Henkel AG & Co. KGaA (OTCPK:HENKY) Q2 2022 Earnings Conference Call August 15, 2022 3:00 AM ET

Tom Sykes - Deutsche Bank

Good morning, and welcome to the Henkel H1 2022 Conference Call. With us today are Carsten Knobel, CEO; Marco Swoboda, CFO, and the Investor Relations team. For the duration of the call, you will be on listen-only. [Operator Instructions] Please note that there will be a live webcast of today's conference call, including the Q&A session.

In addition, a replay of the conference call and the Q&A session will be available on our website, www.henkel.com/ir, for a certain period of time. By asking a question during the Q&A session, you agree to both the live broadcasting as well as recording of your question, including salutation to be published on our website. Here, we will briefly mention your name and the company you're representing.

At this time, I'd like to turn the call over to Mr. Knobel. Please go ahead, sir.

The investors and analysts, good morning from Dusseldorf, and a warm welcome to our conference call on the results of the first half year 2022. Really, thank you for joining us today. I'm here with our CFO, Marco. And together, we would like to talk you through the key aspects and answer also your questions.

Before we begin, I would like to remind everyone that this presentation, which contains the usual formal disclaimer to forward-looking statements within the meaning of relevant U.S. legislations can be accessed via our website at henkel.com/ir. The presentation and discussion are conducted subject to this disclaimer. I will not read the disclaimer, but we take it as read into the record for the purpose of this conference call.

With this, let us start with the key developments. So what are the key topics we will present to you today. First, we will take a closer look at our business environment. Not least intensified by the implications of the war in the Ukraine, we face drastic input cost pressures. And while the overall environment is becoming increasingly inflationary, volatility and uncertainty persists.

Second, we will come to our half year results in detail. In this highly challenging environment, we achieved significant organic sales growth, driven by strong pricing. And as expected, earnings were affected by the substantial input in cost pressure. Based on this performance in the first half, we have updated our outlook for fiscal 2022 today. We have raised our expectations for organic sales growth on group level to a range of 4.5% to 6.5%, driven by our consumer businesses. And we have confirmed our guidance for both, adjusted EBIT margin and adjusted EPS, while we have more confidence on the margin side in our consumer businesses.

And finally, we will provide a brief overview on the progress on our purposeful growth agenda, including an update on the creation of Henkel Consumer Brands. But let us first take a look at our main KPIs in the first half. We achieved organic sales growth of 8.9%, driven by strong pricing and supported by all three business units. The adjusted EBIT margin came in at 10.7%, impacted by substantial input cost pressure, which we could not yet fully compensate for true pricing and savings initiatives. And as a consequence, the adjusted EPS was below previous year at EUR1.95. All-in-all, a robust performance in a highly challenging business environment.

In the first half year, overall, we have witnessed this a broad-based inflationary development. Globally, and across markets and industry, there is an exceptionally high level of volatility and uncertainty, particularly with regard to the further development on the supply side. While input prices recorded a drastic increase compared to the first half year of 2021, dynamics started slowing down month over month recently, and we will get back to that in a minute.

In terms of our end markets, we saw a robust industrial production. However, the automotive industry was still held back by the ongoing shortage of semiconductors, as reflected in the light vehicle production index, which declined by minus 1.8% in the first half year of 2022. The consumer demand continued to normalize from the COVID-related shift in demand patterns resulting in varying dynamics. For example, as daily life and routines are no longer significantly impacted by the pandemic, demand for styling products continues its recovery. In contrast, demand for hygiene-related household cleaners and at home colorations further declined against elevated prior year levels.

Now taking a closer look at the input cost side. The war in Ukraine has not only significantly changed the geopolitical situation, but also intensified already strong pressures on the raw material and logistics markets. COVID-related lockdowns in China have put additional pressures on the global supply chain. And as a result, prices for input cost materials further increased drastically throughout the first half year, and we have seen mid to high double-digit increase versus prior year levels in key feedstocks, like crude oil or palm kernel oil, but dynamics, as mentioned before, slowed down recently with partially mixed developments. So overall, we faced an absolute headwind of around EUR1 billion from direct materials in first half year one.

To put this into perspective, that equals the additional amount we faced the entire last year, and we expect around the same amount also for the second half, totaling an absolute headwind of close to EUR2 billion this year, so our expectation from April is unchanged. Looking at these developments, it is too early to tell whether we have reached a peak yet. The situation remains highly volatile and uncertain, particularly against the background of a possible gas shortage in Europe, which would have far-reaching consequences across industry also on a global level.

Taking a broader perspective now. How are we managing our business in such an inflationary development with drastically higher input costs? As discussed, we have been stepping up pricing initiatives across all business units and regions. You see that reflected in our price development over the past quarters. Pricing further accelerated from 7.1% in Q1 to 10.9% now in Q2. And at the same time, we were able to deliver a solid volume development despite a strong baseline in the first half of 2021, which had been characterized by significant COVID recovery as well as the announced portfolio measures in Beauty Care.

