Reckitt Benckiser Group plc
Annual Report 2015

Plain-text annual report

R e c k i tt B e n c k i s e r G r o u p p l c A n n u a l R e p o rt a n d F i n a n c i a l S t a t e m e n t s 2 0 1 5 betterbusiness 2015 Reckitt Benckiser Group plc (RB) Annual Report and Financial Statements We make a difference to people’s lives through a trusted portfolio of brands, across consumer health, hygiene and home. Our vision A world where people are healthier and live better. Our purpose To make a difference, by giving people innovative solutions for healthier lives and happier homes. Our strategy betterbusiness betterfinancials How we drive growth and outperformance bettersociety How we support our communities and develop our people betterenvironment How we reduce our environmental impact Contents Strategic Report 1 Highlights 2 At a glance 4 Chairman’s Statement 7 Reasons why RB delivers 8 Chief Executive’s Review 10 Our unique culture 12 Strategic framework 14 Our market and resources betterfinancials 16 – Our strategy to deliver 17 – Organisation 19 – Powermarkets 20 – Powerbrands 22 – Virtuous earnings model bettersociety 24 – Workplace 26 – Communities 26 – Products betterenvironment 27 – Greenhouse gas emissions 28 – Water 28 – Waste 29 – Sourcing 30 Our operating model 32 Our operating model in action 34 Creating stakeholder value 36 Financial Review 40 Strategic Risks Chief Executive’s Review on pages 8–9 Strategic framework on pages 12–13 Governance Report 46 Board of Directors 50 Executive Committee 52 Chairman’s Statement on Corporate Governance 54 Corporate Governance Statement 60 Nomination Committee Report 61 Audit Committee Report 66 Directors’ Remuneration Report 68 Our remuneration at a glance 70 Annual Report on Remuneration 79 Directors’ Remuneration Policy 85 Report of the Directors 88 Directors’ Statement of Responsibilities Financial Statements 89 Financial Statements Any information contained in the 2015 Annual Report and Financial Statements on the price at which shares or other securities in Reckitt Benckiser Group plc have been bought or sold in the past, or on the yield on such shares or other securities, should not be relied upon as a guide to future performance. Highlights betterfinancials Net Revenue £8,874m Like-for-like1 growth +6% Gross margin 59.1% +140 bps Adjusted1 earnings per share (diluted) 258.6p +12% Developing markets 30% of Net Revenue Adjusted1 operating margin Health and Hygiene 26.8% +210 bps 74% of Net Revenue Read more on pages 16–23 1. Note: Definition of non-IFRS measures and their reconciliation to IFRS measures are shown on page 39. bettersociety betterenvironment Net Revenue from more sustainable products £558m 6% of Net Revenue Read more on page 26 People reached with Health and Hygiene messaging 237m Since 2013 Save a Child Every Minute £6.5m Committed to the programme in 2015 Greenhouse gas emissions per unit of production 14% Reduction since 2012 Water use per unit of production 30% Reduction since 2012 Waste per unit of production 14% Reduction since 2012 Read more on pages 24–26 Read more on pages 27–29 1 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBAt a glance The right markets, categories and brands. Millions of consumers worldwide love and trust our brands. We have operations in more than 60 countries and sales in most countries across the globe. We organise our business into two areas, centred on groups of countries with many similarities in consumer behaviour, brand development and how the retail trade is organised. This structure helps us to be faster to market, with more consistent in-market activation. KEY: ENA regions DvM regions ENA DvM Europe (including Russia/CIS and Israel), North America and Australia/New Zealand Africa, Middle East (excluding Israel), Turkey, Asia (excluding Russia/CIS) and Latin America Net Revenue Like-for-like growth Net Revenue Like-for-like growth £5,830m 2014: £5,891m +5% £2,695m 2014: £2,629m +9% Food We run Food as a standalone business. Its brands include French’s, the leading mustard brand in the US. 2 Net Revenue Like-for-like growth £349m 2014: £316m +4% RB / Annual Report and Financial Statements 2015Governance Report Financial Statements Net Revenue Like-for-like growth £2,942m 2014: £2,701m +14% Health and wellbeing are the key to happiness. Our health brands are generally sold over the counter and include products targeting everyday issues such as pain, fever, cold, flu, sore throat or heartburn. Our sexual wellbeing products, including condoms, lubricants and other aids, promote safe and pleasurable sex. The Health category also includes footcare, with products to address hard skin and other foot and nail conditions. Market positions • Nurofen and Gaviscon are leading analgesic and gastro-intestinal brands in Europe and Australia • Durex is No.1 worldwide in condoms for both safe and more pleasurable sex • Strepsils is No.1 in medicated sore throat globally • Mucinex is the No.1 cough brand in the US • Scholl has leading positions in many footcare markets Hygiene is the foundation for healthy living. Our brands promote personal hygiene for good health and home hygiene, to create a safe environment for families. Our range includes disinfectant cleaners, multipurpose and speciality cleaners, lavatory care, automatic dishwashing detergents, pest control, depilatory products and acne treatments. Net Revenue Like-for-like growth £3,589m 2014: £3,627m +3% Market positions • RB is No.1 globally in the overall category of surface care • No.2 worldwide in lavatory care with Lysol in North America and Harpic across Europe and Developing Markets • Dettol is No.1 worldwide in antiseptic liquids • Finish is No.1 worldwide in automatic dishwashing • No.2 worldwide in pest control with the Powerbrand Mortein, the Group’s international brand, supported by local brand franchises like d-Con in North America • Veet is No.1 worldwide in depilatory products Net Revenue Like-for-like growth £1,715m 2014: £1,810m +2% Home is the centre of family life. Our brands help create the right environment for families to enjoy their time together. Products in this category include air care, water softeners, garment care and fabric treatment. Market positions • Vanish is No.1 worldwide in fabric treatment • Calgon is No.1 worldwide in water softeners • Woolite is No.2 worldwide in garment care • Air Wick is No.2 worldwide in air care Portfolio (including Food) The Portfolio category includes our laundry and fabric softener business, as well as our Food brands. Net Revenue Like-for-like growth £628m 2014: £698m +1% 3 HealthHygieneHomeHealthHygieneHomeHealthHygieneHomeStrategic ReportAnnual Report and Financial Statements 2015 / RBA year of delivery 2015 was another successful year for RB, as we continued to benefit from the strategy we outlined in 2012. Total Net Revenue was flat due to the negative impact of foreign exchange, but increased by 6% on a like-for-like basis. Reported Operating Profit was up 4% in actual currency and 7% in constant currency terms. Adjusted Operating Profit rose 9% in actual currency and 12% in constant currency, resulting in a 210bps increase in our Adjusted Operating Margin. Reported Diluted Earnings Per Share were 240.9p, up 6% while Adjusted Diluted Earnings Per Share were 12% higher at 258.6p. Our strong operational performance and continued excellent cash conversion enabled us to return a record amount to Shareholders in 2015. We maintained the level of dividend this year, despite the loss in earnings from the Indivior demerger in December 2014. The Directors have proposed a final dividend of 88.7p per share, up 12%, giving a total dividend for the year of 139p. Subject to Shareholder approval, the final dividend will be paid on 26 May 2016 to Shareholders on the register on 15 April 2016. We also increased our share repurchase programme to £0.8 billion for the year (up from £0.3 billion) while maintaining our net debt position at around £1.6 billion. The Directors believe this policy of balanced returns leaves your Balance Sheet in a healthy position, while giving us the financial strength to invest in strategic, value-accretive acquisitions, in line with our strategy. It is pleasing that RB’s share price performance continues to reflect our successful delivery. During the year, RB’s share price rose by 20.6% to 6281p, well ahead of the 4.9% change in the FTSE 100. A successful strategy RB’s strategy concentrates our resources on the attractive Health and Hygiene categories and looks to deliver well-balanced growth across developed and developing markets. The Board remains highly focused on the success of this strategy. Each year, we spend considerable time with the Executive Committee, reviewing RB’s competitive environment and our plans for driving the business forward. We also carefully monitor the Company’s progress against its plans. Through this work, we remain convinced that our strategy is the right one and that it continues to position RB to outperform for the long term. Sustainability is a fundamental part of this strategy, as we recognise that we have a wider responsibility that goes beyond our commitment to deliver financial returns for Shareholders. We made further strong progress with our sustainability agenda this year, using our health and hygiene capabilities to make a real difference to people’s lives, while ensuring we operate safely and with the lowest possible impact on the environment. At the start of 2015, we announced Project Supercharge, which is already making a significant difference to our organisation and its performance. At its heart, it is about simplifying our business, so we can get our innovations to market more quickly and effectively. At the same time, the substantial cost savings from the programme frees up cash for investment elsewhere, further improving our prospects for growth. More information about Project Supercharge and its benefits can be found on page 17. Chairman’s Statement “Our purpose-driven strategy is delivering for all stakeholders.” Adrian Bellamy / Chairman Returns to Shareholders £20.8bn Of additional value delivered to our Shareholders in the last three years Net Revenue from more sustainable products £558m 6% of Net Revenue 4 RB / Annual Report and Financial Statements 2015Governance in action Board members’ trip to India In September 2015, the Board held a highly successful visit to India, which is a key growth market for RB and we believe will soon rank in the top three countries for revenues. Board members met government ministers, including Minister of Power, Piyush Goyal and Finance Minister, Arun Jaitley, e-commerce entrepreneurs including Snap Deal CEO Kunal Bahl, and Kailash Satyarthi, who won the 2014 Nobel Peace Prize for his work to protect the rights of children and young people. The visit enhanced Board members’ knowledge of the Indian business environment, including the pivotal role that e-commerce will play in future growth. At the same time, it emphasised the importance of RB’s purpose as a company, which goes beyond our financial success. The Board learned about the progress we have made in supporting the Indian Government’s campaign for a cleaner India – known as Swachh Bharat – in which we are helping to improve hand hygiene and sanitation, which in turn helps people in India to live healthier lives. 5 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBChairman’s Statement continued Governance We believe that good governance is vital for business success. It provides the framework within which RB can implement its strategy and create further value for our Shareholders. Our annual evaluation of the effectiveness of the Board and its committees again showed that governance within RB is strong and effective. The evaluation identified areas for further improvement, which we are implementing. More detail about the evaluation and its findings are on page 57. The Board also benefitted from the contributions and broad range of skills of our three new Non-Executive Directors, Mary Harris, Pam Kirby and Chris Sinclair, who joined the Board in February 2015 and who have brought fresh perspectives to add to the deep experience of our long-standing Directors. More information about RB’s approach to corporate governance and the Board’s activities during the year can be found in my statement on pages 52 and 53 and in the full Corporate Governance Report on pages 54 to 58. A culture of outperformance As this Annual Report makes clear, RB’s culture is critical to its success. Our culture makes RB a dynamic and exciting business, which rewards outperformance and is constantly looking to do better for our customers, consumers and Shareholders. Appreciation On behalf of the Board, I would like to thank Rakesh Kapoor and his team for their substantial achievements this year and for positioning the business to succeed for years to come. We have an exceptional depth of talent on our Executive Committee and in our broader senior management team, which gives us the leadership we require to continue to outperform. I would also like to thank everyone in RB around the world for their outstanding commitment and performance in the last 12 months. My thanks also go to my colleagues on the Board for their guidance. During the year we were very sorry to receive the resignation of our long time Deputy Chairman, Peter Harf, due to his ever increasing workload at JAB. Peter led the public offering of Benckiser and was subsequently very instrumental in bringing together Reckitt and Colman and Benckiser to form RB as we are today. This wise combination of two great companies has proven enormously beneficial to the shareholders of both corporations. Over the years Peter has been an outstanding director offering his great experience and wisdom during our Board deliberations. He contributed meaningfully to the growth of Shareholder wealth in RB. On behalf of all stakeholders I thank Peter for his immense contribution and wish him well in the future. At the AGM to be held on 5 May 2016 (AGM), Jaspal Bindra, Sue Shim and Doug Tough will not be offering themselves for re-election and will retire from the Board from the conclusion of the meeting. I would very much like to thank each of them for their contributions and wish them well for the future pursuits they will be undertaking. Thank you also to our Shareholders for your continued support. AGM resolutions The AGM is on 5 May 2016 and the resolutions that Shareholders will vote on are fully explained in the Notice of Meeting. Conclusion The Board remains confident that the building blocks are in place for RB’s ongoing success. The combination of our strategy, culture and people gives us a platform for continued growth and outperformance, which will benefit all our stakeholders. Adrian Bellamy / Chairman 22 March 2016 6 RB / Annual Report and Financial Statements 2015Reasons why RB delivers Performance-driven culture Our culture is central to our outperformance, because our strategy becomes real when we execute it with excellence. We live our values of Achievement, Ownership, Entrepreneurship and Partnership. Our compensation approach and industry-leading share ownership requirement for senior management encourage our people to act as Shareholders and to treat the Company as their own. Share ownership requirement of “Top40” management £185m Read more on pages 10–11 Right portfolio strategy We identify unmet consumer needs in underpenetrated, higher-growth and higher- margin categories. We drive growth through innovation, penetration-building programmes, scaled distribution, consumer education and in-store excellence. We invest disproportionately behind our high-potential markets (Powermarkets) and our faster growing brands (Powerbrands). Our growth is broad based and we do not rely on any one market or brand. Powerbrands Powermarkets 19 16 Read more on page 16 Successful innovation Virtuous earnings model Value creation Continuous, successful innovation is the key to long-term success. We listen to our consumers and develop