Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016
Purpose with a passion
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 RB has a vision of a world where people are healthier and live better lives. Inspired by our purpose and a passionate culture that drives ownership and rewards success, we push ourselves to outperform, every day.
Our purpose Our passion Our performance
See more on pages 2-3 See more on pages 4-5 See more on pages 6-7
2 3 4 5 6 7 Strategic Report Strategic Report Strategic Report Strategic Report Strategic Report Strategic Report Governance Governance Governance Governance Governance Governance Financial Statements Financial Statements Financial Statements Financial Statements Financial Statements Financial Statements Why RB delivers Our purpose… …combined with …drives our (out) Right portfolio strategy We identify unmet consumer needs, drive growth through innovation and invest our passion performance disproportionately behind our high-potential markets (Powermarkets) and our faster- growing brands (Powerbrands). Our purpose inspires us and informs what we do. RB has a unique culture that harnesses Bringing together passionate people and With every decision, we look for innovative solutions that Our purpose is to make the passion of our people. We have a compelling We want our people to behave as giving them a clear purpose makes RB a business where Powerbrands Powermarkets can help our consumers to live better, from new products a difference, by giving people desire to challenge ourselves and each other, if they own the business. The “Top40” we act fast, take responsibility and aim for and reward that improve health to social programmes that to not just deliver but to outperform and make exceptional performance. managers in RB have the highest 19 16 innovative solutions for healthier touch millions of lives. RB the best it can be. Rakesh Kapoor lives and happier homes. shareholding requirements in Chief Executive Officer the industry. See more on pages 36-37
Total share ownership Our world Our purpose informs every requirement for “Top40” Partnerships aspect of our strategy, from management is changing the brands we focus on and the We tap into innovation, innovations we bring to market, creativity and knowledge Many factors, from increasing life to the role we play in society. through our partnerships with Performance- Successful expectancy to rising healthcare £203m costs, are boosting demand for We have the highest other organisations, and strive health and hygiene products. based culture innovation shareholding requirement in for a spirit of openness. the industry and the FTSE 100. Our culture is central to our Continuous, successful outperformance. We live our innovation is the key to See more on values, and our compensation long-term success. We listen pages 18-19 approach and share ownership to our consumers, develop requirements encourage our new products and invest people to act as if the Company heavily behind them. Our culture means we continually Achievement was their own. People reached with Health As well as offering innovative look for ways to do things better and Hygiene messaging products, we improve people’s Everyone wants a sense of health and hygiene through achievement and for RB that our education and prevention £150m means outperformance. Virtuous Value creation 365m programmes. Savings targeted from Project Supercharge earnings model We have created substantial value through organic growth By targeting higher-margin See more on pages 30-31 See more on page 24 but, in a fragmented consumer segments and optimising cost, health market, we also have we expand our Gross Margin. the opportunity to acquire This gives us room to invest for strong brands. The combination Save a Child Entrepreneurship growth, increasing Net Revenue of our organic growth strategy and our Operating Margin. and acquisitions have Every Minute RB is 35,000 passionate generated significant returns people, pursuing projects for Shareholders. they believe in and Our campaign with Save the Children pushing the boundaries Total Shareholder Return since uses our expertise and our people’s Gross Margin efforts to stop diarrhoea being a of innovation. announcement of strategy in 2012 top five killer of children. £100 invested on 1 January 2012 was worth £253 on 31 December 2016. See more on pages 36-37 +180bps See more on pages 30-31
Reckitt Benckiser Group plc (RB) Reckitt Benckiser Group plc (RB) Reckitt Benckiser Group plc (RB) Reckitt Benckiser Group plc (RB) Reckitt Benckiser Group plc (RB) Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 Annual Report and Financial Statements 2016 Annual Report and Financial Statements 2016 Annual Report and Financial Statements 2016 Annual Report and Financial Statements 2016 Annual Report and Financial Statements 2016
Our betterbusiness strategy
Our betterbusiness strategy betterfinancials bettersociety betterenvironment focuses on how we deliver How we outperform, How we support our How we reduce our through our focus on communities, develop our environmental impact and financial performance, by our brands, markets people and drive quality ensure we source materials fulfilling our social and and creating a digitally and safety in all we do responsibly environmental responsibilities. connected company
See more on pages 22-35 Contents
Strategic Report 36 It’s my RB 74 Corporate Responsibility, Sustainability, 1 Highlights 38 Operating Review Ethics and Compliance Committee Report 2 Our purpose, passion and performance 42 Financial Review 76 Directors’ Remuneration Report 8 Chairman’s Statement 46 Our framework for risk management 81 RB’s Remuneration Policy at a glance 10 Acquiring a world leader in infant 82 Annual Report on Remuneration and children’s nutrition Governance 93 Report of the Directors 12 Chief Executive’s Statement 54 Board of Directors 96 Directors’ Statement of Responsibilities 14 Our ongoing support in South Korea 57 Executive Committee 16 How our business works 60 Chairman’s Statement on Corporate Financial Statements 18 The megatrends driving our business Governance 97 Financial Statements 20 Our operating model explained 62 Corporate Governance Statement 174 Shareholder Information 22 betterfinancials 68 Nomination Committee Report 28 bettersociety 69 Audit Committee Report 32 betterenvironment
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 1 Strategic Report Governance Financial Statements
Highlights
Introduction from the Chairman betterfinancials
Net Revenue Adjusted1 Earnings Per Share (diluted) £9.9bn 302.0p Like-for-like growth1 +3% +17% Total reported growth +11%
Gross Margin Total dividend for the year
2016 was an important year for RB. Our earnings model remains strong, 60.9% 153.2p as our growth strategy continues to +180bps +10% deliver outperformance. The tragic humidifier sanitiser (HS) issue in South Adjusted1 Operating Margin Health and Hygiene Korea, and Oxy RB’s part in it, reminds us that consumer safety is our number one priority. The lessons from 28.1% 75% the HS issue and actions we have +130bps of Net Revenue taken are set out on pages 14 to 15. Operating Margin 24.3% (-90bps)
Reported Earnings Per Share (diluted) Developing markets 256.5p 31% +6% of Net Revenue
1. Definitions of non-IFRS measures and their reconciliation to IFRS measures are shown on page 45.
Our brands >80% bettersociety Net Revenue from Powerbrands Net Revenue from more People reached with Health sustainable products and Hygiene messaging See page 26 13.2% 365m
betterenvironment
Greenhouse gas emissions Water usage per unit per unit of production of production 25.0% 31.8% Reduction since 2012 Reduction since 2012
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 2 Strategic Report Governance Financial Statements Our purpose…
Our purpose inspires us and informs what we do. With every decision, we look for innovative solutions that can help our consumers to live better, from new products that improve health to social programmes that touch millions of lives.
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 3 Strategic Report Governance Financial Statements
Our purpose is to make a difference, by giving people innovative solutions for healthier lives and happier homes.
Our purpose informs every Our world aspect of our strategy, from the brands we focus on and the is changing innovations we bring to market, Many factors, from increasing to the role we play in society. life expectancy to rising healthcare costs, are boosting demand for health and hygiene products.
See more on pages 18-19
People reached with Health As well as offering innovative and Hygiene messaging products, we improve people’s health and hygiene through our education and prevention 365m programmes.
See more on pages 28-31
Save a Child Every Minute
Our campaign with Save the Children uses our expertise and our people’s efforts to stop diarrhoea being a top five killer of children.
See more on pages 28-31
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 4 Strategic Report Governance Financial Statements …combined with our passion
RB has a unique culture that harnesses the passion of our people. We have a compelling desire to challenge ourselves and each other, to not just deliver but to outperform and make RB the best it can be.
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 5 Strategic Report Governance Financial Statements
We want our people to behave as if they own the business. The “Top40” managers in RB have the highest shareholding requirements in the industry. See more on pages 36-37
Total share ownership requirement for “Top40” Partnerships management We tap into innovation, creativity and knowledge £203m through our partnerships with other organisations, and strive We have the highest for a spirit of openness. shareholding requirement in the industry and the FTSE 100.
Our culture means we continually Achievement look for ways to do things better Everyone wants a sense of achievement and for RB that £150m means outperformance. Savings targeted from Project Supercharge
See more on pages 22-24
Entrepreneurship
RB is 35,000 passionate people, pursuing projects they believe in and pushing the boundaries of innovation.
See more on pages 36-37
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 6 Strategic Report Governance Financial Statements …drives our (out) performance
Bringing together passionate people and giving them a clear purpose makes RB a business where we act fast, take responsibility and aim for and reward exceptional performance.
Rakesh Kapoor Chief Executive Officer
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 7 Strategic Report Governance Financial Statements Why RB delivers
Right portfolio strategy
We identify unmet consumer needs, drive growth through innovation and invest disproportionately behind our high-potential markets (Powermarkets) and our faster- growing brands (Powerbrands).
Powerbrands Powermarkets 19 16
Performance- Successful based culture innovation Our culture is central to our Continuous, successful outperformance. We live our innovation is the key to values, and our compensation long-term success. We listen approach and share ownership to our consumers, develop requirements encourage our new products and invest people to act as if the Company heavily behind them. was their own.
