Executives: Adrian Hennah - CFO and Executive Director Rakesh Kapoor - CEO and Executive Director Richard Joyce - SVP of IR, Communications & External

Affairs
Analysts: Alexander Smith - Barclays Celine Pannuti - J. P. Morgan Chris Wickham - Whitman Howard Eva Quiroga-Thiele - Deutsche Bank Guillaume Delmas - Bank of America Merrill Lynch Iain Simpson - Societe Generale James Jones - RBC Capital Markets Martin Deboo - Jefferies Philip Gorham - Morningstar Pinar Ergun - UBS Investment Bank Richard Taylor - Morgan Stanley Rosie Edwards - Berenberg

Richard Joyce: Good morning, and welcome to RB's half year results call. We will talk through today's presentation and then we will move on to Q&A as is normal practice. So without any further delay, I'll turn to Rakesh Kapoor, our Chief Executive Officer.

Rakesh Kapoor: Yes. Thank you, and good morning, and welcome to our half one results webinar from my side, too. Before we start, I just wanted to draw your attention to the usual disclaimers. I would like to start this morning with three key messages

for you: Firstly, I told you at the beginning of the year that 2017 will be a year of two halves. Adrian and I will give you the details of the first half, then at the end of his presentation, I will come back and talk to you about our half two.

Secondly, we have executed two strategic transactions in this half. It's not just what we have done that's really good it's how we have executed these, which is to my mind, showcases our ability in M&A. The sale of our Food business for $4.2 billion should enable us to deleverage the balance sheet quicker. The accelerated closing of Mead Johnson will also accelerate the realization of synergies. These two transactions mark a significant step in our strategic portfolio transformation, which is my third message.

Over the last five years, we have made significant progress in our vision from being a household cleaning company to a health and hygiene company. Before I talk in more detail about the second half, I want to just take you through quickly what happened with the cyberattack which hit us on the June 27th. On June 27th, many companies, some 30 companies as we understand it, including RB, were impacted by an unprecedented and sophisticated global cyberattack. We immediately took measures to limit the spread of the attack, including shutting down systems and networks to protect business operations and data to the extent possible. However, the virus uniquely mimics a normal IT administrator and therefore avoided many of the usual measures and traps in place to prevent its spread.

To give you a measure of the scale, nearly 500 systems and 2,000 servers, which are reliant upon certain operating systems, were affected and rendered inoperable. A crisis team was put in place to ensure RB could manufacture, ship, invoice, and close the half year financially. High-priority systems were recovered between July 3rd and July 11th. By July 11th, our major manufacturing sites were producing at close to 100%, albeit somewhat still using workaround solutions. However, there are a number of activities which will take until the end of August to complete in full.

We do have significant cybersecurity measures in place, but with every new attack being more vicious and far-reaching than the previous one, we will need to take further measures to minimize both the likelihood and potential impact of any future attacks. As indicated, the market at the beginning of this month, the cyberattack impacted our factory operations in a way that will result in lost revenues. I believe we have quantified the impact of the cyberattack, but it will take time to work through the full ramifications of it. And if there is anything new and important to inform you of, we will. Let's now take a look at our first half.

Net revenue growth in half one was minus 1% on a like-for-like basis, clearly a result made worse by the cyber issue. As a result, on a continuing basis, adjusted net income growth in constant was broadly similar. The cash conversion remains very strong, over 100% in the half. Our adjusted net income in actual increased by 14%, and in line with the dividend policy, we are declaring a dividend of 66.6p, an increase of 14% over half one 2016. Our earnings model stays intact.

You heard me saying many times before, our P&L starts at gross margin and this continues. Growth in gross margin slowed in the half, primarily due to the negative operational leverage, mix and input cost headwinds. Despite these headwinds, pricing in emerging markets and the positive effects of Project Fuel and Supercharge have mitigated all of these negative factors. We continue to invest in the long-term growth and health of our brands. You will see that BEI as a percentage of net revenue has declined by 40 basis points in the quarter.

This principally reflects a reduction in our BEI onshore, as we have cut the non-return generating investment behind the Wet & Dry Pedi. In terms of fixed cost, we continue our focus on tight fixed cost control and efficiencies without going down the full ZBB route. Overall, this has given us some good margin expansion in the first half. I will come back and talk to you later about the second half once Adrian has given you some more detail on our half one numbers. Now, let's move on to my second message today, our M&A agenda.

I have always said that we have three criteria when it comes to an acquisition at RB. First, it must be compelling and aligned with our strategy; second, we need to be a better owners and as a result, and this is in my opinion a necessary even if not a sufficient condition; and finally, we must be able to get it at a price at which we believe we can deliver value for our shareholders not only theirs. What I firmly believed that Mead Johnson ticks all these boxes. The infant and child nutrition category fits smack in the middle of our concept of consumer health. It is a large and growing category and its geographic footprint aligns very well with our strategy to create a strong presence in emerging markets.

Are we going to be better owners? Absolutely, I do believe that. What's more, this is also a great opportunity because combining the best of both organizations we will become not only better owners of this business, but also a better company as a whole. And in terms of value creation, although we have not really started, the more we get into this business the more excited we are about the immense possibilities to harness the talent of our people and potential of the brands to create value. But I also know we have a job on our hands at this stage. The good thing, of course, is that we've made an early start.

Our team worked really hard to close the deal a quarter ahead of our ingoing expectations. This in turn has meant that we will be able to do two key actions of important financial consequence. Firstly, we went out to the market immediately following completion to raise almost $8 billion of bonds. The combination of significant interest from investors and lucky timing allowed us to get very attractive rates, thereby reducing future interest cost versus our ingoing expectations. Secondly, by getting these keys earlier, we will be able to get to work on the back office and procurement synergies announced earlier.

We are now targeting some synergies in 2017 it-self at an accelerated rate to what we would have originally envisaged. This will help us offset the somewhat lower margins on Mead Johnson, which Adrian will talk to you about in more shortly. In summary, we couldn't wait to get started and now we don't have to. Now let's turn to the other end of the portfolio, and a slide I'm going to talk to with mixed feelings. Last Wednesday, we signed a deal to dispose-off our non-core Food business.

We are saying goodbye to some amazing people and great brands. The Mead Johnson acquisition became a catalyst for us to undertake a thorough strategic review of the Food business. Culminating, we're now selling this business to McCormick for the price of $4.2 billion. I think the price we achieved is a fair reflection of the value of a highly profitable growth business with strong brands and people. These two transactions done in just six months creates very different picture of RB.

You just see how far we have come in just five years when I announced our new strategy of healthier lives and happier homes back in 2012. At that time, health care had just become 23% of our business. In fact, SSL at that time was recently added, so this number 23% was inflated by that. And the portfolio brand, brands like Propack and Private Label, of course, our Food business and our Footwear business and all these portfolio brands, were 10% of our business at that time. Since then, we have discontinued our Private Label business, spun off Indivior, sold the Food business and clearly created a consumer health platform in India, Latin America, entered the VMS category, and now we are entering this exciting category of infant and child nutrition.

Five years is a very long time in RB. We now have 50% in our Health business and just 2% in our portfolio. So on a pro forma basis, almost 85% of our business is now focused on consumer Health & Hygiene, which is where we wanted it to be, and in fact, even at a faster pace. Going forward, our focus will be to make Mead Johnson a success, while continuously looking at ways to strengthen our portfolio and the way we drive this business for outperformance. We now have a comprehensive brand portfolio that spans our vision of healthier lives and happier homes.

You will recall I showed you a version of this slide back in February. When we look at our brands, we actually see them sitting across a category continuum, which starts with health relief down to health nutrition with brands like Enfamil, Nutramigen, Airborne; into health wellness with brands like Durex and Scholl; and into health hygiene with brands like Dettol, which in markets like India and Africa, is the bedrock of health; and then into traditional home hygiene brands like Lysol and Harpic; into home brands that you are familiar with, Air Wick, Vanish and so on. By innovating with these fantastic brands, we deliver healthier lives and happier homes. And on that note, I now turn over to someone who has been both healthier and happier, has enjoyed his healthier and happier life particularly in RB our CFO, Adrian Hennah.

Adrian Hennah: Thank you very much, Rakesh and good morning, ladies and gentlemen.

