Beiersdorf Aktiengesellschaft (OTCPK:BDRFF) Q2 2022 Earnings Conference Call August 4, 2022 3:00 AM ET
Company Participants
Jens Geissler – Head of Investor Relations and Corporate Treasurer
Vincent Warnery – Chief Executive Officer
Astrid Hermann – Chief Financial Officer
Anke Schmidt – Corporate Communications
Conference Call Participants
Iain Simpson – Barclays
Guillaume Delmas – UBS
Fulvio Cazzol – Berenberg
Bruno Monteyne – Bernstein
Celine Pannuti – JPMorgan
Tom Sykes – Deutsche Bank
Emma Letheren – RBC
Jeremy Fialko – HSBC
Chris Pitcher – Redburn
Olivier Nicolai – Goldman Sachs
Karel Zoete – Kepler Cheuvreux
Pinar Ergun – Morgan Stanley
David Hayes – SocGen
Jens Geissler
Good morning to all of you. I would like to welcome you to Beiersdorf’s Second Quarter Conference Call. Joining me this morning is our CEO, Vincent Warnery; our CFO, Astrid Hermann; and Anke Schmidt, my colleague at Corporate Communications. We would like to share with you Beiersdorf’s business results of the first six months of 2022. For today, like last time, we have organized a combined call for analysts and journalists.
Anke, could we share some details about the presentation?
Anke Schmidt
Yes, Jens, and good morning also from my side. As usual, we will start with the business review from Vincent and Astrid, and afterwards, there will be the Q&A session. Before we get going, let me quickly remind you of some technicalities. [Operator Instructions]
And with that, now I would like to hand over to Vincent.
Vincent Warnery
Thank you, Anke and Jens, a warm welcome also from my end to today’s conference call, and thank you for taking the time to join us. Astrid and I are very pleased to take you through our performance over the first six months and give you an overview of the key developments in the past quarter. 2022 has been a successful year for Beiersdorf to-date. The group is clearly continuing on its growth path. Despite facing some significant headwinds, we managed to achieve double-digit growth on group level, driven by the outperformance of Consumer with plus [11.7%] [Ph] growth in the first-half. Tesa also delivered good growth despite challenges in China, and a strong prior year first-half. We are not only successful from a top line perspective, but also on the bottom line. The group EBIT margin of 15.9%, which is an increase of 50 basis points over the first-half of 2021, clearly shows that we are committed to delivering on our promise to achieve an expansion of the EBIT margin in the Consumer business in 2022 and the years to quarter.
Let’s take a more detailed look at our performance in the second quarter. After an already strong first quarter, we saw a slight acceleration in Q2. We were optimistic about our second quarter performance at our Capitals Market Day, and are happy to report today very good numbers, driven by a strong end of the quarter. As you can see, the growth of the Consumer segment is broad-based. Nivea, Derma, and Healthcare, all had a very strong double-digit growth in the second quarter. La Prairie also put an impressive performance in June at plus 17% growth, thus managing to limit the negative impact of the lockdown in China. Overall, we achieved strong growth of plus 11.9% in Consumer.
The tesa business recovered very quickly after the lockdowns in China, recording growth of plus 5.7% in the second quarter. Combined, we achieved plus 10.7% sales growth at group level. As I mentioned, NIVEA performed extremely well with growth of plus 13.2% in the second quarter.
I would now like to provide you with a few details on what exactly is driving this performance. With our portfolio, we’re able to outperform, not only the skin care market, but the personal care market as well. In terms of skin care, we saw very strong growth throughout our portfolio, with particularly strong growth coming from the sun, lip, face and body categories. We also managed to gain significant market share in the majority of skincare categories. Personal Care also had an excellent second quarter. The deodorant and shower categories recorded strong demand resulting in market share gains around the globe.
Allow me to make just one comment on the progress we have been making with the sustainability of our shower products. Last year, I presented to you our first climate-neutralized NIVEA shower range. Today, exactly one year later, we have put a version of this product on the shelves with an even stronger sustainability profile. The re-launch of our best-selling NIVEA shower gels, marked an important step forward on the journey towards climate-friendlier products at Beiersdorf. Not only the new NIVEA shower bottle made from at least 96% recycled plastic, it is also 26% lighter than it was before. The drop in weight means that there is a corresponding 32% reduction in packaging-related CO2 emissions. All our formulas are microplastic free, and up to 99% biodegradable. This is something that we are extremely proud of.
Back to NIVEA’s performance in Q2, the broad-based growth we experienced came not only from the category perspective, but also from a regional perspective. There are two examples I would like to share with you. In Western Europe, we recorded double-digit growth in net sales over the course of the second quarter, and this strong trend actually accelerated even further in June. As I indicated before, this growth was generated by strong performances through our portfolio with our sun care category clearly being one of the main drivers in Western Europe. Additionally, we are delighted to report that the investments in our face care portfolio continue to pay off. Leading the way in this regard are sales in NIVEA LUMINOUS, which we managed to double year-on-year, making it the primary source of growth in our face care category. These developments were all underscored by substantial market share gains in most Western European countries.
At this point, I would like to direct your attention to one of our ongoing success stories Latin America. This region was once again at the front of the pack from a regional standpoint, delivering another very strong performance in the second quarter with broad-based sales growth. It is really interesting to see that the dynamics of Latin America development were quite similar to the development we saw in Western Europe. The sun category really stood out. Here, we managed to more than double our sales in the second quarter. But that was not the only category that delivered a strong performance. There were also significant growths in the face care category in Latin America.