Virtuous Value creation earnings model We have created substantial value through organic growth By targeting higher-margin but, in a fragmented consumer segments and optimising cost, health market, we also have we expand our Gross Margin. the opportunity to acquire This gives us room to invest for strong brands. The combination growth, increasing Net Revenue of our organic growth strategy and our Operating Margin. and acquisitions have generated significant returns for Shareholders. Total Shareholder Return since Gross Margin announcement of strategy in 2012:
£100 invested on 1 January 2012 was +180bps worth £253 on 31 December 2016.
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 8 Strategic Report Governance Financial Statements
An important year Chairman’s This was an important year for RB. One of the Board’s top priorities has been absorbing the lessons from the tragic events in South Korea Statement surrounding humidifier sanitisers (HS), and Oxy RB’s involvement in this industry-wide issue. Oxy RB has expressed their sincere apologies to all individuals and their families who have suffered from lung injury as a result of the HS issue.
Consumer safety is the Group’s fundamental priority. Developments in South Korea as described on pages 14 to 15 caused both management and the Board to review the “Our review in September once Group’s quality, compliance and safety procedures. We have established a new again confirmed that the strategy Board committee, chaired by Pamela Kirby, to support the Board in fulfilling its duty was working well and that the focus to safeguard and advance RB’s reputation for responsible and sustainable corporate on Health and Hygiene positions us conduct. In addition, we have brought together our consumer safety, health and for further outperformance.” safety, quality, compliance and sustainability functions into a single team. The objective is to further strengthen our safety, quality and Adrian Bellamy compliance culture, and to drive continuous Chairman improvement in these critical areas. The Board has also engaged law firm Linklaters LLP to advise the Board on the Group’s management of the HS and related safety issues.
Business performance Performance was affected by the HS issue and by weak conditions in key markets such as Russia. Even so, our successful strategy delivered Revenue growth that compared favourably with our peers and Profit growth that was well ahead of the industry.
Total Net Revenue rose by 11%, which equated to a 3% increase on a like-for-like basis. Reported Operating Profit was up 8% in actual currency and down 3% in constant currency terms. Adjusted Operating Profit rose 17% in actual currency and 6% in constant currency, resulting in a 130bps increase in our Adjusted Operating Margin. Reported Diluted Earnings Per Share were up 6% to 256.5 pence, while Adjusted Diluted Earnings Per Share were 17% higher at 302.0 pence.
Our Profit growth enables us to reward Shareholders through rising dividends. The Directors have proposed a final dividend of 95.0 pence per share, up 7%. When added to the interim dividend of 58.2 pence per share, this gives a total dividend for the year of 153.2 pence per share, an increase of 10%. Subject to Shareholder approval, the final dividend will be paid on 25 May 2017 to Shareholders on the register on 18 April 2017.
RB is a highly cash generative business and we continued to use surplus free cash flow to buy back shares, with the aim of keeping our net debt broadly constant. In 2016, these buybacks totalled £802 million. This policy leaves us with a healthy Balance Sheet, while retaining the financial strength we need to implement our strategy. Reckitt Benckiser Group plc (RB) As a business, we are resolutely focused on Annual Report and Financial Statements 2016 9 Strategic Report Governance Financial Statements
outperformance and it is pleasing to see this We remain focused on succession planning and reflected in our Total Shareholder Return (TSR), regularly review the composition of the Board which shows the increase in the share price and its committees. In July 2016 a new Board assuming dividends are reinvested. Since we Corporate Responsibility, Sustainability, Ethics achievements adopted our current strategy in 2012, RB has and Compliance Committee was established delivered a TSR of 153%, compared with the (see Board achievements). 54% return from the FTSE 100. We have also approved changes to our The right strategy committees. André Lacroix will become The Board formally reviews RB’s strategy each Chairman of the Audit Committee from the year. Our review in September once again conclusion of the Company’s AGM. Ken Hydon New Board confirmed that the strategy was working well will step down as Chairman but will remain a committee and that the focus on Health and Hygiene member of the Committee to support André in positions us for further outperformance. his new role. Mary Harris will move from the The new Corporate Audit Committee to the Remuneration Responsibility, Sustainability, During the year, we invested US$50 million to Committee following the conclusion of the Ethics and Compliance acquire a stake of around 1% in China AGM and transition to the role of Chair of that Resources Pharmaceutical Group (CRP). CRP is Committee on 1 November 2017. Judy Sprieser Committee has a key role in China’s largest manufacturer of over-the- will remain on the Remuneration Committee to reviewing, monitoring and counter (OTC) drugs. While the investment is support Mary in her new role. I would like to assessing our approach to small in the context of RB, it opens up some thank Ken and Judy for their many years of these critical issues. interesting strategic possibilities for us. We service as Chairs of their respective committees. have signed a non-binding memorandum of understanding with CRP, which will see us More information about RB’s approach to See more on pages 74-75 explore ways to cooperate with respect to corporate governance and the Board’s activities certain designated OTC medicines, medical during the year can be found in my Statement devices and healthcare products in the on pages 60 to 61 and in the full Corporate Chinese market. Governance Statement on pages 62 to 67.
RB’s betterbusiness strategy recognises that A culture of outperformance long-term success depends as much on As this Annual Report explains, RB’s unique meeting our obligations to society and the culture is one of the most important environment as it does to strong financial contributors to its success. It makes our performance. We further improved our people hungry to achieve more and frees their environmental performance in 2016 and entrepreneurial instincts, while encouraging continued with our social programmes, which them to work in partnership and act as if they support our business purpose by helping own the business. This drives us on to do better people benefit from better health and hygiene. for consumers, customers and Shareholders.
The Mead Johnson acquisition: Our approach to reward is a fundamental part A good strategic fit of this culture. While average performance On 10 February 2017, RB announced that leads to average reward, we give our people an agreement has been signed to acquire the chance to earn exceptional long-term Board highlights Mead Johnson for US$16.6 billion. The reward for exceptional long-term performance. from 2016 acquisition of Mead Johnson is aligned with RB’s well-established strategic focus on AGM resolutions • Reviewed the Group’s strategy growing in consumer health and on investing in The AGM is on 4 May 2017 and the resolutions • Reappraised the Group’s risks Powerbrands with attractive growth prospects. that Shareholders will vote on are fully • Considered the Viability Statement RB already reaches millions of mothers through explained in the Notice of Meeting. • Offsite visit by Board to China as part its hygiene education programmes and, of the Strategy Review, which included: through world-class brands such as Nurofen A General Meeting (GM) will be held to approve review of e-commerce platform, and Mucinex, provides parents with relief and the acquisition of Mead Johnson Nutrition. in-depth analysis of Chinese social and reassurance when their children are unwell. Shareholders will receive details separately. economic issues, consumer and market This will be enhanced by Mead Johnson’s deep trends, logistics and trade visits, understanding of a new mother’s journey and Conclusion visit to sexual wellbeing plant and well-established relationships with healthcare The Board remains confident in RB’s future. meeting with local management professionals. (See more on pages 10 to 11). The Company has the right strategy and is • Meetings with functional and strongly positioned to outperform categories operational management heads, Robust governance with robust long-term growth characteristics. e.g. Finance, Tax, Treasury, Investor RB has strong governance and our annual Combined with our outstanding people and Relations, HR, Safety, Quality and evaluation showed that the Board and its culture of achievement, we look forward to Compliance, Supply, IT, programme committees continued to work effectively. creating further value for all our stakeholders. leaders and divisional heads The Board’s membership was stable during • Reviewed and updated corporate the year, with the only changes being the I would also like to express my personal governance policies and procedures in retirements of Jaspal Bindra, Sue Shim and appreciation to my fellow Board members, connection with the EU Market Abuse Doug Tough, all of whom stepped down at to Rakesh Kapoor and his team, and to Regulation which came into force on the conclusion of the Annual General Meeting everyone in RB around the world for their 3 July 2016 (AGM) in May. On behalf of the Board, I thank substantial efforts during a challenging year. • External evaluation of the Board them for their contributions. Adrian Bellamy Chairman 20 March 2017 Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 10 Strategic Report Governance Financial Statements
Acquiring a world leader in infant and children’s nutrition
A large and growing market On 10 February 2017, we announced The global infant and children’s nutrition category is worth approximately US$46 that we have signed an agreement billion in annual sales. We expect this to grow at 3‐5% per annum in the medium to acquire Mead Johnson for to long term. This growth is underpinned, particularly in developing markets, by trends US$16.6 billion in cash. The acquisition such as economic growth, urbanisation, increasing spend on premium nutrition, special nutritional needs, more mothers choosing will be a significant step forward in to work while their children are young, and changes to China’s one-child policy. Brand, RB’s journey as a leader in Consumer quality and innovation are increasingly Health and will increase our revenues important differentiators in the category. Mead Johnson’s geographic footprint in this area by approximately 90%. significantly strengthens our position in developing markets. The business derives 67% of its Net Sales in Asia and Latin Mead Johnson’s Enfa brands are the world’s America, including 2016 Net Sales of US$1.1 billion in China. Developing markets leading franchise in infant and children’s nutrition. will account for approximately 40% of the combined group’s sales, with China The Enfa franchise is a natural extension to our becoming our second largest Powermarket.