So turning firstly in this part of the presentation to the next slide, these are the aggregate reported numbers in our release. The numbers include, of course, the contribution of the acquired MJ business to the two weeks between the transaction closing and the period end; the Food business has been accounted for as a discontinued business following the announcement of its sale and its contribution to the income statement is, therefore, summarized in the discontinued net income row. Also included within this row is a provision in respect to the demerged Indivior business, and we return to both of these in a few moments. In the coming slides, we will go through separately the numbers of the RB business, pro forma MJ numbers, the impact on the group numbers of the food disposal and the summary of the debt taken on to fund the transactions. Dealing with interest and tax on this slide, the increase in net finance expense to £47 million reflects, of course, the borrowing taken on to finance the acquisition, including £23 million of fees associated with a bridge finance were paid on the issuance of the bonds.

We cover later the composition of the debt following the bond issuance completed between the closing and the period end. The tax rate of 23%, excluding adjusting items, reflects our expectation of the full year rate and is in line with prior guidance. Turning to the next slide, this slide shows the summary of RB-based numbers and the MJ numbers in pro forma format down to operating profit. The RB-based numbers do not include food, as this is now treated as a discontinued item, as we just mentioned. The MJ numbers are pro forma numbers, including periods before the acquisition closed.

They are based on U.S. GAAP and exclude one-off items in line with established MJ policy. We include them in this format as we believe they help to inform investors on the shape of the business. We expect only small changes in conforming to IFRS, as you may have seen from the class 1 circular material. On this pro forma basis, the like-for-like net revenue of the combined group decreased 2 percentage points in Q2 and in half one.

Gross margin decreased by 50 basis points and operating margin by 80 basis points. We will, of course, see the drivers of these movements in more detail in a moment. Turning then to the next slide, the RB based income statement. As we've just seen, revenue for Q2 was £2.353 billion, a like-for-like reduction of 2%. As noted in our trading update on the 6th of July, the impact of the cyberattack reduced revenue by 2 percentage points, mainly due to delayed shipments.

As Rakesh has already mentioned, the attack has also impacted production of some of our factories, especially health care factories. This production disruption had only limited impact in Q2 but is having an impact in Q3. Korea reduced growth by 0.5%, less than in prior quarters, as we annualized the delistings. There will be no material year-on-year effect on growth from Korea in Q3. The failed Scholl launch continued to have a significant effect on total group growth in Q2.

We expect the impact to be materially lower but still present in Q3. Growth on the RB base of actual rates in Q2 was 8%, reflecting 10% translational ForEx tailwind. Revenue for half one was £4.891 billion, a like-for-like reduction of 1%. We have set out an analysis of the impact of currency movements and disposals in the appendices to this presentation and in the release. If the exchange rates at June 30th were to remain at that level until the end of 2017, we would expect reported revenue growth in the RB base business to be increase by 7% in the full year numbers.

Gross margin in half one at 60.3% was flat on the prior year after many quarters of significant increase. This reflects the signal of commodity headwinds, the lower health growth and a slightly sharper pricing environment. Adjusted operating profit before exceptional costs in the half was £1.171 billion, flat on the prior year at constant currency. The profit margin was 23.9%, 50 basis points higher than half one last year. Again, we will turn to the driver to these margin movements in a later slide.

Turning to the next slide, an analysis of revenue growth rates in the RB base business by business segments by quarter; firstly, on price and volume changes across the geographies we operate in. The 2% net revenue reduction for the RB base business as a whole in Q2 comprise a broadly flat price plus mix and a volume reduction of 2%. The impact of the cyberattack is, of course, a volume impact as largely all the Korea and Scholl impacts. The set price plus mixed contribution is a slight reduction from prior periods and reflects a modest toughening of the price environment in Europe and North America. With respect to ENA sales, we delivered a reduction of 4% in Q2.

Revenue in North America was flat and the reduction in Europe and ANZ was 6%. The impact of the cyberattack on U.S.A. sales in the quarter was smaller. The competitive environment, especially the home business in the U.S.A., however, remains tough, impacting price and volumes. Conversely, the impact of the virus in many parts of our European business was especially marked.

The Scholl impact was also much larger in Q2 in Europe and ANZ than in the U.S.A., the result of the timing of launches in the prior year. We also saw some toughening in the environment in especially U.K. and Australia, impacting pricing and volume. Within DvM, we delivered sales growth of 2%. The impact of the cyberattack was felt in DvM in Q2 but more likely than in Europe.

The impact of Korea was lower in Q2 than prior quarters at around 1.5 percentage points of DvM revenue. Our sales in India were, however, reduced materially by customers preparing for the introduction of GST. There is no evidence that consumption was reduced, and indeed, the market saw very strong sales in early July. We, however, suffered shipment difficulties in the early days of July as a result of the cyberattack. This did not impact Q2 sales but have had an impact in quarter three.

Elsewhere, in DvM, progress was varied. Better progress in many brands in Lat-Am was offset by the effects of annualizing the strong prior year Zika-enhanced pest season. Africa performed well, but the effects were felt as a continuous substantial market decline in the Middle East. Turning then to the next slide, the analysis of revenue growth rates by our RB base product categories. Firstly, Health, we delivered a reduction of 4% in Q2.

The failed Scholl launch continued as signals to weigh heavily on Health growth. This was, of course, exacerbated by the cyberattack. Nevertheless, for the first time in many quarters, the underlying growth of the Health brands did not exceed our ambitions for the category in the quarter, although it did in the half. Why? We saw a continued strong growth from many brands, in particular, Durex and Mucinex. We saw weaker performance in the quarter from others, in particular, Strepsils and local brands in aggregate as well, of course, Scholl.

Does this reflect the trend-changing growth opportunity in the segment? We do not think so. Market growth has been slightly weaker, but we see no significant suggestion of the trend market growth is weakening and the loss of new opportunity. We will see variation in growth rates quarter-to-quarter. In Hygiene, we delivered 1% reduction. Looking through the cyber effect, we saw a mixed performance, strong growth in Veet helped by the trimmer device; weak growth in pest in large part due to the lapping of the Zika boost in Brazil; and Dettol growth held back by the GST dynamics in India.

In Home, we delivered 2% decline in revenue in Q2. Looking through Korea and the cyberattack, this was in line with our long-term growth expectation and comprised a stronger performance in DvM with a reflection of the tough market conditions in the U.S.A. and Europe. Air Wick in the U.S.A. saw especially tough conditions, but also a good response to new innovations in Europe.

The portfolio category no longer includes food and now comprises just a number of local laundry brands plus certain institutional sales. Growth rates will continue to be volatile. Turning then to the next Slide and analysis of RB based margins for the half year. As noted earlier, gross margin in half one is flat on the same period last year. This reflects the signals of commodity headwinds, the lower health growth and a slightly sharper pricing environment.

Together, these offset the normal vigorous work we do on cost of sales and the remaining benefits from the Supercharge program that are being delivered this year. Brand equity investment was down 40 basis points. As we have stated in recent quarters, we are broadly happy with the level of BEI. We will see fluctuations. This half reflected a significant reduction in the level of Scholl BEI previously put behind the Express Pedi.

Other costs were down slightly as a proportion of revenue, leading to a 50 basis points increase in operating margins. Turning then to the next slide, this shows an analysis of operating margin before exceptional items by RB based business segments for half one. Within ENA, we saw 60 basis points increase. This included some growth in gross margin with Supercharge benefits and local initiatives more than offsetting the commodity and pricing headwinds. In DvM, we saw 50 basis points increase in operating margin.

This reflected some reduction in gross margin and some gains in SG&A. So turning to the next slide and from the RB based business to a pro forma U.S. GAAP based P&L for the acquired MJN business, now the infant formula and child nutrition IFCN segment of the RB Group. Rakesh has given an update on progress with integration, what more we have learned about the business and why we remain confident with the trajectory for the business, which we set out in announcing the acquisition in February. Set out here and in the next couple of slides is a summary of the Q2 and H1 MJN P&L.