I would like to take you now from a detailed look at NIVEA to a more comprehensive overview of our portfolio performance in two main regions, North America and China. Let’s start with North America. As mentioned also at the Capital Markets Day, we have established a very successful and diversified portfolio in North America, and have recently extended it with the acquisition of Chantecaille. Our North America business has been gaining a significant amount of momentum over the course of the last couple of quarters, and this trend continued in Q2 where our portfolio delivered some very impressive numbers. With plus 15.5% growth in the second quarter, we once again outperformed the competition. All our brands grew significantly in the U.S. NIVEA showed strong growth in the body category, and Coppertone start into the summer season is promising. Our more recent acquisition, Chantecaille, also got off to a good start with growth exceeding our expectations.
I would like to highlight two main drivers of these excellent results in North America: our La Prairie and Derma brands. With La Prairie, we’re able to accelerate our client data strategy. We are in a unique position when it comes to client data capture, thanks to our exclusive agreements with retailers in the U.S. We were able to double our client data capture, a development that made it possible to provide more personalized offers, something that also contributed to our strong sales recovery. With our double-digit growth in the second quarter, we outperformed the market.
Our Derma brands, Eucerin and Aquaphor, have already gained significant market share in the U.S. in 2021, and they are continuing to make significant gains in the current year. Aquaphor in particular, delivered considerable market share gains. With developments like this, we are outperforming our competitors on all channels and across all subcategories. When it comes to continuing this encouraging trend, our most recent launch, Eucerin Sun, has been no exception. Initial results have exceeded our expectations, and we are well on track to become a serious competitor in the U.S. sun category in the very near future.
Let us take a look now at our activities in China, and particularly La Prairie. The lockdowns that [hit] [Ph] the country in April and May, and Beijing and Shanghai in particular, had a negative impact on our La Prairie business. The situation was aggravated by a number of other COVID-related restrictions such as the PCR test requirements, before entering a department store. Indeed, because we are significantly more dependent on Beijing and Shanghai due to our very selective distribution, we are not able to offset the effects of the lockdown by boosting our e-commerce activity. This is not only because we are only distributed at Tmall. We stopped supplying customers in Shanghai during the lockdowns, but even more because, unlike our competitors, we do not promote our brand through festival such as 6.18 and 11. As a result, our La Prairie sales in China declined by minus 30% in April and May.
The good news, however, is that we are already seeing a turnaround. June and July are up plus 32%. We’re also opened a JD.com site in three weeks, and you are surely aware that JD.com’s market share in online premium skin care went up from 7% last year to 20% now. And we will also open 10 new doors before the end of 2022, and nine of them are not located in Beijing and Shanghai. With this in mind, we are expecting very good double-digit Q3 growth, not only in China, but also for the overall La Prairie business. The recovery story for La Prairie is similar to what we have seen with our NIVEA business in China. After being impacted in April and May by the restrictions to fight the pandemic, NIVEA recovered very quickly in June with strong growth, especially body care in Mainland China, and also the face care category, the cross-border sales grew significantly.
Moving on Eucerin, the brand which was the least affected by lockdowns in the second quarter in China, thanks to our digital-only approach, we were able to almost double our sales year-on-year in the second quarter. Additionally, we recorded strong sell-out number in the 6.18 shopping festival, the second largest and most important shopping festival in China. We are well on track in China, and we are constantly gaining market shares. On product level, Thiamidol remains one of the main growth contributors in our Chinese businesses. The strong performance of our anti-pigment skin perfecting serum gives additional confidence to deliver a stronger mission to continue building our brand with the best assort.
I would like to wind out my remarks with a word or two regarding an iconic wound Care brand, Hansaplast. As some of you are likely aware, we are celebrating the 100th anniversary of the brand this year. It was way back in 1922 that we launched our first wound plaster under the name Hansaplast. Today, we sell more than 200 products in 65 countries in our health care business, from wound spreads to ointments, bandages and tapes as well as plasters for various applications. We look back on hundred years of incredible success that has continued and [dated] [Ph] into 2022. Double-digit growth in the first two quarters is a clear evidence of our strong market position in the health care business.
With these remarks, I’m finishing my part of today’s presentation, and will now hand over to Astrid who’ll take you through our first-half 2022 financials in more detail.
Astrid Hermann
Thank you, Vincent, and also good morning from my side. I’m happy to take you through our H1 2022 financials. Let us start with the main figures on growth levels. We achieved strong organic double-digit sales growth in the first-half of 10.5%. In nominal terms, we grew by 15.5% supported by foreign exchange and structural effects. At the same time, we were able to grow our EBIT in absolute, but also relative terms, leading to an EBIT margin of 15.9%, which is an increase of 60 basis points. In parallel, the profit after tax margin went up to 11.5%, and we were able to increase our earnings per share by €0.39 to €2.22.
Coming to our financials per segment, in the first six months, we grew like-for-like sales in our Consumer segment by 11.7%. The difference to the nominal sales growth of 17.3% is explained by favorable foreign exchange as well as additional sales from our most recent acquisition of Chantecaille. We were able to increase our EBIT margin by 100 basis points to 15.1% of sales. Our gross margin declined year-on-year, driven by high levels of input costs, partly offset by pricing actions. While our absolute marketing spend increased to its highest level ever, we benefited from more efficient investments in digital media. In addition, strict cost measures helped contain our general expenses.
The tesa business takes a very strong H1 comparable from last year. On the top line, we meet the strong first-half year 2021 with 5.4% organic growth. Tesa reports an EBIT margin below last year due to the strong headwinds from inflationary input costs and the temporary disruptions in the China business in the second quarter.
