INTERVIEW: No Recovery Yet For US, Europe

Global growth in the consumer industry has slowed and talk of recovery in the U.S. and Western Europe is premature, Reckitt Benckiser PLC (RB.LN ) Chief Executive Bart Becht told Dow Jones Newswires.

In a recent interview at the company's headquarters in Slough, England, Becht, who shocked the markets last month when he announced his retirement from the FTSE 100 group from this September after 16 years at the helm, also said the household and healthcare giant is ready to look at any transformational deal opportunity alongside its ambitions to grow market share across its brands portfolio, even as it continues to offset escalating input pressures by paring costs.

Last month, the U.K.-based maker of Dettol disinfectant, cleaning product Cillit Bang and Air Wick air fresheners, posted a rise in first-quarter profit on higher sales, boosted by surging demand for household and personal care items in emerging economies.

Sales in Asia, Africa, Latin America, the Middle East and Eastern Europe, where rising incomes and socio-economic improvement have driven higher demand for its products, more than offset weakness in Western Europe and North America. Still, like its rivals, the company faces a challenging outlook in mature markets where, in addition to cut-throat promotional competition from suppliers and retailers, the disposable spending power of cash-strapped shoppers is being hit by rising unemployment and squeezed by government-backed austerity tax hikes and public spending cuts.

Becht warned structural macro-economic weakness in major Western economies has tapered the rate of growth, even as the globalized industry gradually shifts to the East. "The overall global growth clearly has come down somewhat because Western Europe and North America are still a huge part of that picture," he said.

"In Europe, the situation continues to be very, very weak. In North America, it also continues to be rather weak. It is marginally better than it was maybe a couple of months ago, but it is not good enough in order to call it that we have a recovery. It is way too early for that."

Dutch national Becht, speaking at a breakfast bar in a dummy 'supermarket' showcasing the group's branded products, rejected speculation that his surprise departure was the result of a split at board level over the strategic direction of the company, including involvement in a play for a transformational merger or acquisition, such as with Unilever (ULVR.LN), Procter and Gamble Co. (PG) or Colgate-Palmolive (CL). "That is complete rubbish. There was one analyst who dreamt up this hypothesis. It is complete nonsense."

Still, he added there is capacity for a major deal in the industry and the group is ready to scrutinize such an opportunity. "Transformational deals basically happen once every couple of decades. When the opportunity, if ever, arises, I am sure we will take a look at that. Yes, there is room for it. It might happen, [but] I don't think it is very likely to happen."

The group delivered GBP11 million first-quarter cost synergies from its GBP2.5 billion buy of SSL International PLC in 2010, which owns the Durex and Scholl brands. It has recently focused on bolt-on acquisitions in emerging markets to build portfolio and brand equity. Last December, it acquired India-based Paras Pharmaceuticals for GBP460 million.

The company, which also makes Lysol disinfectants, Clearasil spot cream and Finish dishwasher powder, as well as French's Yellow Mustard, is also being hit by rising commodity prices as the cost of oil, palm oil, chemicals and plastics soars. To combat these effects, it is ramping up savings by streamlining packaging and paring logistics, sourcing and purchasing costs to stem profit margin losses.

The CEO said long-contract hedging mitigates against daily price movements. "We don't buy necessarily on a spot basis. We lock prices in on raw and packaging materials, anywhere from three to 12 months, to make sure we have some stability in our cost structure."

A week ago, global commodities prices including gold, silver and oil crashed on fears of a global economic slowdown, resulting in some of the biggest falls in a two-year period characterized by upward pressure. Becht said it was a correction that should be positively received. "The fact they are coming down is welcome news because a lot of it has been very speculative."

In a bid to recover higher costs, the company invests in innovation and product design, like replacing butane in aerosol cans with compressed air, improving the ergonomic utility of toilet fresheners and packing dishwasher tablets in cardboard packaging rather than plastic. Becht said the real work begins once the new product hits the shelves. "You always have to start your cost optimization after you have launched. There is always stuff to be done."