Of course, in this environment, we closely monitor and analyze market developments, price elasticities and customer and consumer behavior. We have confidence in the strength of our brands. In Beauty Care and in Laundry & Home Care, our portfolio covers different price points from premium laundry detergents and hair care to value for money products.

And for sure, we keep a strict cost discipline and strive to realize further efficiency gains in our supply chain and procurement, while the overall priority is always to secure supply. I'm proud to say that we were largely able to compensate for the direct material headwinds by higher product prices in absolute terms and supply bottlenecks were resolved, a strong result of our team. So we are on a good track, but for sure, we'll need additional pricing efforts going forward.

So let me wrap up by reflecting on the major developments in the first half of this year. We are managing our business in a highly challenging environment. As just described, we have been stepping up pricing and saving initiatives in light of the drastic input cost inflation. The situation at the supply markets was significantly accelerated by the war in Ukraine, which had also further far reaching implications. Against the background of this war, we decided to exit our business activities in Russia and Belarus, and we're currently working towards it.

Besides managing these developments in our environment, we took an important strategic decision which will transform our company. We announced to merge our Laundry & Home Care and Beauty Care businesses to create one multi-category platform with EUR10 billion of sales. Henkel Consumer Brands will be our second strong pillar next to our very successful Adhesive Technologies unit. With the creation of Henkel consumer brands, we will fuel growth and profitability and bring our purposeful growth agenda to the next level.

It will enable better opportunities to shape our portfolio, to leverage combined scale and provide more exciting roles for our team. We will also benefit from significant synergies. In the midterm horizon, we target gross savings of EUR500 million. The implementation will take place in two phases. And as we will discuss later in the presentation, we are well on track. So I believe it is fair to say, this was quite an exceptional half year and together as a strong team, we have accomplished a lot.

And with this, now taking over and handing over to Marco for the details of our half year results. Marco, please?

Yeah. Thanks, Carsten, and good morning to everyone on the call also from my side. Carsten mentioned some key aspects already. And let me provide some more color on our financial performance in the first half now. .We achieved significant organic sales growth of 8.9%. Quarter-over-quarter, we accelerated pricing, resulting in a double-digit contribution in the half year, while volumes were down slightly by minus 1.3%.

The net effect from acquisitions divestments was negative at minus 1.4% and currencies were a tailwind this time at 2.4%. In nominal terms, sales grew by 9.9% to a level of EUR10.9 billion. From a geographical perspective, we recorded broad-based organic sales growth across all regions in the first half. Emerging markets overall achieved organic growth of 12.9% with strongest growth in Eastern Europe and Latin America. The mature markets showed a very strong increase of 5.5%. While Western Europe grew by 2.2%, the North America region achieved organic sales growth of 9.2%.

Moving on to the performance of our business units. Now starting with Adhesive Technologies, which delivered organic sales growth of 12.2% in H1. Here, the teams further accelerated pricing initiatives resulting in a double-digit contribution to organic sales growth and stable volumes. This growth was driven by all business areas across the regions. Automotive and Metals achieved a very strong sales growth, even though Automotive continued to be impacted by the global semiconductor shortage.

Packaging and Consumer goods benefited from continuous demand and achieved a double-digit performance, just like our Electronics & Industrial business. And Consumer, Craftsmen and Professional contributed with a significant organic sales increase. So all in all, a very strong top line performance. The adjusted EBIT margin reached 13.6%, that compares to a level of 17% in the prior year period and reflects the negative impact from the drastic increase in input cost, which we could not yet fully compensate.

Also here to keep in mind two effects, which we have described before, the time lag of pricing to pass on our input costs, typically three months to six months. And even though we are well on track to pass on the input cost in absolute terms, there is a dilutive effect on percentage level.

Moving on to Beauty Care. The business recorded positive organic sales growth of 0.4%. While we saw strong pricing, volumes declined. This development is mainly due to the implementation of the portfolio measures in the consumer business we did announce end of January. From a business area perspective, Professional continued its strong development and achieved double-digit growth, driven by both the mature and the emerging markets.

Consumer, in contrast, was below the prior year level. Here, as mentioned, particularly driven by the portfolio measures which include the discontinuation of non-core activities. For the full year, we expect the impact to be around 5 percentage points of total Beauty Care organic sales growth. The hair category recorded an overall stable sales development, with mixed picture across the different businesses. Styling grew double-digit and that continues its recovery from the pandemic-related decline.

The normalization of demand had an adverse effect on at-home colorations. Here, we recorded a negative development versus higher levels last year. And Hair Care was also below the prior year, and the negative development in the Beauty Care category was mainly due to the portfolio measures, I just mentioned. The adjusted EBIT margin came in at 9.2%, 80 basis points below last year's level, predominantly impacted by high input costs.

Laundry & Home Care continued its strong organic sales performance with significant growth of 7.4% with pricing up by close to 10%. Laundry Care achieved double-digit growth, mainly driven by heavy-duty detergents and special detergents. Home Care recorded a positive development. Main drivers were the toilet care and dishwashing categories, while hard surface cleaner was slightly negative, as consumers demand continued to normalize from high levels during the pandemic. The business unit grew in all regions and gained further market shares in key countries.