Consumer Health portfolio and will become our largest Drawing on the best Powerbrand. We already reach millions of mothers of both businesses Our ambition is to bring together the best through our hygiene education programmes and, of both companies, keeping the consumer at the heart of the combined group. RB has through world-class brands such as Nurofen and extensive multi‐channel go‐to‐market and Mucinex, provide parents with relief and reassurance global branding capabilities across consumer health and a track record of consumer‐centric when their children are unwell. This will be enhanced by innovation. These capabilities, together with our culture of swift decision making and Mead Johnson’s deep understanding of a new mother’s commitment to driving performance, will journey and well-established relationships with enable us to add value to Mead Johnson by enhancing its position in key markets. healthcare professionals. At the same time, Mead Johnson brings significant R&D, quality, regulatory and specialist distribution capabilities to RB.
Following a transitional period, our goal is for Mead Johnson to perform progressively towards the upper end of the 3-5% category growth rate. Our supply chain infrastructure and distribution network will enhance Mead Johnson’s go‐to‐market capabilities, while our scale and expertise will enable accelerated entry into nascent markets for Mead Johnson, where we already have a deep understanding of the local consumer health dynamics.
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We also expect to build on Mead Johnson’s Financing e‐commerce platforms. The two companies The acquisition will be financed through new have complementary e‐commerce expertise, fully underwritten debt facilities with Bank of Mead particularly in China where approximately 30% America, Merrill Lynch, Deutsche Bank and of RB’s sales are online. HSBC. These facilities include US$9 billion of Johnson term loans over three to five years and US$8 Financial highlights billion of bridge funding to cover the cash Mead Johnson Shareholders will receive US$90 consideration, plus a further US$3 billion to A company with a in cash for each share of common stock, refinance existing Mead Johnson bonds if valuing the total equity at US$16.6 billion. required. They also include an additional £1 compelling purpose Including net debt of US$1.2 billion as at billion revolving credit facility, to provide 31 December 2016, the total enterprise value financing headroom from the date of of the transaction is US$17.9 billion, completion. We expect to refinance the bridge representing a multiple of 17.4x 2016 non‐US by issuing bonds with a variety of maturity Mission GAAP EBITDA of US$1.0 billion and 14.0x 2016 dates which will reflect the expected cash non‐US GAAP EBITDA including the expected flows of the combined group. We are in run‐rate cost savings described below. discussion with the rating agencies and To give children the expect to retain a strong investment grade best start in life We expect the integration to deliver cost credit rating. savings of £200 million per annum by the end of the third full year following completion. Integration planning These arise principally from removing We have a track record of effectively duplication in back office functions and integrating consumer health companies. The leveraging the scale of the combined business acquisitions of Boots Healthcare International, Core beliefs in procuring raw and packaging materials, Adams and SSL all delivered an important advertising and promotional expenditure and inflection point of growth for RB. other spend. One‐off costs to achieve the Good early life nutrition savings are expected to be approximately We will establish an infant and children’s supports lifelong health £450 million. nutrition division, which will report directly to Rakesh Kapoor. Selected key RB employees will Informed decisions: The acquisition is expected to be accretive to transfer to this new division. access to information helps our Adjusted Diluted Earnings Per Share in the parents and paediatricians make first full year following completion and We will balance the opportunity to realise better decisions double‐digit accretive by year three. We also cost savings with the need to retain and expect the acquisition to deliver a post‐tax invest in valuable talent at Mead Johnson, Empowering women: return on invested capital in excess of our cost especially within the R&D, quality, regulatory working mothers trust infant of capital by year five. and specialist distribution capabilities. formula to support their child’s Our objective will be to balance RB’s nutritional wellbeing We intend to maintain our current dividend leadership and FMCG talent with the skill policy of paying out about 50% of our and expertise that has helped establish Adjusted Net Income. However, we do not Mead Johnson as a category leader. intend to buy back any further RB shares until debt is materially lower. Steps to completion The proposed acquisition requires the approval of RB’s Shareholders. We will in due course send a circular to Shareholders, convening a meeting to approve the acquisition. The RB Board is unanimous in recommending the transaction. Enfa is the No.1 global The acquisition is also subject to approval by franchise in infant and Shareholders of Mead Johnson, regulatory children’s nutrition approvals (including in the US, China and other markets), and certain other customary conditions.
The transaction is expected to complete by the end of Q3 2017.
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A purpose-driven company Chief Executive’s RB has a clear purpose: to provide people with innovative solutions for healthier lives and happier homes. This purpose inspires us and Statement we are passionate about achieving it. We look to bring it to life in everything we do: the strategic choices we make, the brands we focus on, the type of innovations we bring to market and the programmes we run. Having this purpose makes the work we do each day more fulfilling for our people and drives us to higher levels of performance.
Our purpose also encompasses the role we play in the world. There is a social dimension “The acquisition of Mead Johnson to our work, in particular our programme to eradicate diarrhoea as a leading killer of is a significant step forward in children under five years old. This unique, multi-year commitment focuses everyone RB’s journey as a leader in in RB on an issue where we can use our health and hygiene capabilities to real effect. consumer health.” Our financial contribution is important but we also apply our R&D resources to create products specifically for families See more on pages 10-11 around the world who cannot afford high- end solutions for preventing diarrhoea.
Rakesh Kapoor RB’s betterbusiness strategy also includes Chief Executive Officer setting challenging environmental objectives. We have set ourselves targets for reductions in carbon emissions and water use. As a highly innovative company we can use our new product pipeline to bring more responsible products to the market. These efforts have made us one of the top-ranked companies in the sector for corporate responsibility.
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However, I am deeply sorry that an Oxy RB The Mead Johnson acquisition E-commerce China revenue product in South Korea caused lung and The acquisition of Mead Johnson will this year was respiratory injuries and deaths among its mark a significant step forward in RB’s users. Oxy RB has taken responsibility for the journey as a global leader in consumer part it played, along with other companies health; with the Enfa franchise already who supplied humidifier sanitisers. In July established as the global leader in the >30% 2016, Oxy RB announced a full and fair infant and children’s nutrition category. of China’s Net Revenue compensation package for Category I & II Oxy HS victims categorised by the South Korean Mead Johnson brings significant R&D, Up from 25% of China’s Net Revenue Government in its first two categorisation quality, regulatory and specialist distribution in 2015 rounds. As of 31 January 2017, 97% of capabilities. When paired with our existing eligible victims are participating in this plan. expertise in consumer-centric innovation, Connected Health scaling global brands and commitment to Connected Health is the As Oxy RB strives to do the right thing in driving performance this will enable long-term interrelationship between digital South Korea, we must also ensure that value creation for the Group. (See more on technology, health and self care. similar problems cannot arise in the future. pages 10 to 11). We have therefore created a new position of The ability to bring these areas Chief Safety, Quality and Compliance (SQC) Looking forward together has led to our breakthrough Officer, reporting directly to me. Through The next few years will be both challenging innovation and first-ever connected this combined SQC organisation, we will and exciting for RB. The challenges will health product: Nurofen FeverSmart focus on end-to-end safety: product and come from world markets that are likely to Temperature Monitor. consumer safety, as well as the health and remain tough. However, we see exciting safety of our people, and our quality and possibilities for our business and aim to This innovation has been designed compliance systems and processes. I am outperform categories whose long-term with young children in mind. Parents determined that RB will learn all the lessons growth prospects remain robust. will be familiar with the concern we can from this tragedy, so we emerge experienced when a child is unwell a much stronger and better Group. We continue to position RB for a world where with fever. Research shows that over digital and technological advancements are 80% of parents find it hard to monitor Delivering outperformance changing how people live their lives, as well a young child’s temperature. Market conditions were generally difficult as how they connect with brands and look in 2016. Economic growth was slow in for solutions that can keep them healthier. At In response to this clear consumer developed markets and mixed in developing the touch of a button, consumers can now need RB has launched FeverSmart. markets, with India expanding rapidly find the right medication for their symptoms. Placed under a child’s arm the small, but major economies such as Brazil and Offering tailored, innovative solutions for their flexible monitor sends real-time Russia proving weak, and geopolitical and everyday ailments is a huge opportunity for us. social issues affecting the Middle East and continuous temperature readings straight to the user’s smartphone. Turkey. Commodity prices, which had been At the same time, the rise of e-commerce favourable, have also started to rise. is creating a borderless world, opening Parents can track medicine doses and up new opportunities for RB. We already receive alerts for when their child’s RB is not immune to these challenges but have major successes in this area, notably temperature spikes; helping parents our goal is to always deliver, no matter in China where more than 30% of our manage their child’s temperature. what the external environment. Our Net revenue this year was online. We intend to Revenue performance of 3% growth on stay at the forefront as other developing a like-for-like basis, was affected by a countries go through this transformation. combination of challenging markets, the HS issue in South Korea reducing our growth Overall, we remain confident that our medium rate by 1% and an innovation within our and long-term strategic choices are right, consumer health portfolio which failed and will deliver Shareholder returns. In 2017, to meet our expectations. However, RB’s we are targeting like-for-like Net Revenue virtuous earnings model delivered a further growth of 3%. For Adjusted Operating strong expansion in our Operating Profit Margin, we reiterate our medium-term Margin, while giving us the room to invest target of moderate margin expansion. in category building initiatives, penetration programmes and new market entries. Rakesh Kapoor Innovation plays an important role in our Chief Executive Officer growth, with Dettol Squeezy, Mucinex Clear 20 March 2017 & Cool and Harpic Bathroom among the many new products contributing in 2016. However, there was a negative impact from the lower- than-expected uptake of the Scholl/ Amopé Wet & Dry express pedi, which we launched this year. We pride ourselves on high-quality innovation and have a culture that allows people to push ideas they are passionate about. This passion for ideas is the most important driver of innovation. While we are never happy when a launch fails, I firmly believe it is the sign of a healthy culture. Companies that never fail are companies that are not doing their best, since they avoid the calculated risks that outperformance demands. Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 14 Strategic Report Governance Financial Statements
Our ongoing support in South Korea
In 2001, RB acquired Oxy, a South Korean company. Oxy RB manufactured and sold household products, including HS products which accounted for less than one half of one percent of their sales. By 2011, Oxy RB was one of about 13 suppliers of HS products in the South Korean market. RB did not sell HS products in any other market. Oxy RB continued to sell the HS products in South Korea for the next ten years. In 2011 the Korean Centre for Disease Control (KCDC) determined that HS products might be responsible for serious respiratory diseases, including fatalities. Oxy RB immediately began to withdraw its HS products.