Still, Becht said shrinking the quantity of a household product is a no-go area, unlike for food manufacturers. "[You can] take out packaging materials, but not change the experience for the consumer. Taking quantities away is taking away from the consumer." Earlier this year, reports said U.S.-based Kraft Foods (KFT) cut the size of its Cadbury Dairy Milk chocolate bar due to the rising cost of ingredients.

In addition, while the group drives through selective price increases in developing markets, Becht said it is a different story for mature economies where highly-competitive supermarkets rely on their value proposition to drive sales.

"We have not really taken price increases of any substance in Europe or North America. I don't believe at this stage of the game there is substantial room for material price increases because of where the consumer sits today. I don't think [the promotional environment] will change overnight."

Becht said there are further growth gains to be made for its 'powerbrands', including Calgon limescale tabs and Vanish stain remover. "In 2000, right after the merger, we had less than 40% [of our business] in our powerbrands and today we have close to 70%. They are strong market leaders in categories which still have substantial growth potential because they tend to be under-penetrated, not just in developing markets but also in developed markets."

"Automatic dishwashing is a classic example. Dishwashing machine penetration, even in Western Europe and North America is somewhere between 30% and 60%, when you have washing machine penetration at 90% plus. We drive [this] penetration together with [appliance manufacturers] like Bosch Siemens and Whirlpool".

However, first-quarter group fabric care sales fell 6%, hit by laundry detergent purchases in the struggling economies of Portugal, Greece, Spain and Italy, while Europe overall was relatively flat in dishwashing. Becht said the trend wouldn't change in the short term.

"For dish, the overall market growth rate has come down somewhat, [but] it is not a share issue. Fabric is a very different story because our softeners are mostly driven by laundry detergents in southern Europe. Volume is not fantastic and promotional spend is very high. I don't see that changing in the next couple of months." He said next year "we will see some better results."

Meanwhile, Reckitt Benckiser's pharmaceutical business is delivering strong returns. Last month, it noted "very good" progress on patent-protected Suboxone film -- a heroin dependency treatment that dissolves under the tongue -- which had 37% volume share in the U.S. by the end of 2010. New pipeline initiatives for the drug will be revealed in the next 12 months. Suboxone tablets were exposed to potential generic competition after its exclusivity in the U.S. expired in October last year, but the company's move to the patented film products should help protect it from competitors.

Despite Suboxone's success, and apart from "one or two" possible extensions into addiction treatments, Becht said the group has no plans to greatly expand its pharmaceutical operations. "We are a niche pharmaceutical company," with no intention to become a major one, he said.

On his future and after taking a break, Becht, 54, said he remains open to an external non-executive position once his tenure ends, though he hasn't found one yet. "So far, I have not really had the time".

However, he aims to shift direction. "I am mostly focused on smaller businesses, not so much in an executive capacity. There will be some private companies probably that I want to be involved with," he said.

However, his extensive charity work will also take center stage, which includes support for organizations including Save the Children and Médecins Sans Frontières. "One of the reasons why I am retiring is also to make sure we can spend some of the money on the right causes. But that takes much more time that I ever envisioned." In 2009, Becht transferred around GBP110 million in stock options to his trust.

The announcement of his planned departure came less than five months after Liz Doherty replaced Colin Day as chief financial officer. Yet Becht, who will be replaced by executive vice-president of global category development Rakesh Kapoor, said concerns about the speed of management change at the company were overdone.

"Colin's departure had nothing to do with my retirement. They are completely unlinked events. It is a bit like praising or killing the messenger. Since we have been bringing the good news basically for the last 10 years, they think the news is directly linked only to us. This is a team effort of nine people at the end of the day".

Under Becht's leadership, the company's shares have soared more than fivefold, from 600 pence in 1999 to more than 3000 pence today.

"I have done this for 16 years, which is a long time. And I think there comes a time when the company, as well as myself, are ready for a change. There is never a perfect time, but it is about as good a time as there can be for this transition to be made".

By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; simon.zekaria@dowjones.com

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