Let me specifically mention our performance in North America. Here, we achieved good growth in the first half year, with sales increases in both Q1 and Q2. And we are seeing year-to-date market shares stabilizing, with market share gains in most recent periods. There is a positive trend, which needs to be confirmed going forward. On bottom line, the adjusted EBIT margin in Laundry & Home Care declined to a level of 9%. Also here, sales price increases and savings could not fully compensate the drastic headwinds from raw materials and logistics.

With that, back to the financials on group level. Let us take a closer look at the components of the adjusted income statement. Due to the exceptional increase in direct material prices, the adjusted gross profit margin was at 42.6%, down by 4 percentage points. Marketing, selling and distribution expenses increased in absolute terms. But due to the higher nominal sales level, the impact as a percentage of sales decreased by 50 basis points to a level of 25.1%. As a result, the adjusted EBIT margin declined to a level of 10.7%.

On to the bridge from reported to adjusted EBIT. One-time expenses amounted to EUR281 million and mainly related to non-cash impairments, particularly related to the planned exit from our business activities in Russia and Belarus. Restructuring expenses were at EUR232 million, thus increase significantly versus the prior year level. As announced, these also include expenses related to the merger of our Laundry & Home Care and Beauty Care businesses. As a result, reported EBIT came in at EUR684 million below prior year level.

Adjusted EBIT declined to a level of around EUR1.2 billion, and the adjusted financial result came in at minus EUR44 million, and thus below prior year, mainly due to high interest rates, particularly related to the U.S. dollar. The adjusted tax rate was stable at 25%. Finally, adjusted net income after minorities amounted to EUR840 million. This translates into adjusted earnings per preferred share of EUR1.95, a negative development of minus 18.8% year-over-year or at constant exchange rates, a decline of minus 20.8%.

With that, moving on to our key cash KPIs. On group level, the ratio of net working capital to sales increased by 160 basis points to a level of 5.2%. This development was mainly due to two factors. First, the impact from the inflationary environment, particularly the drastic and higher input cost; and second, investments into safety stock in selective cases. As a result, of the high net working capital and due to a weaker operating cash flow resulting from the lower EBIT, we recorded a free cash flow of EUR46 million.

Our net debt reached a level of around minus EUR1.4 billion. The decline versus the prior year period reflects both the payout of dividends and the investment in our share buyback program. Since its launch in February, we have bought back around 7 million shares amounting to EUR432 million.

With that, moving on to our outlook for 2022, which we have updated today. Based on our business performance in the first six months, we are raising our expectation for group organic sales growth in the full year by 100 basis points to a range of 4.5% to 6.5%. The increase is driven by our consumer businesses. For Beauty Care, we now expect organic sales growth to be between minus 3% to minus 1%, up from minus 3% to minus 3% -- up from minus 5% to minus 3%, sorry. And for Laundry & Home Care, we now assume a range of 4% to 6% compared to 2% to 4% previously.

Our outlook for the adjusted EBIT margin on group level remains unchanged. While we see the clear potential to reach the upper half of the guidance range in both, Beauty Care and Laundry & Home Care. We also confirm our expectations for adjusted EPS growth at constant currencies of minus 35% to minus 15%. This guidance is based on the assumption that there will be no widespread business and production closures in industry and retail and that the effects of the war in Ukraine will not worsen significantly. Accordingly, the outlook is based on the assumption that there will be no production shutdowns in the industry, resulting from widespread gas shortages in Europe.

And with that now, back to you, Carsten.

Thank you, Marco. While managing our business in a truly challenging environment, we remain fully committed to the strategic priorities laid out in our purposeful growth agenda, and we have been driving further progress here along the pillars. We will outline a more holistic review on where we stand since the strategy launch 2.5 years ago and was ahead for us at our Capital Markets Day, which is planned and scheduled for September 20.

Today, I would like to briefly share some of the highlights of the first half of this year. As announced to further shape our portfolio in consumer, we currently have brands and businesses with a total volume of around EUR1 billion of sales under review for potential portfolio measures, including the divestment or the discontinuation of these activities, and we have been taking action already. We had announced the discontinuation of around EUR200 million of sales volume in Beauty Care this year.

Here, we are well on track, and we expect a further acceleration in the second half of the year, as Marco has mentioned it. We also strengthened our portfolio through a value-adding acquisition. We acquired Shiseido's Hair Professional business in the Asia Pacific region, which helped us advance to the Global number two position in the professional business. To put that into perspective, while M&A remains integral part of our strategy, we have been clear that short term, our focus in Consumer will be on successfully completing the integration of our two business units.

Moving on to the area of competitive edge and here, starting with some of our key innovations. In Adhesive Technologies, we transform the garment production in the fashion industry by replacing stitching and gluing. Our innovative hotmelt technology provides clean operations and a trouble-free production line. Thanks to process automation, it increases manufacturing efficiency by up to 7 times whereas the traditional stitching method. And as you know, e-mobility is a highly attractive market for us.

