Henkel Ag & Co Kgaa S/Adr

Thank you and good morning, everyone. A warm welcome to Henkel's conference call on the results of the first half of 2023. Here with me today are our CEO, Carsten Knobel, and our CFO, Marco Svoboda. As always, following the presentation, Carsten and Marco are happy to take your questions. Before handing over to Carsten, please let me remind you that this call will be recorded and a replay will be made available on our investor relations website shortly after this call. By asking a question during the Q&A session, you agree to both the live broadcasting as well as the recording of your questions, including salutation, to be published on our website. Also, please be reminded that this presentation contains the usual format disclaimer in regard to forward-looking statements within the meaning of relevant U.S. legislation. It can also be accessed via our website at hankl.com. As always, the presentation and discussion are conducted subject to this disclaimer. With this, it is my pleasure to hand over to our CEO, Carsten Knobel. Carsten, please go ahead.

Thank you, Leslie, and a warm welcome also from my side to everyone joining our call today. After highlighting the key developments of the first half year, we will walk you through our business performance and the outlook in more detail. And of course, we are looking forward to taking your questions. So let's get started with the major topics and the achievements in half year one. The first six months of this year, we clearly sustained Henkel's growth momentum. We achieved very strong organic sales growth of 4.9%, which was driven by both adhesive technologies and consumer brands. Both business units delivered double-digit price increases. Volumes were below the prior year. As you know, we had cautioned you about expectations for volume development in our consumer business, particularly on the back of trade negotiations and portfolio measures. which accounted for roughly 6% in Q2. In adhesive technologies, we saw a comparably good development versus relevant markets. For the second half, we expect volume development to clearly improve in both businesses. When it comes to the bottom line, we have made good progress in restoring our profitability with focus and with discipline, both in terms of gross profit as well as adjusted EBIT margins, which reached 11.5% on group level, being up 80 basis points. The significant increase was supported by strong pricing to further compensate for the still elevated imports costs, but also by accelerated savings from the consumer-brands merger and from continued portfolio theft. This also resulted in an adjusted EPS growth of more than 14% at constant exchange rate in the first half. And at the same time, we are putting a strong emphasis on investing in growth, for example, by stepping up our marketing activities in the consumer space to further strengthen brand equity and by fostering growth innovation, strong innovations in both business units. On top, we also significantly improved Our free cash flow, more on that from Marco a little bit later. Against the background of the strong performance in the first half, we raised our full year guidance today. We upgraded our expectation for our key KPIs. That means stronger organic net sales growth, a further increase in the adjusted EBIT margin, and adjusted EPS growth now expected at 5% to 20%. All in all, a very strong set of results in the first half year. Looking at the macroeconomic environment, the global economy continues to grow, although at a lower pace compared to the previous year and with recessionary trends in some regions. After muted growth in half year one, industrial production is expected to slightly improve into the second half, reaching 1.1% in the full year. We are also still facing globally high inflation rates and increased interest levels. And at the same time, we see the situation in global supply chains, logistics and commodity markets improving. Specifically, input costs are partly easing. For some raw materials, pricing has come down. However, for some of the products we purchase, for instance, in organics, we still experience higher price levels compared to the first half of 2022. Also, there is an impact from wage inflation and still elevated energy costs. Our end markets show diverging developments. Looking at adhesive technologies, we continue to see muted demand in areas like construction and packaging. The market environment in China remains challenging, also having an impact on the electronics sector. In contrast to that, the automotive market is showing double-digit growth. The light vehicle production recorded a plus of more than 11% in the first half. Also, aerospace is growing strongly as there is a significant order backlog in that industry. The relevant consumer markets continue to be impacted by the overall inflationary environment, and as a consequence, we still observe downtrading in key categories, which, of course, also have an impact on our business performance. But we will get to that in more detail in a couple of minutes. Let us now turn to some major achievements in the first half. The further integration of our consumer businesses is in full swing, and I will provide a brief update on where we stand in just a minute. We are not only shaping our consumer brand business. Also in adhesive technologies, we have been advancing our setup. And at the same time, we are further strengthening our competitiveness in the markets to fuel growth. We are consistently investing in product innovations, And we have stepped up our marketing activities, as I mentioned before, by a double-digit percentage rate in the consumer brand business in order to drive brand equity, not least in light of a fast-involving consumer