As you’ve seen, revenue for Q2 was £726 million, a like-for-like reduction of 1%. Revenue for half one was £1.428 billion, a like-for-like reduction of 3% following the 5% reduction in Q1. This growth rate is broadly in line with what we expected MJN to deliver when we announced the acquisition in February. In actual exchange rates, the pro forma half one growth in sterling was 8%. It set out an analysis of the impact of currency movements in the appendices for this presentation.

Gross margin in half one reduced by 210 basis points. Adjusted operating profit in the half was £284 million. This was a 19.9% margin, a 500 basis points reduction on half one in the prior year. Margins are lower than we expected when we announced the acquisition in February. However, as Rakesh has explained, we remain confident on the underlying margin potential of the business and our ability to deliver it over the next few years.

We'll return to the drivers of these margin movements in the next one slide. Turning to the next slide and the pro forma Mead Johnson like-for-like revenue growth. We explained the principal drivers of the strong growth achieved by Mead Johnson from demerger from BMS in 2009 to 2014 and of the decline in 2015 and 2016 when we announced the transaction in February. We also said that some important remedial actions have been initiated by Mead Johnson during 2016, but that some of the negative drivers had further to run and that further deterioration would occur before growth returned. So what has been happening in half one? The format shown here is the format used by Mead Johnson for external reporting.

Asia comprises mainly China and the countries of Southeast Asia, where Mead Johnson has a substantial presence, the Philippines, Thailand, Malaysia, Vietnam, in particular. Within Greater China, the forward drivers we described in February are playing through. Sales of locally manufactured product and physical cross-border trade from Hong Kong continue to decline, and sales of imported product and e-commerce cross-border trade from Hong Kong continue to grow strongly. There continues to be some disruption in the channels ahead of the regulatory changes expected at the start of 2018. There are very large -- there are a very large number of moving parts in the China market at present.

We have, however, been encouraged by the work the team in China has underway and which is delivering the improving revenue trend, and we see opportunities to build upon. Within Southeast Asia, progress is less clear-cut. Progress has been made in correcting some of the earlier operational missteps and in reducing inventory in the channels, which had built to high levels in prior years but there is significantly more to do. Within North America and Europe, U.S.A. accounts for substantially the largest part.

Within U.S.A, the half one decline is slightly larger than we expected last February. We did expect a decline. Mead Johnson's share of newborn infants outside the WIC program declined from Q2 2015 through to the last quarter of 2016. It has since stabilized as a result of greater investment and focus, but it clearly takes a while for this change to be seen in year-on-year growth rates, and there is also a lag between infant birth and revenue growth. Executional challenges have also been evident in some segments of the market.

We are encouraged by opportunities for improvement emerging from engagement with our new MJN colleagues, but it is early days for specifics. Within LATAM, the Mead Johnson business is quite widely spread. Brazil accounts for quite small proportion. The deteriorating trend between Q1 and Q2 is focused on Central America and Argentina. We have much more work to do to understand fully the dynamics and opportunities in each LATAM market.

Returning to the Mead Johnson business as a whole, the 1% reduction in Q2 revenue comprised a volume decline of 5% and a price mix increase of 4%. Most of the improvement over Q1 was in the volume. Turning to the next slide and analysis of Mead Johnson margins, as we have seen, operating margin declined 500 basis points in half one. And you can see from this chart that the decline comprised of 210 basis points decline in gross margin, a 170 basis points increase in A&P spend and a 120 basis points increase in SG&A spend. It is clearly important to understand why this margin reduction has occurred and whether and when it is reversible.

There have been 2 main drivers of the gross

margin decline: Firstly, there has been an increase in the cost of dairy products and other inputs especially in Q2, coupled with intentionally modest net price increases; secondly, the channel and sourcing shift in China have involved material margin dilution. Both of these trends have further to run. And in addition, H2 will see the start of higher rebates to California following the retender of the State WIC contract. Going in the other direction, of course, will be synergy and other improvements that we fully expect to make. The increased A&P spend was planned and is focused in China and the United States.

It was a necessary correction. The increase in SG&A was in large part of the result of the reduction and focus on MJN's Fuel for Growth cost-reduction program in the face of the transaction, coupled with a topline reduction. As noted, we had expected a margin decline between announcement and closing of the transaction, but not one as large as 500 basis points. What does this mean for our acquisition model? The model is very much intact. It included a smaller reduction in margin at this point and £200 million per annum of cost synergies.

We are confident based on the work to date that we will find many ways to compensate for this as we move forward. We are seeing enhanced opportunities in many areas. It would, of course, take a little more time to structure these as a complete program, but work is well underway. And as Rakesh had explained, we are very focused on making this as engaging a program as Supercharge was, combining clarity of purpose, clarity of accountability and analytical clarity on areas of opportunity. Turning then to the next slide and from the Mead Johnson acquisition to the sale of the Food business, Rakesh has provided an overview of the transaction.

We will here just focus on the numbers in a little more detail so that you can see the impact on the RB Group numbers. The gross proceeds of $4.2 billion, subject to customary working capital adjustments at the close -- will be subject to customary working capital adjustments at the closing date. U.S. antitrust approval is required, but with limited overlap we expect that approval to be obtained without any substantial delay. We, therefore, expect the deal to complete within quarter three.

The disposed business contributed $206 million of our group EBITDA in 2016. This comprised the disclosed earnings of the Food segment, some profit from the Tiger's Milk nutrition brand, which was previously included within our Health category; and some level of stranded costs, mostly from the allocation of corporate costs to the Food segment. The multiple is, therefore, 20.4x trailing EBITDA, significantly above 17.4x we paid for MJN. The transaction will be slightly dilutive to EPS. The disposal largely comprises the sale of entities via a U.K.

holding company and therefore, we expect the tax charge in relation to the profit on disposal to be small. We will use the net proceeds to pay down our BNC term loans pro-rata and the transaction enhances our credit ratios accordingly; it is also rocky enhancing. Turning to the next slide and the summary of the total group's net working capital position. We have included a separate column showing the Mead Johnson net working capital acquired. You can see the strong overall RB position continues.

But frankly, slightly flatted by the effect of the cyberattack, which delayed some payments. And the net period end position remains ahead of our target of 8% to 9% to negative net working capital on average through the year. The tough environment faced by many of our retailer customers continues to put pressure on working capital. We continue to look for and find improvement opportunities to counteract the headwinds. You can see that Mead Johnson has a better level of receivables than the RB Group with higher inventories.

Mead Johnson's payables position benefits from the terms under which rebates are made within the WIC program in the U.S.A. We are, of course, looking for opportunities to improve the position of all parts of the business, Mead Johnson and RB, following the closing of this acquisition. Turning to the next slide and the cash flow statement. As you can see, the group had another good half of cash generation. Free cash flow generated in half one was £1.234 billion.

This was 139% of adjusted net income. The group had net debt of £15 billion at the end of the year -- at the end of the half year, increasing as the result of the cash consideration for Mead Johnson of £13 billion and the net debt acquired of £1.3 billion; half one saw good cash generation, flatted by the impact of the cyberattack on the June payables position and also the £669 million of payment of the final dividend. Turning then to the next slide. Here, we set out a summary of the group's gross and net debt at June 30, following both the acquisition of Mead Johnson and the issuance of $7.75 billion bonds towards the end of June. As just noted, we will use the proceeds of the sale of our Food business to pay down the term BNC loans pro-rata.

We are pleased to have secured good fixed terms for the 5-, 7- and 10-year bonds, and we believe that this debt structure provides a good maturity profile. The proceeds of the Food disposal and the near term cash generation will reduce the floating-rate debt, increasing the proportion of debt within fixed rates. And then turning to the last slide in this part of the presentation, a few more specific points. Firstly, you will have seen that we have provided £318 million in respect of possible costs arising from the DoJ and FTC investigations into certain matters relating to Indivior, the group's prescription pharmaceutical business demerged in 2014. As noted in the release, we are in discussion with the DoJ as a result of which we have made this provision.

There is very little more than it is possible to say at this stage and it is also not possible at present to provide a timescale within which we expect to know more. Secondly, Rakesh will recap our future -- our forward-looking guidance in a few moments. A few more technical and granular matters on this slide that are hopefully useful in building models on our future earnings and cash flows. Capital expenditure. RB has targeted a capital expenditure around 2% of revenue.