Our automotive team has developed thermal propagation prevention materials that protect passengers of electric vehicles. In case of accidents, they delay the spread of fire so that passengers have more time to exit the car safely. Here, we're currently running various projects with different OEMs, Tier 1 suppliers and battery manufacturers. And we have expanded our product range in flexible packaging with two new solvent-free solutions, which were recognized for recyclability externally this year. The products not only increase second life options for flexible packaging, but also enable the use of up to 35% recycled content.

Moving to Beauty Care. In Beauty Care, we've relaunched our family brand Schauma with a redesigned sustainable packaging concept. For example, selected variants now come in 750-millimeter big size bottles which are recyclable, made out of 50% recycled plastic and are refillable. As such, they use 25% less plastic compared to three normal-sized Schauma bottles. In Professional, growth was supported by strong innovations under our Bonacure and IGORA brands.

Our new Bonacure clean performance line embraces clean beauty with 100% vegan formulas, which are free from sulfates, silicons and parabine. The high performing products, introducing our new vegan, Keratin and cell technology are highly biodegradable and they come in fully recyclable packaging made of up to 97% recycled plastic.

Also the rework IGORA Royal highlights range of ultra and special brands build on our strong technology know-how, its new formula allows a more powerful lift combined with a stronger color utilization. Thanks to its special fiber bond technology, the product helps protect the inner hair bonds during the lifting process and minimizes hair breakage.

And in Laundry & Home Care, our core brand Persil achieved double-digit organic sales growth and expanded market shares. This performance was supported by strong innovations with improved hygienic cleanliness and also by expanding our sustainable and e-commerce-ready product ranges. For example, our ultra-compact Persil Eco Power Bars using 97% less plastic, meanwhile, are available in nine countries across Europe.

And we relaunched core brands in both Laundry & Home Care with strong performance upgrades and further sustainability improvements for innovations from Perwoll, Snuggle and Pril. We had better color revival, improved send or cold water activeness and that all comes with an increasing share of natural or biodegradable ingredients.

As we have just seen, sustainability is an integral part of the innovations across our businesses. We take a holistic perspective on driving sustainability as an element of our competitive edge. That is why we have evolved our previously long-term sustainability strategy. Beginning of the year, we launched our 2030+ sustainability ambition framework. It is based on tangible targets and includes new long-term ambitions to drive further progress in the dimensions of regenerative planet, thriving communities and trusted partners.

Let me give you two examples of how we turn this into practice. In March of this year, BASF and Henkel committed to substitute around 110,000 tonnes of fossil-based ingredients per year with renewable feedstock using BASF's certified biomass balance approach. And as a result, our core brands like Persil, Pril, and Schauma will come with a reduced carbon footprint avoiding around 200,000 tonnes of CO2 emissions in total. We also took additional steps towards our ambition for climate positive operations by 2030. In the first half of this year, three sites in Germany have been converted to operate with 100% CO2-neutral energy.

Moving now to our digitalization topic. The share of digital sales grew double-digit in the first six months of this year now to more than 20% on group level. This growth is enabled by our integrated Recon platform, which we have been leveraging through our partnership with Adobe. The expansion of our digital sales share is driven by all business units, which are continuously advancing their digital initiatives, be it with our e-shops in Adhesive Technologies and Beauty Care Professional growing double-digit or with dedicated e-commerce ready products in Laundry & Home Care. Especially, but not only in times of high volatility and disruption, it is obvious that a future-ready operating model is a critical success factor.

And here, let me provide a brief recap and update on where we stand with the Consumer Brands merger. We have designed the structure of the future organization with two global categories: Laundry & Home Care on the one side and Hair Care on the other side. Other categories will be steered via the regional structures. We will have efficient structures with reduced layers, which also offer our people roles with higher levels of responsibility. Meanwhile, we have defined the first four organizational layers, and we are committed to have the new Consumer Brands unit up and running latest by the beginning of 2023.

In some countries, we are even ahead of this timing. In the U.S., for example, the new organization will be established already from September onwards. So we are well on track. When it comes to our digital unit DX, we are leveraging the reorganization of our digital and IT teams which we had also completed ahead of time. The new setup with highly efficient structures and standard IT processes helps us boosting our investments in digital skills and platforms and makes us future ready for additional growth.

With this now coming to the last pillar of our strategic framework, collaborative culture and empowered people, because we have always been outspoken about it. You can set whatever strategy you want in the end, it will be the culture which makes the difference, and we are well aware that the consumer brands merger, which affects a large number of people is a topic we can only complete successfully together as a strong team. That is why we have launched a comprehensive change management program, building on the pillars of culture, communication and capabilities.

In February, we also made a bold statement by launching our ambition to reach gender parity across all management levels by 2025. And we take action towards it with clear communication, targeted measures and initiatives, while continuously monitoring our progress. Now despite the challenges we are facing in our business environment, we don't lose sight of the priorities of our purposeful growth agenda, which will help us to win the 20s.

So let me briefly sum it up. In the first half, we operated in a challenging environment with a war in the middle of Europe and unprecedented price increases for raw materials and logistics. And in this environment, we achieved a strong top line performance. We stepped up our pricing initiatives across all businesses. And as a result, we were largely able to compensate the drastic input cost pressures on an absolute level. But as expected, the strong headwinds have impacted our margin and also our EPS development.