products that create healthier lives and happier homes. We then invest heavily behind these initiatives, with category and penetration- building and consumer education activities we call Brand Equity Investment (BEI). Scholl Velvet Smooth Express Pedi rolled out in 50markets Our virtuous earnings model starts with Gross Margin, which we constantly seek to grow by targeting higher-margin segments, led by consumer health, and optimising cost throughout our supply chain. Combined with tight fixed-cost containment, this provides room in our Income Statement to invest for growth through our short and long-term BEI initiatives, enabling us to drive Net Revenue and expand our Operating Margin. Converting our profit into cash is an important part of our culture and compensation ethos. All our operational management teams have revenue, profit and net working capital objectives built into their annual bonus targets. Gross Margin +140bps We are primarily an organic growth company and have created significant value from successful innovation, investing behind our brands and in-store excellence. However, the consumer health market is fragmented, which gives us the opportunity to acquire strong brands. In recent years we have made important, value-accretive acquisitions, which have enhanced our organic growth platform and provided significant returns for our Shareholders. Total Shareholder Return since 2012 announcement of new strategy +126% Read more on pages 30–33 Read more on pages 22–23 Read more on page 34–35 7 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBChief Executive’s Review “The combination of the right portfolio strategy and the right culture is delivering outstanding returns to Shareholders.” Rakesh Kapoor / Chief Executive Officer “Our people have the hunger you usually only find in companies that are just starting out.” Number of “Top400” management working outside their home country 61% Like-for-like Net Revenue growth +6% 8 RB has a long track record of outperformance. While it is tempting to focus on the ‘hardware’ of our financial performance, to discover what truly makes RB special you need to understand the ‘software’ beyond it – our culture and values, and our talented people who embody both. RB’s culture is very different from others in our industry. Our people have the hunger you usually only find in companies that are just starting out. We have a compelling desire to challenge ourselves and each other, so we outperform and make RB the best company we can be. Our culture is reflected in our values – Achievement, Ownership, Entrepreneurship and Partnership. They determine how we make decisions and how our leadership provides a role model for the behaviours we want. Our values are interlinked, and they combine to make RB a business where we act fast, take responsibility and aim for and reward exceptional achievement. I also believe that successful companies must have a clear purpose, which explains who they are and what they stand for. RB stands for healthier lives and happier homes. This purpose inspires us and helps us to prioritise. For example, we know which innovations to pursue and which capabilities we need, because we can easily see whether or not they will help us achieve our purpose. Our purpose therefore directly informs our business strategy. Results 2015 was an excellent year for RB, as we continued to benefit from our focus on consumer health and hygiene. These categories are faster growing, higher margin and less competitive. Our approach of identifying unmet needs means we can drive category growth, rather than fighting for market share. We delivered strong like-for-like growth and exceptional Operating Margin expansion. The starting point for our virtuous earnings model is Gross Margin, which we increased by 140bps, as we drove a superior sales mix and ongoing optimisation of our cost base. Higher gross margins give us the capacity to invest heavily behind our brands, which in turn drives our top line. Brand Equity Investment (BEI) rose by £48 million (constant) equivalent to 12.7% (-20bps) of Net Revenue, which understates the true increase given our reinvestment of efficiencies. Our operating margins are already best in class but we increased them by a further 210bps, to 26.8%. Supercharging our organisation In our markets, speed matters. However, as organisations grow they inevitably become more complex, which makes them rigid and slower to respond. We must constantly battle against this, so our culture and business can thrive. We announced Project Supercharge at the start of 2015. It is our programme to ensure we have a simpler, more agile organisation, which focuses our efforts on our consumers and our retail customers. Supercharge is already delivering real benefits. For example, we have reduced our geographical areas from three to two, bringing our developing markets under a single leadership and helping us to deliver more scalable innovation and better in- country activation. To focus on the blockbuster innovations with the best returns, we have reduced the number of projects in our pipeline, while increasing their average value. And our Power of 1 teams (see page 30) are helping us to roll-out new products more quickly, consistently and cost effectively across our areas. Supercharge is a cultural programme but it is also delivering cost savings to reinvigorate our earnings model. Our people have embraced Supercharge to such an extent that we have accelerated these benefits and achieved more than we planned in 2015. We also now expect to achieve the upper end of our £100 million – £150 million annual savings target once we have fully implemented this three-year programme. RB / Annual Report and Financial Statements 2015A connected company The digital revolution is transforming the business world, so we continue to invest in creating a connected company. The need to be where our consumers are, means we are increasingly moving online. In some of our key markets, more than 50% of our media impressions are now through digital media. We are connecting our Powerbrands directly to consumers, for example by engaging with new mothers to promote Dettol, and using technology and data to derive better and faster insights, so we can rapidly identify and respond to changes in consumer demand. E-commerce is ever more important and more than 25% of our revenue in China now comes through this channel. We use China to develop new approaches to e-commerce, which we can then apply to the rest of the world. Our betterbusiness strategy Truly sustainable businesses need to be financially strong while improving people’s lives and acting in an environmentally sustainable way. Our betterbusiness strategy therefore encompasses how we drive financial performance – through our focus on our Powermarkets, Powerbrands, our organisation and our margins – as well as how we meet our social and environmental responsibilities, so we deliver sustainable value. The most effective social programmes are those which inspire people because they are closely connected to the Company’s business. Our Save a Child Every Minute campaign with Save the Children uses our expertise and our people’s efforts to effect real change, with the goal of stopping diarrhoea being a top five killer of children. This year we have launched two innovative hygiene products to reduce the incidence of diarrhoea, with their profits being reinvested in the programme. We also continue to educate people and to raise awareness of health and hygiene. I am delighted that our efforts mean we have already hit our 2020 target of reaching 200 million people. We have a well-established sustainability programme, as we aim to grow in an environmentally and socially responsible way. As a result, we work hard to make our products and our production more sustainable, by reducing our greenhouse gas emissions, waste and energy and water use, and by increasing the proportion of Net Revenues from more sustainable products. More details of our approach and performance can be found on pages 24 to 29. Conclusion We are making good progress with our strategy and remain on target to reach our 2020 goals. Despite all our achievements so far, we believe there is much more to go for, as we drive penetration of our markets and introduce innovations that delight consumers and create value for all our stakeholders. In 2016 we expect that the macroenvironment will be tough but we remain confident that our strategic choices across Powerbrands and Powermarkets will enable RB to deliver another year of growth and margin expansion. We are targeting like-for-like Net Revenue growth of +4-5%. For operating margin our medium-term target is for moderate margin expansion. We expect this to be supplemented in 2016 by part of the remaining Project Supercharge efficiencies. Rakesh Kapoor / Chief Executive Officer 22 March 2016 Case study Connected to our consumers Durex passionately believes in providing couples with better protection and better sex. We know that the best way to reach our core targets – young people – and talk to them about sex is through digital media. In 2015, Durex therefore decided to take connectivity to a completely new level. In China, Durex created the first personalised condom packs, allowing people to go online to choose their preferred design and create a personal message for the person they love, with the packs then shipped directly to their home. Globally, Durex showed that the best way to turn on is to turn off your device. YouTube videos created for our Earth Hour campaign in March 2015, were viewed more than 75 million times, making them the most-watched branded YouTube videos for weeks. No icon is yet available to communicate safer sex on social platforms, so for World Aids Day 2015, Durex campaigned for a ‘condom emoji’. The Durex video really struck a chord with young people, creating a digital interaction every three seconds during the campaign and achieving 2.9 billion impressions globally. When it comes to better and healthier sex – in real life or on the net – the best way to connect is the Durex way. SHAREHOLDER RETURNS RB has demonstrated outstanding Shareholder return. If you invested £100 on 1 January 2000 that investment would have grown to £1,721 by the end of 2015. That same £100 invested in the FTSE 100 would be worth £156 over the same period of time. 1800 1575 1350 1125 900 675 450 225 0 0 0 2 y r a u n a J 1 t a d e t s e v n i 0 0 1 £ f o e u a V l £1,721 £156 0 1 Jan 00 1 Jan 01 1 Jan 02 1 Jan 03 1 Jan 04 1 Jan 05 1 Jan 06 1 Jan 07 1 Jan 08 1 Jan 09 1 Jan 10 1 Jan 11 1 Jan 12 1 Jan 13 1 Jan 14 1 Jan 15 1 Jan 16 RB FTSE 100 9 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RB Our unique culture RB has a distinctly different culture. Our culture is all about the people who make RB what it is; the ways in which we improve the health and hygiene of our consumers, and how we work with and develop our people, suppliers, partners and third parties. Our culture is captured by our four values – Achievement, Ownership, Entrepreneurship and Partnership. These values are interlinked and together define how we make decisions, how our people act and how we assess and reward them. Our leaders are role models for these behaviours, so everyone in RB understands the way we work. THE RIGHT VALUES ACHIEVEMENT We don’t just aim high, we strive for outperformance. OWNERSHIP We treat the Company as if it is our own. ENTREPRENEURSHIP Daring to be different, taking calculated risks. PARTNERSHIP Leveraging relationships for outperformance. 10 Achievement Everyone wants a sense of achievement and for RB that means outperformance. We constantly raise the bar, expecting more from ourselves and inspiring others to stretch beyond targets. This hunger is the basis of our drive to outperform. Every day we challenge the tried and tested because we want to be better – better innovations, better ways of doing things and better results. We explore what it means to be the very best. We have a unique approach to rewards, where average performance results in average rewards but top performance earns excellent rewards. Partnership Partnership means leveraging our relationships to drive outperformance. In today’s world, we cannot be the best if we do everything ourselves. In aggregate, there is far more innovation, creativity and knowledge outside RB than there can ever be inside it. We therefore partner with organisations who can bring us innovative products and help us develop more effective ways of working. We also strive for a spirit of openness in our internal partnerships. To maximise our potential, we have to seek help when we need it, share best practice and make each other better every day. To be a great company, we must be obsessed by making each other the best we can be. RB / Annual Report and Financial Statements 2015Ownership To build a company focused on achievement, our people need a sense of ownership. This means our people take ownership of issues, identify what needs to be done and see ideas through to fruition. They accept responsibility and own the outcome. Rather than waiting to be told what to do, they act in RB’s and consumers’ best interests and when making spending decisions, they spend as if the money were their own. We encourage our people to behave as if they own the business. The “Top40” managers in RB have the highest shareholding requirements in the industry. Medium to long- term rewards, based on outperformance in earnings per share growth, can significantly outweigh short-term bonuses. Many employees throughout the business also own shares and have share-based incentives. Wherever possible, employees are given the opportunity to participate in share ownership schemes. Outperformance therefore has material benefits for our people, by creating value for Shareholders. Entrepreneurship Owners are usually entrepreneurs. Entrepreneurs challenge the status quo, find fresh approaches and adopt new thinking. They have more ideas and look for the resources to implement them. This contrasts with the typical big company, which has more resources than ideas and – because it worries more about failure than success – avoids taking calculated risks. We make a conscious effort to breed a culture of entrepreneurship. By tightly controlling resources, we encourage our people to innovate and find better ways to achieve their goals. We allow passionate people to pursue projects they believe in, knowing they can fail small and will be rewarded if their project is launched. We create a culture of diversity, so we benefit from different experiences and viewpoints, and encourage people to speak up. Case study Project Supercharge • We have focused our innovation pipeline on fewer, bigger, better innovations and it is now stronger than ever. • We have increased investments behind our health products and behind those capabilities that are critical to grow our share of the healthcare market and drive our Powerbrands to market leading positions. • We are reducing the number of partners we work with by consolidating our creative agencies and point of sale suppliers. By involving procurement specialists early in the supplier selection process, we are able to negotiate the best possible deals which often results in savings for the same level of service. Procurement have delivered significant savings in freight costs, copy production and Consumer Market Insights (CMI). The benefits: • Our resource allocation is now focused on fewer, bigger projects. We have boosted the average size of our top 10 projects by 27%, whilst reducing complexity. In DvM we have set up a centre of excellence for healthcare to boost capabilities. • • We have invested in e-commerce in the DvM area. • Through agency consolidation we now have the very best creative agencies working across each of our portfolios. Our creative communications strategy is working much harder to grow penetration for our Powerbrands. • Through better forward planning of copy production, we have been able to drive efficiencies and we are seeing significant increases in multi country campaigns and also in the average number of copies per TV campaign. # Supercharging Outperformance. Total share ownership requirement for “Top40” management £185m Nationalities in “Top400” management 49 11 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBStrategic Framework: The changing world drives our purpose- driven strategy and business model Our world is changing… Powerful long-term trends are increasing demands for our products Why we can deliver Our purpose-driven strategy and unique culture create the conditions for outperformance relative to our markets Read more on pages 14–15 Read more on pages 16–29 The right strategy: (Our Hardware) betterbusiness betterfinancials How we drive growth and outperformance bettersociety How we support our communities and develop our people betterenvironment How we reduce our environmental impact The right culture: (Our Software) – Achievement – Entrepreneurship – Ownership – Partnership We are living longer Our incomes are rising We are more proactive (about health) Our lives are busier We are always connected Healthcare costs are rising Regulation is changing Society and Shareholders expect more Our purpose To make a difference by giving people innovative solutions for healthier lives and happier homes. 