Reckitt Benckiser Group plc ("RB" or the "Company")
ANNUAL REPORT AND NOTICE OF AGM
The Annual Report and Financial Statements 2013 for the Company was posted out today to shareholders who have requested copies together with the circular containing the Notice of the 2014 Annual General Meeting to be held at 11.15 am on Wednesday, 7 May 2014 at the London Heathrow Marriott Hotel, Bath Road, Hayes, Middlesex UB3 5AN.
Copies of both the Annual Report and the AGM circular are available to view or download from the Company's website using the links below, and will also shortly be available for inspection through the National Storage Mechanism at http://www.morningstar.co.uk/uk/
Annual Report and Financial Statements 2013: www.rb.com/online-annual-report-2013
2014 Notice of Annual General Meeting: www.rb.com/AGM
A condensed set of RB's financial statements and information on important events that have occurred during the financial year ended 31 December 2013 and their impact on the financial statements were included in RB's preliminary results announcement released on 12 February 2014. That information, together with the information set out below, which is extracted from the 2013 Annual Report, constitute the material required by Disclosure and Transparency Rule 6.3.5 which is required to be communicated to the media in full unedited text through a Regulatory Information Service. This announcement is not a substitute for reading the full 2013 Annual Report. Page and note references in the text below refer to page numbers in the 2013 Annual Report and notes to the financial statements.
3 April 2014
Enquiries:
Elizabeth Richardson
Company Secretary
Reckitt Benckiser Group plc
Telephone: + 44 (0) 1753 217800
Cautionary Note Concerning Forward Looking Statements
This document contains forward looking statements, including statements with respect to the financial condition, results of operations and business of RB and certain of the plans and objectives of the Company with respect to these items. These forward looking statements are made pursuant to the 'Safe Harbor' provisions of the United States private securities litigation reform act of 1995. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Company, anticipated cost savings or synergies and the completion of strategic transactions are forward looking statements. These forward looking statements are not guarantees of future performance: by their nature, forward looking statements involve known and unknown risk and uncertainty and other factors because they relate to events and depend on circumstances that will occur in the future. There are a number of factors, discussed in this Annual Report that could cause actual results and developments to differ materially from those expressed or implied by these forward looking statements, including many factors outside RB's control. Past performance cannot be relied upon as a guide to future performance. Each forward looking statement speaks as of the date of the particular statement.
APPENDICES
(i) PRINCIPAL RISKS
RB operates a major risk assessment process to identify, assess, control, mitigate and review those risks it considers to be most significant to the successful execution of our strategy. The most senior managers of our business dedicate time each year in a facilitated discussion with the Group risk team to consider the risk environment for their particular functional or geographic area of responsibility and how their emerging or known risks could impact on the achievement of the Group's strategic objectives; similar sessions are held with the Group's external advisors. The key content from these sessions are then synthesised into the Group's 'Top Ten' risks, with each risk having an EC owner, who is accountable for executing the current control strategy and for compiling and executing a plan of mitigating actions to properly manage the Group's exposure to that risk. Progress is reviewed periodically and the full output from the major risk assessment process is formally submitted annually by the EC to the Board for its consideration and endorsement. Through the course of each year, the EC and Board agendas address all of the top risks through specific deep dives to ensure proper focus and progress with mitigation.
The Group's activities expose it to a number of risks which, while actively managed, as described above, may still adversely impact the business and its financials. The principal risks that, in the opinion of the Directors, pose the most significant threat to the delivery of the Group's strategic objectives are as follows, with a more expansive explanation provided on pages 93 to 100 of this report. The Group recognises the risks described here and has taken measures, addressed in this report and in previous reports, to mitigate these risks.
We could be adversely affected by economic conditions in, and political developments affecting, the markets in which we operate.
A variety of factors may adversely affect our results of operations and financial condition during periods of economic uncertainty or instability, social or labour unrest or political upheaval in the markets in which we operate. Such periods may also lead to government actions, such as imposition of martial law, trade restrictions, foreign ownership restrictions, capital, price or currency controls, nationalisation or expropriation of property or other resources, or changes in legal and regulatory requirements and taxation regimes. We may also be unable to access credit markets materially adversely affecting our liquidity and capital resources or cost of capital.
Our Powerbrands collectively contribute a significant portion of our revenue, and any material adverse change to demand for existing Powerbrands, or any future products we may develop, could have a material adverse effect on our business.
Consumer preferences, tastes and habits are constantly evolving. Various factors, some of which are beyond our control, may have an adverse impact on demand for our Powerbrands. Similarly, we may fail to respond to changing consumer wants or fail to differentiate our Powerbrands from competitors' products, both of which could adversely impact consumer demand for our products.