The Humidifier Sanitiser (HS) Oxy RB was the subject of legal action from the Government and sought to defend itself in the issue, while dating back to events courts. It took the same approach in defending against civil claims which began to arise from in South Korea from the late 1990s, individual victims. Over the period to March 2016, 63 of the 79 cases (80%) brought by Category I & II Oxy HS victims in required significant senior Rounds 1 and 2 against the company were settled through a court-mediated or private management attention in 2016. settlement process.
We recognised in April 2016 that this court- led process was taking too long, and was RB remains committed to putting not fair on victims. From this point, Oxy RB publicly apologised to all individuals victims first in working to resolve and their families who had suffered lung injury as a result of its HS product, and this tragedy. committed to deliver a compensation plan. In July 2016, it announced a full and fair compensation package for Category I & II Oxy HS victims categorised by the South Korean Government in its first two categorisation rounds. As of 31 January 2017, 97% of eligible victims are participating in this plan.
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We recognise that it took too long for Oxy RB RB today to move from a legally driven approach and Drawing on the lessons of this tragedy to bring forward a compensation plan. We RB is strengthening further its approach deeply regret this delay. We are proud of the to consumer safety. Actions are the real leadership position that Oxy RB has taken since demonstration of putting safety at the centre April 2016 in working to resolve this tragedy. of operations. We have taken significant steps including the creation of a Board committee Transparency is key in our response to on product safety, compliance and ethics the HS issue. We have included all the which will ensure that product safety is details of our actions on our website. further embedded across the organisation.
We recognise that it will be a long road to We have created a new role of Chief recover the trust of South Korean consumers. Safety, Quality and Compliance (SQC) We also understand that all the work Oxy RB Officer, reporting directly to the CEO. can do pales in comparison to the hardship The Quality, Consumer Safety, Employee and irreparable harm suffered by HS victims. Safety, Sustainability and Product related Oxy RB cannot undo the past but can work compliance programme teams will report to make amends. Today its focus is on these into this new structure and will support victims and ensuring they have recognition and the work of the Board in relation to fair compensation for the damage caused. safety, quality and compliance matters.
We believe that victims of lung injury from Our Compliance Management Committee is HS products should be provided with a undertaking a review of safety and quality single, consistent and readily accessible management systems; and working on source of compensation which also covers the continued rollout across the world of uncertain long-term medical needs, SQC activities, including those related to regardless of which products they used. We evidence, safety and medical oversight. believe this requires a single, industry-wide approach to compensation, funded fairly For our part, RB is a learning organisation and by all the contributors to this tragedy. we will ensure our structure and governance continues to put consumer safety at the core. In 2017, Oxy RB will work hard to engage other stakeholders, including the South The Board has also engaged law firm Korean Government and other manufacturers Linklaters LLP to advise the Board and ingredient suppliers, to try to find such on the Group’s management of the a long-term and sustainable industry-wide HS and safety-related issues. solution for all Category I & II HS victims in the third and fourth rounds of the categorisation process. Resolving this issue is a matter of urgency, and requires everyone to participate and learn from their mistakes.
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How our business works Our business model
We are passionate to power about using our our business… strengths… Our markets Our people, culture and brands differentiate ENA DvM us from our competitors. Food Europe (including Russia/CIS Africa, Middle East (excluding We run Food as a standalone and Israel), North America and Israel), Turkey, Asia (excluding business. Its brands include People and culture Australia/New Zealand Russia/CIS) and Latin America French’s, the leading mustard brand in the US RB has a unique culture, which harnesses our people’s passion and allows them to Net Revenue Net Revenue Net Revenue make a real difference (pages 36 to 37). £6,410m £3,070m £411m Net Revenue % LFL growth +1% LFL growth +8% LFL growth +5% Powerbrands from Powerbrands We have 19 Powerbrands, which are leaders in their markets and offer faster >80% growth (page 26). Our categories Health Hygiene Covers treatment products for everyday issues Personal and home hygiene such as pain and flu, but also wellness products products, which provide the Our business model also in sexual wellbeing, footcare, vitamins and foundation for healthy living depends on the following supplements inputs for its success: Net Revenue Net Revenue £4,066m £3,332m LFL growth1 +4% Skillset LFL growth1 +4% We have proven clinical R&D capabilities and an agile organisation
Infrastructure We have well-invested manufacturing sites, R&D laboratories and logistics centres
Relationships We develop strong, value-creating relationships Home Portfolio with customers, consumers, suppliers (including Food) and communities Brands that make the home environment harmonious and less stressful, so that families Includes our laundry and fabric softener are happier every day business, as well as our Food brands Environment We use natural raw materials, water and energy Net Revenue Net Revenue
Financial capital £1,828m £665m LFL growth1 -1% LFL growth1 Flat We are financed by Shareholders’ equity, debt and retained profit
1 Definitions of non-IFRS measures and their reconciliations to IFRS are shown on page 45
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and pursue so we drive our purpose… outperformance
Megatrends Outcomes
Powerful long-term trends are These trends are increasing Our strategy and operating influencing our markets, from demand for our products and model push us to outperform, longer lives to the relentless rise changing what society and so we create value for all our of technology and e-commerce. Shareholders expect from stakeholders. companies such as RB. See more on pages 18-19 People Exciting and challenging careers, with excellent 35,000 rewards for outstanding challenging careers performance
Our purpose-driven strategy Consumers Safe, high-quality We have designed our strategy to respond to these trends products that lead to 19 healthier lives and market-leading and deliver long-term success happier homes Powerbrands
betterfinancials bettersociety betterenvironment Shareholders How we outperform, How we support our How we reduce our Strong operational and financial performance, so through our focus on communities, develop environmental impact we can grow dividends 153% our brands, markets our people, and drive and ensure we source and return funds TSR since adoption of new strategy in 2012 and creating a quality and safety in materials responsibly digitally connected all we do company Customers Leading brands that grow the category, and drive customer Operating model value in all relevant channels
Our three-part model enables us to rapidly scale up our ideas and offer them to Bricks + E- consumers around the world Mortar commerce Create Scale Activate Communities Create innovative Scale our innovations Activate our ideas through our products that meet to make them as global customer relationships, while Improved health and hygiene standards, 365m consumers’ under-served as possible driving consumer demand through our products people reached demands through offline and digital and social programmes channels with health and hygiene messaging. See more on pages 20-21
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The megatrends The consumer driving our business landscape is changing
Our world is changing We are living longer Life expectancy is rising around the world. The number of people aged over 60 is expected to increase from 900 million in 2015 to Powerful trends are 1.4 billion in 2030 and 2.1 billion by 2050. Ageing populations put ever-greater demands on changing what consumers, healthcare services and motivate people to find society and investors new ways to promote wellbeing and wellness. demand from us. Here we People over 60 explain those trends and how they are shaping 1.4bn in 2030 our strategy. Up from 900m in 2015 Our incomes are rising Due to medical The global middle class currently numbers advances life 3 billion people. By 2021, this could surpass expectancy is 4 billion – more than half the world’s increasing population – with the growth coming from developing markets. This means people will have more money after meeting their essential needs, spurring demand for health and hygiene products. Infrastructure improvements, such as new sanitation systems, will further increase demand.