Looking at the sales development of the Consumer segment of the past quarter, we can see a continuation of strong quarterly performance. After finishing the year 2021 with organic sales growth of 8.8%, we started the year with growth of 11.6%, and are confirming this level now with another growth increase to 11.9% in the second quarter.
Looking at the performance by brands, Vincent already took you through some details, so I will briefly cover the main developments. First, we are happy to report that all our brands are contributing to positive sales growth in H1 2022. As mentioned earlier, NIVEA performed very well both the Q1 and Q2 on a global level and across the whole portfolio, with an outstanding performance in the sun category. The first-half 2022 finished with organic sales growth of 11.2% for NIVEA. Online sales outperformed offline sales once again in the first-half. Derma continues its success story in nearly all markets. We see strong market share gains and sales growth in our top countries such as the U.S. and Germany, but also former rate costs continue to accelerate like Latin America. Thiamidol remains a very important growth driver. Additionally, Derma again saw very strong online growth.
Our plaster brands continue to outperform the market. We see ongoing market share gains and recorded sales growth of 14.9% in the first-half. This growth is mainly driven by the wound category which includes the successful 2021 relaunched Bacteria Shield plaster. We already mentioned La Prairie’s performance in Q2. Nevertheless, we were able to grow with La Prairie in the first-half year, and we finished with strong growth rates in June, which makes us confidence for the third quarter.
Switching now to the regional perspective for our Consumer business, all regions are reporting positive growth and also this quarter, our Americas region is growing fastest. Latin America achieved 29% organic sales growth in the first-half of 2022. The growth is broad-based from a country as well as brand protected. Both NIVEA and Eucerin saw very strong results. North America continues to grow on a very high level, as already explained in detail by Vincent. All in all, we saw a 19.2% organic sales growth in the region.
The Europe region also accelerated in the second quarter, which the H1 growth to 8.1%. Both Western and Eastern Europe recorded similar growth rates, driven by strong performance in the so-called COVID categories such as sun, the new shower and lip.
As reported, our Africa, Asia, Australia region has been impacted by lockdowns in Asia in Q2. Nevertheless, we achieved growth of 8.9% in the first-half of the year. Sales trends were especially positive in India, Middle East and South Africa. In addition, Derma performed well in the whole region, and continues its growth story in China.
Turning to the gross margin of our Consumer business, assuming constant exchange rates, our gross margin decreased by 160 basis points to 59.6% from 61.2%, we were able to push through significant pricing in the first-half, which helps offset nearly half of the additional input costs in H1 2022. Mix effects were flat. The strong contribution from sun, Derma and skin care was offset by lump sum growth in La Prairie and high sales in lower-margin categories in personal care.
Cost of sales, logistics and others had a negative impact of 300 basis points. This is mainly caused by higher commodity prices and increases in transportation costs. For the full-year, we expect reported input costs to further increase, but also a stronger acceleration of the pricing components, resulting in a decrease of gross margin for the full-year. Despite the lower gross margin, we were able to increase our EBIT margin, and are on track to deliver slight EBIT margin growth for the full-year. The key drivers of the EBIT improvement in the first-half with a strong top line development, sequentially strengthening pricing impact, proportionally lower marketing spend and strict cost control of general expenses. While our marketing spend grew significantly, and has reached the highest absolute level ever, the top line leverage, the strong push into more efficient digital media and particularly precision marketing as well as a shift of budget into the second-half of the year, helped reduce the spend relative to sales.
Turning to working capital, in the first-half of 2022, we were able to reduce our working capital further to 4.6% of sales. This decrease was mainly driven by trade payables where we continue our initiatives around the optimization of payment processes.
Let’s now move to our tesa business. Tesa also faced a difficult situation at the beginning of the second quarter when lockdowns in China started. But once again, the business was able to show how quickly it can recover. After a very negative April, the month of May and June saw a quick return of the business. The China region eventually grew by 30% in June. The Electronics business was the main driver of the performance in the second quarter. Despite the lockdown, we could report positive growth in Greater China and the Asia Pacific region in the second quarter. Let me mention on a more general note, that tesa manages the global supply chain disruptions exceptionally well. With our high service levels throughout the full-year, we were able to achieve a competitive advantage, helping us win new contracts. Overall, tesa grew by 5.4% in H1 2022, primarily driven by pricing initiatives.
Looking ahead into H2, there is an ongoing discussion about our exposure to a potential shortage of natural gas. Here is what we can share as of today. Given our footprint, we have high production volumes in the EU and especially in Germany for both Consumer and tesa. In both businesses, we have already significantly reduced our exposure in Germany by implementing preemptive measures. These include rearranging gas consumption between sites and backup solutions to use alternative energy sources. We now see a low risk from a potential gas shortage for our own factory. While we do not expect a complete gas shutdown, there still are important risks of course. Alternative solutions require investment activity. Additionally, the running cost of operations can go up when using other energy sources. And even though we are prepared for potential gas shortages internally, our suppliers might be affected more severely, causing supply chain interruption at core.
This brings us to our full-year guidance for 2022. Despite a strong finish to the first-half, we will keep our full-year guidance unchanged. There is a high level of volatility, and we see a variety of potential risks going into the second-half: one, ongoing supply disruptions and the lingering risk from potential gas shortages, which I just mentioned; two, inflation seems to remain on a very high level, and continued pricing could have an impact on consumer purchasing behavior; three, the COVID pandemic, which is not yet over and its further development which is impossible to predict. Despite peak headwinds, we are confident to arrive at our efficient guidance for the year.