Based on our H1 performance, we have updated our outlook for fiscal 2022 today. We raised our expectations for group organic sales growth by 100 basis points and we confirmed our bottom line guidance while seeing the clear potential to reach the upper half of our margin outlook ranges in our consumer businesses. We are well on track with the integration of Laundry & Home Care and Beauty Care into the combined Consumer Brands unit and also beyond, we made further tangible progress along our framework.

With this, now let us move on to the Q&A. Marco, and I are really looking forward to taking your questions.

Thank you, Mr. Knobel. [Operator Instructions] Our first question comes from the line of Bruno MOnteyne from Bernstein. Please goa head.

Hi. Good morning. My first question is, did I hear correctly that your guidance does not include any impact of any potential gas shortages, that's sort of what I heard in the last few minutes there? Because surely, there's already some impact of sort of lower gas availability in Germany and it doesn't look like it's going to get better with sort of other problems in hydropower equally. So I just wanted to confirm that the entire guidance is free of any potential cash shortages? And if that's the case, could you please expand a little bit about the magnitude of what you'd expect to happen on the different scenarios we assume you have made different scenarios about something happening?

The second question is around, how your account for the impact of Russia and Belarus? I noticed in your discontinuation of brands in the beauty category, it's sort of part of organic growth and therefore was on organic growth. But the impression that you treated Russian better differently, you haven't put it as a reduction of lower organic growth you're putting it into M&A despite not really disposing of it. Did I really hear that correctly? And what's the reason to treat Belarus and Russia differently from the brands you're discontinuing? Thank you.

Good morning, Bruno. I take your first question regarding the guidance and Marco, you take the one regarding the OSG impact with Russia and Belarus. So first of all, when we come to the guidance, I think, yes, you phrased it right, the guidance what we have is not taking into account any production shutdowns based on gas shortages in Europe. So therefore, for sure, we also see some -- current some impacts of the gas shortage, that's for sure, impact that's included, but the overall impact of a gas shortage in terms of really production stops or whatever and a severe situation is not included in that guidance.

And taking that as a starter and your second question in terms of how we, as a company, could be impact or how we are working on that? I think let me outline that in the context of, first of all, overall, Henkel is not a company with really high energy consumption. Our total energy spend accounts in terms of a low-single digit of our cost of goods space. Nevertheless, for sure, ensuring here security of energy supply for our production is, for us, for sure, of utmost importance. In a hypothetical case that a gas supply is cut-off, this would have, for sure, severe impacts on many companies across countries.

On the other side, I think in that context, we have made our homework in terms of preparing ourselves, our production sites, and we will close that at the end of this month, that we will be also able with alternative supplies of other materials to compensate. On the other side, it's clear, if the whole gas supply would stop then for sure, suppliers of us from raw materials would be impacted.

So in a nutshell, as I said, quite low energy consumption also in the share of cost of goods. We're preparing ourselves for that, and we are more or less ready with alternative supplies. But the big question mark, for sure, remains for the whole industry is supply from basic chemicals and things like that is not available anymore, then for sure also that would have an impact on us. I hope that clarifies. With this to Marco.

Good. So to your second question, I think, yes, you understood that correctly. We basically did also explain how we would treat Russia-Belarus in our OC calculation going forward when we did announce the Q1 results, and we informed that we will exclude Russia-Belarus from the OC calculation from Q2 onwards as we had decided the exit and also the sales trend there is a result of the geopolitical development and the sanctions environment and does not reflect the operational development of the group. That's why we also decided on that treatment, and we did basically disclose that accordingly.

Can I just come back on the gas situation? I understand that you worry more about your own supplier, a little bit [indiscernible] much of your customers wouldn't be the impact on the adhesive customers be by far the biggest pain you would carry in case there was a gas shortage in Germany? Thank you.

Bruno, I think on that, for sure, suppliers and customers is at that point a similar situation, yes.

And for that, there would be also an impact clear. Clarified, Bruno?

The next question comes from the line of Christian Faitz from Kepler. Please go ahead.

Yes, sir. Thank you. Good morning, Carsten, Marco and IR team. Two questions, if I may. First of all, congrats on the share gains in Laundry & Home. Are you also seeing share gains in North America in that segment? And in that context, how is Persil in the U.S. performing and how's the Sun Liquid portfolio? And then my second question would be another logistical question, any possible impact from the Rhine River situation? I mean I would believe for now or not directly, not for you guys in Dusseldorf, but what about if there were force majeures being declared by some of your key suppliers, such as BASF or Covestro? Thank you.

Good morning, Christian. Yeah. Starting with your first question. I think to put it a little bit, if it is okay for you, in the overall perspective, we have seen a good development of market shares or stable development of market shares with slightly gains in Laundry & Home Care and in Beauty Care overall worldwide. I think taking especially into account the situation of pricing. And I think you have also seen -- we have seen quite good developments in quarter two in Laundry & Home Care of our volume. So despite the price increases, we are able also to bring volume through.