12 RB / Annual Report and Financial Statements 2015How we can deliver Our three-part model enables us to rapidly scale up our ideas and offer them to consumers around the world What we can deliver Our strategy and business model create value for our stakeholders and reinforce our position as the global leader in health and hygiene Read more on pages 30–33 Read more on pages 34–35 Create For our Consumers Create innovative products that meet under-served demands Scale Scale our innovations, to make them as global as possible Activate For our Customers Activate our ideas through our customer relationships while driving consumer demand For our People Rewarding and challenging careers + For our Consumers Innovative solutions that make a difference + For our Shareholders Sustainable growth and outperformance + For our Customers Leading brands that drive profitable category growth and footfall + For our Communities Healthier and happier communities through the use of our products Global leader in consumer health and hygiene1 1. Based on RB’s definition of hygiene plus consumer health sales. (Data sources: Hygiene: RB select categories (Euromonitor); Consumer Health: OTC (Nicholas Hall) ; Condoms/Devices (ACNielsen); Foot care – (ACNielsen – select markets only). 13 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBOur world is changing… Our market and resources Our consumer landscape is changing Our environment is changing Healthcare costs are rising Access to healthcare is not only a human need – it is a basic human right. The current infrastructure and health delivery systems are creaking under the strain of ever-increasing demand as they face a perfect storm of pressures: burgeoning population, increased longevity, and resource shortfalls among doctors, nurses and other health professionals. As the boundaries of science get pushed back, we are able to offer more solutions for health needs but that adds cost. As costs spiral and resources diminish, what we can least afford to do is reduce the healthcare that people can access. We need a radical rethink to find more cost-effective ways to help consumers protect and manage their health. Regulation is changing The ever-changing global consumer landscape exposes potential gaps in regulation in environmental stewardship, patient safety and data protection. In response, governments are demanding more responsible behaviours and accountability from all stakeholders. Evolving laws and regulations mean companies must innovate to keep pace and adapt their products to exclude ingredients that may affect safety or the environment and to reduce the environmental footprint of their operations. This favours forward-thinking companies who strive for transparency and continuous improvement. We are living longer Our incomes are rising Life expectancy is rising around the world. Between 2015 and 2030, the number of people aged over 60 is expected to increase to more than 1.4 billion. Ageing populations are putting ever greater demands on healthcare services and motivating people to look for new ways to promote wellbeing as well as wellness. An expanding middle class, particularly in developing markets, means more people have money to spend on health and hygiene products after meeting their essential needs. Increased income also spurs development of better infrastructure such as sanitation systems, which further drives demand. We are more proactive (about health) Longer life expectancies and rising incomes are encouraging more of us to actively look after ourselves and prevent health issues before they occur, for example through better hygiene and healthier home environments. We believe that self-care is the new frontier of healthcare. Our lives are busier Modern life brings more opportunities at work and at home but also more demands on our time. This encourages consumers to use easily accessible over- the-counter health products, rather than wait for a doctor’s appointment, to seek out the fastest-acting hygiene or laundry product and to look for personal grooming and beauty treatments that can be used at home. We are always connected Advances in digital technology, particularly mobiles, mean consumers can make ever-greater use of online resources and e-commerce to manage lifestyles and healthcare. Sites such as WebMD enable us to learn about health and wellbeing, while Facebook and other social media help us to interact with brands and to exchange information with people with similar issues and interests. Consumers around the world increasingly act on this information by buying products online. E-commerce enables companies to gather data about consumers and their preferences, to tailor offers that are specific to them, and to provide a consistent customer experience across different countries and to increase engagement. This requires companies to have robust systems and processes for gathering data and the ability to analyse it to derive valuable insights while protecting consumer privacy. 14 RB / Annual Report and Financial Statements 2015Our environment is changing Society and Shareholders expect more The licence to operate for companies like RB now encompasses stakeholders’ expectations that can go beyond the letter of the law and regulations. Continuous improvement on environmental and social metrics is expected of responsible companies. One particularly strong trend is a growing focus on tackling the causes of easily preventable deaths and illness. For example, each year around the world there are over 84,000 deaths from sexually transmitted diseases, over half a million deaths of children under the age of five from diarrhoea and over 610,000 deaths from malaria, which can all be prevented. We recognise the need to balance our desire for delivering sustainable financial outperformance for our Shareholders with delivering meaningful employment and economic viability for the communities where we live and operate and protecting our precious environmental resources. Business must be a force for good across all three metrics. prioritising one over the other is not sustainable. How this links to our strategy We believe we are uniquely placed to respond to these global trends through our betterbusiness strategy. Our focus on Health, Hygiene and Home categories helps consumers protect and improve their health and wellbeing as they enjoy longer and more prosperous lives. Our Powermarkets address the countries with the fastest growing demand for these products. For example, we expect that in India there will be 100 million more toilets by 2020 and we want to be there and elsewhere to fulfil increased sanitation needs. We continue to expand our e-commerce capabilities and to invest in our IT and data analysis. This will help us exploit opportunities in the emerging eHealth arena. We believe that digital capability will revolutionise health monitoring and we are committed to be at the forefront of this trend. In fact, 25% of all sales in China today are via e-commerce and we anticipate this to be over 50% by 2020. Our emphasis on an agile, responsive organisation enables us to anticipate and address consumer needs quickly and effectively. Consumer health is higher margin, which helps give us the financial headroom to invest in innovation and in building brands, so that consumers have access to the next generation of products that meet their changing needs. This approach drives financial outperformance, with revenues growing faster than the market and increasing margins creating value for our investors. At the same time, we know that growth and responsibility go hand in hand. Our betterbusiness strategy therefore also encompasses our role in society – through the way we look after our people and our community programmes – and our drive to continue to reduce our environmental impact. Our betterbusiness strategy inspires us to do the right thing every day. 15 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBWhy we can deliver betterfinancials Our strategy to deliver The betterfinancials element of our strategy has four pillars, which focus our business on faster-growing markets and categories and enable us to outperform. THESE PILLARS ARE: Organisation Powermarkets Powerbrands We organise our business into two geographical areas1 ENA/DvM 16 Powermarkets This helps us to allocate resources effectively and to scale our blockbuster innovations. We continually invest in and evolve our organisation, to ensure speed of decision making and execution. We have selected 16 Powermarkets, the majority of which are in developing markets. They benefit from higher growth, rising middle classes and opportunities to increase penetration. In addition to their growth potential, our Powermarkets are those where we see the ability to win. 19 Powerbrands spread across1 Health Hygiene Home These Powerbrands provide over 80% of our revenue and enable us to achieve higher growth and higher margins. Virtuous earnings model Gross Margin Net Revenue UNIQUE CULTURE Fixed cost BEI Operating Margin Our virtuous earnings model gives us the capacity to invest in top line growth, while expanding our operating margins. 1. Our total operations also include Food. 1. French’s is also a Powerbrand. See pages 17–18 See page 19 See pages 20–21 See pages 22–23 16 RB / Annual Report and Financial Statements 2015 Organisation DESCRIPTION For our business to continue to thrive, we need to organise it for continued success. Growing organisations can become more complex and slower to react, which is a major disadvantage in a fast-moving industry. We therefore focus on how we can remain agile so that our creativity is unleashed and we can be even more customer centric. PROGRESS At the start of 2015, we announced Project Supercharge. This is primarily a cultural programme, born from our desire to always be better. It is designed to fight the complexity that arises in big companies, which means we must constantly simplify and reduce the layers of decision making. Supercharge does this by ensuring we focus on the two things that really matter: the consumer and the retail customer. A full description of Supercharge can be found on page 17 of our 2014 Annual Report. Supercharge is already delivering substantial benefits for us, examples of which include: • Streamlining our portfolio of initiatives in support of blockbuster innovations has enabled us to increase the average size of our top 10 projects by 27% during 2015. • Changing our geographical structure from the start of 2015, combining our two areas focused on developing markets into a single DvM area, and moving Australia, New Zealand, Russia, CIS and Israel into our ENA area. • Organising our business around clusters of similar consumers and bringing developing markets under one leadership supports our ability to deliver bigger, better and more scalable innovation, combined with improved in-market activation at a country level. Simplifying and delayering our structure has also provided funds to reinvest in growing our revenue. We are already seeing benefits from the new structure, including faster growth in Australia and Russia, as a result of grouping them with similar countries, and the ability to streamline decision making and share information between markets more effectively. • Deploying ‘Power of 1’ teams in both ENA and DvM, helping us to deliver more efficient, effective and scalable roll-outs of our innovations. Each Powerbrand is assigned a lead market. The Power of 1 team in that market is now responsible, with input from the other countries in its area, for developing a master launch package for that innovation. This ensures consistency across the area and avoids the time and cost of reworking the launch package for individual countries. As well as creating a simpler, more agile organisation, Supercharge is providing substantial cost savings. We estimated these savings at the time of announcement of the project as £100 million – £150 million a year by 2017. The speed with which our people have embraced Supercharge accelerated delivery of savings in 2015, contributing to our operating margin enhancement this year (see page 22 for more details). Creating a connected company To improve our efficiency and support our ability to grow, we are focusing our information technology investment into three main areas. First, we have introduced a global process for managing our investment so we create a standard set of systems. This ensures we only spend money in one place and can then scale that system as required, rather than duplicating investments in similar systems in different countries. We are also enhancing the connectivity between our systems, so we can generate insights more quickly. For example, connecting our sales systems with our factories enables us to respond faster to changes in demand for a product. This improved connectivity will enable us to share data wherever it is needed in the business. During 2015, we have also rolled out collaborative tools such as telepresence units and document sharing. This helps create a more collaborative and productive environment, in which people can work more closely together, while reducing travelling costs. In addition, we are improving efficiency by negotiating global deals with IT suppliers and beginning to standardise and globalise our back office processes. OUTLOOK After a highly successful first year of Supercharge, we are well positioned to continue to reap the benefits in its second year and we are now targeting the upper end of the initial £100 million – £150 million annual savings target. 