Haleon plc

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Haleon plc is a global consumer healthcare company, offering a wide range of over-the-counter health products across various categories and geographies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Haleon’s business model centers around developing, manufacturing, and marketing consumer healthcare products across five core categories: Oral Health, Vitamins, Minerals and Supplements (VMS), Pain Relief, Respiratory Health, and Digestive Health & Other.

The company boasts a portfolio of well-known brands globally.

Haleon’s revenues are broadly distributed across its market segments and geographies:

  • Geographic Reach:
    • North America is the biggest market for Haleon’s products representing 39% of total revenues.
    • Europe, Middle East, and Africa (EMEA) combined represent 30% of total revenues
    • Asia Pacific (APAC) region comprises 21% of total revenues.
    • Latin America comprises the rest - 10%.

This geographical diversity reduces the company’s reliance on any single region.

  • Product Category Mix:
    • Oral Health makes up 27% of revenues.
    • Vitamins, Minerals, and Supplements (VMS) constitutes 15% of revenues.
    • Pain Relief products account for 24% of total revenues.
    • Respiratory Health contributes 15% of total revenues.
    • Digestive Health and Other categories account for the remaining 19% of revenue.

The distribution across categories contributes to the diversification of the company’s revenue streams.

The industry is characterized by a mix of trends, including growing demand for preventative health products, increasing self-medication trends, and growth in e-commerce. The company faces intense competition from both multinational and smaller, more nimble, regional companies and retailers. The regulatory landscape for healthcare products is also constantly evolving, thus requiring companies to be flexible and adaptable.

Haleon aims to create value by developing differentiated products, focusing on geographic expansion, investing in its brands and R&D, and maintaining a strong financial discipline.

Competitive Landscape

The company claims to have a competitive advantage arising from its brands, geographic reach, size and scale.

Haleon faces significant competition from established multinational players such as Johnson & Johnson, Procter & Gamble, and Bayer, as well as from a multitude of smaller regional competitors. The competitive landscape is also significantly affected by the rise of retailer’s private label products, and shifting customer behavior towards e-commerce.

  • Pricing power: In many categories, particularly the commodity products such as pain relief, brand recognition and loyalty is not high, so Haleon is very vulnerable to companies with cheaper alternatives.
  • Distribution Networks: Haleon can capitalize on distribution advantages in certain regions where its scale allows them to service niche markets.
  • R&D Capabilities: Many companies, including smaller players, can quickly and easily bring new products or solutions to the market and can disrupt the existing player’s position
  • Innovation: The pace of innovation is relatively slow in their industry compared to other industries such as software or technology, therefore, it is not easy to build a large advantage through research.

Haleon’s brand portfolio helps it maintain market share, however, that alone is not enough in this industry which is characterized by high levels of competition.

Financial Analysis

Haleon’s financial performance has been quite mixed and volatile since the demerger in 2022.

  • Revenues: The most recent reports, for the first half of 2023, shows revenue growth, however, this is largely attributed to pricing and to a smaller extent, higher volumes.
  • Margins: Operating profit margin declined to 16.8% from 22.8%. However, adjusted operating profit margin has fallen slightly to 22.8% from 23%. This was because the company failed to pass along increased costs.
  • Profitability: The first half of 2023 shows a decline in profits, after a good prior year. The management expects headwinds of declining demand in coming quarters.
  • Debt: Haleon has a debt to equity ratio of approximately 1.25, which is slightly high for a consumer staple company. Net debt is around £8.7 billion.
  • Cash Flows: Free cash flow is positive, however, it has taken a major hit of approx. 25% compared to last year. This is driven by an increase in the working capital as well as lower profit due to declining margins.

The overall picture indicates that margins are being squeezed due to cost pressure, but the company is showing growth in its revenue streams. However, it’s free cash flow is also taking a considerable hit.

It must be mentioned that the company’s finances are highly volatile and can rapidly change in a short term due to many factors such as cost, pricing power, consumer sentiment etc.

Moat Assessment

Haleon’s moat rating is a 2/5. Here’s a breakdown:

  • Intangible Assets (Brands): While Haleon has a portfolio of popular brands, their products are mostly commodities. This limits the ability of these brands to provide any pricing advantage compared to its competitors.
  • Switching Costs: Switching costs for customers of Haleon’s products are virtually nil. This means customers are free to switch from brand to brand and therefore are not very loyal to any product.
  • Network Economics: The business has little or no network effects.
  • Cost Advantage: This is a weak spot. The size of the company is helping it procure better pricing terms from its suppliers. Therefore, the company lacks any meaningful and durable moat that would ensure predictable returns over long-term.

Risks to the Moat and Business

Several risks could erode Haleon’s business and its competitive advantage:

  • Competition: Intense price and innovation based competition among the larger players and numerous smaller regional players could significantly damage the returns.
  • Private Label: Increasing prominence of private label brands may challenge Haleon’s market share.
  • Changing Consumer Preferences: Shifting consumer preferences towards new products, new distribution channels and new technology may leave Haleon behind.
  • Regulation: Changing regulations in healthcare markets may impact pricing and operations.
  • Supply Chain Disruption: Events such as wars or pandemics can severely affect supply chain and impact revenue.
  • Currency Fluctuation: Since Haleon is geographically diversified, changes in currencies can reduce revenue and profit margins.
  • High Debt Levels: The current high debt loads may create pressure on operations and increase vulnerability to financial distress.
  • Economic Slowdown: The current economic situation might lead to reduced consumer spending, which will ultimately impact the topline and profitability.

The lack of a strong and durable moat, may leave Haleon extremely vulnerable to competition.

Management recognizes that the current market and macroeconomic conditions are unpredictable. They hope to mitigate these risks through a strong portfolio of well-known brands, diverse geographic presence, investment in R&D, and prudent financial management. They acknowledge that margin pressures will continue in the near term.

Understandability

Haleon’s business is moderately complex for the average investor. Therefore, it is rated as 3 / 5. Understanding its different brands and categories is relatively easy, but the complexities related to the supply chain, distribution network, various segments, and the financial reports makes it slightly harder to analyze. Additionally, forecasting long-term growth requires specific industry knowledge.

Balance Sheet Health

Haleon’s balance sheet is not the strongest therefore, it is rated as 3 / 5. Although the company has a reasonable debt to equity ratio, there is little to no flexibility in terms of capital expenditure and dividend payments. Furthermore, cashflows are under pressure and might impact the future performance. The large amount of intangibles and goodwill may have an outsized impact on their balance sheet and could be written off in future. However, the company is not in any immediate financial distress and they should be able to recover, as long as its competitive advantages are intact.