Mead Johnson has average capital expenditure of 4% per annum over the last 3 years. We are currently anticipating a CapEx ratio of 2% to 3% for the combined group. We continue to expect the tax rate of around 23% for the combined group. We continue to target negative working capital of 8% to 9% for the combined group. We will, following the Mead Johnson transaction, have material finite life intangibles on our balance sheet.

These valuations are, of course, subject to revision. However, we expect at present a balance sheet value of around £700 million and an annual amortization of about £80 million. We will exclude this amortization charge in arriving at adjusted profit and earnings. This is why you see we have changed the exceptional items terminology used in the past to adjusting items. Internally, we have revalued the Mead Johnson inventory held at the acquisition date at fair value effectively close to net realizable value as required by IFRS.

This revaluation will be charged through the cost of sales as the inventory is used. We expect the full charge to be made in the second half. We will exclude this charge also in arriving at adjusted profit and earnings so as to give investors a clear view of progress. Fixed assets are also being revalued but we expect no material net impact on the depreciation charge. And with those technical points, I'll hand back to Rakesh.

Rakesh Kapoor: Thank you, Adrian. And before I get to the second half, let me just summarize how we see the remainder of the half two in terms of our innovation pipeline. And as usual, I'm going to give you a start with the Health business. And I have cut down the number of initiatives to what is possible to show because the list is rather long. Just to emphasize here, we still see growth in the hard skin segment.

We've all talked about Scholl Pedi for a long time and, of course, the innovation is -- has not worked. But the hard skin removal opportunity in the segment is still a very important opportunity for RB. And one of the lessons we learnt was that rather than innovating as the premium end which did not really work, we should think about new ways of bringing new consumers in, and therefore, we are launching as the value end, especially to drive penetration in emerging markets. So we are launching basically the Scholl Value-priced Express Pedi. It might be low on price, but it is high on quality.

It will sell for about half the price as the original express pedi and right now is being launched in India as a quick test before we rollout elsewhere, particularly in emerging markets. And because it is refillable, it also provides lasting value for consumers. So we're very interested in this segment. We're interested in this innovation because it helps us innovate and bring consumers at a very different price point, and looking forward to how we can still continue to expand Scholl's presence in hard skin. Moving from Scholl to Durex.

Want to talk to you about Durex Naturals Intimate Gel is the first line of Durex natural products and comes with an intimate gel because we know people want to use products that feel natural and not artificial, particularly those that they use on their skin to minimize the likelihood of irritation. And of course, in addition to all the naturalness that people need for their skin, this is also for use in intimate areas. So we need to provide a solution that does not also disrupt the normal balance. We believe this will do really well and look forward to how we can expand the Durex line into naturals. And moving from Durex to Mucinex, a brand that we already flagged has done really well in half one.

This example actually is about Mucinex in terms of how we can bring our strategy to play out in our innovation and claims. I'm asked many times across the world actually how Mucinex is doing versus Private Label, and I always say that we compete with Private Label across many of our categories, and Mucinex is no different. And we have to innovate, and we have to show consumers and our brand loyalists how Mucinex is better. But actually, strategically, Mucinex's real opportunity is not just fighting Private Label, it's going -- it's to go after a plethora of 4-hour products that dominate the market. This is where we have a real point of difference because Mucinex works for 12 hours, while most regular products work for only 4 hours.

And that means that actually just 1 tablet of Mucinex is just as good as 6 teaspoons of the regular 4-hour products. And that differentiation of just 1 tablet being similar to 3 doses of 4-hour products each is a huge advantage for people. And of course, it's better value too, because with 1 dose, you provide better value than 3x of 4-hour each products. Now this strategy has been working well and driving strong growth for the brand because suddenly, you orient the market, our customer thinking, our consumer thinking around where the enemy really is. The enemy is not a 12-hour product whether it comes from generics.

The real, let's say, opportunity here is to go after all the 4-hour products in the market which are a substantial part of the market. So this strategy, I think, is a fantastic idea that we are trying to drive taking Mucinex into a completely new growth opportunity. So this is working and we are very excited about this. And moving to VMS, I've actually had 3 innovations to show because we haven't talked about VMS for a long time, but I'm going to take you only to 1 because it's quite interesting actually. We have probably also spoken about Digestive Advantage in many earnings calls because we spoke a lot on Mucinex -- sorry, on MegaRed, but just to remind you all that we have 4 very interesting Schiff brands in our VMS portfolio.

We have, of course, MegaRed that we've talked about, but we also have Airborne, we have Move Free and we have Digestive Advantage. And actually, the all 4 offer good growth potential, because the all 4 serve very interesting benefit platforms. So now we are introducing -- I mean, I just took out 3 other innovations which -- talk about Digestive Advantage, we are introducing Digestive Advantage chocolate bites. And these not just help you keep your gut healthy but actually make you feel good about it. It contains a naturally protective probiotic that survives stomach acid hundred times better than other probiotics and yogurts.

So this is easily better benefit for consumers versus what they already do to look after the gut health. And the best part of this is it's only 30 calories a pop, so you can go on and pop one. So the next -- it's very tasty. I must say you try this product. It is a fantastic product to taste.

It's a dark chocolate, you feel like you're having a chocolate. Adrian loves to have chocolates, so this is the one which is going to look after his gut health while he can appreciate himself. He don't each much, by the way. But anyway, so let's move from Adrian's eating habits to the next innovation, which is about category creation and a new brand launch. I think we haven't talked about new brand launches and new category creation, but I think this is very exciting.

So I want to talk to you about a category which fits in Health and one that addresses a major unmet need. And all of you who live in London and maybe elsewhere probably think that air pollution is all about China and -- but it's not, because it's clearly becoming a pressing health issue on a global scale. And it's not just in China or even New Delhi or India. It's in many other countries, including -- and major urban centers, including London. Pollution impacts consumer health as we can understand.

But also the way we live our lives, for example, fear of pollution can make parents in China and even other markets reluctant to let their kids play outdoors with obvious impacts on physical health. This issue of pollution level is also not understood properly because pollution levels very greatly. For example, in local areas, let alone within urban centers, for example, indoor air quality is different than outdoor air quality. It could be 2x more pollution inside a tube station versus just outside one. Inside a room or a car could be a very different level of pollution air-quality versus on outside.

So the fact of the matter is current outdoor air pollution solutions in market are generally limited to masks. And that offers limited flexibility and also addresses the needs of the consumers in a very limited way. So what are we doing? We are introducing SiTi, a new brand endorsed by Dettol. A range of products designed to protect consumers against out-of-home pollution. We have developed a new brand for this category, SiTi, to ensure it’s seen as an expert that it has a credibility.

It develops the partnerships to succeed in the long term in this very important area. Now, because pollution levels as I explained vary by location, we also need local measurement. And because all air pollution is not visible, this measurement is a very important element of enabling consumers to monitor their own personal spaces. So I think most of us think that air pollution can be seen and you will see this haze and this black mist around you and that is pollution. But in many times, in a clear day, you might have very high levels of pollution.

And therefore, this measurement of pollution, whether it's in a personal space or outdoors, requires monitoring and measurement. And then people can decide what to do with the protection that they need. So first in our range of SiTi products is a sensor. Now this sensor connects you to your smartphone and constantly monitors air pollution where you are, indoor or outdoor. And if it goes into the yellow or the red zone, it will send you an alert asking you to take action.

So you got the first starting point is a monitor, which is a connected device with attachment to your personal smartphone. Now to protect against this pollution sensing that you will get to know from your monitor, we are launching 2 other products. The first one is a mask, but this is no ordinary mask. It is the most sophisticated and high-quality mask in the market and also contains a micro vent for maximum breathability. Because if you wear mask for a long period of time you're also worried about whether or not you're inhaling your own carbon dioxide so you -- and particularly for young children.

So what we have provided in this mask is not only the maximum protection from a PMI 2.5 point of view but also breathability through this micro filter so that you or your children can wear this mask for long periods. The third product in the range are nose filters. You can simply put these inside you. They are very discreet and you can blew that with -- and takes 98% of the air pollution out. So it's a very, very effective nose filter.

You can't -- if you wear 1, nobody can see that happening. So if next time you go on a run or a morning walk and you think pollution outside is high, you just wear it and move forward. Now these are going into, of course, India and China in this quarter but they will be launched very differently. They will be launched via digital and e-commerce. We are going to launch it in a very -- these are connected innovation.