17 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBWhy we can deliver betterfinancials Organisation continued ENA Rob de Groot / Executive Vice President, ENA PROGRESS Total Net Revenue was £5,830 million, with LFL growth of +5%. All European regions had a strong finish to the year, completing a year of broad-based growth. Absolute growth was led by our larger markets (UK, France, Germany and Spain) whilst smaller markets in Eastern and South Eastern Europe had strong rates of growth. Australia performed well throughout the year. Operational performance in Russia and CIS was strong with an improved go-to-market model for our Consumer Health business but the outlook remains uncertain given the current market and currency issues. North America had a good year with 3% LFL growth driven by the launch of our successful Velvet Smooth Express Pedi under the new brand name, Amopé, and in the second half, our new electronic nail file. VMS brands were mixed with good growth in Digestive Advantage and Move Free offset by weakness in Megared and Airborne. Mucinex had a strong end to the year, benefitting from the launch of new liquid filled caplets across the adult Fast Max Multi-Symptom and Sinus variants. Lysol performed well, driven by health education programmes, offset by competitive market conditions for Finish. Adjusted Operating Profit increased +10% (constant) to £1,744 million; the adjusted operating margin increased +210bps to 29.9%, due to strong gross margin expansion and Project Supercharge initiatives. Our priorities for 2016 include continuing our drive towards healthcare brands, with a focus on higher-margin channels, as well as continuing to build our e-commerce capabilities. DvM Frederic Larmuseau / Executive Vice President, DvM PROGRESS Total net revenue was £2,695 million, with LFL growth of +9%. Growth came from all regions. In South Asia, India continued to deliver improving growth trends. Our penetration-building initiatives within Dettol and Harpic support the Government’s health and hygiene initiatives. China had a strong performance with Durex and e-commerce driven initiatives leading the growth. Middle East, Turkey and South Africa also had strong performances. Brazil remains challenging, although strong pest demand in the second half helped mitigate some of the weakness. Thailand, Indonesia and West Africa also remain challenging. 18 Adjusted Operating Profit increased by 19% (constant) to £528 million; the adjusted operating margin was +210bps higher at 19.6%. This was due to strong gross margin expansion, combined with Supercharge initiatives. Our priorities for 2016 include continuing to enhance distribution and penetration to enable our products to reach even more consumers, as well as continuing to build our e-commerce capabilities. Food PROGRESS Total Net Revenue was £349 million, a +4% LFL increase versus prior year at constant exchange rates. In North America growth was led by Frank’s RedHot and the launch of French’s ketchup. Growth in North America was partially offset by share losses in French’s mustard due to a competitive entry. Increased distribution drove growth outside the USA. Operating margins improved by +230bps to 29.2% due to pricing initiatives and Project Supercharge efficiencies. KEY PERFORMANCE INDICATORS Like-for-like Net Revenue growth +6% 2015 target: +4% 2016 target: +4-5% at constant exchange rates Target to 2020: Total Net Revenue growth which outperforms the markets in which we operate Operating margin Expansion +210bps 2015 target: Moderate to ‘nice’ expansion 2016 target: Moderate margin expansion Target to 2020: Moderate margin expansion PERFORMANCE Exceeded our like-for-like Net Revenue growth target. Gross margin expansion +140bps to 59.1%, driven by mix, commodity costs and cost optimisation initiatives. Adjusted Operating Margin up +210 bps to 26.8%. RB / Annual Report and Financial Statements 2015Case study China While the full list of our Powermarkets is commercially sensitive, we have said that China is one of them. So how have we treated China differently since it became a Powermarket? • First, we promoted it within our organisational structure, from being designated as a small country within our hierarchy to being its own region. This has reduced the number of touch points and layers of management between it and the CEO/top management. • We then upscaled both the seniority and reward structure of the management team. China is now a market where we put our more senior and high potential people. It is also a stepping stone for further promotion within RB. For example, our General Manager in China has recently been promoted to lead our Consumer Health division within our global category function. • We also prioritise investment behind our brands, distribution and equity building capabilities. In fact China now has its own dedicated digital media team. This means that China will be slightly dilutive to our operating margin in the short-term but we are happy to invest for growth. China, in due course, will be a large market for us, with the right product portfolio, strong gross margin and a similarly strong operating margin. In summary, our strategy is simple – we aim to be a ‘self-help’ company. By investing disproportionately behind, and moving our centre of gravity towards, higher growth markets (our Powermarkets) and higher growth brands (our Powerbrands), we should become a higher growth business over the long-term, even if market and category growth rates do not materially change. Powermarkets DESCRIPTION Our Powerbrand approach, where we disproportionately invest resources and management talent behind our higher-growth, higher-margin brands, has been successful for us. This success encouraged us to adopt the same mindset to our markets, making our ‘Powermarkets’ one of the four pillars of our betterfinancials strategy. These are markets where we see the highest potential for absolute growth and where we have the capability and infrastructure to win. By looking at our markets through this lens, we have identified 16 Powermarkets. A significant proportion of these are developing markets, due to their higher growth potential and better penetration opportunities for our brands. Our Powermarkets also include a number of our larger developed markets, which will be significant contributors to our absolute growth. Powermarkets receive priority for our top-rated and high potential people, and like our Powerbrands, we will invest disproportionately for growth. KEY PERFORMANCE INDICATORS Proportion of total Net Revenue from DvM 30% 2014: 30% Target to 2020: 40% PERFORMANCE Delivered broad-based growth across ENA (+5% like-for-like) and DvM (+9% like-for-like). Made further progress towards our target for the percentage of total Net Revenue from DvM, with good progress from strong, organic growth offset by unfavourable foreign exchange impacts from many emerging markets. 19 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBWhy we can deliver Health betterfinancials Powerbrands KEY PERFORMANCE INDICATORS Proportion of total Net Revenue from Health and Hygiene 74% 2014: 72% Target to 2020: 80% PERFORMANCE Continued to benefit from strategy of focusing on Health and Hygiene, which delivered like-for-like Net Revenue growth of 14% and 3% respectively. High quality, Health and Hygiene led growth of LFL +8%. 20 Health Hygiene OUR POWERBRANDS ARE: Health Hygiene Home • Durex, • Cillit Bang, • Air Wick, Gaviscon, Nurofen, Mucinex, Scholl, Strepsils Clearasil, Dettol, Finish, Harpic, Lysol, Mortein, Veet Calgon, Vanish, Woolite Portfolio Hygiene (including Food) • French’s Home Health Health Home 33% of Net Revenue DESCRIPTION Health and wellbeing are the key to happiness. Our health brands are generally sold over the counter and include products targeting everyday issues such as pain, fever, cold, flu, sore throat or heartburn. Our sexual wellbeing products, including condoms, lubricants and other aids, promote safe and pleasurable sex. The Health category also includes footcare, with products to address hard skin and other foot and nail conditions. PROGRESS Total Net Revenue was £2,942 million, with LFL growth +14% (total +14%) – an exceptional year of growth and outperformance relative to our markets. Growth was driven by a number of factors: Strong category growth, towards the high end of the +4-6% medium-term category growth trends. This is due to a strong cold and flu season at the beginning of the year. Innovation within the Scholl franchise, in particular our Velvet Hygiene Smooth Express Pedi, a series of insole initiatives, and the Velvet Smooth Electronic Nail Care System. This has delivered an outstanding performance throughout many ENA markets and a number of DvM markets. A full year of contribution from the successful Amopé franchise in North America following its initial launch in Q4 2014. Broad based growth across all of our Health Powerbrands, driven by innovation (eg; Durex RealFeel, Strefen Direct Spray). Consumer education programmes (eg; Nurofen Express), improved go-to-market capabilities (Russia and Turkey) and improved distribution and in-store execution programmes in pharmacies and online (Durex China). VMS performance was mixed, with good growth in Digestive Advantage and Move Free offset by weakness in Megared and Airborne. We believe we are well positioned to outperform long-term category growth within Consumer Health, driven by our market leading, trusted brands, strong consumer centric innovation pipeline, and significant investment behind medical professional and consumer education programmes. We do not believe, however, that the current level of growth is sustainable. Home RB / Annual Report and Financial Statements 2015Health Health Hygiene Hygiene 41% of Net Revenue Case study Dettol Squeezy DESCRIPTION Hygiene Hygiene is the foundation for healthy living. Our brands promote personal hygiene for good health and home hygiene, to create a safe environment for families. Our range includes disinfectant cleaners, multipurpose and speciality cleaners, lavatory care, automatic dishwashing detergents, pest control, depilatory products and acne treatments. PROGRESS Total Net Revenue was £3,589 million, with LFL growth of +3%. DvM weighted brands of Dettol and Harpic led the growth in this category behind both penetration-building programmes and innovations such as our new Dettol Squeezy hand wash and Harpic bathroom cleaner in India. Our pest franchise (led by Mortein and SBP) had a mixed performance, with innovations and strong demand in Brazil and Australia offset by weakness in India behind competitive activity. Finish also had a mixed performance with strong growth across emerging market countries and the UK offset by competitive market conditions in the US. Finish continues to be heavily weighted to developed markets. We continue to work on penetration improvement programmes with dishwasher machine manufacturers in order to drive category growth. Home Home Home 19% of Net Revenue DESCRIPTION Home is the centre of family life. Our brands help create the right environment for families to enjoy their time together. Products in this category include air care, water softeners, garment care and fabric treatment. PROGRESS Total Net Revenue was £1,715 million with LFL growth of +2%. Our largest Powerbrands of Air Wick and Vanish led the growth driven by fewer but larger innovations (Air Wick Life Scents range and Vanish Gold range) and scaling of these innovations across many markets. The roll-out of Air Wick Pure and launch of Wax Melts in the second half of 2015 are also showing strong in-market results. Vanish in Brazil had a challenging year due to both market conditions and competitive activity. Portfolio (including food) 7% of Net Revenue DESCRIPTION Portfolio includes the laundry and fabric softener business as well as Food brands. PROGRESS Total Net Revenue was £628 million, with LFL performance of +1%. The laundry detergents and fabric softener market in Southern Europe remains weak and competitive. However, the organisational changes made a year ago have helped stabilise the performance of our brands in this challenging category. We all understand the importance of hand washing in leading a healthier life and preventing dangerous diseases. However, in developing markets, hand washing is not yet a regular habit. Our research shows that consumers know that liquid hand wash is more hygienic than bar soap, which turns soggy and germ ridden over time. However, consumers can struggle to afford liquid hand soaps. We therefore took up the challenge to produce a liquid hand soap for the price of a bar of soap. The result is the innovative delivery mechanism for new Dettol Squeezy, which comes in a squeezable bottle and is loved by kids and adults alike. It gives consumers the same superior Dettol protection and is proven to kill 100 illness-causing germs. India is our largest hand wash market and we achieved one of our most successful launches there, when we introduced Dettol Squeezy in March 2015. 21 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBWhy we can deliver betterfinancials Virtuous earnings model DESCRIPTION We focus on higher-margin initiatives and rigorous control of our costs. Through our virtuous earnings model, this funds our investment in our brands, capabilities and development, and enables us to deliver operating margin expansion. KEY PERFORMANCE INDICATORS Adjusted Operating Margin 26.8% 2015 target: Moderate to ‘nice’ operating margin expansion Medium-term target: Moderate operating margin expansion We expect this to be supplemented in 2016 by part of the remaining Project Supercharge efficiencies. 22 PROGRESS Our virtuous earnings model continued to deliver in 2015. Increased gross margin +140bps We increased gross margin by 140bps (actual), driven by mix, commodity costs and cost optimisation. Reduced fixed costs -50bps We reduced fixed costs (excluding exceptional items) by 50bps, largely as a result of accelerated benefits from our Supercharge programme. Increased BEI +£48m We increased investment behind our brands, increasing BEI by £48 million (at constant exchange rates), which equated to 12.7% (-20bps) of Net Revenue. The efficiencies we have driven from our Supercharge programme have been reinvested back into brand equity building initiatives throughout the year. Net Revenue growth +6% We grew Net Revenue by 6% on a like-for-like basis. Increased Adjusted Operating Margin +210bps The outcome was an increase in the operating margin of 210bps, to 26.8%. RB / Annual Report and Financial Statements 2015 Gross Margin Our ethos is that the virtuous earnings model starts at gross margin. Gross margin creates room in the income statement to fund investment and deliver operating profit growth. We drive gross margin expansion through our focus on higher-margin brands, which results in a superior sales mix, stronger pricing and by continuing to optimise our cost of goods sold, an ongoing process we call Project Fuel. Fixed cost We always invest appropriately behind our people, capabilities and infrastructure. However, we deliberately keep our organisation lean and encourage our people to focus and prioritise. We constantly seek to avoid duplication, inefficiency and waste. Brand Equity Investment (BEI) There are many ways to invest behind brands. We focus our investment on consumer education and penetration-building activities, to build long-term brand equity. BEI includes our TV and print media spend, digital and social media investment and consumer and medical education. Net Revenue BEI helps us to drive Net Revenue growth, in particular as we invest disproportionately behind our Powerbrands and in our Powermarkets, ensuring we put our investment where it can have the greatest effect on the top line. Operating Margin Our operating margin is already best in class, but we believe that our virtuous earnings model means our ability to further expand our margins is far from over. Gross Margin Net Revenue UNIQUE CULTURE Fixed cost BEI Operating Margin 23 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBWhy we can deliver bettersociety Workplace DESCRIPTION PROGRESS Our trademark is to attract great people, give them a career packed with global challenges and experiences, inspire them with stretching performance-based rewards, and nurture an achievement-focused culture where winning is critical. At the same time, we look after our people and contractors through high standards of health & safety and adherence to RB’s code of conduct. We expect our suppliers to take similar care, and our human rights programme includes a range of measures to facilitate this. Health & safety Protecting our people is our priority. During this year a key initiative has been launched to further increase safety for our commercial offices and staff; this has included enhancing accountability, staff training and the release of global minimum safety standards. Research and Development (R&D) has completed a global risk register highlighting clear functional risks and mitigation in place; this work has led to the closing of gaps and will inform priorities for continually