environment and the market dynamics I just described. And we see that this strategy is paying off. Just to give you some examples, we were able to expand market shares globally in health dialing by 40 basis points, given and even gaining 100 basis points in our core markets in Europe. And in North America, our market share in fabric cleansing increased by 50 basis points. In the current process of repositioning our brands globally, flanked by strong innovations, we may still see some dips in market shares for some categories in certain regions. However, this is absolutely in line with our expectations and the deliberate choice we are making. For the second half, we will thus keep up with a strong level of investments. In adhesive technologies, our e-mobility solutions again deliver strong double-digit growth rates. We also further shaped our portfolio. We continued with our portfolio pruning measures in consumer brands. And in April, we successfully completed the exit from our business in Russia with proceeds of more than 600 million euros. With that, let me provide some more color on the progress with the consumer brands merger. We further move the hat with the integration and we are ramping up the net savings faster than anticipated. And as a reminder, in total, we want to realize at least 400 million euros of net savings in full swing by 2026. As we are optimizing the organizational structure, we in the meantime reduced a total of around 1500 positions in the consumer business since beginning of last year, which is equivalent to around three quarters of the targeted 2,000 positions we had announced. We also made substantial progress in shaping our consumer portfolio. Our focus is clearly on the two global categories laundry and home care and hair and we succeeded in either divesting or discontinuing businesses which didn't fit to the pursuit portfolio strategy. Out of the 1 billion euros we announced being under review, We already executed on around 0.4 billion euros last year, and with the further progress we made in the first half of this year, we now stand at a total of 0.5 billion euros. And at the same time, we have been strengthening our portfolio through acquisitions. The integration of Shiseido's hair professional business in Asia-Pacific, which we acquired last year, is well on track and the business is performing in line with our expectations. And in the first half year of 2023, we acquired the leading sustainable laundry and home care brand Earthwise in New Zealand. Having a more streamlined portfolio enables us to perform our marketing activities at a much more focused and also much more efficient rate. Also, as just mentioned, we clearly accelerated our marketing and advertisement activities to fuel growth momentum. Beginning of the year, we also kicked off the second integration phase dedicated to supply chain and operational excellence. And also here, we have already achieved tangible progress. We announced that we would align our operations and processes along the principle of one phase to the customer. The corresponding 1-1-1 approach, meaning one order, One shipment and one invoice was now implemented in the first countries just a few weeks ago. Furthermore, we consolidated our production footprint for hair and body care products in Europe into two sites. So, we are ahead of plan and we are delivering on our targets. Let me just share some highlights related to our successful brands and technologies. In the first half, we relaunched our leading detergent brand Persil with unique enzyme technology. The new deep clean formula for clean laundry and the hygienic freshness for the washing machine was rolled out across 30 countries globally. Supported by this relaunch and a strong corresponding marketing campaign, Persil continues to deliver double-digit organic net sales growth, a strong performance of our premium fabric cleaning brand, considering general down-trading trends worldwide. In our hair business, Styling is one of our key categories. Here we relaunched our Gene Set and Gene Alpha brand got to be in co-creation with its community. The relaunch comprised a modernized premium design, better-for-you formulas with strong performance and more sustainable packaging. The relaunch product range was rolled out across more than 30 countries in Europe, EMEA and Latin America in the first half of 2023. As with Persil, the relaunch was accompanied by a dedicated marketing campaign that focused on the core digital channels like YouTube, Meta and TikTok, most relevant for this young target group. Our Got2B brand delivered double-digit organic net sales growth and with this supported the very strong performance of our styling business in the first half year. Supported by the successful relaunch, Got2B advanced to the number three styling brand in Europe, being the top brand when it comes to gels, cremes, and waxes. In this segment, we significantly increased market shares by 260 basis points, a clear proof of the strength of our consumer brands. As just mentioned before, we have also advanced our adhesive technologies business in order to further leverage our globally leading market position. Under the leadership of Mark Dorn, we have optimized the organizational setup to enhance customer and market proximity. The new structure along the three businesses, areas mobility and electronics, packaging and consumer goods, and consumer craftsman and professional is already established and fully reflected in our reporting. We also continuously advance our manufacturing footprint to ensure an even more efficient and resilient production setup. For example, We will further consolidate our site network in Europe this year. And at the same time, we are investing into our manufacturing footprint to always