Regarding sales of the Consumer business, we expect at least the upper end of mid-single-digit organic growth for the full-year. We reiterate our guidance of a slight EBIT margin improvement. For tesa, we are looking for low to mid-single-digit organic sales growth in the full-year 2022. The EBIT margin will be noticeably below last year’s level. This means that for the group, we are guiding for the upper end of mid-single-digit organic sales growth in 2022, and for an EBIT margin at last year’s level.
With this, I conclude and hand back to Jens for our Q&A session. Thank you.
Question-and-Answer Session
Jens Geissler
Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] Okay, looking at the queue, the first question comes from Iain Simpson at Barclays. Please go ahead, Iain.
Iain Simpson
Good morning, everyone. Firstly, if I could just pick up on something you said in the guidance, if that’s okay. You said consumer organic sales growth for the full-year would be at least the upper-end of mid single-digit, if I heard you correctly. Clearly, you’ve done 11.7% in the first-half. It sounds though Q3 has started very well for you. So, I just wanted to check if I heard that correctly, and it could, in fact, be some way above the upper-end of mid-single digit, but you were keeping that as a floor, given the limited visibility?
And then my second question, if I just want to drill into what’s happening with the NIVEA brand and the rollouts of the various innovations there. You talked about A&P spend stepping up in the second-half of the year, is that specifically stepping up in NIVEA? And if so, is it sort of stepping up to support pipeline launches? And any indication you could give us, what categories that might be in, or just any color at all as to how we should think about the innovation phasing or the white space launch in the second-half of the year, and where that additional marketing spend is going, would be very helpful. Thank you.
Vincent Warnery
Thank you, Iain. Astrid will answer your questions.
Astrid Hermann
So, Iain, on the guidance, yes, you clearly heard at least correctly, it was [on purpose] [Ph]. And as you mentioned, given current visibility, we are taking a cautious approach. We’re very happy with where the business is year-to-date. That said, we have a number of risks, and we are managing and trying to understand those further. In order, I would suggest those are customer negotiations that are ongoing on pricing, particularly in Europe. The lockdowns in China and their continued impact on our business, and I would say regular recessionary peers that all of us have right now, obviously, in the economy and what impact that could have to consumer behavior. And then, as I mentioned, also supply constraints. We are managing a significant amount of bottlenecks and obviously continued challenges for around gas and product could lead to more.
In terms of your question on the — second question on A&P and innovation, yes, we continue to feel very good about our portfolio of innovation going into the second-half, and we are planning to support our second-half business very strongly. We generally speaking, always have a heavier second-half anyhow. And you know some of the big events that are coming in the second-half that we need to support as well. So, we continue to feel very good about the A&P level we have. We are driving significant efficiency, as I mentioned, also by a significant shift into digital media and precision marketing, but we feel very good about the level of spend we have, and we are going to increase that in the second-half further.
Vincent Warnery
Okay. So, we move to the — Jens, you are good?
Jens Geissler
Very good, thank you.
Vincent Warnery
Thank you.
Jens Geissler
So, we move to the second caller, Guillaume Delmas of UBS. Please, Guillaume.
Guillaume Delmas
Thank you very much, Jens, and good morning, Vincent and Astrid. First question is on NIVEA. Growth significantly improved sequentially in the second quarter. You did mention the performance was broad-based, but wondering if you could provide some color on NIVEA’s growth in the sun care segment in Q2 specifically. I mean, it would just be helpful to understand how much of the brand growth acceleration was down to that strong performance in sun care versus what, I guess, would be more underlying and sustainable performance.
And then my second question is on the other line. In your P&L, there was a noticeable swing in the first-half of this year relative to the same year ago period. I think it’s from minus €14 million to plus €10 million this first-half. So, can you provide some color on what this improvement is attributable to? And how do we think about the full-year for that other line?
Vincent Warnery
Guillaume, I will take the first question, and Astrid will answer the second. Yes, we have a fantastic season sun care. We also back to — we are, in fact, above the level of ’19, which is also very important, not only is the market growing, but we are gaining market share. We are also gaining some number one position that we had lost a few years ago in some big European countries, starting with Germany. All the sun care franchises are doing well. We have a very strong business in [indiscernible], for example, which has always been a very strong franchise of NIVEA, and we are growing everywhere. The biggest growth I would say — the turnaround is really happening in Europe where we are, as I said, turning around the brand, but we are also gaining market share in Latin America — in all countries of Latin America. So, all in all, this has been a continuous success since last year, and we are expecting — now we see the sellout results and the season is happening. We are expecting a big growth year for sun care.
Astrid Hermann
On your second question, Guillaume, we said there are smaller factors going back and forth within that. The biggest, of which, I would call out is, we were still producing for buyer as part of the big copper acquisition — Coppertone acquisition. That’s no longer the case, and there were some losses related to that last year.
Guillaume Delmas
Thank you.
Jens Geissler
Thank you. We move on to Fulvio Cazzol at Berenberg. Please, Fulvio, good morning.
Fulvio Cazzol
Yes, good morning, and thank you for taking the questions. My first question is on the U.S., one of your competitors highlighted a slowdown in July, so, I was wondering if you noted similar trends in any of the key markets that you’re in?
And then, the second one is on pricing. You indicated that you recovered around 50% of input costs from pricing. I think at the last results presentation in Q1, you were aiming for 80% recovery. So, I was just wondering, is this still a target? And is the 50% that you’ve realized so far, just reflecting the timing effects of when pricing goes into the market? Thank you.