improving safety into 2016. After an initial pilot in 2014, we have expanded our process safety management programme into Africa, Latin America and India. This programme considers the risks and controls needed to manage catastrophic risk at our aerosol and chlorine manufacturing facilities. We have also reviewed our behavioural safety programme across our factories, which included us focusing the safety observation programme to encourage workers to challenge known poor behaviours and become a key tool leading to a continually enhanced safety culture. The outcome has been a further reduction in our lost work day accident rate, which fell by 13.9%, giving us an aggregate reduction since 2012 of 25.4%. A diverse and global workforce We value diverse backgrounds and experiences, which bring different perspectives and new ideas. Our Executive Committee (EC) is made up of seven nationalities and its members have had experience in multiple countries during their RB careers. Our “Top400” executives include 49 nationalities and 69% of our General Manager, marketing and sales leaders are working outside their country of origin. International assignments are part of our way of life and range from the most strategic to the most operational roles. Being immersed in different cultures and ways of working helps our top people to challenge conventional thinking. We are confident that those who consistently succeed at these challenges become global leaders of distinction. Diversity of course includes gender and this year we launched Project DARE, which aims to develop, attract, retain and engage talented women. Initiatives include more options for flexible working and a global maternity policy, which sets a minimum standard and makes us one of only a handful of employers with such a policy. Gender diversity The percentages of female members in the Group’s director, senior manager and all employee populations at 31 December 2015 were 29%, 19% and 42% respectively. The Group has designated the members of its “Top40” and “Top400” populations as RB’s ‘senior managers’ for the purposes of the gender split disclosure required by the Companies Act 2006. Of Board Directors, 10 were male and 4 female, of senior managers, 339 were male and 78 female, and 15,027 of all employees were male and 10,723 female. There is a variance in total employee numbers from those reported in note 5 on page 111, in respect of contracted labour for which gender split information is not available. KEY PERFORMANCE INDICATORS Increased supplier audits since 2014 51% Lost work day accident rate1 0.080 2014: 0.093 Target: continual reduction year-on-year 1. At manufacturing, warehouse and R&D sites. 24 RB / Annual Report and Financial Statements 2015 We take on around 200 graduates each year, placing them in our larger markets, where we have the critical mass to develop them. We put considerable effort into identifying which universities will provide our next generation of leaders, considering not just their academic prowess but also their fit with our entrepreneurial culture. Succession planning is a key focus and we review our plans at each monthly EC meeting. The EC oversees planning for all “Top40” and “Top400” roles, while regional leaders plan for middle manager positions, which are those below our “Top400”. Our aim is to grow half our middle managers ourselves and to recruit the remainder from outside, ensuring we bring in people who think differently. STRETCHING PERFORMANCE-BASED REWARDS Our reward system is designed to attract and inspire a high- achievement talent base. We provide competitive base salaries and significant short and long-term incentives, which are set to deliver outstanding rewards for outperformance. Measures are simple, unambiguous and concrete. Average performance results in average bonuses, while top performance results in excellent rewards. We believe this unique approach ensures we attract the right people. Our annual performance reviews assess both what our people have achieved and how they have done it. The ‘how’ is defined by the behaviours expected in our culture and our Leadership Charter. We have a career tool, which helps our people to identify the functional and leadership development they need. Training follows our 70/20/10 model, with 70% on the job, 20% learning from others and 10% formal training. On-the-job training mostly consists of stretch assignments, since we believe people learn best when challenged. UNDERSTANDING ENGAGEMENT We use a bespoke survey, which we call our Culture Pulse, to measure how well our people think we are doing. This measures our performance against our Culture and our Leadership Charter, which sets out how we behave and how we deliver. The survey identifies the areas that are most important to our people and where we are doing least well, relative to the other areas. We then formulate action plans at a local level to address these issues. The results show that our people are highly engaged to work at RB, and that they value both our culture and our Leadership Charter. Read more in our Sustainability Report HUMAN RIGHTS RB has had a human rights programme in place for some years and in 2015 undertook a review of its approach against industry comparators and the UN Guiding Principles on Business and Human Rights (UNGPs). We have established a range of mechanisms that use cross-functional support to engage on human rights with suppliers and to identify and address any issues identified. These measures focus on our own operations and supply chain and include due diligence, self assessments, audits, internal and external training and other capacity building initiatives. We acknowledge the growing importance and complexity of human rights and are committed to continuously improving our programme of activity in this area. Case study Lost Work Day Accident Rate Our Shangma site in China has led the way in proactively improving safety and reducing the number of accidents on site. An innovative and focused approach on legal compliance, worker participation, procedures, health initiatives and leadership enabled the site to achieve 5 million hours worked without a lost work day, by the end of 2015. In November, the site held a safety week to celebrate this achievement and to look at how it could drive its health & safety culture forward in 2016 and beyond. The LWDAR is the number of workplace accidents (resulting in at least one day of lost time) that occur per 100,000 hours of work. 1.340 1.5 1.2 0.9 0.815 0.6 0.3 0.0 0.577 0.404 0.324 0.338 0.220 0.182 0.142 0.136 0.127 0.107 0.107 0.093 0.080 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 25 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBWhy we can deliver bettersociety Communities DESCRIPTION As a responsible business, we recognise our larger role in society. Our community initiatives support our vision of a world where people are healthier and live better. We do this by promoting health and hygiene messages, bringing together the awareness and education work of our Dettol, Lysol, Harpic, Mortein and Durex brands, and through our partnership with Save the Children, which aims to eradicate child deaths from diarrhoea. PROGRESS Our aim is to reach over 200 million people by 2020, to help them improve their health and hygiene. This includes delivering hygiene, sanitation, sexual health and mosquito-borne disease prevention programmes. These programmes support the UN’s Sustainable Development goals. Our progress has been rapid and this year we exceeded our 2020 target, which is why we have decided to increase the goal to reach 400 million people by 2020. Since 2013 we have reached: • 104 million people through hygiene and sanitation programmes; • 115 million people with sexual health messaging; and • 20 million people with malaria/dengue prevention education programmes. Save a Child Every Minute is our diarrhoea eradication programme with Save the Children. In March 2015, we unveiled two innovative products to support the programme – a low-cost germ protection bar and a toilet powder which makes pit latrines more hygienic. Profits from these products will be reinvested in the programme and they will be produced locally, to encourage entrepreneurship and reduce their environmental footprint. In 2015 we committed £6.5 million to the programme, of this £3.25 million was raised through RB events worldwide, plus a corporate donation of £3.25 million. We have a proactive programme of assessing the ingredients of our products and have a restricted substances list, which contains ingredients we have phased out or are in the process of phasing out. Towards the end of the year, we introduced a new policy covering restricted substances. We provide ingredients information to consumers on packs, via our consumer care lines and, in some countries, through ingredients websites. We continue to roll-out new websites, so more consumers can obtain meaningful information. Products DESCRIPTION We are committed to advancing global health, consumer safety and environmental protection by continuously optimising our products and aim to increase the proportion of our revenue that comes from products that we’ve made more sustainable. We are focused on ingredient innovation and increased transparency and aspire to provide 100% transparency about the ingredients in our products. PROGRESS The proportion of Net Revenue from more sustainable products rose to 6%, from 5% last year. To ensure our products are fit for the future, our primary focus has been on improving the sustainability profile of our innovations. By the end of 2015, almost 70% of our pipeline consisted of more sustainable products, up from 50% last year. From 2016, we will also include existing products where we have made changes that have a meaningful sustainability impact. 26 KEY PERFORMANCE INDICATORS TARGET to 2020 People reached with health and hygiene messaging1 200m 1. This goal has been increased to 400 million. PERFORMANCE:2 237m since 2013 2. Total number of people reached is lower than the sum of the programmes to account for possible double counting. Save a Child Every Minute TARGET Remove diarrhoea as one of the top killers of children PERFORMANCE: Committed £6.5 million to the programme in 2015 KEY PERFORMANCE INDICATORS TARGET to 2020 Net Revenue from more sustainable products 1/3 of Net Revenue PERFORMANCE 6% of Net Revenue up from 5% of Net Revenue RB / Annual Report and Financial Statements 2015betterenvironment Greenhouse gas emissions DESCRIPTION PROGRESS We look to reduce our greenhouse gas (GHG) emissions by designing more sustainable products and by continually improving our manufacturing processes. Sustainability is a key element of our innovation process as we look at the carbon footprint of our products across their entire lifecycle, from the sourcing of raw materials to the way they are manufactured, used and disposed of. Our total carbon footprint per dose has remained broadly unchanged since 2012. While we are making good progress in the areas within our control, like manufacturing, we have not seen material reductions from the largest part of our footprint – those associated with consumers using our products. We are reducing carbon emissions associated with energy use by focusing on energy efficiency programmes, investing in on site renewable technologies and procuring energy from renewable sources. Our GHG emissions for 2015 were made up of: 1. Combustion of fuel and operation of facilities (Scope 1) 79,502 tCO e (2014: 86,235). 2 2. Electricity, heat, steam and cooling purchased for our own use (Scope 2): 214,586 tCO e (2014: 219,202). 2 Our total Scope 1 and Scope 2 emissions in 2015 were therefore 294,087 tCO e (2014: 305,437). 2 We calculate our emissions intensity per unit of production. This equated to 0.0389 tCO e per unit of production in 2015 (2014: 0.0410). 2 Footnote Our GHG data includes all GHG emissions from operations covered by the Group Financial Statements for which we have operational control. We include emissions for businesses we acquire in the first full calendar year of our ownership. We calculated CO e emissions using internationally recognised methodologies from the WRI/WBCSD Greenhouse Gas Protocol and International Energy Authority (IEA). Scope 2 GHG emissions reported in 2015 are net emissions which equals gross emissions from renewable electricity purchased (7,542t). 2 KEY PERFORMANCE INDICATORS TARGET to 2020 Carbon footprint per dose of product 1/3 reduction TARGET to 2020 GHG emissions per unit of production 40% reduction Case study PERFORMANCE Increase since 2012 1% PERFORMANCE Reduction since 2012 14% Scholl Velvet Smooth Express Pedi’s reduced packaging Following the success of the Scholl Velvet Smooth Express Pedi in 2014, we challenged ourselves to think bigger in a way that would drive even stronger growth. Aligned with our FUEL programme, we chased product improvements that improved sustainability while simultaneously delivering cost savings, focused on two areas. Packaging adaptation improved the product’s visibility at the point of sale while decreasing the amount of materials used. Product improvements decreased the complexity of the device, while increasing durability. In total, we made a 26% reduction in material weight per product, saving approximately 300 tonnes of PET and 137 tonnes of paper and board each year. Combined, these changes will save over £5 million and 3,500 tonnes of CO per year. 2 27 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RB Why we can deliver betterenvironment Water DESCRIPTION We seek to reduce the water impact of all our products throughout their lifecycle, from raw materials sourcing through to the way they are manufactured, used and disposed of. We also consider water scarcity in specific locations. PROGRESS We continued our ongoing initiatives to reduce the water impact of our operations, including identifying sites in areas of water scarcity, so we can plan ahead. While we are making good progress in the areas within our control, the majority of our total water impact comes from the water used by consumers for our hygiene products, especially bar soap in developing markets, which creates a tension for us as our drive to improve people’s lives through better hygiene inevitably results in greater water use for washing. KEY PERFORMANCE INDICATORS TARGET to 2020 Water impact per dose of product PERFORMANCE Reduction since 2012 1/3 reduction 9% TARGET to 2020 Water use per unit of production PERFORMANCE Reduction since 2012 35% reduction 30% Waste DESCRIPTION Our aim is for none of our waste to go to landfill. We also look to reduce the waste created by our manufacturing processes. We are creating a culture of zero waste and look for new revenue streams and disposal options, for example where other organisations can use our waste as raw materials. PROGRESS We made further good progress, with our manufacturing sites showing great motivation to achieve our waste targets. At some sites, landfill is our only disposal option but we continue to develop partnerships with others who can use our waste, so we do not have to dispose of it. We are also committed to reducing waste from our products by using less packaging. 28 KEY PERFORMANCE INDICATORS TARGET to 2020 Factories sending zero waste to landfill PERFORMANCE Factories sending zero waste to landfill 100% TARGET to 2020 Manufacturing waste per unit of production1 10% reduction 1. Increased 2020 target to 20% reduction over 2012 baseline. 