I once told you all that you can see RB working not just on traditional trigger or tablet or liquid type of innovations, you will see more of our connected innovations come to fore. I explained to you the example of Nurofen Fever Smart last half. This is yet another example of a connected innovation because it's an end to end solution for consumers, and therefore, we are launching it in a very different way through digital and e-commerce, and we are excited about this. But I can also say this is just a start. As this range starts to gain traction, more elements will be added to an ecosystem, which I think will be very exciting.

Now as you can well imagine, we are all very excited to play a role in a very major health issue that affects us all every day and everywhere in the world. And in this process, of course, we are also trying to create a category with a new brand. So moving from Health into Hygiene. The next example actually is also about category creation, albeit about 1 of our existing categories of automatic dishwash. Now we have showcased the role Finish has been playing over this long history of working with dishwash manufacturers to help develop the category, and this is what we've been doing also in China for the past 7 years.

And I think the inflection point is not far away. As you can see, we expect in 2017 1 million new dishwashers to be sold in that in China. But as Chinese consumer spending grows, this is going to transform this whole automatic dishwash market is going to transform. But like many other things in China, what works in the West does not really easily translate and cut the mustard in China. So the dishwasher the kind of dishwasher driving this growth is not a normal dishwasher that you and I might have in our homes in U.K.

or Europe. The dishwasher driving all this growth is actually a compact tabletop tablet. And that's the reason why RB has developed a dishwash tablet specifically designed for the compact desktop Chinese dishwashers. And therefore, this all in 1 compact tablet is not just a smaller version, if you want, of the larger tablet. It is a completely different technology.

The composition is free of phosphates, it is designed for faster dissolution, contains the right balance of bleach and enzymes and has the right ingredients actually to tackle China specific food soil challenges very effectively. So in sum, it's a very new technological platform. For China, we're also developing actually a very unique go to market model to serve consumers, again, using digital marketing and e commerce. Finish is a global market leader in dishwashing, and we have the same ambition in the very fast growing China market. Moving to Lysol, we are launching a range of wipes to deliver a superior cleaning experience.

The new wipe material is specifically designed to pickup dirt and germs better. And in a container with enhanced dispensing quality and experience, and a new packaging design. So it's a very new wipe in product, in packaging, in the dispensing and the customer experience. These wipes will also be rolled out on the Dettol platform. As the last example of innovations in a category that is hypercompetitive comes from multipurpose cleaning with brand Veja.

And simplicity, we are overhauling the entire Veja brand with a superior product which works 2x better from cleaning power point of view throughout the house. It comes with a superior packaging, a new campaign and this launch across Brazil is, in my opinion, the single biggest change we've made to Veja over the last 5 to 10 years. So this is a big launch in Veja in Brazil, and we are very excited about this. So finally, moving to home. Let's start first with Vanish.

And in Vanish, as we've done time in time out, launching a range of innovations, which makes the product even better. And this one is a range of wipes under our Vanish Gold platform with a simple and exciting promise of instantly whiter after just one wash. It's that simple, you use Vanish White and in one wash you will have noticeably whiter product, your clothes. So moving to and as the last example of the day before I get to targets and interesting things like that, is on Air Wick. So the product is called V.I.Poo, and you'll soon know why.

And with the launch of V.I.Poo we are effectively creating a new segment in Air Care, and that's all the toilet perfumes. I encourage you to see this extremely interesting campaign for Air Wick, V.I.Poo on your YouTube if you have time. And the insight and the reason why it's called V.I.Poo

is this: that even V.I.Poo VIPs have to use the toilet, and the idea that others could walk in just after you and smell something nasty is rather embarrassing. And V.I.Poo is not just a traditional post poo spray. It's actually a pre poo spray.

It contains natural essential oils that traps the nasty smells and releases pleasant aromas. Adrian, next time I'm getting you to make all these innovations that are presentations.

Adrian Hennah: Thank you, Rakesh.

Rakesh Kapoor: Just add a few sprays in the bowl before you use the toilet, and it will create an essential oil barrier which traps embarrassing smells before they hit the air. I hope you got it.

So no one really gets to know what really happened in the toilet. So with very interesting explanation around V.I.Poo from Air Wick, let's move to actually our targets, and let's first talk about our RB base business. Now the targets for the full year that we have set for ourselves of plus 2%, we have all communicated to you on July 6, just 4 days after the month closed, the earliest time actually we could assess the impact of cyber on half one. And as you can see, a 2% growth implies material acceleration versus half one. I can certainly see the building blocks for a return to growth as we lap a number of issues that we faced over the last 12 months.

We are going to go for plus 2% for the year, but on the other side, we are operating in volatile and tougher markets. The microenvironment is tougher now versus just 6 months ago. And on top of this, we still have to work our way through the impact of the cyberattack, as Adrian has flagged. So to move to Mead Johnson. As we just saw from Adrian, the top line in half one ended with minus 3%.

We would like to target the turnaround of this business in half two, but these things take time and there remain headwinds. The business lasts a number of price increases taken in Q2 last year and of course, the Californian WIC contract kicks in during Q3. Given the moving parts and the lead up to the expected regulation in China which might also cause some volatility, we are targeting a range of minus 2% to flat in half two, which will mark an improvement over the last 12 months. And will give us a pro forma full year like for like performance of somewhere between minus 3% to minus 1%. We are all tremendously excited about the potential for significant value creation in this new business and I can assure your working extremely hard to deliver it to bring positive momentum to this business.

And finally, before we move to Q&A, let me talk about margins. There are a number of moving parts here. On the base business, our earnings model remains resilient, intact and we continue to make satisfactory progress. In the second half, we do expect to return to growth, as I've just mentioned, and I do intend to keep investing strongly in the business. So we are reiterating how I see the base business as a moderate margin expansion business over the medium term.

And on Mead Johnson, we will be running this business also for the long term and will seek to ensure that both investment levels behind brands and stock levels in the channel are at the right levels. As I noted, there will be some pricing pressures in half two, which will be offset at an acceleration by the acceleration of the phasing of our cost synergies. So to summarize with Mead Johnson, we do see significant opportunity with the business and remain confident that operating margin expansion over the medium term will be in line with our plan. So with this, both Adrian and I are happy to take your questions.

Operator: [Operator Instructions] We will now take the first question from Celine Pannuti from J.

P. Morgan.

Celine Pannuti: My first question is on Health. Could you so if I understood well, so ex Scholl and ex cyberattack, you feel that your business did not meet the industry growth targets, so the industry growth. Could you tell us what's the industry growth you see now in the market for Health? And also, am I right in understanding that cyber and Scholl will still have impact in Q3? Is there any way you can quantify sequentially what would be that impact versus Q2? My second question is on Mead Johnson.

I thank you for talking about the building block of topline acceleration. Could you quantify how much synergy you see in the first in the well, in H2? And as well, in terms of the margin, so you want to do I understand well that given the rebase of the margin, you are working harder to offset this and that will be including in the £200 million cost saving or there will be higher cost savings as you offset that?

Rakesh Kapoor: Celine, many, many questions to answer. So let me just try for the first one. And I think considering the number of moving parts in the second quarter, which is of course the continuous of Scholl and then cyber, let me just take the picture on half one, which might be a broader timeframe to talk about Health. So in half one, we saw that Health on an underlying basis, underlying, excluding cyber, which is of four days, but also Scholls, was at the outperformance range that we had indicated basically long term market growth rates.

So I think the Health growth rates in half one have very much been in line with our long term target that we have set long time ago so that, I think, shows that the underlying brands and business on Health has performed well in half one. So in terms of where we think Q3 impacts on cyber will be, I think we have at this stage, we have rolled everything into the full year guidance of 2% topline growth rate, and we believe that some of the big impacts of cyber, which is going to flow into Q3, will mean that the acceleration of growth will be more back end weighted by that simple logic. But it's all based into our 2% guidance for the year target for the year as a whole. In Mead Johnson, I think your question is whether we are going to how whether we're going to drive more synergy to offset the margin delta that we find ourselves with versus our in going assumption. And the answer is that it's not about synergy itself.