In Beauty Care, you don't see a volume increase. The significant part of that is due to -- well, the reduction in volume is due to the portfolio measures in the mid-single digits. It's a little bit less. So we are expecting an over proportional development in the second half of the year. And taking that as a starter and now moving to your specific question in North America. I think what we see is -- and we're talking about that, we have continuously seen now in quarter one and quarter two really good development of organic net sales growth in both in our Beauty Care business and specifically also in our Laundry & Home Care business with significant growth now in the first half year. This is also taking a positive impact on the market share situation.

If I take year-to-date, that we have been also that we have been significantly losing market shares -- this is more or less bottoming out now. We have year-to-date only more or less stable, slightly negative situation. But if I see the recent periods, the last ones here, I see positive market share developments, which is going, I would say, across the board, but also you mentioned specifically Persil. We see a good development also here. So overall, I think, as I said a couple of times before, we're doing it step by step.

I think we have launched a couple of initiatives from pricing, innovations, investments and portfolio changes and management changes. And I think that the fruits are coming into reality and Purex is currently in the market share is more or less stable, but here also maybe consumer behavior or changes in consumer behavior because Purex is value for money position will, from my point of view, we'll see in the second half some positive effects. I hope that answer was quite long the answer, but I wanted to give a comprehensive one on the overall market share situation. And I think Marco will now take the Rhine River question.

We'll take that question on River Rhine. The water level is extremely low. And indeed, that plays a role in transportation in Continental Europe. So we're, of course, concerned that is putting additional stress on the supply chain. Henkel itself does not use the River Rhine directly to transport large amounts of goods. But of course, we depend on our suppliers, which are using, to a larger degree, the River Rhine as means of transportation. And since the last low-level situation. Our suppliers have put in place various mitigation measures, and that's what we also understand from current conversations. So we are currently confident that we won't have major impacts from the low water level, but ultimately, of course, we have to see how that finally plays out. But so far, we understand mitigations are in place.

Okay. Thank you very much.

The next question comes from the line of Celine Pannuti from JPMorgan. Please go ahead.

Good morning. So first, my question is on the cost inflation. So you said it's at EUR2 billion for the year, and that's unchanged. At the same time, you said that some of the fixed jobs are starting to roll over. So I just want to understand when are we going or are you going to see the benefit of lower price point into your overall cost basket?

And does this EUR2 billion include higher energy costs, even if you say it's a small number? And just to follow up on that, does this impact your pricing negotiation, i.e., the lower feedstock. Are you still planning for price increases in H2 or are we starting now as well that pricing is picking I'm especially thinking also at some of the industrial price negotiation?

And my second question is on the volume bounce back between Q1 and Q2 in Laundry. So you talk about market share, but can you explain why the volume bounced back so dramatically between the quarters? Thank you.

Good morning, Celine. Taking or starting with your first question and to put that in perspective, I think what we have seen -- and maybe if I start with Adhesives, we have been seeing, and I think we talked about the continuously increase in our pricing initiatives quarter one, quarter two, also seeing that now starting in quarter three that pricing was going up. We expect the peak of that in the course of quarter three and by that getting, for sure, spillover effects then in quarter four and into next year.

In the Consumer businesses, the peak when it comes to the pricing and by that, for sure, first, the input cost increases and by that, the pricing is seen for more Q3, Q4 on the year in that perspective. In Adhesives, we have a time delay of around three months to six months until we get the pricing initiatives into the P&L. And I think independent of that, we expect that the market situation remains quite uncertain and volatile due to the war in Ukraine, due to the economic slowdown by the high inflation by the potential gas shortage we just discussed, but also, for sure, geopolitical tensions, which are also in other parts of the world. Maybe that's to the first question.

And to your second question, when it comes to the bounce back of volumes, you may recall when we were in our Q1 call, we said that the volume in both in Beauty and in Laundry was impacted also by negotiations with the trade or reluctance of the trade to accept respective pricing initiatives. I think during the course of Q1 and Q2, we have been solving most of these negotiations, which then play also an impact now into the quite significant bouncing back of the volumes in Q2 and maybe also a slight impact because of this extraordinary impact is the prebuying of some of the accounts before the 1 of July.

And then also in Q2, we had the portfolio measures in Beauty, which is taking down volume, as I said, mid-single digit. I think you need to exclude that. And if you take that Beauty -- the development of volume in Beauty, I think that's on a comparable level to competitors what we are seeing. Hope that clarifies.

Thank you. I just didn't understand you said there was some extraordinary buying. What were you referring to and how big is that?

First of all, I do not quantify that. What I meant is, for sure, if you have price increases scheduled in parts of the world, then there is a certain element of prebuying in order to still buy on the oil prices. But that's -- you asked for, for sure, you said -- as you asked, quite a significant bounce back and there are different reasons and therefore, I wanted to give you a couple of.

You’re welcome. Thank you Celine.

The next question comes from the line of Iain Simpson from Barclays. Please go ahead.

Thank you very much. Good morning, everyone. I wondered if you could talk a little bit about Middle East, North Africa and what you're seeing in that region? It's clearly a business where you've done very well in laundry historically, but then some concern around recent macro, perhaps any color on how the consumer is holding up would be great?