89% PERFORMANCE Reduction since 2012 14% RB / Annual Report and Financial Statements 2015 Sourcing DESCRIPTION PROGRESS We believe in responsibly sourcing all our natural raw materials. Our policy clearly defines the minimum standards expected of our suppliers. We are committed to zero deforestation, zero development on peatlands and zero exploitation of workers or communities, and to being transparent about our requirements and our progress. Our responsible sourcing programmes focus on high-risk commodities such as palm oil and latex. We have continued to make good progress against our responsible palm oil sourcing targets. Partnering with TFT we have undertaken a detailed review of our physical palm oil supply chain, achieving 100% traceability to refinery in 2014, and 70% traceability to mill in 2015. Additionally, we completed on-the-ground risk assessments for all key suppliers and have Green Palm Certificates covering all palm oil procured. During the year, we completed due diligence including on-the-ground field assessments of our latex supply chain. The findings of these assessments confirm that RB’s latex has been responsibly sourced, meeting the requirements of our Natural Raw Material standard. We are now conducting a scoping exercise to identify opportunities to work with smallholder farmers within our latex supply chain. KEY PERFORMANCE INDICATORS TARGET to 2020 All natural raw materials to be responsibly sourced PERFORMANCE Palm oil traced to mill1 70% 1. Excluding surfactants. Case study Reducing waste to landfill We have a goal of achieving zero waste to landfill by 2020. To help us reach this target, we are creating partnerships with local businesses and the communities in which we operate, to develop innovative solutions. In our Jammu pest factory, in India, a local brick manufacturer is now using our briquette ash to make bricks for boundary wall construction. This has diverted 2,100 tonnes of waste from landfill annually, reducing waste to landfill in our Asia region by 92%. 92% reduction in waste to landfill in our Asia region 29 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBHow we can deliver Our operating model Our operating model is to use FMCG experience to develop, acquire, produce, distribute and promote consumer products in growing Health, Hygiene and Home categories. Our model has three key elements, which enable us to create value for all our stakeholders, but primarily for our consumers, our people and our Shareholders. Capital inputs Create Scale Financial Shareholders’ equity, debt and retained profit + Intellectual Proven clinical R&D capabilities, well-loved brands and an agile organisation + Manufactured Well-invested manufacturing sites, R&D laboratories and logistics centres + Human Highly motivated people and partners, in a culture of outperformance + Social Strong, value-creating relationships with customers, consumers, suppliers and communities + Natural Natural raw materials, water and energy Create innovative products that meet under-served demands Scale our innovations, to make them as global as possible Innovate • Consumer insight • Clinically proven R&D • Embedded sustainability Procurement • Centralised globally • Sustainably sourced Manufacturing • 46 factories • Quality assurance Commercial operations • Power of 1 – One lead market for each Powerbrand • 124 logistics centres globally • Best-in-class supply services Acquisitions • Rapid acquisition integration 30 RB / Annual Report and Financial Statements 2015Activate Outcomes we deliver Activate our ideas, through our customer relationships and driving consumer demand Customer networks • Sales in most countries across the globe • Global sales operations and strategic partnerships • Local sales forces with executional excellence Consumer education • Brand equity investment Employees Rewarding careers for our people + Consumers Innovative solutions that make a difference + Shareholders Sustainable growth and outperformance + Global leader in health and hygiene Customers Leading brands that drive profitable category growth and footfall + Communities Healthier and happier communities through the use of our products See our operating model in action on page 32 31 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RB How we can deliver Our operating model in action Our operating model is to use FMCG experience to develop, acquire, produce, distribute and promote consumer products in growing Health, Hygiene and Home categories. Our model has three key elements, which enable us to create value for all our stakeholders, but primarily for our consumers, our people and our Shareholders. Create Continuous and successful innovation is the key for staying ahead in our markets. Consumer insights are the starting point for all our innovations. Through our focus groups and digital channels, we gain a deep understanding of consumers’ needs, including needs that consumers are not yet aware of. Every day, our people generate new ideas for meeting those needs. We also increasingly partner with third parties who bring us ideas for great products. To maximise our return on investment, we focus on under-served needs, where we can create differentiated products which result in greater consumer loyalty, faster growth and better margins. We also concentrate our investment on ideas with blockbuster potential, rather than smaller enhancements to existing products. Speed is critical, so we focus on advances that come to life in months, not years. We then leverage our R&D capabilities to develop clinically proven and innovative solutions, through R&D hubs in the UK, India and the US which specialise in particular product categories. The process contains ‘gates’, ensuring we regularly test the idea as development proceeds. Our spread by geography and product category reduces the risk of any one innovation failing to deliver. Sustainability considerations are built into our innovation process, for example as we look to minimise the carbon emissions and water used to make our products. In action Create Scholl Velvet Smooth Express Pedi We identified a widespread under-served need for quick and effective removal of hard skin. Consumers had been using pumice stones and manual files for hundreds of years, with few improvements. We test-marketed an electronic foot file and validated its potential, then improved both the design and performance to enable a rapid worldwide launch in 2014. In 2015, we introduced additional versions to create a very strong second wave of growth. These included further device designs to target specific consumer types, and different coarseness levels for the roller-heads, to achieve optimum performance for different skin types. 32 RB / Annual Report and Financial Statements 2015Scale Activate Centralised procurement leverages our global purchasing power, while ensuring we source sustainably and responsibly. We then manufacture our products in 46 factories worldwide, which continually strive to improve efficiency and reduce their environmental impact. All our Powerbrands are manufactured in-house, while carefully selected third parties manufacture some other brands on our behalf. Quality is essential, so we have a dedicated assurance team. The stringent quality requirements in healthcare mean that we manage our consumer health factories globally, to ensure we consistently meet our standards. To make our products physically available, we have 124 logistics centres worldwide, holding finished products for quick and efficient distribution. Our supply services organisation is customer facing and aims to achieve best-in-class delivery and customer satisfaction. To scale our innovation more quickly, we identify a lead market for our Powerbrands and use our Power of 1 teams to develop a global launch package that we can then take everywhere, minimising reworking and inconsistency. Our strong Balance Sheet and sector-leading cash conversion also allow us to acquire brands that add value and support our vision. We quickly integrate acquired brands, so they benefit from our global value creation model. Our brands include many category leaders. They drive footfall for our retail customers, which encourages them to stock our products. We develop strong relationships with major retailers, so we can work together to promote our products and drive growth and penetration of the product category. To support our efforts, we have over 60 commercial operations worldwide, with local sales, marketing and doctor/medical detailing teams. Our global sales operation manages our global retailer relationships and our relationships with strategic partners such as Facebook. We use distributors to reach smaller retailers and build relationships with these distributors that focus on executional excellence. Ultimately, our business depends on consumer demand for our products. We invest heavily behind our brands, through targeted television and print advertising, social and other digital media, and consumer and medical education. Our virtuous earnings model (see pages 22 to 23) enables us to fund this investment. This in turn enables us to grow revenues while increasing our margins, driving returns for Shareholders. In action In action Scale Scholl Velvet Smooth Express Pedi Activate Scholl Velvet Smooth Express Pedi We used the lessons from our test-marketing to optimise our sales and marketing plans. Combined with agile centralised production, this enabled us to launch across 50 markets in 2014 – a record for RB. In 2015, we further tightened the process and focus, allowing us to introduce the additional versions across these same markets in under six months. Our rapid roll-outs and the resulting success enabled us to define how to achieve executional excellence. By continually sharing and applying this knowledge, we were able to drive further success in market. Strong retailer profitability drove increased collaboration, leading to greater and more visible physical availability and creating a virtuous cycle. With these well co-ordinated Create-Scale-Activate activities, sales of Velvet Smooth Express Pedi doubled in 2015, building on an already strong 2014 performance. 33 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBWhat we can deliver Creating stakeholder value Our business model is designed to create value for all our stakeholders. In the process, it ultimately creates a sustainable, long-term and growing business, which adds value for our Shareholders. For our People We provide fascinating and challenging careers for our people, with the opportunity to work across a growing group and around the world. We invest in their development, so they can maximise their potential, recognising that this benefits them and us. We enable our people to take responsibility so they can get things done, and provide excellent rewards for outstanding performance. For our Shareholders For our Customers Our culture and strategy have delivered strong operational and financial performance, which in turn enable us to grow our dividend and return funds to Shareholders through share buybacks. This success has helped us to generate outstanding long-term Shareholder returns. If you had invested £100 on 1 January 2000, that investment would have been worth £1,721 at the end of 2015. That same £100 invested in the FTSE 100 would be worth £156 over the same period. With our many market-leading brands, our products are an important driver of footfall and web traffic for our traditional and online retail customers, which in turn helps them to grow their revenue. This is underpinned by our strong customer relationships and our ability to successfully activate our products in-store. Through our innovation and penetration-building activities, we are able to grow our categories and further increase revenue for us and our customers. 34 RB / Annual Report and Financial Statements 2015For our Consumers Preview of 2016 Initiatives Consumers benefit from safe, high-quality products that help them to lead healthier lives and have happier homes. Our over-the-counter Health brands provide quick and easily accessible relief for common ailments and support our consumers’ wellbeing. Hygiene products help to protect consumers, while our Home products create a pleasant and comfortable home environment that families love. Through our relentless focus on innovation, we meet our consumers’ changing needs and ensure our products play an important part in maintaining and improving their lifestyles. For our Communities We use our capabilities and the passion of our people to benefit our communities, by educating and raising awareness of the benefits of improving health and hygiene standards. Through our partnership with Save the Children, we aim to stop diarrhoea being a major killer of children. Other products – such as Durex and Mortein – have a key role to play in preventing sexually transmitted and mosquito- borne diseases respectively. RB has announced a number of new product initiatives for the first half of 2016: Health • Nurofen Soft Chews for Children: Effective relief with just the right strength medicine for kids 7-11. In an innovative gummy format; they’re easy to chew and no need for water. • Scholl Velvet Smooth Wet & Dry: for soft, beautiful feet effortlessly: on wet and dry skin. • Scholl Athlete’s Foot Complete Pen & Spray Kit: The first Athlete’s Foot treatment kit to provide both effective treatment and prevention from reoccurrence. • Roll-out of Durex Invisible condom: Durex’s thinnest condom – offered in a super premium pack, maximising shelf impact. Offers consumers ultimate sensitivity for an even closer connection, protected by Durex quality. • Durex Pleasure Ring: Harder for Longer. Durex’s new constriction ring helps men maximise hardness for longer and to intensify the pleasure for them and their partner. Hygiene • Dettol Gold: Delivers 100% superior germ killing action vs. other anti-bacterial soaps in the market. • Lysol Disinfectant Max Cover Mist: New wide area disinfectant mist for unbeatable protection and deodorisation of your large surfaces. • Harpic/Cillit Bang/Lysol Fresh Power 6: Same amazing freshness from the first to the last flush. • Finish Supercharged Powerball: One supercharged solution for all your dishwashing needs. Home • Air Wick Pure: Just fragrance, no wet spray. A water-free aerosol to enjoy the pleasure of Pure fragrance. • Air Wick scented Oil Warmer: The ultimate fragrance control for a superior fragrance experience. Food • French’s ‘better for you’ Ketchup and Mustard: A new range of products under our ‘Promise’ campaign, which is anchored in three pillars: Real Ingredients, Great Taste and Commitment to our Communities. In 2015 all French’s formulas were reviewed and all those that did not comply with our ‘Promise’ principles were reformulated. We removed high fructose corn syrup and all artificial flavours, colours and fillers from all our formulas. 