be where our customers need us. And in June, we celebrated the groundbreaking of a new addition to our global production network in the Asia-Pacific region. And beyond that, we are upgrading our customer-facing and R&D activities. We, for instance, foster the centralization of customer service activities in Europe, leveraging new tools to drive customer excitement, and our newly opened global hub for R&D services in India enables standardized services and the continuous development of our data assets, which are key to developing relevant high-impact innovations at speed. And also in the first half year, our strong product and solution fueled further growth. For example, in automotive, where 140 out of 150 cars being produced every minute contain at least one Henkel solution. Specifically, our e-mobility business continues to benefit from the attractiveness of the global electric vehicle market throughout half year one. The ongoing market transformation is also reflected in our outstanding performance with roughly 70% organic net sales growth compared to the first half year of 2022. It is a highly attractive segment offering us a two times higher sales potential per car for electric vehicle models compared to the traditional combustion engine vehicles. By encompassing the complete electric vehicle engine architecture from power conversion to eDrive and the battery system, we are proactively developing solutions for key challenges in the automotive industry. And our eMobility portfolio continues to providing a more convenient driving experience by enabling fast charging and increasing driving range while supporting higher safety standards. Another area I'd like to highlight is aviation. The aerospace industry has come back strongly after the COVID downturn and is expected to accelerate its growth in the future, with an annual average of 2,000 airplanes estimated to be manufactured in the next 20 years. To capitalize on this development, we are continuously investing in innovation, manufacturing footprint and global supply chain resilience. These efforts enabled our aerospace business to grow double-digit in the first half of the year compared to the same period of previous years. The industry is going through a tremendous transformation, especially in sustainability, automation and lightweighting. We aim to support our aerospace customers in achieving their goals, for example, with our carbon neutral production plant in Montanez in Spain. Montanez is one of the 10 additional production sites which we converted into carbon neutrality in the first half year of 2023, another big step in our efforts in the area of sustainability. In order to achieve carbon neutrality in our production, we are using different levels. It is about increasing energy efficiency. For example, smart industry 4.0 solutions are helping to reduce electricity and thermal energy consumption. And we are transitioning to renewable energy sources, for example, by on-site electricity generation via photovoltaic, by direct purchasing or virtual coverage. These measures are consistently helping us to significantly reduce our CO2 emissions from our operations. And by 2025, we want to reach a reduction of 65% versus the year 2020-10. And to date, we have achieved already a minus of 56% per ton of product, a strong achievement on that topic. In the area of digitalization, we are leveraging our strategic partnerships with leading tech companies like Microsoft, SAP, and Adobe to co-develop innovations and solutions to both digitalization and make it a real value driver. A strong example on that is Raccoon, our mega platform for digital business and e-commerce. It enables us to drive hyper-personalized content and omni-channel experiences. Meanwhile, we run over 3,000 campaigns for 40 brands via this platform. And for us, digital solutions are a key enabler for unique consumer and customer experiences, and we are also exploring new opportunities presented by artificial intelligence. Some examples here. Our Schwarzkopf Salon Lab is using NIA BICE technology, which enables real-time analysis of our customers' hair and the hair salon to provide hyper-personalized digital experiences and products that match their individual hair needs. And meanwhile, we have rolled out this unique B2B2C business model across 19 markets. In adhesives, we brought digital customer experience to the next level. We launched our new Loctite equipment shop in North America. On this centralized platform, customers can search, learn, talk to our experts and purchase a range of products for industrial manufacturing and maintenance. The launch in North America is just the starting point. We will further expand the product offering and roll out this experience globally. These are just a few highlights on how we have been stringently executing on our strategic priorities. And with that, let's take a look at our outlook for the full year, which we increased this morning based on a strong top and bottom line performance in the first half. While the overall macroeconomic environment remains challenging, we are confident to see continued growth momentum and stronger margins versus the prior year, reflecting the progress deriving from the measures we implemented as well as the strength of our portfolio and the leading market positions we have globally. We now expect organic sales growth of 2.5% to 4.5% and adjusted EBIT margin of 11% to 12.5% on group levels. For Henkel's adjusted earnings per preferred share, we now expect an increase in the range of 5% to 20%, and this confidence is also backed by the good start, a really good start we saw entering into Q3. With that, let me hand over to Marco for some more details on our financial performance and also the outlook. Marco, please.