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We are more Our environment proactive about health is changing Longer lives and rising incomes are encouraging How this links more of us to look after ourselves and to our strategy prevent health issues before they occur, for example through better hygiene and healthier home environments. We believe that self- RB’s response to the care is the new frontier of healthcare. changing environment Our Health products provide a cost- effective way for consumers to treat a range Our lives are busier of ailments, relieving pressure on health The pace of modern life means many people services. We continue to develop innovative feel busier than ever. This encourages consumers responses to new health threats, such as to use easily accessible over-the-counter health our Dettol air pollution range of masks and products, rather than wait for a doctor’s our pest control products. appointment, to seek out the most effective hygiene product, and to look A key part of our organisation strategy for personal grooming and beauty is working to comply with all laws and treatments they can use at home. regulations, through our new Safety, Healthcare Quality and Compliance function. costs are rising We are always connected Access to healthcare is a basic human right. Consumers are making ever-greater use of Current systems are straining due to rising online resources and e-commerce to manage populations, longer lives and shortages of lifestyles and healthcare. Sites such as WebMD healthcare professionals. Scientific advances Stakeholder and Facebook allow us to learn about health offer more solutions for health needs but and wellbeing, interact with brands and at a higher cost. Society therefore needs expectations are exchange information. Consumers around the more cost-effective ways to help consumers changing world are increasingly buying online, giving protect and manage their health. companies data about their preferences that drive tailored offerings and increase engagement. Companies’ licence to operate now New health encompasses stakeholder expectations that go beyond the letter of the law risks are emerging and regulations. To be truly sustainable, As populations urbanise, pollution is becoming companies must continuously improve their an increasing risk to people’s health. We are also environmental and social performance. seeing diseases emerging, such as the Zika virus, How this links which is spread by mosquitoes and other pests. One particularly strong trend that companies to our strategy such as RB can help to address is the growing focus on tackling easily preventable deaths and illness. For example, each year around RB’s response to the Regulation is changing the world there are over 94,000 deaths from Governments are demanding responsibility sexually transmitted diseases, over 526,000 changing consumer and accountability from all stakeholders, as children under the age of five years die from landscape the evolving consumer landscape exposes diarrhoea, and malaria kills over 439,000 gaps in regulations covering areas such as people. All these deaths can be prevented. By creating innovative Health, Hygiene environmental stewardship, patient safety and and Home products, we help consumers data protection. Companies must innovate to to protect and improve their health and meet changing laws and regulations, adapting wellbeing, as they enjoy longer and their products to exclude ingredients that may more prosperous lives. Our Powerbrands affect safety or the environment and reducing strategy gives consumers brands they their environmental footprint. This favours can trust to meet these needs. How this links forward-thinking companies that strive for to our strategy transparency and continuous improvement. Our Powermarkets strategy addresses the countries with the fastest growing demand for our products, while our RB’s response to organisation strategy helps us to scale our innovations and get them quickly changing stakeholder to the consumers who need them. expectations We are also investing in our e-business and data capabilities, to respond to the Our bettersociety and betterenvironment shift to buying online, and developing strategies ensure we work in the way connected products, such as the new expected of us by our stakeholders Nurofen Feversmart digital thermometer and society as a whole. which links to the consumer’s smartphone.
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We develop, acquire, Our operating produce, distribute and model explained promote consumer products in the growing Health, Hygiene and Home categories.
Our operating model has three key elements, which enable us to create value for all our stakeholders, but primarily for our consumers, our people and our Shareholders.
Our operating model in action
Wave toilet block
Keeping the toilet clean and fresh is an everyday struggle for consumers. We homed in on this need by developing the Wave toilet block. Available under the Harpic, Cillit Bang and Lysol brands, it delivers best-in-class fragrance and cleaning cues, lasting up to four weeks. The product also looks great, with a sleek, colourful design.
Veet Sensitive Precision
We realised that women were not fully satisfied with products for removing hair in sensitive areas. They saw them as painful or inconvenient, and lacking the precision and gentleness they wanted. We recognised this as an opportunity for Veet to play in a new area of the market, driving brand penetration.
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Create Scale Activate
Innovation is in the DNA of our Company. Centralised procurement leverages our Our brands and innovations drive footfall By staying close to our consumers, we learn purchasing power, while sourcing responsibly. and online traffic for our retail customers, about their needs and demands. We generate We manufacture most Powerbrand products encouraging them to stock our products. a range of ideas to meet those needs, which in-house, with third parties producing some We work with major retailers to promote our we translate to differentiated products with other brands for us. Quality control is stringent, products and grow the category, supported by blockbuster potential, driving greater consumer particularly in healthcare. Our customer-facing our worldwide commercial operations, and use loyalty, faster growth and better margins. supply services organisation aims for best-in- of distributors to reach smaller retailers. We Sustainability is built into our process, for class delivery and customer satisfaction. To invest heavily behind our brands, through example to minimise carbon emissions and rapidly scale our innovations, we identify a lead advertising, social and digital media, and water use. Our culture of innovation and market and our Power of 1 team develops consumer education. Our virtuous earnings pushing boundaries on new-to-world solutions global launch packages which we can take to model enables us to fund this investment, grow means that occasionally we also fail, such as all markets. Our financial strength also allows revenues and increase our margins. with the Scholl/Amopé Wet & Dry express pedi. us to acquire brands, which we quickly We are as comfortable with these rare failures integrate into our operating model. as we are excited by our many successes.
Wave toilet block Wave toilet block Wave toilet block Create Scale Activate
Having identified the need for a superior Sales far exceeded expectation following the Wave’s in-market performance, combined toilet block, we partnered with a third party to initial launch. Performance was closely with our years of experience, helped us to develop and improve their existing product. monitored and lessons learned were used to create an approach tailored to the needs of The toilet block was launched just six months scale further into new markets for toilet blocks, each specific market. Approved budgets have after conception in France, Germany, US, such as Russia. Close collaboration across been created for each country with regard to Turkey, UK and Benelux. This required no departments and with our partners enabled promotional/media spend for the toilet block, capital expenditure for RB and demonstrated us to rapidly increase capacity. We are poised to continue to increase sales of Wave during our speed to market. for a truly global rollout in 2017. 2017.
Veet Sensitive Precision Veet Sensitive Precision Veet Sensitive Precision Create Scale Activate
Our product idea was distinctive: a versatile Close collaboration across departments, great By continually gathering lessons, identifying electric trimmer, tailored to gently trim and supplier management and constant monitoring success factors and correcting issues, we precisely style hair in areas such as the face, of test markets enabled us to rapidly ramp achieved excellent execution across our bikini and underarms. We test marketed it in up capacity, as sales exceeded expectations. markets. We used our keen understanding Germany, which proved the high penetration We addressed issues identified by online of the ‘4Ps’ (product, price, promotion and potential of mass-distributing the device and reviews through continuous improvement place), and created strong communication maximising its visibility and accessibility. and, in just six months, we rolled out the assets to maximise consumer awareness, trimmer in more than 20 markets. including activation guidelines for vloggers and bloggers.
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Strategic overview
Our betterbusiness strategy betterfinancials What we said
The betterfinancials element of Deliver +4-5% LFL Net Revenue growth, through focus on Health and Hygiene and by increasing distribution our strategy has four pillars, which and penetration focus us on faster-growing markets Achieve moderate Adjusted Operating Margin and categories and enable us to expansion outperform. Drive further benefits from Project Supercharge Continue to create a connected company, through investments in our systems, e-business capabilities and data analytics
What we did
LFL Net Revenue growth (+3%) short of target due to the HS issue in South Korea and the Scholl/Amopé Wet & Dry express pedi failing to deliver to expectation Outperformed our Adjusted Operating Margin expansion target (up 130bps) Made further progress towards our Net Revenue targets for DvM and Health and Hygiene (see pages 38 to 41), and on Project Supercharge, we have completed the majority of the programme of our planned £150 million cost savings over three years Strategic approach Formed a Safety, Quality and Compliance (SQC) team (see page 24) Established a dedicated e-business function to Organisation Powerbrands accelerate online revenues (see page 24) Organising our business into We invest heavily in our focused two geographical areas helps us portfolio of 19 market-leading to allocate resources and scale Powerbrands. They provide innovations. We continually evolve over 80% of our revenue and our organisation, to ensure fast offer higher revenue growth What we will do decision making and execution. and margins. Continue to invest heavily behind our Powermarkets Powermarkets Virtuous and Powerbrands, particularly in Health and Hygiene, We have 16 Powermarkets. earnings model to increase penetration and distribution These are the markets which We focus on higher-margin Advance our SQC processes and practices, with have the highest absolute growth initiatives and rigorous control of the aim of moving from good to great performance potential for us and where we see our costs. Through our virtuous the greatest ability to win. They earnings model, this funds our are weighted towards developing investment in our brands, markets which have greater capabilities and development, economic growth, rising middle and enables us to deliver classes and more opportunities to operating margin expansion. increase market penetration.
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11% KPIs Total Net Revenue Performance growth
Organisation LIKE-FOR-LIKE NET REVENUE GROWTH2 Commentary Growth in Net Revenue, excluding the 2016 was a good year in which impact of changes in exchange rates, +3% we achieved broad-based acquisitions and disposals 2013 +5% growth and excellent margin 2014 +4% expansion, despite challenging Category: Medium-term Target markets and an unusual growth: 2015 +6% number of issues. Health 4–6% Outperform 2016 +3% Hygiene 3–5% Top end Home 1–2% In line
OPERATING MARGIN EXPANSION2 Commentary The increase in the Adjusted Operating Adjusted Operating Margin Margin +130bps was 28.1% due to strong Gross Margin expansion and Medium-term target: 2013 +20bps 2014 +160bps fixed cost containment. Moderate Adjusted Operating 2 2015 +210bps Margin expansion 2016 +130bps
Powermarkets DvM Commentary Net Revenue generated in DvM delivered LFL growth of our DvM Area, as a percentage 31% 8% with strong penetration of total Net Revenue 2013 31% gains from Dettol and Harpic We operate in underpinned by innovation Target to 2020: 2014 30% 2015 31% and consumer education 1 2016 31% programmes. Powermarkets16 40%
Note: 2013 number restated to reflect DvM Area
Powerbrands HEALTH AND HYGIENE Commentary Net Revenue generated by our Health and Hygiene delivered Health and Hygiene categories, as a 75% LFL growth of 4%. The Health percentage of total Net Revenue portfolio exceeded market We have 2013 70% 2014 72% growth rates (with the Target to 2020: 2015 74% exception of Scholl/Amopé 1 2016 75% Wet & Dry express pedi). Powerbrands19 80% Hygiene growth was led by DvM growth of the Dettol and Harpic brands and the growth of Finish in ENA.