I think the whole earnings model of RB starts at a much higher level than cost synergies and savings. We start with, as you know very well, I mean Celine, we start with gross margin expansion and gross margin is a factor of not just product cost, which might be counted as synergy, but it's about product mix, about brand mix, about country mix, or innovations being launched at better margins. And therefore, the number of levers that we will use from start, which is gross margin to the finish, which is operating margins, will be as comprehensive as we usually deploy across RB. And therefore, what we are saying is that although we find ourselves somewhat short on margins, not on growth, versus our ingoing assumptions at this point in time, we believe we have the range of levers in place over the medium term to get to our plan as in line with our expectation.

Celine Pannuti: Just one follow up on the first question, yes, you referred to H1.

I was referring to the comments you made on Q2 that you saw deceleration in the underlying Health markets health growth market.

Rakesh Kapoor: Yes, and that is indeed the case. There is if you and again, how much of it is cyber exactly and so on so forth and how much is Scholl, there is no question that the underlying growth of health care category as a whole in the first 6 months and also the second quarter is somewhat lower than the lower end of the long term range that we have talked about. So actually, in line with that, if you see it against that, there is somewhat of a lower health care growth in the first 6 months. But as we've indicated many times, I don't think we should think about health care opportunity and the growth of this category in quarters.

We have to think about it over the medium and long term. And I think the medium and long term outlook for Health category as a whole is very intact.

Adrian Hennah: And maybe if I could just because you're pushing hard on the numbers so you get what I said, Celine. We have a long time said we see the medium term growth of the Health sector as 4 to 6 and our goal is to exceed it. And as we've gone through this Scholl issues, we've been clear up in earnings releases up to now, that if you pull out Scholl for all previous quarters, we would've met that target of exceeding 4 to 6.

So in the spirit of full disclosure we wanted to say this quarter in isolation we would not have exceeded the medium term target of 4 to 6. But as Rakesh says, the market is a bit weaker at the moment. We don't see a long term trend change in the market, but it's a bit weaker in this period. But for full disclosure, we would not in the quarter in isolation have exceeded 4 to 6 excluding Scholl. But we would have done in the half.

Rakesh Kapoor: That was the point I was trying to make. I clearly didn't make it quite clearly enough in the remarks.

Richard Joyce: Next on the line, we've got Eva from Deutsche Bank. Go ahead, Eva. Eva Quiroga-Thiele: Rakesh, I'd like to come back to your comment, please, on the second half margin building blocks.

You've obviously delivered 50 basis points in H1 with actually no operating leverage. So I was wondering if you can talk us a little bit through the building blocks as we go into the second half of the year. And you've made reference to pricing pressures on several locations so I was wondering if you could talk about whether you sit particularly high by the category or region?

Rakesh Kapoor: Yes, I think, Eva we first of all to be very clear, we haven't set a target for half two. We've set in the margins we have not changed basically our targets, which we started with at the beginning of the year. We said for we should expect moderate margin expansion in the medium term.

We did not set premium margin targets. In the first half, clearly, we had, I would say, strong margin expansion of 50 basis points on an underlying basis, our base business RB base business. But we also said that in the second half, we expect to return to growth. We expect to drive investment in the business strongly, and therefore, when you add up all of these factors, all of these moving parts, we should we are going to be in on our journey of moderate margin expansion in the medium term. So I know you would like to be more specific about the half two margins, but I cannot be as specific as you want because I don't want to set targets by half.

There was another part to your question, I think, Eva, on pricing... Eva Quiroga-Thiele: What are your comments on pricing?

Rakesh Kapoor: Yes, pricing, I mean, I think the again, I think everyone knows this and everyone has talked about it. We are certainly in very volatile and unpredictable markets. The pricing environment in Europe continues to be, let's start with Europe, the pricing environment is tough because you can see the amount of pressure. There is on in the retail space.

And the pressure to compete on with channels and competitors and therefore, there is a flow into this competitive pricing across European markets. So I think that is certainly a point of competitive pressure. In developing market in Russia, for example, just to take it slightly differently, there had been a lot of price inflation in the past, particularly as the currency was being corrected or deflating, but now that pricing pressure, as the pricing or the positive pricing has gone away, actually there's a lot more, I would say, competitive activity in Russia. So you see some of those normal inflationary markets which we're building pricing in the past are not so doing so at this point in time. And clearly, in emerging markets, where, again, we would normally expect material inflation and pricing, you are seeing that market like Brazil and India for very different reasons, actually are also very volatile.

So I would say that when you add it all together, the pricing environment is tougher. We see it much tougher than even 6 months ago. And that's what we have to navigate through as we go along. But as said many times, and I'm going to say it again, there is a strategic reason why we want to be in consumer health. Let's move away from a quarter story or the even half story.

I think this call should be about the transformation that has happened in this over just not the last 6 months, but over the last five years. Imagine if I had 20% of my portfolio in Health and 80% of my portfolio in nonhealth, like we did 5 years ago, we would have the whole issue of pricing, competition and all these other things that happened in a world where detergents and cleaning products get treated and dealt with differently versus how we deal with Mucinex or Nurofen. And I think you could see where we have come from to where we are and where we want to be. And therefore, this is the reason why I like our business to be much more in consumer health because the same issues that we just talked about of competition and trade and pricing pressure are completely different conversations when we come to consumer health. And we have there is no question the traditional environment is tougher.

The macro traditional environment is tougher, but we have to drive our strategy, therefore differently and that's what we are doing. These 2 transactions that we have done added together changed quite significantly the shape of RB and position us in a very different way moving forward. And I think that really if you ask me what's the headline of half one, the headline of half one is a strategic transformation of RB's portfolio.

Richard Joyce: Next on the line, we've got Richard Taylor from Morgan Stanley.

Richard Taylor: My first question is on working capital.

Minus 16% for the half year is quite an achievement. Can you walk us through the particular drivers behind that this half? And then, on your prior transactions that you've described as transformational, namely Bank Iza and BHI, you've been quite persistent on working capital opportunities. So maybe you could talk about the working capital opportunity at Mead and particularly interested outside the WIC program? And then secondly, on growth, can you give us some color on the traction of Mead's super premium innovation, Enfinitas, in China? And the most recent trends in terms of newborn market share? And then finally, my last question is just to follow up on cost savings. I know you've only had the keys for 5 weeks and you said that there are multiple levers to get you to your medium term need margin goals. But are you actually implying higher cost savings than your £200 million net number?

Rakesh Kapoor: So I think you want to start with the working capital?

Adrian Hennah: Yes, surely.

The listen the pretty graph as you call it, Richard, was a bit flatted by the cyber cut off because it did affect payment schedules and so on at the end of the quarter. I did try and draw highlight that in the prepared remarks, so I don't think you should see it as a particularly spectacular good half of underlying progress in working capital. It was just a normal RB half in working capital terms. There's nothing specific to draw attention to. Other than that we continue to navigate an environment which is very challenging, particularly in the receivables area, but that's, sort of, normal.

In terms of Mead Johnson, yes, you're right. The when you look at the headline numbers, they are a bit better than us in receivables on the face of it, not as good as us in inventory. And on payables, very similar, but that payables does include the big benefit, as your question implied, of the WIC rebate, which is paid a long time in arrears. We're clearly now getting under the surface to look at the opportunities and certainly payables is one area when you look through the WIC rebate where we expect to find opportunities. We haven't yet quantified them fully because as you say, we had the keys for 5 weeks and that takes a bit of time to get into.

But yes, there's clearly an opportunity here, which we will be getting after, Richard.

Rakesh Kapoor: Right, and on the some of the questions on how Enfinitas is doing? It's doing well, very simplistically. It's doing well. As indeed actually, the premium imported segment of the market. So I think it's been red flagged by Mead Johnson management before that the whole China trend basically was a trend of, on the 1 side of the channel trend, mom and baby stores, e commerce and cross border.

And the other big trend was the Chinese consumers sort of favoring imported versions of brands actually even the same brands but in an imported version was more preferred. And also at the premium end of the market, the more expenses somehow of course with better implied nutritional benefits and health benefits the better it was. And I think, to the credit, Enfinitas is a differentiated proposition. I mean, it looks different. It is different from a product point of view.

