Reckitt Benckiser Sales Miss Estimates on Korean Fallout (3)

(Bloomberg) -- Reckitt Benckiser Group Plc said the fallout from deaths and illnesses linked to toxic humidifier sanitizers it once sold in South Korea damped sales as it works to restore its battered reputation in the Asian country.

Second-quarter revenue rose 4 percent, excluding acquisitions, disposals and currency shifts, the Slough, England-based company said Friday, below the 4.8 percent gain analysts anticipated. A decline in South Korea lowered quarterly sales by 1 percentage point, and the company now sees full-year revenue growth coming in at the lower end of its 4 percent to 5 percent forecast. The shares fell the most in almost a year.

‘‘South Korea is likely to continue to cast a dark uncertain shadow,” Exane BNP Paribas analysts said in a note to investors.

The problem built up slowly, as South Korea began scrutinizing chemical substances used in the home back in 2011 after an outbreak of a fatal lung disease caused by the products. The disinfectants, designed to clean humidifiers, were then recalled. The scandal came to a head this year as retailer Lotte Mart, which operates about 100 supermarkets in South Korea, halted orders of some Reckitt Benckiser products and investors protested Chief Executive Officer Rakesh Kapoor’s pay package.

‘Losing Faith’

Regaining customers will take “months and months and months,” Kapoor said on a call with reporters, “not because we’re not trying hard enough, but because there is a large number of stakeholders involved.” He said in a later interview in London that the company is selling “practically nothing” in South Korea.

Reckitt Benckiser shares dropped 4.7 percent to 7,089 pence at 11:54 a.m. in London, the biggest drop since Aug. 24.

Reckitt Benckiser executives have publicly apologized for not responding more quickly to complaints about the disinfectants. The company and other manufacturers are under criminal investigation, charged with false labeling, it said.

Reckitt Benckiser erred by downplaying the problem at first, treating it like a “minor car accident,” said Song Ki-ho, a lawyer at Soorun Asia Law Office and a member of Lawyers for a Democratic Society, which is pursuing a civil lawsuit against Reckitt Benckiser in Korea. “Consumers are not just angry at the products, but also at the inappropriate way they handled the case and this became the cause of losing faith.”

Consumer Boycotts

Reckitt Benckiser took a 300-million pound ($395 million) charge for costs associated with its business there, which represents about 1.5 percent of total revenue. It’s also faced consumer boycotts of its products there.

“Given the high profile and complex nature of this issue in South Korea, there also remains the possibility of wider legal or governmental developments which may give rise to further financial liability,” the company said. The issue won’t affect its acquisition capabilities, Kapoor said.

Reckitt Benckiser said it will compensate victims, most of whom used sanitizers sold under its Oxy brand. It has also set aside about 6 million pounds in a humanitarian fund for affected individuals. The disinfectants were recalled by the South Korean government in November 2011, and the company stopped selling them that same year.

‘Hit Hard’

The British consumer-product maker bought Oxy Co. in 2001, and began marketing the Korean company’s products under the Oxy Reckitt Benckiser name. The company sells more than 120 household items and some medical products in South Korea, including Vanish detergents, Strepsils lozenges and Gaviscon antacid.

“The fallout from the South Korea humidifier sanitizer sales hit division sales hard,” Liberum analyst Robert Waldschmidt said.

Last month, South Korea’s Ministry of Trade, Industry and Energy blamed part of the fall in discount store sales to consumers’ boycott of Oxy brand products. Discount-store sales fell 6.3 percent in May compared with a year earlier, the ministry said.

The South Korean affair overshadowed an otherwise good performance in emerging markets for Reckitt Benckiser, with sales rising by more than 10 percent excluding the country. The company also raised its profitability forecast for the year after widening margins by 180 basis points to 23.7 percent in the first half.

(Updates with attorney comment in eighth paragraph.)

--With assistance from Hooyeon Kim and John Ainger To contact the reporter on this story: Matthew Boyle in London at mboyle20@bloomberg.net. To contact the editors responsible for this story: Matthew Boyle at mboyle20@bloomberg.net, Marthe Fourcade

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