Vincent Warnery
Thanks for your question. On the U.S. business, so as you know, we are particularly strong in sun care. So, here we are, clearly on a very positive dynamics. So, we are not seeing any slowdown on the contrary. We have not only Coppertone doing extremely well, but as I mentioned, also the success of Eucerin Sun, which is above expectations. We don’t see also any kind of slowdown on NIVEA. We are more into kind of mass market body care environment, where we see some cautiousness is obviously on department stores. So, La Prairie is obviously part of it where we see the retailers being more cautious in terms of taking orders. So, it’s more I would say cautiousness than really a slowdown that we can see today. And that would be the message on the U.S. Astrid?
Astrid Hermann
Yes. So, on your second question on the coverage of our cost increases, we are still holding on to the previously stated ambitions to cover about 80% of our costs with pricing. We’re well on track with that; 50% year-to-date is where we want it to be. We will see a reduction of cost increases into go, while our pricing will accelerate significantly, and may be one fact to give you on the way. When we’re looking at our Q2 performance from pricing, half of our growth is driven by pricing in the second quarter, so, a really strong acceleration there of the impactful pricing.
Fulvio Cazzol
Thank you for that color.
Jens Geissler
Thank you. We’ll move on, Bruno Monteyne at Bernstein. Good morning, Bruno.
Bruno Monteyne
Hi. Good morning, everybody. My first question is back to the gas in Germany. Thanks for the explanation of what you’re doing. But I presume that you’re using Germany for producing your products for a much broader area than Germany sales. So, could you indicate what percent of your global sales is really driven by production based in Germany, to get a bit of feel of how far that could spread?
And the second question is back to I think something we just heard on commodities and costs. Given where commodities have recently moved, do you think you will reach peak COGS inflation in the second-half, or will it be later, or do you see no end to that inflationary cycle just yet? Thank you.
Astrid Hermann
Thank you, Bruno. I’ll take both of those questions. Yes, we produce for a much larger part of our business in Germany. About 1/4 of our business is supported with production in Germany. As I mentioned though, we have significantly prepared to ensure that we can continue to support that business through alternative energy sources, through shifting production and so on. So, we are certainly doing everything we can to prepare for that. I do want to call out, as I said of in my speech, we are also in the end relying on our suppliers and need to manage that situation as well.
In terms of commodities, yes, we have reached a peak. What you should understand why I’m quoting that our costs will continue to rise somewhat, is — obviously, we have bought certain contracts and have inventory for contracts opened currently at — essentially at peak, but we are starting to see a bit of a slowdown of the improvement of the cost, which is great to see. Hopefully, that holds.
Bruno Monteyne
Thank you very much.
Jens Geissler
Thank you. Next on our line is Celine Pannuti at JPMorgan. Good morning, Celine.
Celine Pannuti
Yes, good morning. Can you hear me?
Jens Geissler
Yes, we hear you well.
Celine Pannuti
Oh, excellent. Good morning, everyone. Two questions, and maybe a follow-up on just the last question; first on the growth for the second-half, if I look at your comp over the next — the last three years, it seems that H2 is easier comparative. And you alluded to La Prairie bounce back as well as some activities in terms of launching. So, just try to — I mean, do you agree with that? And like are you — I mean, the cautiousness on the top line, is it really driven and you buy the overall environment? Or are you expecting effectively a slowdown in the second-half despite easier comparative?
Then my second question is on your A&P comment. A&P and Consumer last year you said was the 25.5% of sales. What’s the number in H1? And it was 27% last year in full-year ’21. Are we expecting it to be below that level for fiscal year ’22? Or given the ramp up in H2, it should be above that?
And just to follow up on the last question because, Astrid, I heard you saying that COGS inflation will be lower in H2, but prior year, you said you had stronger costs. So, I’m not very clear. So, all in all, including [numbers] [Ph], including supply chain, energy, is your COGS higher in — or lower in H2 versus H1?
Vincent Warnery
Interesting, I will take the first question. I think as we’ve insisted a lot on the work at least — you know very well that at Beiersdorf we prefer to under-promise and to over deliver. So, yes, we are in a positive analyst. Still, as tried mentioned a few risks or hiccups that might happen. If there is a lockdown again in Beijing and Shanghai after — we might be impacted. We are also in the middle of tough conversations with European retailers on price increases. So, all of that is making us be more cautious. But you are right to mention the comparatives of last year and the dynamics of the business. Astrid on the second — questions?
Astrid Hermann
Okay. So, Celine, on A&P, let me tell you what development we saw in H1, and I’ll start actually with last year. Last year, H1 spend was €200 million, what we care about, what’s 200 basis points above the 2019 level. We continue in this first-half year to be 130 basis points above. We ended up at 24.5 percentage points for overall spend, and again, above the line with 130 basis points better than 2019. We were at a record level for marketing spend ever. So, really strongly supporting the business, but of course, what we have seen is very strong sales leverage which is obviously lowering the percent spend. What we’ve also done is shifted significantly into digital media and also precision marketing. We’re seeing significant efficiencies from that perspective. And we have seen through the lockdown, some shift of budget into the second-half. We were obviously not spending when we were seeing the situation in China. But we feel still very strongly about having spent the right amount building also for the second-half, and we will be higher even in percentage in the second-half.
In terms of costs, so what I said is, we will see a slight increase of the impact from unfavorable cost in the second-half because we already have inventory or contracts at essentially peak pricing, but the impact of pricing to offset that will accelerate versus the first-half. So, we will try to, again, reach our goal of covering 80% of our cost increases through other measures, pricing and mix.