Our business, financial condition, and results of operations, substantially depend on our ability to improve our existing products, and successfully develop and launch new products and technologies.
If we are unable to successfully develop, launch and market new products that obtain consumer interest and acceptance, we may be unable to compete and maintain or grow our market share. If we enter new categories or geographies in which we have limited experience, we may be exposed to unexpected or greater risks.
Substantial harm to our reputation, or the reputation of one or more of our brands, may materially adversely affect our business.
Various factors may adversely impact our reputation, including product quality inconsistencies or contamination resulting in recalls. Reputational risks may also arise from our third parties' labour standards, health, safety and environmental standards, raw material sourcing, and ethical standards. We may also be the victim of product tampering or counterfeiting or grey imports. Any litigation, disputes on tax matters and pay structures may subject us to negative attention in the press, which can damage reputation.
We could be materially adversely affected by the loss of revenue from the sales of Suboxone and Subutex.
Our RB Pharmaceuticals' business may face price pressure or share loss from the increased branded and generic competition that is entering the market both in the US and in the rest of world leading to a material reduction in net revenue from this product adversely affecting our overall revenues and operating profit.
We could be impacted by the fact we compete in intensely competitive industries.
We compete with well-established local, regional, national and international companies including private label and generics. Some of these may have more resources to establish and promote their products. If we are unable to offer products that consumers choose over our competitors' products, or maintain successful relationships with our trade customers, who determine access to shelf space and promotions, or to effectively compete in new channels, our business and results could be materially impacted.
We are exposed to foreign currency exchange rate risk.
In FY 2013, 93% of our net revenue was derived from markets outside the UK. The Sterling value of our revenues, profits and cash flows from non-UK markets may be reduced or our supply costs, as measured in Sterling in those markets, may increase. Additionally, competitors may benefit if they incur costs in weaker currencies relative to Sterling. We currently hedge some of our currency exposures using financial instruments, but we may not be effective.
We are subject to the risk that countries in which we operate may impose or increase exchange controls or devalue their currency.
We operate in markets which have been known to impose exchange controls. Such controls may restrict or make it impossible to repatriate earnings, borrow on the international markets to fund operations in that country or limit our ability to import raw materials or finished products. Additionally we operate in markets that are prone to currency devaluations which can make our products more expensive in local currency terms.
We face risks of interruptions of our supply chain and disruptions in our production facilities, which could materially adversely affect our results of operations.
We may face risks to continuity of supply arising from certain specialised suppliers, both of raw materials and of third party manufactured items. Significant disruptions to our own, or our suppliers' operations, may affect our ability to source raw materials and negatively impact our costs. Suppliers may fail to fulfil their contractual obligations. Replacing suppliers may require them to be qualified under industry, governmental or our standards, which could require investment and may take time.
Volatility in the price of commodities, energy and transportation may impact our profitability.
Increases in cost or decreases in availability could adversely affect our profitability if we are unable to pass on the higher costs as price increases or achieve cost efficiencies.
We have grown, and may continue to grow, in part, through acquisitions, joint ventures and business alliances, which involve various risks.
Acquisitions present a range of risks and uncertainties, in addition to the risk of management resource requirements to handle the acquisition and the base business simultaneously. There could be increased debt and interest payments to fund larger acquisitions, which could place pressure on our credit rating. We may fail in achieving an acquisition yet still bear substantial out-of-pocket expenses. We may fail to achieve projected benefits of an acquisition, or we may take on unforeseen future liabilities with an acquisition.
We may be unable to attract and retain qualified personnel, including key senior management.
The market for talent is intensely competitive and we could face challenges in sourcing qualified personnel. If we are unable to achieve our performance targets, our senior management would not be entitled to their variable pay, which may operate as a disincentive for them to continue their employment with us.
A disruption to, or failure of, our information technology systems and infrastructure, may adversely affect our business.
Failures or disruptions to our systems or the systems of third parties on whom we rely, due to any number of causes, particularly if prolonged, or, if any failure or disruption were to impact our backup or disaster recovery plans, could result in a loss of key data and/or affect our operations. Sub-optimal implementations of new systems could occur. Our computer systems, software and networks may be vulnerable to unauthorised access, computer viruses or other malicious code and other cyber threats that could have a security impact. All of these could be costly to remedy and we may be subject to litigation.
Our business is subject to significant governmental regulation.