And then secondly, just stepping back a little bit. I wondered if you could remind us with your merger of Beauty and Laundry business in terms of the total gross savings that, that was expected to yield, which I believe you've quantified at EUR500 million, how much of that we should expect to see reinvested across the life cycle of the program and how much it drop through? I think you've quantified the drop-through for the first stage of it only, but I wondered if you could just talk across the entire program, how much reinvested versus how much drop-through? Thank you very much.

Iain, so I thought the merger question would be more on a strategic perspective. But due to the fact that you are more related to numbers, I think Marco, you will take that in terms of the savings, if you want. To your Middle East question, Iain, I think what we see is also during first half year, a good growth pattern in the Middle East businesses that's valid for Adhesives, that's valid for Laundry & Home Care. We have quite good pricing, which we bring through with double digits. And by that, also increasing our market shares quite good and significant on that. I think important here, maybe different to other regions, the consumers in Middle East, Africa are used to pricing initiatives because of the inflationary development over the last couple of years.

In Beauty Care, I think here the -- in general, is the same, but here specifically, first half is related also to our portfolio measures. The EUR200 million, which we have been pointing out for 2023 overall, plays a role for sure across the world, but has also a significant fair share also in the Middle East Africa situation in order to get portfolio parts out businesses/brands, which are dilutive, be it in top line, be it from a margin perspective, so therefore, in the first half year, we see here an extraordinary impact in the Beauty Care, but the rest is continuing -- the rest of the business is continuing, as I pointed it out before. So I think I hope that clarifies. And by that, giving the synergy question now to Marco.

Yes, indeed, we had communicated that we aim at roughly EUR500 million of gross savings for the entire program, and we had subdivided that into phases because, obviously, first phase comes sooner and we have more visibility on that, and we did announce that we will aim at approx. (ph) EUR250 million of net savings also including already potential reinvestments. So we haven't detailed out the overall impact of the reinvestments on the EUR500 million because that's quite some time into the future. We haven't communicated on that because also here, we haven't taken a final decision.

We want to stay flexible to also cater for the market requirements and the return patterns we do see, as I said before, that is still some time into the future. With the announcement of the EUR500 million, we wanted to give you some flavor on where we see the potential opportunity in total going forward. And that's why we announced it, and we will communicate at some point in the future also how we see how much of that will be reinvested. So, so far, I need to now ask you to stay a bit more cautious or need to wait for our communication coming. At the moment, I cannot give you more flavor to that.

Perhaps a very quick follow-up, if I may? You talked about EUR250 million net in stage one, are you able to give the gross figure in stage one, please?

No, we haven't communicated that on purpose. We will steer that flexibly. And hence, on that number, I cannot give you more details, I'm sorry.

Okay. Thank you very much.

The only thing, Iain, on that we're really making good progress on that, that we want to get that executed. So we're really on track.

So it's our commitment to bring the EUR250 million net savings down to the bottom line. I think that's what's now important also. And that's why we thought that is a major information piece that you need also to understand how that will impact the earnings. That's why we concentrated on that figure.

The next question comes from the line of Jeremy Fialko from HSBC. Please go ahead.

Hi. Good morning. A couple of questions from me. First one is, can you give a bit more detail on the margin for some of the consumer divisions in H2? So clearly, in Beauty, you're ahead of your full year targets; laundry, you're at the top end of the range. So can you talk about the main kind of margin moving parts in H2, and clarify the comment that you made on being clearly the top end -- or sorry, clear potential for being at the top end of the range in those divisions?

And then secondly, can you talk a little bit about what your sort of base case scenario for the adhesive end markets are in the second half of the year? What sort of growth you'd expect to see there and how that would translate into your kind of volumes within the division? Thanks.

Now first of all, Jeremy, good morning. Maybe starting with your second question in terms of growth perspective. I think we had the guidance in adhesives, which we have with 8% to 10% and the results of more than 12% in the first half year. We see that in the second half, at least if you look from the macroeconomic perspective, you see that industrial demand, at least there is a little bit of reducing pace in the dynamics which is, I think, maybe then reflected in a little bit lower organic growth in the second half of the year. On the other side, we have quite high comparables.

Based on the pricing, we had already, in the second half of last year, but I think overall, 8% to 10% guidance. I think we have so many influencing factors and volatility that I think that taking into account, I think that's more than fair where we are. In Beauty Care and in Laundry & Home Care, we have raised the guidance by 200 basis points each the guidance. And that, I think, for sure, there is a certain impact, which maybe is from consumer behavior, which to be seen. But I think overall, the situation is as we raise the guidance that we are quite confident to further drive the businesses on that and having also an impact what we see. The other question was more related to the bottom line to the margin perspective, Marco, do you want to take that?

Of course. And Jeremy, yes, indeed, we kept the margin guidance for the two consumer business as before. But we said that there is a clear potential to reach the upper half of the guidance range in both Beauty and Laundry and to also make clear that it can also get there. The key moving part of that margin in the second half, on the one hand, we do expect a higher advertising promotion support in the second half to support our brands, in particular in Beauty.