Please note: 2013 numbers have been adjusted to strip out RB Pharmaceuticals 1 Excluding the impact of the proposed acquisition of Mead Johnson 2 Definitions of non-IFRS measures and their reconciliation to IFRS measures are shown on page 45
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What we’re doing Enhancing our safety, quality and compliance culture
Our new SQC team brings together health and safety, consumer safety, quality, compliance and sustainability, with the aim of strengthening and co-ordinating our capabilities. The team sets the agenda for the Group and reports directly to the CEO, giving these critical areas focus at the very top of the Organisation organisation. We continued to develop our Driving incremental organisation in 2016, establishing new functions to support our growth and growth online operations, while introducing further In 2016, we established a dedicated simplification and efficiency. e-business unit. It supports our in-country teams with their online offerings but crucially is also developing a centralised proposition for selling our products across borders. By building our relationships with e-distributors and partners such as Amazon, it aims to accelerate online growth for us.
Highlights 2016
Continued to benefit from two-area structure introduced in Leveraging 2015, simplifying the scaling and activation of our initiatives the power of data (see Operating Review on pages 38 to 41) Delivered further benefits from Project Supercharge, our Data analysis gives us essential insights into cultural programme to simplify the organisation, targeting consumer needs. This year we opened a £150 million annual savings digital centre in Poland, employing around Set up Safety, Quality and Compliance (SQC) team 40 specialists to give us better and faster data analytics. The new metrics and key Established new e-business function and digital centre performance indicators we can now produce Continued to simplify and strengthen our IT function, by will help us to become more agile and improve consolidating suppliers, data centres and help desks, and our speed of decision making. investing in cyber security
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What we’re doing Setting the pace in e-commerce
E-commerce is a huge growth driver for us in China. As well as our own platform, we have strong relationships with major players such as Taobao and Alibaba, and e-distributors who put our products in around 1,000 online Online sales are shops. This presence means online sales are over 30% of our business in China now over 30% of our Net Revenue in China, with a target of 50% by 2020. Online sales China Non-online sales Powermarkets China In 2016, we made further Succeeding with strategic progress in our our strategy in India Powermarkets, with particular We once again delivered rapid growth in India, with success in India and China. successful brand penetration programmes and marketing putting our products in the hands of ever more consumers. We also stepped up our visits to stores, with an extra 200 salespeople helping to significantly expand our distribution. Dettol India continued to implement its five-year Banega Swachh India (BSI) programme promoting nationwide hygiene and sanitation among students
Highlights 2016
Strong growth in DvM, with improved household Working in penetration, and solid growth in ENA, held back by difficult partnership with Amazon conditions in Russia (see pages 38 to 39) India was a major contributor to growth this year, fuelled by Our relationship with Amazon in the US is innovation and expanded distribution, despite a significant going from strength to strength. By analysing slowdown in Q4 caused by the demonetisation market Amazon’s traffic data and providing high- disruption. quality content that differentiates our products, China grew rapidly, led by e-commerce we are increasing conversions and repeat visits, resulting in significant sales growth. Acquired cornerstone investment in China Resources Pharmaceutical Group, China’s largest over-the-counter (OTC) drugs manufacturer, and signed non-binding strategic cooperation agreement
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 26 Strategic Report Governance Financial Statements Strategic overview betterfinancials in action continued What we’re doing Increasing penetration for Dettol
Increasing penetration has been key to Dettol’s growth this year. From smaller sizes at lower prices in India to cost-effective super-sized soap bars in Nigeria, we offer the right size at the right price. We also raise awareness of the importance of hand hygiene, for example through sponsoring Handwashing Day and our hand hygiene education programme in India.
Multiple hand hygiene initiatives have reached 12.8 million people in India Powerbrands We continue to benefit from our strategic focus on the Health and Raising demand through Hygiene categories and remain well positioned to outperform the consumer education long-term category growth rates. Our point of market entry campaigns for Durex were very successful in 2016. By offering sex education to young people and helping them avoid unwanted pregnancies, we stimulated demand for our products. We also continued to innovate, expanding our sexual wellbeing offer with KY Duration, to help with premature ejaculation.
Highlights 2016
Successfully grew in Health and Hygiene by focusing on Growing the penetration initiatives for our global brands (see case studies and Operating Review on pages 40 to 41) market for Scholl Successful innovations contributed to growth, such as Durex We have increased penetration of Scholl significantly Invisible extra thin condoms, Mucinex Fast Max Day/Night since 2013. In 2016, we launched Scholl Light Legs gelcaps and Dettol Gold, although newly launched Scholl/ compression tights and GelActiv invisible insoles and Amopé Wet & Dry express pedi underperformed, against a inserts – all designed to provide superior comfort for strong comparative for the brand in 2015 tired legs and feet. While short-term growth rates may fluctuate, our medium- term annual growth rate expectation for our categories is unchanged: Health 4-6%, Hygiene 3-5%, Home 1-2%
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Gross Margin Brand Equity Our ethos is that the virtuous Investment (BEI) Virtuous earnings model starts at Gross We focus our investment on Margin. Gross Margin creates consumer education and room in the Income Statement to penetration activities, to build earnings model fund investment and deliver long-term brand equity. BEI Operating Profit growth. We includes our TV and print media drive Gross Margin expansion spend, digital and social media through our focus on higher- investment and consumer and margin brands, which results in a medical education. superior sales mix, stronger Through our virtuous earnings model, pricing and by continuing to Net Revenue optimise our cost of goods sold, BEI helps us to grow Net we are able to fund investment in our an ongoing process we call Revenue. We invest brands, capabilities and development, Project Fuel. disproportionately behind our Powerbrands and in our so we drive revenue growth while Fixed cost Powermarkets, where our increasing our operating margin. We invest appropriately behind investment can have the greatest our people, capabilities and impact on the top line. Revenue infrastructure. However, we from the sale of products is deliberately keep our recognised when the risks and organisation lean, encouraging rewards of ownership of the our people to prioritise and avoid products are passed to the inefficiency and waste. customer.
Operating Margin Our Operating Margin is already best-in-class, but our virtuous earnings model means we can continue to expand our margins. Progress
Our virtuous earnings model remained highly effective in 2016.
Gross Margin Fixed cost Gross Margin Gross Margin benefited from Fixed costs were little changed a beneficial sales mix, as a percentage of Net commodity cost tailwinds and Revenue, as we invested in the cost optimisation initiatives. business and Project Supercharge continued to deliver savings and efficiencies. +180bps Flat
BEI LFL1 Net Revenue We increased investment We grew Net Revenue by 3% Net behind our brands by £63 on a like-for-like basis. UNIQUE Fixed cost million or 50bps of Net Revenue Revenue. Total investment CULTURE was 13.2% of Net Revenue. +£63m +3%
Adjusted1 Operating Margin The outcome was an increase in the Operating Margin of 130bps, to 28.1%. Operating BEI Margin +130bps
1 Definitions of non-IFRS measures and their reconciliation to IFRS measures are shown on page 45
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Strategic overview
Our betterbusiness strategy bettersociety What we said
Continue to improve our health and safety performance Bettersociety is about how we meet at all our sites our responsibilities in the workplace Advance our gender diversity initiative, Project DARE and in our communities, as well as in (Develop, Attract, Retain, Engage talented women) relation to our products. Promote health and hygiene messages and continue to invest to deliver social impact Grow the proportion of revenue from more sustainable Read more in our Sustainability Report products sustainabilityreport2016.rb.com Further increase transparency about the ingredients in our products
What we did
Continued to reduce our lost working day accident rate and further restructured our health and safety compliance programmes Focused on gender balance, including Project DARE, improved performance reviews and increased support to international transferees and their partners Relaunched our Human Rights and Responsible Business policy and continued to work with stakeholders to Strategic approach address human rights issues Reached 365 million people through our health and hygiene messages and invested £8 million in social Workplace Products impact programmes We attract great people, give them We advance health, consumer Increased proportion of Net Revenue from more global experiences in a unique safety and environmental sustainable products to 13.2% culture, and inspire them with protection by optimising our Started reviewing our Restricted Substances List (RSL), stretching performance-based products and aim to increase the increased ingredient transparency and accelerated rewards. We look after our people proportion of our revenue that the phasing out of microbeads and contractors through high comes from more sustainable health and safety and human products. rights standards in addition to our Code of Business Conduct. What we will do We expect suppliers to take similar care. Launch global standards for health and safety, to set Healthier lives our minimum expectations for the highest risk areas How we improve Health and across all our sites Hygiene behaviour through our Focus on diversity, talent, succession and performance products, brand educational Develop our networks, to scale our health and hygiene programmes and corporate programmes globally social investment. Continue to increase revenue from more sustainable products Complete the review of our RSL and continue to increase ingredient transparency Deliver further improvements to our human rights due diligence and remediation processes
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KPIs Performance
Workplace GENDER DIVERSITY Commentary The percentage of women in our global 20% New KPI for 2016. workforce. women in “Top 400” Senior positions Target: Expand our focus of diversity and talent by improving the retention rates of women from managers to senior managers.