And of course, we can always do better in terms of communicating the uniqueness and the differentiation of Mead Johnson of the Enfinitas product. But I think the start of this innovation is good. And we want to actually see how to actually improve that even further. In terms of market share and new start, I mean, I can tell you in terms of performance management, it is one of the big areas that we want to actually get Mead Johnson, the dashboard to be all about acquisition, retention and extension. So they are what we call, ARE model, how are we doing on acquisition of new starts, how are we doing on retaining them over the life of the use of the product, and then, of course, extending them to different stages.

And I can say that, of course, over the last couple of years, you can easily assume that when volumes were coming down, the acquisition and the acquisition within new starts was down. And a part of what we have to do going forward is to start with improving the penetration rates or the acquisition rates amongst newborns. And because this is not an overnight thing, this is the reason why we think that this opportunity will come. It will come over the next few years. So this dashboard of acquisition and new starts and all the discipline around that, we are going to have to work very hard and already started to do so across the business.

In terms of the question on synergies, I think I tried to answer that maybe obviously not very well, the assumption that we will certainly find more cost to offset the shortfall in margins should not be made. I think there are many elements to the earnings model. It starts with gross margin, starts with better mix, with better opportunities to drive our gross margin in different with different levers. But there are other elements of the P&L and we're going to deploy all the elements of the RB earnings model levers to find the gap between the assumed, let's call it, margin versus where we start with, but we believe and we are confident that we will close the gap over time.

Richard Joyce: Next on line is Iain Simpson from SocGen.

Iain Simpson: A couple of questions, if I may firstly, Mead turning positive in Asia in the second quarter, it's a nice surprise. Could you go into the moving parts here as I thought there was still some pretty substantial channel issues in China. Secondly, you're starting to lap Scholl / Amope headwinds here. Your Q2 comp, it was 5% easier. But Health is still very weak at 4% sequential deceleration.

So is lapping the wrong way to think about what's going on with Scholl / Amope and rather that, that brand just kind of continues to fade until the next big launch? I mean I know you flagged the big overall health market is slower, but you're clearly still getting a big Scholl impact in there.

Rakesh Kapoor: Yes, Hi, Ian. On the first one, on Mead, Asia positive I mean listen, Asia is a big part of Mead Johnson's business. So if Asia if Mead has to turnaround, implied, even in our half two guidance, actually, I would say, although I hate to give by quarter, by market or whatever, but being such a large part, the implied assumption is that Asia has to turnaround in aggregate. And within Asia, it doesn't come bigger than China.

So I think if you can add 2 and 2 to make 4 here, that with the story here has got to be around how do we actually start to build growth back into China Greater China. It's not just China. China should not be decoupled from Hong Kong in any company by the way because there is an interrelationship between how these things work, whether it's luxury goods or infant nutrition. And therefore, China has been an important part of better performance from Asia, and China should have to be a good part of what we want to do in Mead Johnson's future growth. In terms of Scholl / Amope, I mean, first of all, the health growth rate in Q2, now if you just want to focus on Q2, as you saw from a headline point of view, is worse than health and growth in Q1.

And the reason is not just Scholl, there is a cyberattack, which hits the health numbers more proportionately than the other 2 categories. Having said that, as Adrian just said, the underlying underlying growth on health is weaker in second quarter versus first. But also is the category weaker in the second quarter versus first. So I would not really personally and I if there was if it was otherwise I would also say it, but I it would not draw too many conclusions because the underlying brand portfolio on health in the first half is done well. And in between first and second quarter, with not just Scholl / Amope but also cyber, it's not so easy to isolate every factor to say well, actually, this brand got less impacted and this brand got more impacted.

Our health business continues to perform well. Some of the growth rates over the last quarter in the category itself are somewhat lower than what we have been in the past at a category level. But from a long term point of view, we are as structurally advantaged from a health growth point of view as we have been. There's nothing I see as a change.

Richard Joyce: Okay, now we've got James Edwardes Jones from RBC on the line.

James

Edwardes Jones: Two quick questions for me, please. First of all, Adrian, you mentioned with the cyberattack that, I'm not sure if I got this right, it didn't have much impact on the factories in the second quarter but will in the third quarter. Can you explain and maybe quantify that slightly more? And secondly, what proportion of the costs to Mead Johnson are hedged?

Adrian Hennah: Surely, James. The well, the point we were making about distinguishing the supply from or delivery, if you like, from production is the cyberattack was on June 27. So the impact you see in Q2 with the Finish delivery delay, it's where there were orders that weren't able to be shipped because of complications from cyber.

The relatively small amount of product would actually have been produced or not produced in the factory in that time period and not delivered. Whereas the production issues which did begin at the same time, will have an impact after Q2. That was really the point of distinguishing Q2 impact supply Q3 impact not on effects of production difficulties. And that was the distinction we were drawing there. What was the second question?
Unidentified

Company Representative: Cost on MJ unhedged.

Adrian Hennah: Cost on MJ unhedged, actually, relatively small amount of pure hedging. There are some forward contracts obviously with suppliers, but in terms of the technical term of how much is actually hedged in the for instruments and relatively small proportion of their inputs, James.

Richard Joyce: Next on the line is Martin Deboo from Jefferies. James

Edwardes Jones: I had the same question really as Eva did on the core operating margins in H2. The 1 area you didn't comment on is what would you expect to happen to your commodity basket in the core i.e excluding Mead? We've had some commentary from others, in fact the petrochemical inflation could be a bit worse in H2, but we are interested in your perspectives on that?

Adrian Hennah: Well, I mean, we have been flagging for a while, Martin, that what was a long period of commodity tailwinds that ended and as we went through this year, we'd see that upturn in headwinds.

We have definitely seen that in half one as we expected to and it ain't disappearing in half two. Slightly more slightly less it's all the same but it's certainly a headwind that is coming through now once we got through this sort of inventory and cover the lags.

Rakesh Kapoor: And Martin, just another add on. When it comes to Mead Johnson, also this is just, of course, the reflection of overall commodities and RB base. But also on Mead Johnson, as you know, we, not we but also probably the previous management has flagged different conditions when it comes to milk prices in over the year.

So we see some hardening of milk over the next 6 months as previously flagged by management, and that is we certainly start to see that.

Richard Joyce: Now we've got Chris Wickham on line from Whitman Howard.

Chris Wickham: Just two things, one is when you talk about the BEI and the volatility, I mean, how much variation is there between regions? And then the second thing, clearly you got a strategy you want to do more M&A in consumer health but one of the attractions of that area has been that so many of the companies appear to have been managed by people for whom it's not their core competence and therefore, have relatively low margins compared with yourself. Is there a danger of those people turning around the margins quite a lot, is that something you see. And therefore, that the opportunities start to diminish largely for affordability reasons?

Rakesh Kapoor: Right, let me just take the second one and maybe Adrian should take the first one.

I think the whole idea about focus driving outperformance is the very important starting point when we start to think about companies. And there is a different type of I my benefit or this benefit is that I've worked in this company for a very long time. And I remember the time when this company called consumer I really do it was noncore, consumer health was noncore like food group is or was noncore. And when you ask when there is something which is small and is not a big part of your company, when it's not called out as something which is really important. It's very difficult to get people to focus on it and without that you don't get outperformance.

So I think there is a material difference in a company which has 20% of its business in consumer health versus one which has 50% of its business. Therefore a very big difference between a company which has 5% of its business in consumer health versus 95%. And therefore, when you say that actually there's a danger that everyone else would be able to drive that level of focus and therefore, outperformance and margin in my opinion can only happen when it's called out as the #1 clarity of the company. Very unequivocally. As you say this is the most important thing in my company and then it's possible that you can see this transformation take place.

Without that, it would not. I stood up 5 years ago and when it was 20% of my company I said it is the #1 thing. And we made it number one and this is what is needed. So I think my personal opinion is that it's cost in big pharma companies. It cannot become the #1 because if it does actually what is it due to their big pharma portfolio? Will that become #2? And how can that be #2 when it's 70%, 80%, 90% or 95% of the business? So I do not comment on whether what's going to happen and so on and so forth.

It's difficult always to predict. Well, I personally call out our ability to outperform for the long term based on the fact that it's our #1 primary focus.