35 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RB Financial Review “In mixed market conditions, RB delivered an excellent year of growth and margin expansion, driven by an exceptional performance in our Consumer Health brands.” Adrian Hennah / Chief Financial Officer Like-for-like revenue growth +6% 2015 target: +4% Adjusted Operating Margin expansion +210bps 2015 target: Moderate to ‘nice’ expansion 36 Total full year (FY) Net Revenue was £8,874 million, an increase of +5% at constant exchange rates, (nil% on a reported basis) and +6% on a LFL basis. The impact of net M&A was slightly negative, as a positive impact from our K-Y acquisition was more than offset by the disposal of our Footwear and Medcom Hospital businesses. Negative foreign exchange on translation reduced Net Revenue by 5%. From a geographic perspective growth was broad based. Our developed market area of ENA delivered LFL growth of +5%, an excellent performance where markets are stable. Our emerging market area (DvM) delivered +9% LFL growth with improving trends in the second half driven by India and China. Brazil and parts of ASEAN remain challenging. Health had an exceptional year of +14% LFL growth (nil% on a reported basis), with a combination of successful innovations (e.g. Scholl Express Pedi and electronic nail file, and Durex Invisible), a strong flu season at the beginning of the year, and a large new brand launch in the US (Amopé). We believe we are well placed to outperform in Consumer Health, but continue to emphasise that double digit growth – well above the longer- term category growth rate of 4-6% – is not sustainable. Gross Margin increased by +140bps to 59.1%, with contributions from mix, input costs and cost programmes. Product mix was favourable as Consumer Health brands grew at a higher rate than the rest of the business. We also continued to deliver supply chain savings through our Project Fuel cost optimisation programme. The impact of commodity driven input costs will vary from year-to-year, and in 2015 these were a significant tailwind, offset somewhat by negative transactional foreign exchange (strengthening of the US dollar versus most currencies). Gross Margin has, and will continue to, drive our virtuous earnings model, as we focus on favourable mix, driven by Consumer Health led growth, Project Fuel, pricing and gross margin enhancing innovations across our Powerbrands. We increased investment behind our brands (as defined by our BEI metric), by +£48 million (constant exchange), -20bps to 12.7% of Net Revenue. The efficiencies we have driven from our Supercharge programme, (e.g. consolidation of creative agencies and media buying savings), have been reinvested back into brand equity building initiatives throughout the year. We continue to expect Project Supercharge to deliver approximately £150 million in annual cost savings over three years, and have achieved a significant portion of those savings within the first year. Operating profit as reported was £2,241 million, +4% versus FY 2014 (+7% constant), reflecting the impact of an exceptional pre-tax charge in 2015 of £133 million (2014: £21 million). The exceptional items were in line with previously announced programmes, principally the disposal of the Medcom Hospital business and Supercharge. Details of the exceptional charge are set out in Note 3 on page 110. On an adjusted basis, operating profit was ahead +9% (+12% constant) to £2,374 million. The Adjusted Operating Margin increased by +210bps to 26.8%, due to the strong gross margin expansion, and approximately £100 million Project Supercharge led cost efficiencies. Net income as reported was £1,743 million, an increase of +5% (+8% constant) versus 2014. On an adjusted basis, net income was £1,871 million +11% (+15% constant). Diluted earnings per share of 240.9 pence was +6% on a reported basis; on an adjusted basis, the growth was +12% to 258.6 pence. RB / Annual Report and Financial Statements 2015Balance sheet At the end of 2015, the Group had total equity of £6,906 million (2014: £6,834 million), an increase of +1%. Net debt was £1,620 million (2014: £1,543 million). The Group had non-current assets of £12,386 million (2014: £12,336 million), of which £730 million (2014: £757 million) is property, plant and equipment, the remainder being goodwill, other intangible assets, deferred tax, retirement benefit surplus and other receivables. The Group has Net Working Capital of -£936 million (2014: -£831 million), current provisions of £229 million (2014: £317 million) and long-term liabilities other than borrowings of £2,652 million (2014: £2,737 million). The Group’s financial ratios remain strong. Return on Shareholders’ funds (net income divided by total Shareholders’ funds) was 25.2% on a reported basis and 27.1% on an adjusted basis (2014: 47.2% on a reported basis and 28.7% on an adjusted basis). Dividends The Board of Directors recommends a final dividend of 88.7 pence (2014: 79 pence), to give a full year dividend of 139 pence (2014: 139 pence). The dividend, if approved by Shareholders at the AGM on 5 May 2016, will be paid on 26 May 2016 to Shareholders on the register at the record date of 15 April 2016. The ex-dividend date is 14 April 2016 and the last date for election for the share alternative to the dividend is 5 May 2016. The final dividend will be accrued once approved by Shareholders. Capital returns policy RB has consistently communicated its intention to use its strong cash flow for the benefit of Shareholders. Our priority remains to reinvest our financial resources back into the business, including through value-adding acquisitions. Through continued strong cash generation the Group has reached a net debt level of approximately £1.6 billion. It is not possible to be definitive on future needs, but we consider that this provides the Group with appropriate liquidity. We intend to continue our current policy of paying an ordinary dividend equivalent to around 50% of adjusted net income. We also intend to continue our current share buyback policy which will broadly maintain our current debt level in 2016, subject to future M&A activity. Contingent liabilities The Group is involved in a number of civil and/or criminal investigations by government authorities as well as litigation proceedings and has made provisions for such matters where appropriate. Where it is too early to determine the likely outcome of such matters, or to make a reliable estimate, the Directors have made no provision for these potential liabilities. The Group from time to time is involved in discussions in relation to ongoing tax matters in a number of jurisdictions around the world. Where appropriate, the Directors make provisions based on their assessment of each case. Net finance expense Net finance expense was £33 million (2014: £38 million). Tax The effective tax rate was 21% (2014: 22%) and the tax rate excluding exceptionals was 20% (2014: 22%). The UK Chancellor has enacted future reductions in the UK corporate tax rate in 2017 and 2020. These reductions will have only a small impact on our ongoing tax rate. They have, however, a larger non-recurring accounting impact on our reported tax charge during 2015 (the year of enactment) as we have a significant deferred tax liability in the UK, the size of which will be reduced by lower future tax rates. Whilst there is no impact on cash tax payable from this adjustment to our deferred tax liability, our tax rate has been positively impacted in the year by 3%. We continue to expect our sustainable, underlying Group effective tax rate to be in the region of 23%. Net Working Capital Inventories decreased to £681 million (2014: £745 million) in part due to foreign exchange and our sustained focus on inventory management. Trade and other receivables were broadly maintained at £1,331 million (2014: £1,307 million). Trade and other payables increased to £2,948 million (2014: £2,883 million) in part due to the reclassification of a long-term payable to short- term payable. Together this has led to a decrease in Net Working Capital to -£936 million (2014: -£831 million). Net Working Capital as a percentage of net revenue is -11% (2014: -9%). Cash flow Converting our profit into cash is an important part of our culture and compensation ethos. Cash generated from operations was £2,295 million (2014: £2,324 million). Net cash generated from operating activities was £1,784 million (2014: £2,099 million) after net interest payments of £31 million (2014: £32 million) and tax payments of £480 million (2014: £416 million). The decrease largely reflects the demerger of Indivior plc in the prior year (£223 million) and higher tax payments. Free cash flow is the amount of cash generated from operating activities after capital expenditure on property, plant and equipment and intangible assets and any related disposals. Free cash flow reflects cash flows that could be used for payment of dividends, repayment of debt or to fund our strategic objectives. Free cash flow was £1,656 million (2014: £1,934 million, £1,711 million excluding cash flows from discontinued operations). Free cash flow conversion as a percentage of continuing net income was 95% (2014: 103% excluding cashflows from discontinued operations) with the reduction due in part to higher tax payments. Net debt Net debt at the end of the year was £1,620 million (2014: £1,543 million). This reflected strong free cash flow generation, offset by the payment of dividends totalling £924 million (2014: £988 million) and net M&A of £10 million (2014: £340 million). The Group regularly reviews its banking arrangements and has adequate facilities available to it. Exceptional Items A pre-tax exceptional charge of £133 million has been incurred during the year; £76 million in relation to the ongoing restructuring of the Group’s organisation and the integration of prior year acquisitions and a further £57 million loss on the disposal of the Medcom hospital business. This included a loss of £33 million arising from the recycling, from equity, of previous exchange losses arising from consolidation of the legal entity sold. 37 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBFinancial Review continued Return on capital employed (ROCE) 25% 20% E C O R 15% 10% 5% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 As reported Excluding RB Pharmaceuticals (RBP) YEAR RB’s return on capital employed (ROCE), both “as reported” and adjusted for the demerger of RBP, is set out above. A return-based, approach is firmly embedded into both organic operational activities and M&A transactions undertaken by the Group. Organic activities Operational activities which utilise capital employed are undertaken with the same rigorous and returns-based approach, which we adopt for brand equity investment and other “P&L” based investments: A transaction may reduce the Group’s ROCE during the years immediately following the transaction. Of key importance, however, is the generation of an appropriate cash return on invested capital within a reasonable time frame. The Group deliberately sets no return thresholds for an acquisition, as transactions vary in nature, strategic importance, risk and size. The Group does, however undertake a significant amount of analysis and due diligence prior to any transaction to review the return expected to be generated by the end of year three, compared to the Group’s weighted average cost of capital (WACC). • Capital expenditure (capex) – all proposed capex must be supported by a relevant business case. We do not set rigid capex budgets each year, but allow the organisation to invest where and when the case is strong. We assign a high priority to projects addressing safety and quality opportunities. Capex levels are on average approximately 2% of Net Revenue. • Net Working Capital (NWC) – tight management of inventories, payables and receivables is always required. The Leadership in every market in which RB operates is targeted on NWC performance. It is typically one of the three multiplicative metrics which determine the annual bonus. NWC is on average approximately minus 8–9% of Net Revenue, superior to industry averages. Inorganic activities Our principal focus is on organic growth. However, there is an inorganic element to our strategy focussed around both value accreting acquisitions, and non-core / tail brand divestures. Decision making with respect to inorganic opportunities is taken at a Group level. Our front-line operations play the leadership role in building the case for an acquisition, the due diligence prior to a transaction and delivering value once a transaction takes place. As management are required to hold a significant personal stake of RB shares, there is strong alignment of interest between management and shareholders in seeking to ensure that transactions deliver an appropriate return within an appropriate time frame. Post investment reviews of all transaction are undertaken on a regular basis and discussed at a Board level. Review of RB ROCE The Group’s ROCE declined immediately following the acquisitions of BHI (2006), Adams (2008), SSL (2010) and Schiff (2012) and then improved as good returns were subsequently generated. It was also negatively impacted in 2013 with the demerger of RBP, as RBP earned a high return on capital employed (RBP ROCE is removed in reported data from both 2014 and its comparative year, 2013). RB performed well in 2014. ROCE performed less well, however, as reported profit was reduced by significant foreign exchange headwinds (-10% negative translational impact on Group profits), while capital employed was less impacted as the majority of the Group’s net assets (especially intangible assets) are denominated in either sterling or US dollars – both of which showed meaningful strength versus other currencies. In 2015 the Group ROCE increased following a year of excellent organic growth and a minimal increase in capital employed. 38 RB / Annual Report and Financial Statements 2015Non GAAP measures Throughout the Annual Report, the following terms are used to describe RB’s financial performance. These terms are defined below: • Like-for-like (LFL) growth on Net Revenue excludes the impact of changes in exchange rates, acquisitions and disposals. • Continuing growth on Net Revenue excludes the impact of changes in exchange rates and disposals. • Constant exchange rate adjusts the actual consolidated results such that the foreign currency conversion applied is made using the same exchange rates as was applied in the prior year. • Actual exchange rates show the statutory performance and position of the Group, which consolidates the results of foreign currency transactions at year-end closing rates (Balance Sheet) or annual average rates (Income Statement). • BEI represents our Brand Equity Investment and is the marketing support designed to capture the voice, mind and heart of our consumers. • Adjusted results exclude exceptional items, defined as material, non-recurring expenses or income. • Free cash flow is defined as net cash generated from operating activities less net capital expenditure. • Return on Capital Employed (ROCE) is defined as Net Adjusted Operating Profit after Tax divided by capital employed, where capital employed is measured as Total Assets less non-interest bearing Current Liabilities. Summary of % Net Revenue growth ENA DvM Food Group Health Hygiene Home Portfolio Group LFL +5% +9% +4% +6% Net M&A -1% – – -1% LFL Net M&A +14% +3% +2% +1% +6% +1% – – -9% -1% FX -5% -6% +6% -5% FX -5% -4% -7% -2% -5% FY 2015 Reported -1% +3% +10% – FY 2015 Reported +9% -1% -5% -10% – LFL +3% +6% +3% +4% LFL +8% +3% +1% -5% +4% Net M&A – +1% – – Net M&A +2% – – -11% – Adjusted Net Income Net income attributable to owners of the parent from continuing operations Exceptional items Tax effect of exceptional items Adjusted net income attributable to owners of the parent from continuing operations Free Cash Flow Cash generated from operations Plus proceeds from sale of property, plant and equipment Less net interest paid Less tax paid Less purchase of intangible assets Less purchase of property, plant and equipment Free cash flow FX -7% -12% -6% -9% FX -8% -9% -10% -7% -9% 2015 £m 1,743 133 (5) 1,871 2015 £m 2,295 51 (31) (480) (25) (154) 1,656 FY 2014 Reported -4% -5% -3% -5% FY 2014 Reported +3% -5% -8% -15% -5% 2014 £m 1,663 21 – 1,684 2014 £m 2,324 19 (32) (416) (27) (157) 1,711 39 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBStrategic Risks Our framework for risk management The following table provides a summary review of the principal strategic risks and uncertainties that could affect the Group, as identified by management and the Board. RB operates a major risk assessment process to periodically identify, assess and mitigate those risks it considers to be most significant to the successful execution of our strategy. The most senior leaders 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 is then synthesised into the Group’s top risks, with each risk having an Executive Committee (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. 