Celine Pannuti
Yes, thank you. Can I just rebound on that and square that with Vincent, what you said; you said tough negotiation on pricing. So, is pricing getting tougher? You seem to think that pricing is accelerating, but at the same time you mentioned, I think, several kind of pricing negotiation in Europe. Can you expand on this, please?
Vincent Warnery
So, I think obviously, we are — we have been forced to be much more daring in terms of the private price proposals we are discussing with retailers, especially in Europe — in Western Europe. So, we are having this conversation. We already — we went through the first price increase, and then we — it’s already — you see that with the sell-off figures of the last weeks. And we’re entering into the second negotiation about price increases which is not a walk in the park, which is generating the necessary exchanges with retailers in Western Europe. That’s what I was referring to.
Astrid Hermann
Maybe just to add to that, Celine, what we — where we have very strong pricing is the emerging markets; Derma, La Prairie, health care. So, one question mark continues to be obviously euro pricing where we are past offer [technical difficulty], but still in the second run.
Celine Pannuti
Thank you so much.
Jens Geissler
You are welcome. Okay. We move on to Tom Sykes, Deutsche Bank. Please go ahead, Tom.
Tom Sykes
Yes, thanks very much, and good morning everybody. Just coming back to your comments on La Prairie, and you said you were rolling out, expanding by about 10 doors in H2, could you maybe say what the increase in selling capacity is in La Prairie in H2, and then perhaps what the increase in cost, you’re sort of expecting in H2 as well, and whether on the growth that you’re budgeting for, you’re expecting to get operational leverage in La Prairie in the second-half of the year? And obviously, it’s noted the start that you’ve got off to in July. And then coming back to the question on sun, I know you gave some interesting descriptions of what had happened in sun. But you did say at the Capital Markets Day, you were up by 30% year-to-date, and I think that was lower in Q1. So, is it fair to say that the run rate of sun and probably [deo] [Ph] were close to double in Q2 what they were in Q1, please? And if I can maybe just put one more, could you possibly say what the FX impact at gross and operating margin was, please?
Vincent Warnery
Okay. On the first question, it’s difficult to give you a precise figure, but I would say the 10 doors we are opening in the coming months in China might generate an extra 10% growth versus what we are doing today. And it’s really a rough figure. The interesting thing and whether insisted on is that we are expanding. So, you remember, Tom that we have only 80, 90 doors in China. So, we are still very, very finicky, but we are expanding our coverage of the Chinese consumers outside Shanghai and Beijing where we are overrepresented, I would say.
On Chantecaille, I was looking at the figures. In fact, we are slightly doing better in Q2 versus Q1. But overall, we are in the same range of 25, 26% growth versus last year, so, no big difference. What I see is clearly an acceleration of NIVEA and sun, but it’s also because of Coppertone we had a big Walmart order in the first quarter, but all in all same kind of growth, 25%, 26% in Q1 and Q2. And we see also — that’s good news. We start to see the sellout of the season. We have the same kind of range in terms of cost.
Astrid Hermann
In terms of foreign exchange, I can give you the impact on the top learning overall for consumer. We saw a positive impact of 450 basis points mainly driven by U.S., Brazil, Mexico and China, and previously that was 380 basis points.
Tom Sykes
Okay, thank you very much.
Jens Geissler
Thank you. Next on our line would be Emma Letheren at RBC. Good morning, Emma.
Emma Letheren
Good morning, everyone, and thank you for taking my questions. I have two; firstly, you had a very strong performance in Eastern Europe despite everything that’s going on there. And I was wondering if you could give a bit more color there about your performance in Russia and Ukraine.
And secondly, you highlighted the potential for prevailing inflation and a potential recession in Europe in your outlook statement in your half year report. I was wondering if you could talk through what action you might be taking now in terms of your portfolio in preparation for this.
Vincent Warnery
Thank you very much for your question. Regarding Eastern Europe, so we are — if I take Europe, Eastern Europe, excluding of course, Russia and Ukraine, we are progressing extremely well, and we had a 35% growth in Eastern Europe, so, doing well on each and every brand. Regarding Russia, Ukraine, if you remember, we have decided to stay in Russia, but with a very — with a much shorter assortment, and we decreased the assortment by 70%. So, we are there. We are doing well I would say with what we have. But obviously, we are not growing the business, and we stopped investing in NIVEA immediately when the war started. So, we are just keeping the trademark NIVEA alive. That’s the objective and no more or less.
Astrid Hermann
In terms of recession, risk and that, to be honest, everyone knows kind of the phase in terms of obviously what we read and what we see. We have a good portfolio of brands that we feel cover as well in recessionary times. So, we have opportunities even within our portfolio and even within our brands, for example, they are to down trade. And previous downturns, for example, the financial crisis in 2008, 2009, they looked at our business overall grow, at least from the consumer side piece that they see at least, but also a fast recovery. But this is obviously a big question mark, no one can really tell what the future will bring.
Emma Letheren
Understood, thank you very much.
Jens Geissler
Thank you. We move on to Jeremy Fialko at HSBC. Hello, Jeremy?
Jeremy Fialko
Hi. Good morning. A couple of questions from me, first one is, when are we looking at the second-half margins, from what I gather, we’re still going to see an element of gross margin pressure in H2, albeit less than what you saw in H1. Your marketing is going to be up as a percentage of sales, and then potentially, you will have a less favorable shift in the other costs, all of which could, in theory, lead to the margins being down in H2. But then when I look at this on a kind of a bigger historical perspective, your margin in H2 last year were 10%, which I think is the lowest kind of half year margin we’ve ever seen from the Consumer division. Margins down year-on-year would imply — obviously, even lower number than that. Yet you’re looking at a business where the sales seem to be growing very well. You’ve got a much bigger sales base than before. So, I just wanted to try and sort of square those couple of things and kind of get your views on that. And then the second question is just on tesa. Could you talk a little bit about how you see some of the different key industries evolving for that in the second-half?