Adrian Hennah: And then on the question of regional variation BEI, I mean I think you should never forget that BEI's fundamental to our business. It's fundamental to our consumer brands, and it's fundamental in all parts of the world. So of course there's some variation but perhaps less than a question implies.

Richard Joyce: We need to move on quickly, we're running out of time. So next question is Jeremy Fialko of Redburn.

Philip Gorham: Jeremy Fialko, Redburn. I have got a question on the management changes that you've made at Mead since taking over the company. We know that you've got your x north Asian head I believe who is running that business overall.

But if you just, kind of, cascade 1 level down the organization could you talk a little bit more about some of the management changes you've had where you've got record people and where you've left the people in place?

Rakesh Kapoor: Right, yes. I mean I think the person who is leading the Mead Johnson Nutrition business is actually not ex north Asia alone. He was ex head of health. And so, therefore, and before just before being appointed he was actually president of North America for RB so he was he has experience in China, experience in managing our health business and was also for a short period of time in charge. Underneath that, we have some RB people and some Mead Johnson people because we need a big blend and mix of both.

I don't what to be very specific about exactly people and locations because that's not what I'd like to do. But we have a mix of people but also beyond that, at an early stage, we have put in a few key markets on a few key functions or aspects from RB people. So I think but having said that, it's really early days. We have 40 days or whatever from the date of close and we are going to continuously evaluate how do we get the best mix of talent in that organization while retaining the expertise and the knowledge, and also the good things that the company has in its way.

Richard Joyce: Now moving on to Guillaume Delmas at Bank of America.

Guillaume Delmas: A couple of questions for me, hopefully quick. The first one on the the WIC program, I mean, we're seeing increasing level of rebates for the WIC. So my question would be how do you look at it? Do you see it as a necessary investment to secure shelf space or a area to optimize in order to drive gross margin expansion going forward? And then my second question is more of a follow up on the pricing pressures you've seen in your non consumer health care categories. What are the main reasons behind this? Is it just a reaction to softer volumes in Europe or North America or do you think it's more structural? And essentially, consumers not willing anymore to pay high price for household cleaning products?

Rakesh Kapoor: So on the first one, I think I would say one is a very important and interesting question. I mean, I think there's no question that WIC contracts enabled companies to have a business opportunity beyond just shelf space.

The opportunity to have credibility in hospitals and hospital contracts and how we can use that to gain a different level of share of new starts and new births. So I think it's a strategic investment. It's not only a financial investment. So we look at, of course, the financials very closely. I mean in RB ownership, we've already made one bid I think.

So we'll see how that plays out. But we have to look at a very holistic picture and not just a bit by bit picture. And in terms of where our investment is, where our resources are and how we actually deploy them better. But as you've seen probably over the last 10 years or so the percentage of market share between the 2 companies has not varied very greatly, even if there have been movements on big contracts between 1 state to the other. So states have changed hands but in aggregate, I think WIC has not traded more very much between 2 companies.

And that's where it is. On the second one I think, maybe, Adrian you answer?

Adrian Hennah: Yes, so pricing pressures in Europe, what's driving is it structural, is it's cyclical, the I don't think we're seeing anything very fundamental happening with consumers. I think that the biggest driver we see has more to do with our retail customers, which you are clearly under enormous pressure and it's pressure from them that I think is more the driver of what we're seeing in this slight hiccup of pricing pressure than anything to do with the consumer frankly, Guillaume.

Richard Joyce: Next question is from Pinar of UBS.

Pinar Ergun: I have a somewhat longer term question.

What are your thoughts on the current China baby food pricing structure? Do you think the absolute pricing levels across premium and super premium products will be maintained in the medium term? And my second question is could you please remind us of Mead Johnson's production facilities supply in China? Where they're based, are they fully compliant with the proposed regulations, are they running at full capacity? In general, is there any work to do from your end?

Rakesh Kapoor: Pinar two good questions of course. The first one is China pricing, I think there is going to be some volatility, first and foremost, in China because of the changing regulation. So in the short term, I think there will be pricing volatility because as the market gets somehow more concentrated, if I may say so, as most industry knows, believes, with the coming regulation, there is going to be some short term pricing which might be adverse, if you want. But the medium and long term of China is actually one where still innovation, better quality and higher nutritional value delivered in precious, children will continue to be a factor of positive growth. So I do believe the China love for premium products will be intact in the medium and long term, even if there are some short term volatility created by this number of regulatory changes that are taking place.

And in terms of your second question, I think Mead Johnson's supply chain serving China at this point in time a significant proportion of that comes from Europe from the factory in Nijmegen in Netherlands, and while it is served also from some other countries, feeding into Nijmegen. We are working very actively or have been we are already starting working actively in trying to broaden the supply footprint of China into some other places and therefore agreed with Mead Johnson's previous management to actually put an investment in Australia in a few months ago actually. So we are going to look at how to broaden basically the supply network. We are fully prepared for the regulatory change that is going to take place as we see today from January of next year. And therefore, our current supply network should be adequate to take care of the regulatory change that takes place even if we work for the medium and long term on broadening that network to help our China growth and also create business continuity.

Richard Joyce: Okay, next question is from Alex Smith of Barclays.

Alexander Smith: I had a question on your Health and Mead category growth rates. You seem very confident that the slow market conditions you're seeing in Health are cyclical or at least short term and that your category growth should return to around 4% to 6%. I guess, I'm curious you talk about infant nutrition as being Health, yet you're targeting 3% to 5% there. So I'm just trying to understand what the disconnect between those 2 respective category growth rates? Is it the volume trajectory or something around infant nutrition? But I guess, why should Mead be dilutive to your core legacy health franchise?

Rakesh Kapoor: So actually, if you think about Health category, there are many, many subcategories within Health and not all of them would fit the 4% to 6%.

Some would be higher and some would be lower and you have an aggregated picture. This category stands to be like another segment if you want of the broader Health category. Where we see the current dynamics at 3% to 5%, and we try to explain actually the underlying assumptions behind 3% to 5% where for example, the 2 child policy in China, as an example, is a positive driver of the health growth rates, of the infant growth and child nutrition growth rates. Whether it's increasing breast feeding, which is actually the right thing probably, is a negative factor from a growth point of view. So we've looked at all of these factors and our best assumptions as we sit here today is that this category should see a 3% to 5% growth rate and as we've flagged before, and although the business is far away from it right now.

We've flagged that we want to get first, of course, to the bottom end of the range, which would be quite different from where we are just now but towards the top end of the range over the medium term, and that's what we are planning to go for.

Richard Joyce: And so the last question now from Rosie Edwards with Berenberg.

Rosie Edwards: Two quick ones for me. Just firstly on the cyberattack, I just want to clarify, I think in the prepared remarks, Adrian, you said that the headwind was 200 basis points. And if so I just wondered why GST was included in the release earlier a couple of weeks ago.

And then secondly, on China infant nutrition, and obviously regulation change, you're being implemented for January 1, 2008. Can you help me understand, is the restriction on noncompliant products is that on the production or on the sale of these set products?

Adrian Hennah: First of all, Rosie, on the first one very quickly. Yes, you're absolutely right. When we on the 6th of July, we said it was cyber plus GST that was the 200 basis points but we always we also said that vast majority of it was cyber. So I was possibly a little too shorthanded in those remarks but you're right to pick it up.

But you can still think of 200 basis points is in shape terms as being cyber. It's although technically we did say it was the 2 in the July 6 release. On the China product nutrition, the...

Rakesh Kapoor: Is it on production or sale, I think if you're seeing that absolutely from anything dated January 1 it needs to be dated as per the new regulation. But if there is stock in the market preceding that date, people are not expected to pull that stock out of the market, if that's what you want to know.

Richard Joyce: Okay, yes, it would help.

Rakesh Kapoor: Anything dated anything produced from January 1st we stood to comply as per regulations. Anything produced before and therefore, will be obviously on the shelf, I mean it's not practically possible. So I hope you get the answer.

Richard Joyce: Good, okay, that's all the questions.

Thank you very much.

Adrian Hennah: Bye.

Rakesh Kapoor: Thank you. Bye bye.

Operator: That would conclude today's conference call.

Thank you for your participation. Ladies and gentlemen, you may now disconnect.