Yeah, thanks, Carsten, and good morning to everyone in the call, also from our side. Let me now share some more color on Henkel's business development in the first half. We delivered a very strong organic sales growth of 4.9% driven by both business units. Pricing was clearly up by more than 12% while volumes were below prior year level. But we'll get to the drivers in just a minute. Both M&A and ethics had a negative effect on sales. So in nominal terms, sales showed a slight increase. And as a result, the group sales in the first half again clearly surpassed the 10 billion mark, reaching 10.9 billion euros. From a regional perspective, we recorded different dynamics. Our largest regions, Europe and North America, showed organic growth of 2.4% and 3.8% respectively. Latin America and EMEA regions recorded clear double-digit growth. In contrast, sales in the Asia-Pacific region were below the prior year, particularly reflecting the continued challenging market environment in China. Let us now move on to the performance of our two business units, starting with adhesive technologies. Adhesive technologies generated sales of 5.5 billion euros in the first half. In organic terms, we delivered very strong growth of 4.7%, with pricing contributing 10.2% and volumes down by 5.5%. Absolute adjusted EBIT amounted to 766 million euros, reflecting in an adjusted EBIT margin of 14%. As just shown on the price slide, we saw very strong organic sales growth driven by double digit pricing, and we will continue to implement further pricing in selective cases particularly as we are still facing high levels on the input cost side. Volumes were below prior year level, yet showing a comparably resilient development given the muted demand in electronics, construction, and packaging, while automotive continued to perform exceptionally well. Also, we observed destocking along the value chain, which is expected to improve going forward. Overall, looking at the second half of the year, we expect the volume development to significantly improve versus H1. Overall, we were able to clearly increase both the absolute adjusted EBIT and the adjusted EBIT margin, despite the overall challenging environment. Let me now turn to the performance in the individual business areas. We saw different dynamics in the three business areas within our thesis business. Mobility and electronics, again, was the main growth driver, with a plus of 10.9%. This increase was first and foremost driven by the automotive and industrial businesses. In contrast, the development of our electronics business reflects the still difficult market environment, particularly in China. Within the packaging and consumer goods business, we showed a slight decline of minus 1.5% in H1. We saw mixed development. while consumer goods showed a stable development, packaging declined versus prior year comparables, which were on a high level. Craftsmen, construction, and professionals delivered growth of 4.9%, supported by all businesses with a stronger contribution deriving from general manufacturing. Our construction business recorded good growth despite ongoing weak demand. From a regional perspective, Europe and North America showed very strong growth. The EMEA and Latin America region posted a double digit plus. In contrast, and as outlined before, sales in the Asia Pacific were down year on year due to the still slower development in China. Overall, a very strong performance of our adhesive technologies business in comparison to our relevant markets, clearly reflecting the strength of our portfolio and outstanding market positions globally. Let us now move to consumer brands. The business generated organic sales growth of 5.7%, which was, to a large part, driven by strong double-digit pricing of 14.1%. Volumes decreased by 8.4%, and I will elaborate on this in more detail in just a minute. In regard to the adjusted EBIT and the adjusted EBIT margin, we saw significant step-up reflecting the progress we are making with the different measures we launched, which are now clearly bearing fruit. I already referred to the strong growth we saw in consumer business, which was first and foremost driven by strong double-digit pricing. It goes without saying that the latter continues to be necessary in order to compensate for the overall still high input costs and to gradually restore margins. Volumes were down 8.4% in the first half and down by 10.9% in Q2 standalone. Trade negotiations had a more pronounced impact on volumes versus Q1 in the magnitude of roughly 3.5% in Q2. The vast majority of that is related to Europe. The good news is we made good progress, particularly towards the end of Q2. We were able to find agreements which should lead to a clear improvement of the volume development in the second half, more pronounced in Q4 versus Q3. In addition, the announced portfolio measures had a negative effect of around 2.5% on volumes in the second quarter. Overall, we expect to see a sequential improvement in our volume development in the second half. When looking at the adjusted EBIT and EBIT margin development, we saw a tangible step up versus prior year levels. This was driven by strong pricing, accelerated net savings from the merger, as well as benefits from the ongoing portfolio optimization. Last but not least, Russia also had a positive impact in the first four months. At the same time, we stepped up our marketing and advertisement activities by a double-digit percentage rate in order to strengthen brand equity and drive growth. an overall challenging and fast-evolving consumer environment. For the second half, we'll keep up with a strong level of investments. Now turning to the performance by business area, we continue to focus on our two global categories, laundry and home care, and hair. Laundry and home care delivered very strong organic sales growth of more than 5%, backed by a very strong increase in laundry care, which was driven by fabric care and fabric cleaning. Home care recorded good growth. Here, the development was in particular driven by double-digit increase in the dishwashing category. The hair business area, which also comprises the professional business, grew by almost 8%. Within the hair business area, the consumer hair business clearly stood out with double-digit top-line growth, mainly