Astrid Hermann
I will take both of those questions. So, H2 margins, as you have mentioned, we always have second-half lower margin, and we will see a smaller impact from gross margin, as you’ve mentioned, and I tried to answer in previous questions. Yes, our A&P will be up. Likely, we will quite have the same figure from our, let’s say, general expenses and so on because this benefited obviously from very significant top line leverage in the first-half. We are holding on to our EBIT margin guidance as we expect 30 basis points increase over the prior year, and that’s what we’re holding on to. And so let’s see how it goes. Obviously, as we continue to belong, we will confirm our guidance further.
In terms of tesa, what I’d like to say here is that currently, we see a good business across the board, obviously, driven by the electronics business. Okay, auto business, again, a big question mark on where that industry will build. And what we can tell you in general with tesa is that, we’ve also just mentioned, when there are recessionary impacts with tesa, we feel that quite quickly, but tesa also tends to get out quite quickly out of those type of slips there. So, far, we do not see that impact yet outside of the Q2 lockdowns in China.
Jeremy Fialko
Okay, thanks.
Jens Geissler
Thank you. That’s a long list of callers today. Next on the line would be Chris Pitcher at Redburn. Good morning, Chris.
Chris Pitcher
Hi, good morning. Good morning, all. A couple of questions for me, please. Firstly, on Chantecaille, could you give us an update on how the integration is going? And could you give us a sales performance on a pro forma basis there? You commented on how it was ahead of expectations in North America, but how has it performed in Asia?
And then, secondly on the gas shortage and sort of contingency planning. You mentioned that you’re well-positioned, but your suppliers could be less well-prepared. Can you give us a sense of the visibility you have on your supply chain with some sort of risk assessment across there? I know that your inventory has obviously stepped up in H1. How much of that was contingency stocks? How much was just the higher prices of raw materials? And should we expect a further increase in inventories into the second-half to contingency plan? Thank you.
Vincent Warnery
Thank you, Chris. I will take the first question on Chantecaille. We’re very happy with the results of the first semester. If I take the months of February to June, which are the months which belong to — Beiersdorf grew 14%, which is pretty good. And we see a good, well-balanced performance across the U.S., slightly more, Asia slightly less, but overall, a good performance. We also were able to move into the integration the way we wanted to move. We recruited top profiles in finance, in HR, in legal, in IT, all the key functions, in order to make a more robust operating model. And we are working now on expanding the business. We have obviously the ambition of being in China. We are also working on some IT improvements. So, everything is working well and delivering what we expected.
Astrid Hermann
On your second question related to inventory and cash shortage, so we are holding more inventory, driven by those what you’ve mentioned, contingency, but also clearly higher on packaging materials. Those are drivers. We absolutely are looking to ensure that we have a very good inventory position, as we go particularly into the fourth quarter there. So, we will do everything we can to lead our business. In terms of transparency on impact for cash shortage, I’ll explain where we are with our business. We’re also obviously working with all of our strategic suppliers on continuity plan. But as you can imagine, they’re working with many customers on go. So, we have somewhat limited transparency on that, but we’ve certainly been working on securing supply needs.
Chris Pitcher
And Vince, can I just quickly confirm, did you say 14 or 40 for Chantecaille growth? Apologies.
Vincent Warnery
Fourteen, 1-4.
Chris Pitcher
1-4, thank you.
Jens Geissler
Thank you. Next in our line will be Olivier Nicolai at Goldman Sachs. Olivier, good morning.
Olivier Nicolai
Hi, good morning, Vince and Astrid. Thanks. I just got two questions, please. So, first on LatAm, you mentioned in the press release, obviously, strong growth in the U.S., but also in Europe. So, could you just help us to understand the geographic split for the brand today? Essentially, how big is China versus U.S. versus Europe? And what is duty-free today? That’s the first question.
And second one on e-commerce for your Consumer business. Can you give us an update on the growth you had in H1? And for LatAm specifically, how much is e-commerce today? Thank you very much.
Vincent Warnery
So, Olivier, your second question was on — could you repeat?
Olivier Nicolai
On e-commerce.
Vincent Warnery
Okay, sorry.
Jens Geissler
How much growth in H1?
Vincent Warnery
Okay. So, overall, if you look at La Prairie today, if you put together the brick-and-mortar business, you put also travel, retail and you put Tmall, it’s around one half of the business, in fact, is coming from China. So, it’s why we are obviously very dependent on the evolution of China. Then you have something like 30% which is Americas, and the rest in Europe. When you look at the evolution of the business, we are doing well in travel, retail, but — so we are growing — I mean, Europe for example, almost 100%, to big growth, but we are far, far, far from the level we had in ’19, and we are still like everybody at low figures versus the pre-COVID time, and we are sure it will take time to develop — to go back to a good level of business in this region.
On e-commerce, we are doing extremely well. You might have seen that we are perhaps one of the only company still gaining market share on e-commerce. We are progressing extremely well on Derma, which was — which is really the first performer in terms of e-commerce growth. We are developing very well our business also in cosmetics. The growth of online is almost double the growth of offline, and particularly in regions like Latin America, but also you see the U.S. So, all in all, on a like-for-like basis, I’m taking into account the fact that we are smaller than some of our competitors in China and the U.S. We are becoming not yet best-in-class, but we are part of the best players in e-commerce, and we’ll continue to invest in this business.