LOST WORK DAY ACCIDENT RATE (LWDAR) Commentary The number of workplace accidents at Further reduction in LWDAR manufacturing, warehouse and R&D sites, 0.071 delivered in 2016. resulting in at least one day of lost time, per 100,000 hours worked. 2013 0.107 2014 0.093 Target to 2020: 2015 0.080 2016 0.071 continued reduction in the LWDAR
Healthier lives PEOPLE REACHED WITH Commentary HEALTH AND HYGIENE MESSAGING Reached a further 128m people The total number of people encouraged 365m during 2016. to improve their health and hygiene behaviour, as a result of our brands’ 2013 24m educational programmes. 2014 142m 2015 237m Target to 2020: 2016 365m 400m
SAVE A CHILD EVERY MINUTE Commentary The amount RB committed to the An additional £1.5m provided programme during the year, including £8.0m to Save the Children during through employee fundraising. 2013 £5.5m 2016 vs 2015. Target to 2020: 2014 £6.5m 2015 £6.5m remove diarrhoea as one 2016 £8.0m of the top killers of children
Products NET REVENUE FROM MORE Commentary SUSTAINABLE PRODUCTS More than double the The proportion of total Net Revenue 13.2% Net Revenue from more derived from product innovations with of Net Revenue sustainable products since significant sustainability benefits, such as last year, amounting to a reduction of 10% or more in CO 2013 3.3% 2 over £1 billion. emissions, water use or virgin packaging 2014 4.7% material per dose. 2015 6.0% 2016 13.2% Target to 2020: 1/3 of Net Revenue
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Human rights
We recognise our responsibility for respecting human rights wherever we operate. In 2016, we relaunched our Human Rights and Responsible Business policy, reinforcing our commitment. We continued to work with forums such as AIM-Progress, to promote responsible sourcing and sustainable production, and worked with suppliers to understand their performance in areas such as managing labour, health and safety, environment and business integrity. We also provided compulsory human rights training to RB’s site management, global procurement and supply services DvM teams, and engaged with suppliers through Workplace workshops and other initiatives. In addition, we In 2016, we made further progress with our conducted a review against the UN Guiding Principles on Business and Human Rights, and identified people strategy, reinvigorated our health opportunities to improve our due diligence and and safety approach, relaunched our Human remediation processes. Rights and Responsible Business policy and continued to work with stakeholders to address human rights issues. Health and safety
Health and safety is a business Reduction in our LWDAR imperative. Since 2006, our robust since 2006: approach has reduced our lost working What we’re doing day accident rate (LWDAR) by 79% and cut the rate each year since 2012. Despite Our people this, we are deeply saddened by the deaths of two contractors in 2016, at an 79% Improving gender balance and female leadership development, RB manufacturing site in Pakistan. Our investigation and engagement and retention were a major focus in 2016. response has contributed to a further restructuring of We continued to implement Project DARE (Develop, Attract, Retain, our health and safety compliance programmes. We Engage talented women), introduced initiatives such as the have strengthened our global standards and introduced Accelerate leadership programme for women, and enhanced Regional Health & Safety Compliance Managers. They support for women on maternity leave. We also focused on will add rigour to annual audits across sites and increase unconscious bias and inclusive leadership. Enhancing performance training for our employees. New global standards will reviews was another key project. We helped line managers to also set our minimum expectations in the highest-risk have inspiring and meaningful conversations with team members, areas across all our sites. At our manufacturing sites, we giving employees clarity about their performance, their impact will continue to develop an Environment, Health & and how they can develop. This is improving both engagement Safety (EHS) Competence framework for managers, and performance. International assignments are key to our supervisors and EHS professionals. development model and we increased support for international transferees and their partners.
The percentages of female members in the Group’s director, senior manager and all employee populations at 31 December 2016 were More than 700 female colleagues took part 27%, 20% and 42% respectively. The Group has designated the in DARE forums, members of its “Top40” and “Top400” populations as RB’s ‘senior called Lean in Circles managers’ for the purpose of the gender split disclosure required by the Companies Act 2006. Of Board Directors, eight were male and three female, of senior managers, 346 were male and 86 female, and 15,681 of all employees were male and 11,430 female. There is a variance in total employee numbers from those reported in Note 5 on page 119, in respect of contracted labour for which gender split information is not available.
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 31 Strategic Report Governance Financial Statements
What we’re doing Brand purpose
We continued to deliver health and hygiene awareness and education programmes to improve people’s lives. Many of our programmes are linked to our brands, such as Durex, Mortein and Dettol. We aim to reach 400 million people by 2020. So far, we have reached 365 million since 2013. This includes 120 million through hygiene and sanitation programmes, 217 million with sexual health messaging and 27 million with mosquito- Healthier lives borne disease education programmes. We continued to promote healthier lives, Social investment reaching more people with our health and This year, we invested £8 million through our Save a Child Every hygiene messaging and supporting the Minute programme, to stop children dying from preventable Save a Child Every Minute campaign. diseases such as diarrhoea to build toilets to discourage open defecation and to educate communities on hygiene habits. Our social impact through this programme benefited more than 1.5 million people in 2016.
What we’re doing Innovation
We further improved the sustainability profile of some of our biggest selling brands, for example through reducing 13.2%of Net Revenue from packaging and cutting associated more sustainable emissions and reducing water consumption. products This helped us to more than double our Net Revenue from more sustainable products to over £1 billion.
Products Stewardship We increased revenue from more In 2016, we started a full review of our Restricted sustainable products, grew the proportion Substances List, which ensures we have a consistent of more sustainable products in our global approach to ingredients of concern. We continued to increase ingredient transparency, pipeline and revitalised our approach to with 66% of our Net Revenue from products for which product safety. we publish ingredients lists. We also accelerated our commitment to phase out microbeads in our personal care products, recognising their negative effect on the marine environment.
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 32 Strategic Report Governance Financial Statements
Strategic overview
Our betterbusiness strategy betterenvironment What we said
The betterenvironment element of our Continue to reduce the carbon and water footprints of our products strategy sets out how we minimise emissions, water use and waste, and Further reduce greenhouse gas emissions from our operations ensure we source responsibly. Make further progress towards zero waste to landfill Work towards all natural raw materials being Read more in our Sustainability Report responsibly sourced against our policy sustainabilityreport2016.rb.com What we did
Successfully reduced our total greenhouse gas (GHG) emissions per unit of production Little change in our carbon footprint since 2012 due to how our business has grown across our product portfolio and key markets Our water footprint has reduced over time and we have invested in product innovation Further reduced water use per unit of production Invested in reusing and recycling waste water, and in waste water treatment Achieved our 2020 waste reduction goal ahead of Strategic approach schedule, strengthened our recycling processes and further improved our product packaging Further increased traceability within our palm oil Greenhouse gas emissions Waste supply chain and successfully started three smallholder We reduce our emissions through We look to reduce our farmer programmes. Continued to engage with manufacturing process manufacturing waste. We have suppliers to ensure materials are sourced responsibly improvements, energy efficiency created a culture of zero waste against our policies programmes, investing in and seek new waste-related renewable technologies and revenue streams and disposal procuring electricity from options. Our aim is for none of What we will do renewable sources. We also our waste to go to landfill. consider how we can reduce the Look for further opportunities to reduce GHG emissions carbon footprint of our products across our manufacturing sites during our innovation process. Work across our value chain to further explore Water Sourcing opportunities to reduce the water impact of We seek to reduce our products’ We believe in sourcing our natural our products water impact throughout their raw materials responsibly. Our In our manufacturing sites we will identify ways to life cycle, from raw materials policy defines the minimum reduce, reuse and recycle water, and invest in waste sourcing to the way they are standards expected of our water treatment facilities and monitoring systems manufactured, used and disposed suppliers, while our responsible Continue to drive towards zero waste to landfill, of. We also consider how we can sourcing programmes focus on with an emphasis on finding new ways to reuse and reduce our water consumption in high-priority commodities, such recycle waste manufacturing facilities especially as palm oil and latex. for water scarce regions. Further develop our palm oil programme, focusing on increasing traceability within our supply chain and the implementation of transformation programmes. We will increase human rights due diligence for palm oil
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 33 Strategic Report Governance Financial Statements
KPIs Performance
Greenhouse GHG EMISSIONS PER UNIT OF PRODUCTION Commentary gas emissions The percentage reduction in GHG (25.0)% A further 13% reduction in emissions per unit of production, GHG emissions per unit of against our 2012 baseline. 2013 (3.6)% 2014 (7.8)% production in 2016 vs 2015. Target to 2020: 40% reduction 2015 (13.8)% 2016 (25.0)%
CARBON FOOTPRINT PER DOSE OF PRODUCT Commentary The percentage reduction in our total 0% Reducing carbon footprint carbon footprint per dose of product per dose of product remains manufactured, against our 2012 baseline. 2013 (7)% 2014 (3)% challenging. Target to 2020: 1/3 reduction 2015 +1% 2016 0% Read more on page 35
Water WATER USE PER UNIT OF PRODUCTION Commentary The percentage reduction in total water (31.8)% A further 2.6% reduction in consumption per unit of production against water per unit of production in 2012 baseline. 2013 (18.9)% 2014 (24.8)% 2016 vs 2015. Target to 2020: 35% reduction 2015 (29.9)% 2016 (31.8)%
WATER IMPACT PER DOSE OF PRODUCT Commentary Total water used during the product’s entire (6)% A 6% reduction since 2012. life cycle, from material sourcing to disposal or recycling, adjusted to reflect water 2013 (9)% scarcity at each stage, and divided by the 2014 (2)% number of product doses manufactured. 2015 (9)% 2016 (6)% Target to 2020: 1/3 reduction
Waste FACTORIES SENDING ZERO WASTE TO LANDFILL Commentary Percentage of our factories achieving zero 97% All except for one factory is waste to landfill status, including both now zero waste to landfill. hazardous and non-hazardous waste. 2013 48% 2014 74% Target to 2020: 100% reduction 2015 89% 2016 97%
MANUFACTURING WASTE PER UNIT OF PRODUCTION Commentary The percentage reduction in manufacturing (19.2)% A further 5.5% reduction in waste per unit of production, against our waste per unit of production in 2012 baseline. 2013 (2.7)% 2014 (6.5)% 2016 vs 2015. Target to 2020: 20% reduction 2015 (14.4)% 2016 (19.2)%
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 34 Strategic Report Governance Financial Statements Strategic overview betterenvironment in action
In 2016, our GHG emissions from our entire operations, including manufacturing, R&D, offices and distribution centres, were made up of:
• Scope 1: 80,321 tCO2e (2015: 79,502) – emissions from combustion of fuel in RB facilities.