40 The Group’s activities expose it to a number of other risks which, while also actively managed, may still adversely impact the business and its financials. A more detailed consideration of a broader range of risks faced by the Group appears on pages 158 to 164 of this report. Group major risks 1. Non-Compliance of Licensed Products 2. Supply Business Continuity Planning 3. Non-Compliance with Quality Standards 4. ERP/IT Systems Failure 5. Cyber Security and Data Protection 6. Loss of Key Management 7. Significant Country Under- performance 8. Legal Non-Compliance 9. Major Tax Disputes 10. ‘Black Swan’ Event Compared with a year ago, the Cyber Security and Data Protection risk is now considered sufficiently material to include this for the first time as a Group major risk, while Activities Upscheduling has been downgraded and removed from the list, as the materiality of the exposure has reduced significantly. Exchange rate risk A description of the exchange rate risk to the Group, and the means used to mitigate that risk, appears on page 164 (General Financial Risks of a Global Company) and on pages 163 to 164 (Currency Exchange). Viability statement Management conducted a viability review covering a five-year period. This period was selected as it is the period covered in the Group’s long-term forecasting process. This period covers the introduction to market of the current product pipeline. The five-year viability review first looks at the Group’s ability to continue in operation if it performs in line with the Group forecast. This assumes that normal market conditions continue and current trends remain. The evaluation takes into account the Group’s cash flow, historic Group planning accuracy, available banking facilities and interest cover ratios in connection with financial covenants. The analysis concluded that if RB performs in line with forecast it would have sufficient funds to trade, settle its liabilities as they fall due, and remain compliant with financial covenants. The analysis goes on to consider the viability of the business should adverse unexpected events arise. To illustrate this, a sensitised view of the Group forecast was produced. The adverse assumptions are based primarily upon the realisation of key Group Strategic risks, which have the most relevant potential impact on viability (see risks marked “*” on opposite and following pages). The sensitivity assigns each adverse assumption an estimated annual monetary value and estimates the impact on interest cover ratios and headroom over available borrowing facilities. The analysis concludes that even with the occurrence of key unexpected scenarios, RB would still have sufficient funds to trade, settle its liabilities as they fall due, and remain compliant with financial covenants. Management has further considered the occurrence of a ‘Black Swan’ Event: an event with sufficient potential impact to risk the future of RB as a strong and independent business operating in its chosen markets. The occurrence of a major issue could result in significant reputational impact, a catastrophic share price fall, significant loss of consumer confidence and inability to retain and recruit quality people. Such an event could have an impact on the viability of the business. As there are a number of mitigating controls in place across the business, the occurrence of a Black Swan event is considered sufficiently unlikely that it has not been factored into the sensitivity analysis. As a result of the Viability Review, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period covered in the Viability Review. RB / Annual Report and Financial Statements 2015MAJOR RISK DESCRIPTION CONTEXT MITIGATION 1. Non-Compliance of Licensed Products* betterfinancials Risk that non-compliance with regulations (e.g. licences, manufacturing, products and laws) results in significant financial losses arising from regulator-enforced factory closures, product recalls, delayed launches, fines, penalties, etc. Also, reputational damage with consumers and regulators. 2. Supply Business Continuity Planning betterfinancials Risk that our business continuity plans (BCPs), including mono- sourcing (materials and products) do not adequately address all risks facing the Group, resulting in unforeseen business disruption. Increased No change Decreased 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 & safety. These regulations can change and may become more stringent. Additionally we are required to obtain, maintain and update licences for such products. If we are found to be non-compliant with applicable laws and regulations, we could be subject to civil remedies or regulatory actions, such as fines, injunctions or product recalls, and/or criminal sanctions. 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 own standards, which could require investment and may take time to resolve. The Group has quality and compliance structures in place with teams focused on driving adherence to the business management and quality systems company wide. Control programmes in place to manage compliance risks include: Regulatory Excellence (marketing authorisations), Product Vulnerability (formulation assessments), Core Company Data (legislative requirements), Pharmacovigilance (adverse events monitoring) and Consumer Care (complaints call line). RB employs senior regulatory and legal specialists at a Group, regional and local level who are responsible for setting policies and ensuring that all employees are aware of, and comply with, both Group policies and the laws and regulations relevant to their roles. A Governance Framework Team has recently been established to oversee and coordinate this broad-based agenda. There has been no change to the assessed profile of this risk in the last year. Suppliers of key raw and packaging materials, co- packers of finished product and the Group’s manufacturing facilities and key technologies are risk assessed for their potential impact on supply disruption for our products. Business continuity plans are in place throughout the Group and major sites are routinely and independently assessed towards achievement of a highly protected risk (HPR) site status. Our consumer product recall process was fully tested and proven as effective during an incident in the USA. The concern level over this risk has reduced, with no significant further actions outstanding. 41 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBStrategic Risks continued MAJOR RISK DESCRIPTION CONTEXT MITIGATION 3. Non-Compliance with Quality Standards* betterfinancials Risk of non-compliance with quality standards, most notably Good Manufacturing Practices (GMP), which are being increasingly audited by health agencies from multiple jurisdictions, restricting our ability to produce or sell key brands, particularly Healthcare. The span of this risk covers the complete product lifecycle: global regulated process compliance, R&D, factories, external manufacturing facilities (co-packers) and in-market execution non-compliance. Various factors may adversely impact on our reputation, including product quality inconsistencies or contamination resulting in product recalls. Reputational risks may also arise from our third parties’ labour standards, health, safety and environmental standards, raw material sourcing and ethical standards. We could also be the victim of product tampering or counterfeiting or grey imports. 4. ERP/IT Systems Failure betterfinancials Risk of IT disruption or accounting error, due to legacy Enterprise Resource Planning (ERP) and IT systems, impacts business operations in a number of areas, e.g. through unavailability of key management information or disruption to transactional processing. 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. The Group has a comprehensive suite of policies, processes and systems to drive compliance with good manufacturing practice and monitor quality assurance, together with routine KPI reporting. An appropriately resourced global quality audit team covers factories’ co- packers, distribution centres and commercial units. Audits by regulatory bodies (FDA, MHRA, Anvisa, etc.) and notified bodies (SGS, DGM) are comprehensively prepared for and promptly responded to. The manufacturing of Personal Hygiene products has been integrated into the Healthcare cluster this year, driving stronger regulatory disciplines. The potential impact of this risk has been assessed slightly higher than previously, having analysed the Mucinex product recall experience, but its profile otherwise remains unchanged. The Group is engaged in a rolling ERP update programme. Disaster recovery plans are in place and are tested periodically. It also invests in security measures and anti-virus software to safeguard against this threat. Maintenance of current systems throughout the execution of the ERP programme implementation is an ongoing priority. SAP manufacturing and commercial templates have now been successfully put in place in some locations. This has resulted in the potential impact of this risk being assessed lower than previously, as more elements of the programme have been proven to be robust. 42 RB / Annual Report and Financial Statements 2015 MAJOR RISK DESCRIPTION CONTEXT MITIGATION 5. Cyber Security and Data Protection* betterfinancials Risk that RB is subject to increasingly sophisticated cyber attacks aimed at causing business disruption, capture of data for financial gain, general embarrassment and reputational damage or that RB’s data protection is considered by regulators to be inadequate. While this risk is not new, the context for its inclusion is the increased business appetite for consumer personal data to drive sales and growth. The potential impact of the threat is also now greater due to the reliance on an increasing number of connected systems. The legislative environment has also been strengthened with significant financial penalties now enforceable to penalise data protection breaches. The Group has strengthened controls and defences around this area of increasing risk. A data protection programme has been established to drive compliance. An update of systems patching against cyber threats has been undertaken and improvements to approaches to protect against data loss and manage privileged access to systems are currently under way. Broader awareness training also continues to be a focus. This risk has been included in the Group major risks for the first time. It has been assessed as having a potentially major impact with a medium possibility of that occurring. 6. Loss of Key Management betterfinancials Risk that RB cannot implement its strategies and meet objectives as a result of key management leaving the business who cannot be readily replaced by equally experienced/qualified candidates. 7. Significant Country Under- performance betterfinancials Risk of material impact on Group growth and profit of under-performance or extreme foreign exchange volatility in certain markets e.g. China, Russia and Brazil. 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 management would not be entitled to their variable pay, which is a significant element of total remuneration. This could operate as a disincentive for them to continue their employment with us. The Group structures its reward programme to attract and retain the best people. The formal succession planning process continues to evolve with plans being reviewed and updated regularly for all key positions and individuals. The concern level over this risk has reduced, due to a consistently high retention level for key management. 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. The Group has developed a robust strategy to drive margin expansion and enable continued investment behind our brands. Both financial results and currency volatility are closely monitored. Partnerships are strengthened with distributors to better manage local risks. This risk is spread over many varied markets, and is considered ‘business as usual’ as our strategy gives us increased protection against market uncertainty. As such, the potential impact of this risk has been assessed as lower than previously. Increased No change Decreased 43 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBStrategic Risks continued MAJOR RISK DESCRIPTION CONTEXT MITIGATION 8. Legal Non-Compliance* betterfinancials Risk that we are not fully compliant with relevant laws and regulations, including anti-corruption laws and global competition laws, resulting in damage to RB’s reputation and significant potential fines and other penalties. 9. Major Tax Disputes betterfinancials Risk of significant unprovisioned cash outflows as a result of tax authority challenge to filed tax positions in any particular territory. 10. ‘Black Swan’ Event betterfinancials An absolute worst-case scenario with sufficient potential impact to risk the future of RB as a strong and independent business operating in its chosen markets. This could arise or be amplified by adverse economic or social conditions, political upheavals or natural disasters. Failure to comply with applicable anti-trust and competition laws, rules and regulations in any jurisdiction may result in civil and/or criminal legal proceedings. 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 direct control, such as agents and joint venture partners, and also through businesses we acquire. Any violation of applicable sanctions, money laundering or other relevant laws could also have a negative impact on our reputation. The Group is proactive in addressing legal risks internally, through mandatory online training undertaken by employees and country- based legal oversight. We also respond to government authorities in a forthright and co-operative manner. A Legal Academy was launched this year that will provide enhanced training on a wide range of topics, including compliance. The whistleblowing hotline was also relaunched and strengthened from the start of the year with a new supplier. There has been no change to the assessed profile of this risk in the last year. 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. The Group has the appropriate risk framework in place to monitor, assess and mitigate operational tax risk. The Board considers that tax exposures are adequately provided for, while recognising that an element of risk will always remain. There has been no significant change to the assessed profile of this risk in the last year. Significant reputational impact as a result of a major issue resulting in multiple fatalities, possibly compounded by apparently negligent management behaviour; extreme adverse press coverage and viral social media linking the RB name to consumer brands, leading to a catastrophic share price fall, very significant loss of consumer confidence and inability to retain and recruit quality people. A strong governance framework and operating model are applied to drive compliance, transparency and oversight. Robust Group policies are maintained and a programme of rolling independent audits operated to ensure their proper application. Comprehensive crisis management training programme and support tools are in place and regularly updated. 44 RB / Annual Report and Financial Statements 2015DESCRIPTION CONTEXT MITIGATION Routine Risks betterfinancials 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. This consists of a full set of policies, processes and systems covering all aspects of compliance, with international and local laws as well as with the Group’s stated minimum control standards. Management provide primary assurance by driving risk compliance through their respective area, regional or functional responsibility. This is done through regular and detailed business reviews. Secondary assurance is provided independently through a combination of Internal and External Audit covering all aspects of the Group’s operations. By order of the Board Christine Logan / Company Secretary 22 March 2016 Increased No change Decreased 45 Strategic ReportGovernance ReportFinancial StatementsAnnual Report and Financial Statements 2015 / RBBoard of Directors Adrian Bellamy Chairman Rakesh Kapoor Chief Executive Officer Adrian Hennah Chief Financial Officer Jaspal Bindra Non-Executive Director Nationality British Nationality Indian/British Nationality British Nationality Indian Nationality British Nationality British Nationality British Length of tenure 16 years Length of tenure Four years Length of tenure Two years Length of tenure One year Length of tenure

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