Olivier Nicolai
Thank you very much.
Jens Geissler
Thanks. We have Karel Zoete on our line at Kepler Cheuvreux. Karel, good morning. Hello?
Karel Zoete
Hello.
Jens Geissler
Yes. Karel?
Karel Zoete
Yes. Can you hear me?
Jens Geissler
Yes. We can hear you. Thank you.
Karel Zoete
All right, good. The first question is on cash flow. It was relatively limited in the first-half of the year. How do you see that developing in the second-half of the year? And the second question is also a follow-up on margin guidance but from a different angle. In the past, you showed regional margins when we saw close to 20% EBIT margins in Europe and single-digit margins elsewhere. How is margin differential between different geographies today? And does that explain part of the answer on your somewhat more cautious guidance on margins in H2? Thank you.
Astrid Hermann
Thank you, Karel. I’ll take both of those. So, cash flow statement, you have to remember that we paid for our acquisition [indiscernible] in the first-half of this year. So, that has an impact. We feel very good about our cash flow, otherwise, our policy [indiscernible] so far. In terms of EBIT development differential, yes, we have obviously in the past, a stronger differences between the parts of the business. I will comment now over the last couple of years, what we see reference they’ve done — started business in that — they are really [indiscernible], but they are losing of the cash flow and will obviously continue to help us manage our overall profitability as well.
Karel Zoete
Okay, thank you.
Jens Geissler
Thank you. Our last caller today is Pinar Ergun at Morgan Stanley. Pinar, good morning.
Pinar Ergun
Good morning. Thanks for taking my questions. Two follow-ups on some of the things that were discussed earlier, I believe you said gross margin mix impact was neutral. Could you please give us more color around that? I was under the impression that sun care would have had a positive impact, but maybe I’m wrong. Or are you seeing any down trading?
And then the second follow-up is on pricing. On the slides, you’re showing 140 bps benefit to gross margin from pricing. Am I right in assuming that implies about 3.5% to 4% pricing in H1 and maybe mid-single digits in Q2? And if so, that suggests your pricing might be lagging inflation. Any thoughts on why have you deliberately gone easy on pricing so far, or was that because you faced some resistance from retailers? Thank you so much.
Astrid Hermann
I’ll take both of those questions. In terms of mix, you are right, we had very strong sales and they absolutely contributed positively to our mix. Beyond that, we also had very strong Derma sales, which are also highly accretive as well as just generally our strong skin care business was contributing positively. On the other hand, unfortunately, as we just also mentioned, La Prairie, with less growth year-to-date, and certainly, we had hoped it’s not contributing to mix and tax going the other way.
And then also a very strong personal care growth at lower margins is also offsetting the good performance in the other parts of the business I just mentioned.
In terms of price pay, yes, there is a time dimension to pricing, but we certainly have been quite aggressive, I would suggest, around pricing. And as I mentioned, in the second-half it’s driving about half of our growth coming from pricing and accelerating, and we will see more impact in the second-half, which should allow us to get to that about 80% coverage of our cost that we all along tried to achieve.
Pinar Ergun
Thank you very much.
Jens Geissler
We have a final caller, David Hayes, SocGen. David, your questions, please?
David Hayes
Good morning. Thank you very much. I just want to look forward to next year. I think you mentioned the guidance that was given in June. So, I just — just to unpack that, a, are we still guiding for at least 50 basis points margin improvement in Consumer next year? And then just coming on that number, given what we know now to the first-half, can you give us any kind of breakdown in terms of input cost outlook assumptions things stand in that number, and pricing levels that you’re achieving, whether you think they will stick or whether there’s a risk that retailers look for some pricing deflation through next year, and also the A&P spend levels, and also the sun care season? Obviously, a great performance in the first-half, but then that leverage benefit. Are you assuming a normal sun care season next year within that guidance as well? I just want to work out whether there’s any more color you can give us on the breakdown for the 50 bps? Thank you.
Vincent Warnery
Thank you, David. I will take the first one and Astrid will take the second one. Yes, we absolutely confirm our long-term outlook of growth above market and that we want to increase the EBIT margin by at least 50 basis points every year from 2022. So, we confirm that. That’s clear. Astrid?
Astrid Hermann
And your question related to your import pricing in sun care, look, David, if you had asked me those questions a month ago, I probably would give you a different answer, and this is part of the challenge in terms of visibility. Certainly, we seem to have crossed a peak in terms of input costs as might — has some — we call it, favorability, but maybe a bit more stabilization of cost mix here, so no negative impact. Well, after [indiscernible], it really depends on how that developed in the months to come. In terms of pricing, certainly, the pricing we’re taking, especially the latest rounds that are starting now, absolutely should have the positive impact next year.
We will have to see what’s going to happen, obviously, into consumer behavior and all dimensions that we have little visibility — most of us have little visibility on. But certainly, the pricing should come through.
And in terms of the sun care business, obviously, we want to build off of where we are — the successful year this year. We just launched, as we mentioned, Eucerin sun care in the U.S. We will build on that next year with further development of that business. We have, in general, a very successful business with NIVEA and Coppertone, and we’re going to try to strengthen that as well. So, we do not see sun care becoming a less important part of our business, rather the opposite.
David Hayes
Thank you.
Jens Geissler
Thank you. Well, that concludes our Q&A. Thank you for having joined our conference call. Beiersdorf’s next Investor Relations event will be the release of our nine-month sales on October 27th. We appreciate your interest in Beiersdorf. Thank you, and goodbye.
Operator
Ladies and gentlemen, the conference has now concluded. And you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.
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