Regulation is imposed in respect of, but not limited to, ingredients, manufacturing standards, labour standards, product safety and quality, marketing, packaging, labelling, storage, distribution, advertising, imports and exports, social and environmental responsibility and health and safety. These regulations can change and may become more stringent. Additionally we are required to obtain, maintain and update licences for some products. If we are found to be non-compliant with applicable laws and regulations, we could be subject to civil remedies such as fines, injunctions or product recalls, and/or criminal sanctions.
The laws and regulations to which we are subject may not be transparent, may be difficult to interpret, and/or may be enforced inconsistently.
Emerging markets can pose heightened risks with respect to laws and regulations. The legal systems in such countries may not be well established, reliable or enforced and there may be difficulties in obtaining legal redress, particularly against the state or state-owned entities, creating higher operational costs and risks to our business.
We could be subject to investigations and potential enforcement action, which could have a material adverse effect on our business.
We could be subject to regulatory investigations or potential enforcement action that targets ingredients, an industry, a set of business practices or our specific operations. Regulatory authorities and consumer groups may request or conduct reviews of the use of certain of our ingredients, or ingredient legislation may change. These could result in a need to change our formulations which could be costly or may not be possible.
Historical or future violations of antitrust and competition laws may have a material adverse impact on our business, financial condition and results of operations.
Failure to comply with applicable antitrust and competition laws, rules and regulations in any jurisdiction may result in civil and/or criminal legal proceedings. As part of the announcement of our HY 2013 results, we reported a provision of £225m, principally relating to competition matters. Our ultimate liability for such matters could exceed this provision.
We operate in a number of countries in which bribery and corruption pose significant risks, and we may be exposed to liabilities under anti-bribery laws for any violations. Any violation of applicable money laundering laws could also have a negative impact on us.
We are subject to the UK Bribery Act 2010, the US Foreign Corrupt Practices Act of 1977, as amended, and similar laws worldwide. Given our extensive international operations, we are exposed to significant risks, particularly with respect to parties not subject to our control such as agents and joint venture partners, and also through businesses we acquire.
Our business is subject to product liability claims.
We may be subject to legal proceedings and claims arising out of our products, including as a result of unanticipated side effects or issues that become evident only after products are widely introduced into the marketplace or additionally claims that our products are defective, contain contaminants, provide inadequate warnings or instructions, or cause personal injury to persons or damage to property. We may be required to pay compensation for losses or injuries or have to pay substantial damages, and related costs, or additionally be subject to the imposition of civil and criminal sanctions.
Legal proceedings in respect of claims outside the product liability area could also adversely impact our business, results of operations and financial condition.
Outside the product liability area, we are subject to legal proceedings and other claims arising out of the ordinary course of business including, but not limited to, claims alleging intellectual property rights infringement, breach of contract, environmental laws and health and safety laws, and advertising claims. Significant claims, or a substantial number of small claims, may be expensive to defend and may divert management time and resources away from our operations.
Labour disruptions may affect the results of our operations.
A substantial portion of our workforce is unionised, and we are party to collective bargaining agreements covering approximately one-third of our direct employees. Our ability to negotiate these agreements satisfactorily or our relationship with unions, including labour disputes or work stoppages, could have an adverse impact on our business.
Changes in tax legislation and other circumstances that affect tax calculations could adversely affect our financial condition and results of operations.
We are subject to tax laws and transfer pricing regulations in multiple jurisdictions, including those relating to the flow of funds between RB and its subsidiaries. Our effective tax rate in any given financial year reflects a variety of factors that may not be present in succeeding financial years, and may be affected by changes in the tax laws of the jurisdictions in which we operate. Tax authorities may challenge our arrangements and if material challenges were to be successful, our effective tax rate may increase, and we may incur significant costs. Any of the foregoing could materially and adversely affect our business.
We may be unable to secure and protect our intellectual property rights.
Even if obtained, these rights may be invalidated, circumvented or challenged in future, and third parties may infringe on, or misappropriate, our rights. We may fail to discover any infringements of our intellectual property rights, or be unable to successfully defend and enforce our rights.
The loss of patent protection, ineffective protection, or expiry of our patents may impact our financial condition and results of operations.
Patent protection varies in different countries, and can be substantially weaker in emerging markets. We may face challenges in enforcing or extending our current intellectual property protections, or any protections we may obtain in future, in these markets.
We may face challenges to our intellectual property rights, including allegations of infringement of others' rights.
If we are unable to successfully defend against these challenges, we may face various sanctions, including injunctions, monetary sanctions, product recalls, alterations to our intellectual property, products, and/or packaging, which could result in significant expense and negative publicity.
Our business may be adversely affected by our funding requirements.
