brand by brand or SKU and SKU, market by market in order to see can we price up? But we wouldn't price up at the detriment of losing volume or pricing ourselves out of the market.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : And for 2022, you're also guiding for 4% to 6% organic sales growth. Benefit from pricing, benefit from the rebound in cough, cold and flu, is 4% to 6% a conservative guidance? Tobias Hestler So look, it's early in the year. So I mean, I think we came out at Capital Markets Day in February. We feel 4% to 6% is the right range. We will update that guidance as the year goes -- as the year goes on. With pricing, I've given -- I said a bit more. I said pricing was 2%, 2.2% last year. I said at the Capital Markets Day, it's going to be more this year given we have the full year impact of the price increases that I just explained in the U.S. and REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 09, 2022 / 4:00PM, GSK.L - GlaxoSmithKline PLC at UBS Global Consumer & Retail Conference (Virtual) other price increases that are underway. And then we need to see how the economies evolve and what will happen. You'll see the quarter results come out, and then we take it from there.

Question: Guillaume Gerard Vincent Delmas - UBS Investment Bank, Research Division - Analyst : And with that, it's time to wrap up this fireside chat. Tobias, thank you very much for your time, and thank you to all the people in the room and the people who's been watching online. Tobias Hestler Excellent.