driven by the styling and color categories. The other consumer businesses showed an overall flat development with growth in North America clearly standing out. From a regional perspective, all regions contributed to the organic sales growth. Within Europe, Western Europe was muted by the already addressed retail negotiations, which were still ongoing at the time. North America again showed organic sales growth In the meantime, the sixth consecutive quarter was an above-average contribution from brands such as All and Purex, and even recent market share gains in our important laundry business. We achieved double-digit growth in Amir, significant growth in Latin America, and very strong growth in the Asia-Pacific region. Wrapping it up, Henkel delivered a very strong top- and bottom-line performance in both. adhesive technologies and consumer brands in the first half. Coming back to the group level and with that to the components of the adjusted income statement. We significantly recovered our adjusted gross profit. We had been impacted by the severe input cost hay wins over the last two years. Thanks to strong pricing to further compensate, for the still elevated input costs and two portfolio improvement measures, we now reached a level of 44.7%. While we generated savings in SG&A deriving from the consumer-brands merger and benefited from more favorable logistics costs, marketing, selling, and distribution expenses as a whole increased both in absolute terms and as a percentage of sales particularly due to the significant step-up in marketing spend in the consumer brand's business in order to strengthen the brand equity. As a result, at a level of 2.8 billion euros, marketing, selling, and distribution expenses accounted for 25.7% of sales. R&D and admin expenses were also higher, with a relative impact increasing slightly to 2.6% and 4.8% respectively. Other operating income and expenses were below prior year, and with that had a rather neutral impact as a percentage of sales. As a result, the adjusted EBIT margin showed a strong increase by 80 basis points to 11.5%. Moving on to the bridge from reported to adjusted EBIT. At around 860 million euros, the reported EBIT was up by more than 26%. compared to the previous year level. One-time income of around 3 billion euros resulted from smaller divestments in the first half year, and one-time expenses of almost 240 million euros are mainly related to the divestment of the business in Russia, which we completed in April. The structuring charges amounted to 155 million euros, with the majority related to the merger of our consumer business as well as to the further optimization of our production and distribution structures in both business units. And as a result, adjusted EBIT came in at around 1.3 billion euros. Taking a closer look at the bridge to the adjusted EPS, the adjusted financial result amounted to minus 41 million euros, a similar level compared to the prior year. The adjusted tax rate was at 25.5%, and finally, adjusted net income after minorities came in at around 900 million euros. This translates into adjusted earnings per preferred share of 2 euros 13 cents. This represents a significant increase by around 9% year-over-year, or at constant exchange rates, a strong plus of 14.4%. Now to our key cash KPIs, starting with networking capital as a percent of sales that increased by 80 basis points to a level of 6.1%. This development was driven by volume and price effects with a more pronounced impact in the adhesive technologies business. We are further working on optimizing networking capital levels and thus expect an improvement in the second half of the year. we significantly improved our free cash flow to around 750 million euros in the first half, reflecting the strong increase in the operating cash flow with lower payouts for working capital compared to the previous year. And we also assume that this development will continue, which would reflect usual seasonal patterns. Our net debt amounted to around minus 1.3 billion euros. Here, the stronger operating cash flow and the proceeds from Russia offset the payouts for dividend and share buyback. Overall, a very solid financial picture and a good foundation while cruising through quickly evolving macroeconomic environment and further investing in measures to accelerate growth. Based on our strong performance in the first half year and our confidence for the remainder of the year, we significantly increased our guidance for 2023 today for both top and bottom line. We now expect organic sales growth of 2.5% to 4.5% on group level, up from our previous expectation of 1% to 3%. For adhesive technologies, we increased our outlook to 2% to 4%, and for consumer brands to 3% to 5%. When it comes to earnings, we anticipate further contributions from the successful execution of our strategic and operational initiatives, while the headwinds from input costs are expected to ease in H2. For the full year, we now expect gross direct material costs to show a low single-digit percentage increase compared to the 2022 average, whilst before we had anticipated a low to mid-single-digit percentage rate. However, please keep in mind that direct material price development is only partly driven by fees or prices, while inflationary trends along the value chain, such as still elevated energy costs, wage inflation, and logistics costs, as well as a certain time lag resulting from contracts, also need to be considered. We also raised our guidance for the adjusted EBIT margin, now expecting an even stronger step up versus the prior year. For the group, we now guide for 11 to 12.5% compared to our previous expectation of 10 to 12%. Also here, we anticipate a stronger development in both business units. For adhesive technologies, we now expect the adjusted EBIT margin to be between 13.5 and 15% and for consumer brands between 9.5 and 11%. With regards to FX rates, we now anticipate amid single-digit negative impact on sales from currencies. For the development of our just CDPS at constant exchange rates, we now expect an increase in the range of 5% to plus 20%. Also here, significantly up versus our previous expectation. So overall, we are confident to further generate strong growth and to deliver a clear improvement in earnings compared to the prior year.