Reckitt-Benckiser reported better-than-expected volumes and sales, while reassurances regarding litigation affecting its premature baby formula in the United States also helped to lift the shares of one of the largest consumer goods companies in the world.
The group’s sales grew by 1.5% in the first three months, compared to the City forecast of a drop of 0.9%. Sales volumes dropped, but the decline was offset by the gains made by the hygiene division of the FTSE100 company.
Reckitt said that the sharp declines in its nutrition business were due to comparisons made with previous growth rates in market share following the disruption of Abbott Laboratories in the US.
Reckitt in Slough in Berkshire has been under pressure since investors became unnerved by fears over possible multi-billion dollar liabilities stemming from hundreds of lawsuits filed in the US regarding its Enfamil brand premature baby formula after a decision in an Illinois state judge last month.
The shares of Reckitt have dropped about a fifth in value since the news broke in mid-last month that a Illinois juror had awarded $60 million in damages for a mother whose premature baby died from consuming the product. The baby was diagnosed with necrotising Enterocolitis, a condition of the gastrointestinal system.
Reckitt is appealing the decision. They have strongly rejected it. Reckitt, Reckitt’s infant formula business, has vowed to sell the Enfamil products that are made by Mead Johnson.
Reckitt shares rose by 124p or 3 percent to £43.74 following Wednesday’s positive update.
Kris Licht, Reckitt’s new chief executive said that the company had “not seen any impact” on the publicity surrounding the verdict and that its nutrition business was “doing very well” in the US.
He said, “Our products are of high quality, premium, safety and effectiveness, and at this point, we haven’t seen any negative effects.”
The 47-year-old Licht, who took over in October has had a turbulent time. He added, “The litigation is centered around Enfamil prematurity, which isn’t a product based on retail sales.” It’s not a big product in terms of sales, but is crucial for neonatologists.
Reckitt’s nutrition business saw a 9.9 percent decline in sales compared to last year, which was better than expected by analysts. Sales in hygiene and health rose 7.1% and 1.1% respectively.
Analysts had predicted a 3.2 percent drop in group volumes, but the actual result was a 0.5 percent decline.
The City and Wall Street were caught off guard by the verdict last month. It sparked speculation that Reckitt could be vulnerable to predatory takeovers, a possible restructure of the group and concerns over the future dividend for its shareholders.
eckitt assured investors that it would “accelerate its share purchase program”. This month, the third tranche of a £1 billion program began. “We expect to announce our next programme in July”, eckitt added.
The company reiterated that it expects adjusted operating profit to “grow ahead” of revenue for the full year.
Reckitt, whose roots date back to 1819 when Isaac and Thomas Reckitt constructed a mill in Boston in Lincolnshire, was created in 1999 by the merger between Reckitt & Colman of the Netherlands and Benckiser of the United Kingdom.
Jefferies analysts said that the results “significantly outperformed fears for the first quarter”. The analysts added that there were signs of stability and gains from innovation in the US nutrition market. It is unlikely that the uncertainty surrounding the US litigation will prevent full enthusiasm. However, given the sentiment, it is a relief to the shares.
Barclays hailed it as a “welcome operation beat after some recent disappointing quarters”.
The consumer goods group is trying to calm down the City of London and Wall Street after they were shocked by the possibility of expensive safety lawsuits against Reckitt’s Enfamil products for premature babies in the US last month.
Reckitt addressed the media on Tuesday for the first time following the shock 60 million damages jury verdict from an Illinois court. Reckitt’s message was reassuring, and there were no negative updates regarding the litigation. This was due to an improvement in the first quarter trading of the Health-to-Hygiene Group after some recent disappointing results.
Reckitt has appealed against an Illinois verdict where a mother claimed that her premature baby died from necrotising enterocolitis, a gastrointestinal disorder, after consuming the product. The NEC Society in the US, which is a patient-led organization, supports Reckitt’s decision. It warned last week that recent litigation results “may have unintended harm for babies, and eliminate potentially beneficial therapies”.
Morgan Stanley analysts, Reckitt’s joint-house brokerage, calculated that 530 NEC claims were filed in federal courts in Illinois in multi-district litigation claiming various Enfamil formulas and Abbott Laboratories’ Similac caused NEC.
Kris Licht Reckitt’s CEO warned on Wednesday not to read too much into the numbers of cases. He argued that the cases could decrease after they have been verified by the US legal system.
Reckitt did not book a provision in the first quarter trading update, but it noted that the company faced “contingent liability” and that a trial was scheduled to start at the end September in Missouri, an adjacent state.
Licht stated that these “near term events” do not alter our outlook, and we are confident in our position. Enfamil products for premature babies are safe and can provide vital nutrition under the supervision of medical professionals administering and specifying our products. We do not plan to stop selling the product, as it would be harmful to pre-term babies’ and their families’ care.
Analysts at Jefferies raised their Reckitt forecasts and reduced the “assumed liability risk” of the cases from £4 billion to £1.5 billion this week, in part because of NEC Society’s stance.