I think we haven't invested so much of the beginning, also to finish our portfolio analysis to really be very decisive where to invest, and we have finalized all those plans. So we do believe in the second half that will be higher than in the first half and to some extent, that also holds true for Laundry and Home Care.

We also do see that in the second half from a P&L perspective, the input cost will be above the first half. The price hikes we have seen in input prices have accelerated throughout the first half, and we do not expect easing off so fast in the second half. So that now looking on average also input price in the second half will be above first half and that will also then impact the margin. So those are the two key drivers.

And then, of course, we talked about it earlier on the gas situation, of course, is some also uncertainty how that will unfold, although as I said before, we don't see a major downside on that part, but still uncertainty remains and also on the input cost, it's quite volatile. So we stay cautious here. But clearly, there is a potential to finish at the upper half of the range.

Our last question for today comes from the line of Tom Sykes from Deutsche Bank. Please go ahead.

Yeah. Good morning, everybody. I wonder just firstly, could you maybe give some comments on where the absolute level of EBIT is in Russia and what the impact on the EBIT margin as being presumably your A&P in Russia is down quite substantially -- is down substantially at the moment? And just where the margin is versus when you last gave the guidance, please?

And then just on adhesives, ex Russia, are we now in a point where pricing -- and I take your comments on board about perhaps some slower demand in the second half of the year, but are we are the point where the absolute EBIT is now stable, that the pricing is matching the cost increases that you're seeing in adhesives to trying to take out some seasonality perhaps as well, but any view there would be great? Thank you.

So Tom, good morning. So if we take the adhesive situation, maybe I'll start with that and Marco takes the question with the EBIT of Russia. I'm not 100% sure I understand your question. Can you elaborate it again?

Well, that's obviously a high pass-through element in adhesives, which is depressing the operating margin as well as whether you can match your prices against costs. So are we at a point now where you're trending at your price increases matching the cost increases across adhesives? And so therefore, although your volumes may move up or down, but we at a point where that sort of essentially a stable EBIT number in adhesives now, sequentially?

Yeah. So if I take that now, the absolute pass through level is reached. And I think it's, I would say, yes, maybe in the course of Q3, we are reaching this absolute pass-through level. And by that, for sure, that will then impact further also the margins in a positive sense because as you see, we had a margin in the first half year of 13.6%.We foresee that we have not changed the guidance means 13% to 15%.

And the midpoint, I don't need to tell you what the midpoint is on that. So therefore, we expect a better half two in comparison to half one when it comes to the EBIT margin, partly, for sure, also impacted by the absolute pass-through, which we have more or less reached while we are speaking. Maybe that's -- to that part, I hope that clarifies or answers your question. And for the other one, the Russia question, I give it to Marco.

So question was on Russia and the EBIT level. So in the first half, the EBIT in Russia was approximately on the prior year level, also fueled by lower advertising spend, as we obviously had communicated that from April, roughly onwards, we're going to stop the advertising in the country. .And if you recall -- when you recall, sales of Russia from -- of the total group is roughly 5%. And the EBIT level in the first half was a bit above that sales share that we have in Russia. So all in all, it was a bit accretive on the market.

Thank you, ladies and gentlemen. I will now hand over to Mr. Knobel for his closing remarks. Please go ahead.

Yeah. Thank you. So thank you, first of all, for your questions. I also -- Marco and myself could answer that accordingly. So let me briefly summarize the key takeaways of today's presentation. We are operating once again in a challenging environment with high volatility and also uncertainty. The war in Ukraine has far-reaching implications. It also accelerated the already tight situation at the supply markets. And all-in-all, in an overall inflationary environment, we face absolute headwinds from increased direct material prices of around EUR1 billion in the first half. And against this background, as out, we recorded significant organic sales growth of 8.9%, driven by strong pricing initiatives in all three business units, which accelerated quarter-over-quarter.

In sum, we were largely able to compensate the drastic input cost pressures on an absolute level, but as expected, our margin and EPS are affected by the exceptional input cost pressures. And nevertheless, we are confident to recover our profitability over time. Today, we've also updated our outlook for fiscal '22, taking into account the performance in the first half. We raised our expectations for organic sales growth, and we have confirmed our earnings guidance for the group adjusted EBIT margin and EPS. And as Marco pointed it out, just again, in our consumer businesses, we see the clear potential to reach the upper half of our margin outlook ranges.

And finally, while managing our business, we are driving the Consumer Brands merger with full force, and we remain focused on our strategic priorities. So before closing today's call, let me use the opportunity again to invite you to our upcoming Capital Markets Day on September 20. We are really looking forward to meeting you in person at our headquarters here in Dusseldorf together with my Board colleagues, we will share our perspective on our two future business unit, Adhesive Technologies, Consumer Brands, also focus on sustainability. And in case of any questions related to this event, please reach out to our Investor Relations team.

And with this, I would like to thank you for joining our call today. And as always, take care, stay safe and stay healthy, and have a nice day. Bye-bye.

Thank you for joining today's call. You may now disconnect your lines.