Our liquidity needs are driven by our ability to generate cash from operations and the level of borrowings, the level of acquisitions, the level of share repurchases and dividends, disposals, target ratings for our debt and options available to us in the equity and debt markets. At 31 December 2013, we had £4,350m in undrawn commitments. If we are not able to access the commercial paper market to the extent that we require, we may need to drawdown amounts under our committed bilateral credit facilities, which accrue interest at floating rates. Increases in such rates could result in significantly higher interest expense for us.
We are subject to risks relating to estimates and assumptions that we are required to make, and that may affect the reported amounts in our financial statements.
The preparation of our financial statements requires management to make some estimates and assumptions based on management's best knowledge at the time. Actual amounts may however ultimately differ from those estimates.
We are subject to a range of compliance and routine risks as part of everyday business.
In order to manage the more numerous and routine risks, the Group maintains a complete and robust governance framework.
We may face risks based on changes to market prices.
Due to the nature of its business the Group is exposed to commodity price risk related to the production or packaging of finished goods such as oil-related, and a diverse range of other, raw materials. This risk is, however, managed primarily through medium-term contracts with certain key suppliers and is not viewed as being a material risk. The Group is not exposed to equity securities' price risk.
We are subject to risks related to interest rate changes.
The Group has both interest-bearing and non interest-bearing assets and liabilities. The Group monitors its interest expense rate exposure on a regular basis. The Group manages its interest rate exposure on its gross financial assets by using fixed rate term deposits.
There is potential for credit risks with financial institutions around the globe.
The Group has no significant concentrations of credit risk. Financial institution counterparties are subject to approval under the Group's counterparty risk policy and such approval is limited to financial institutions with a BBB rating or above. The Group uses BBB and higher rated counterparties to manage risk and uses BBB rated counterparties by exception. The amount of exposure to any individual counterparty is subject to a limit defined within the counterparty risk policy, which is reassessed annually by the Board.
Liquidity Risk
The Group has bilateral credit facilities with high-quality international banks. All of these facilities have similar or equivalent terms and conditions, and have a financial covenant, which is not expected to restrict the Group's future operations. The committed borrowing facilities, together with available uncommitted facilities and central cash and investments, are considered sufficient to meet the Group's projected cash requirements.
Capital Management Risk
The Group's objectives for managing capital are to safeguard the Group's ability to continue as a going concern and maintain an efficient capital structure to optimise the cost of capital. The Group monitors net debt (total borrowings less cash and cash equivalents; short-term available for sale financial assets and financing derivative financial instruments) and at the year end the Group had net debt of £2,096m (2012: £2,426m). The Group seeks to pay down net debt using cash generated by the business to maintain an appropriate level of financial flexibility. Details of numerical disclosures relating to the Group's financial risk management are included in note 14 to the financial statements on pages 70 to 73.
(ii) RELATED PARTY TRANSACTIONS
The following statements regarding related party transactions of RB are set out in the 2013 Annual Report. The following is extracted in full and unedited form from the Annual Report.
[NOTE] 25 RELATED PARTY TRANSACTIONS
On 19 March 2013 the Group purchased an additional 25% of Shanghai Manon Trading Company Limited, thereby increasing its share to 75.01%. The consideration for the transaction amounted to £28m, including transaction costs.
Key management compensation is disclosed in note 5a.
The principal subsidiary undertakings included in the consolidated financial statements at 31 December 2013 are disclosed in note 2 to the Parent Company financial statements.
[PARENT COMPANY NOTE] 11 RELATED PARTY TRANSACTIONS
The Company has taken advantage of the exemption within Financial Reporting Standard No. 8 'Related Party Disclosures' not to disclose related party transactions with wholly owned subsidiaries of the Reckitt Benckiser Group. There were no other related party transactions (2012: nil).
(iii) DIRECTORS' RESPONSIBILITY STATEMENT
The Directors consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess a company's performance, business model and strategy.
Each of the Directors, whose names and functions are listed below, confirms that, to the best of his or her knowledge:
· The Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU and IFRSs as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
· The Report of the Directors includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
Name Function
Adrian Bellamy Chairman and Non-Executive Director
Rakesh Kapoor Chief Executive Officer
Adrian Hennah Chief Financial Officer
Richard Cousins Non-Executive Director
Nicandro Durante Non-Executive Director
Peter Harf Deputy Chairman and Non-Executive Director
Kenneth Hydon Non-Executive Director
André Lacroix Senior Independent Director
Judith Sprieser Non-Executive Director
Warren Tucker Non-Executive Director
