Embattled in litigation and grappling with the aftermath of a tornado disaster that has shut down one of its key US distribution hubs, infant formula manufacturer Mead Johnson Nutrition is set for more uncertainty as parent firm Reckitt Benckiser explores all strategic options for the business - including its sale - in a bid to streamline the group’s operations.
Reckitt acquired Mead Johnson Nutrition in 2017 for $17.9bn, but over the years, the unit has contributed to the slimming margins and stock value of the household goods giant. More recently, the baby formula maker has been in litigation over allegations that its Enfamil product increases the risk of necrotizing enterocolitis (NEC) in preterm infants.
Abbott Laboratories is also under fire, with hundreds of cases having been filed against the Mead Johnson competitor.
Mead Johnson was in fact found ‘negligent’ and ordered to pay $60m over a preterm baby’s death by an Illinois district court in March 2024, plunging the shares of the FTSE 100 member by 15% (around $7bn). Reckitt said the verdict ‘surprised and deeply disappointed’ the company, which has vowed to appeal and said it rejected ‘any assertion that any of our products cause NEC’. Appeal changes were branded ‘reasonable’ by Barclays analysts, who predicted £2bn/$2.6bn in damages would be a worst-case scenario, though others, such as Jefferies, suggested the figure could rise to over £8bn/$10.3bn.
Speaking during Reckitt’s half-year update, Kris Licht suggested that verdict was unlikely to influence the outcome of the appeal.
Asked to elaborate on the strategic options the company was exploring, he added: “We're in complex litigation, and litigation always creates uncertainty. But fundamentally, this is a very good business, it's a very stable business, it's stronger than it was pre-infant formula crisis.
“We have the best brands I think in the industry, so this is a good business and I think there will be options for this business.
“What we're trying to also communicate today is we're not going to rush, we're going to do this properly, thoughtfully, we're not going to rush and do something that would cause us to regret what we did six to 12 months later.
“We want to do what's right for shareholders and we'll look at all options to do that and that includes all options.”
Could Mead Johnson be sold while litigation is ongoing? “I would not rule that out as a possibility,” Licht said. “I would also not say that there's any certainty in that.
“And that's why we're deliberately saying we will explore all options and we will take the time it takes to find the right solution.
“If we can do it faster, that will be a welcome development.”
“But I cannot promise that, and I don't want to promise something that I can't be sure about delivering.”
Tornado disaster skews group outlook
Providing an update on the tornado-damaged warehouse in Mount Vernon, Indiana, Shannon Eisenhardt confirmed the division would experience a short-term impact to its sales of nutrition products, with the majority of this set to happen in Q3.
As a result, Nutrition’s full-year net revenue outlook will be low double-digit decline, a reduction from its previous outlook of a mid to high single-digit decline. This adjustment is also dragging the group outlook down, with Reckitt reducing group like-for-like growth outlook from 2-4% to 1-3%.
Insurance proceeds would largely offset the impact on both the inventory write-off and lost earnings, Eisenhardt added: “We're confident that insurance proceeds covering the write-offs will be recognized within this calendar year.
“However, we may not be in a position to fully recognize the recovery of lost earnings within fiscal 24.”
Focus on ‘powerbrands’
In addition to the Mead Johnson announcement, the FTSE 100 member said it would seek to exit Essential Home brands such as Air Wick, Mortein, Calgon and Cillit Bang by the end of 2025; the portfolio delivered FY23 net revenue of 1.9bn.
Reckitt is planning to focus on consumer health and hygiene brands with high-growth margins such as Strepsils, Gaviscon, Nurofen, Finish, Dettol and Durex. Over the last five years this portfolio has delivered strong growth and high margins, generating a 7% net revenue CAGR between FY2018 and FY2023, and a gross margin of 61% in FY2023. The portfolio will also include likely future 'powerbrands' including Move Free and Biofreeze, and important local hero brands such as Lemsip, Airborne, KY, Veja, Jik, Tempra and Jontex, the company said.
The household goods major will also move to a simpler, more effective organization with fewer management layers and reduced duplication.
The group will restructure its operations, removing the overarching Global Business Unit structure and focusing operations into North America, Europe, and Emerging Markets.
“This organization model will reduce duplication, and we will have fewer executives running our business, and we will have more proximity, we'll have fewer layers,” Licht said. “That all helps a lot in making quick decisions, being close to the market, and driving accountability, which will help me.
“Our category organization is in charge of our long-term category strategy, innovation, and our brands, the strategy for our brands. But the geographies is where our P&L sits, is where the daily operations occur, is the execution.
“So if you want to ask me who is ultimately accountable for the delivery of the P&L every day, every week, every quarter, well, it's the geographies, but they cannot do it alone. It requires teamwork. And so we need to drive a lot of teamwork in this organization, and we will do that.
“When you have fewer leaders in an organization and a simpler structure, it is much easier to drive great collaboration. And I'm confident that we can achieve that.”