• Scope 2: 180,497 tCO2e (2015: 214,586) – emissions from energy supplied to RB such as electricity, heat, steam or cooling.
Total GHG emissions from Scope 1 and Scope 2 emissions in 2016
were 260,818 tCO2e (2015: 294,087). We calculate our emissions
intensity per unit of production, which equated to 0.0344 tCO2e in
2016 (2015: 0.0389 tCO2e).
Our manufacturing Note: Our GHG data includes all emissions from operations covered by the Group Financial Statements for which we have operational control. We include emissions for We made further progress with our businesses we acquire in the first full calendar year of our ownership. We calculated CO2e emissions using internationally recognised methodologies from the Greenhouse Gas Protocol and International Energy Authority (IEA). Scope 2 GHG emissions reported efforts to reduce GHG emissions, in 2016 are net emissions which equals gross emissions minus emissions from renewable the amount of energy and water electricity certificates purchased (36,814.89t). we use in manufacturing, and the waste we produce. Water
We reduced water consumption by 2.6% across our operations in 2016 vs 2015. We have improved metering systems in our plants, to better understand where we can reduce water use, and invested in What we’re doing initiatives to deliver reductions, including reusing reject water in cooling towers and chillers. Greenhouse gas emissions Using water in our production processes and for cleaning creates Energy use is a major source of our carbon footprint and we have waste water, which we treat and clean before we release it from our focused on using renewable energy and reducing consumption. sites. All our sites must comply with local legislation and monitor In 2016, we implemented new energy programmes across our water discharge parameters. In 2016, we strengthened compliance manufacturing sites. We made our biggest investment in renewables by setting water management and waste water discharge standards to date, installing a 2.5MW solar energy system at our Belle Mead across all our global manufacturing sites. We have also invested in factory in New Jersey. We purchased renewable electricity at our our facilities, including a new waste water treatment plant at our manufacturing sites in Derby and Hull (UK), Nowy Dwor (Poland), site in Cali, Colombia. St Peters and Belle Mead (US). This helped to decrease overall carbon emissions by 7.8% tonnes globally. We also invested in low-carbon technologies. The Nowy Dwor plant installed a free cooling module that uses external air to cool manufacturing operations, while our St Peters plant collaborated with the Waste Materials Lifestyle Management Company to transform our waste into low carbon fuel. Our Zero Manufacturing Waste to Landfill Challenge encourages sites to find new ways to divert waste from landfill. It has helped us to make significant progress and in 2016, 46 of our sites sent zero waste to landfill, with the remaining one facility having clearly defined plans to meet the target by 2020. During 2016, the average waste sent to landfill across our factories was less than 1%, which translates to a reduction of over 22,570 tonnes of hazardous and non-hazardous waste being diverted from landfill since 2012.
In 2015, we increased our waste reduction goal to 20% by 2020. We continued to lower our waste production throughout 2016 and given our strong progress, we have further increased the target to 30% by 2020 (against a 2012 baseline).
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 35 Strategic Report Governance Financial Statements
What we’re doing GHG and water footprint for products
Our carbon footprint per dose of product is broadly unchanged since 2012. While we have made good progress in the areas under our control, consumer demand for products with high carbon intensity (especially in hygiene) is offsetting reductions elsewhere. Water use per dose has decreased since 2012. We are developing water efficient products such as Dettol Squeezy and are working to see how we can further reduce impacts in the largest part of our footprint – consumer use of our products.
Our products Packaging waste
We continue to focus on reducing GHG We continually look to reduce, reuse and recycle our packaging emissions and water use for our products, through our sustainable innovation and efficiency programmes. We measure the sustainability impact of packaging for all new products across the value chain through product through our Sustainable Innovation App, to encourage packaging innovation although savings made are reductions and the use of more sustainable materials. As a result, approximately 40% of the products in our pipeline now have less offset by impacts at the point packaging than their predecessor. of consumer use.
What we’re doing Palm oil
Since 2014, we have focused on tracing the palm oil we procure back through the supply chain, from supplier to refinery, and refinery to mill. In 2016, we achieved traceability to mill for 87% of our supply base outside of India, and 55% traceability to port in India1. Traceability in India is challenging and we have run multiple workshops with suppliers and other brands to address this. We have continued to support on-the-ground transformation programmes, and in partnership with The Forest Trust we launched two smallholder farmer programmes to educate farmers in good farming techniques and crop diversification. Responsible sourcing 1 Excluding surfactants We continue to focus on engaging Other materials with our suppliers, increasing levels of In 2016, we started our first latex smallholder farmer programme. traceability and ensuring that our raw As part of this programme we have already engaged with over 120 smallholder farmers and have run multiple workshops focused on materials are sourced responsibly, building farmer resilience. We continued to ensure that the paper in line with our policy. and board we use are sourced in compliance with our policies, whilst rolling out packaging initiatives for brands including Durex, where we converted the board used for the cartons to sustainable sources. We are a very small user of soy. However, in 2016 we confirmed that the raw soy we use originates from low-risk countries.
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 36 Strategic Report Governance Financial Statements
It’s my RB
RB has a distinct culture. We are driven to outperform, Achievement Everyone wants a sense of by acting like owners and achievement. For RB, that having the drive and passion means we have to outperform. of entrepreneurs.
We constantly challenge ourselves and inspire others to stretch. We are Our culture comes to life through our not happy with the status quo because we want better innovations, values. These values are interlinked and better ways of doing things and better results. This hunger pushes us to be the very best. Our unique approach to reward means together define how we make decisions, outperformance results in excellent rewards. how our people behave, how we reward people and how people grow.
The right values Achievement Entrepreneurship We aim high and strive We passionately believe for outperformance. in our ideas and are We challenge ourselves to willing to win big, even if climb mountains and then we may sometimes fail. look for the next peak. Partnership Ownership We leverage We treat the Company relationships to make as if it is our own in each other the best we everything we do. can be, both inside and Ownership outside of the Company. To achieve exceptional things, our people need a Value of share ownership requirements sense of ownership.
CEO £41.8m
CFO £13.9m
EVP £13.9m We encourage our people to behave as if they own the business. This means they identify issues, take responsibility SVP/T40 £2.1m–£3.5m and own the outcome. They act in RB’s and consumers’ best interests and spend money as if it were their own. £0m £5m £10m £15m £20m £25m £30m £35m £40m £45m
Note: Value of share ownership requirements using a share price of £69.69 (the average of Q4 2016)
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 37 Strategic Report Governance Financial Statements
Our ownership philosophy extends to our shareholding requirements for our senior managers, which are the highest in the industry. Many of our employees also own shares. In addition, share-based incentives deliver long-term rewards that can outweigh short-term bonuses. Creating Shareholder value through outperformance therefore materially benefits our people.
Partnership To be a great company, we must be obsessed with making each other the best we can be.
We cannot be the best if we do everything ourselves. There is far Entrepreneurship more innovation, creativity and knowledge outside RB than there can ever be inside it. We therefore partner with organisations that bring us Owners are usually innovative products and better ways of working. We also strive for openness in our internal partnerships. We seek help when we need it, entrepreneurs, so we share best practice and make each other better every day. make a conscious effort to breed a culture of entrepreneurship.
Entrepreneurs are passionate about their ideas. By tightly controlling resources, we encourage our people to find innovative ways to achieve their goals. We allow them to pursue projects they believe in, knowing they can fail small and still be rewarded if their project is launched. This contrasts with the typical big company, which has more resources than ideas and avoids taking calculated risks because it worries more about failure than success. We create a culture of diversity so we benefit from different experiences, and encourage people to speak up.
Net Revenue £9.9bn Like-for-like growth 3% Total reported growth 11%
Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements 2016 38 Strategic Report Governance Financial Statements
Operating Review
% of Net Revenue ENA 65%
Percentage of Net Revenue from ENA