Beiersdorf Aktiengesellschaft (OTCPK:BDRFF) Q3 2022 Earnings Conference Call October 27, 2022 2:00 AM ET
Company Participants
Jens Geissler – Head of Investor Relations and Corporate Treasurer
Vincent Warnery – Chief Executive Officer
Astrid Hermann – Chief Financial Officer
Conference Call Participants
Guillaume Delmas – UBS
Fulvio Cazzol – Berenberg
Iain Simpson – Barclays
Olivier Nicolai – Goldman Sachs
Chris Pitcher – Redburn
Jens Geissler
Good morning, everybody. Welcome to Beiersdorf’s conference call. Here with me this morning is our CEO, Vincent Warnery; and our CFO, Astrid Hermann. We would like to share with you Beiersdorf’s business results of the first nine months of 2022. We will start with the presentation and the business review. But before we get going, let me make some technical remarks. Throughout today’s presentation, all participants will be in listen-only mode. The presentation will be followed by a question-and-answer session. When you register for Q&A, please remember that there is a limit of two questions per caller.
And with that, I will now hand over to Vincent.
Vincent Warnery
Thank you, Jens. I’d like also to welcome you to today’s conference call, and thank you for taking the time to join us. Over the course of the next few minutes, Astrid and I have the pleasure of taking you through our performance in the first nine months and providing you with an overview of the key developments from the past quarter.
First of all, we are happy to report that we have been able to ensure that the momentum from the first half of the year carried over into the third quarter. We achieved strong organic growth on a broad base in the first nine months of the year, and this despite the ongoing economic and geopolitical challenges that we are all facing.
Looking at our group results, an impressive third quarter resulted in double-digit growth of plus 11.1% in the first nine months of the year. Our Consumer business continued the strong performance, it has delivered in previous quarters, ending the nine months period with robust growth of plus 11.7%. Tesa gaining significant ground in the third quarter and closed out the first nine months with an increase of plus 8.3%.
Looking at the performance of our brands in the third quarter we saw a very strong organic growth on a broad base. The double-digit increase of 11.8% in the consumer segment was based on contributions from the entire portfolio due to pricing and volume with all brands delivering positive volume growth. NIVEA’s growth was close to double digits, but we’ll get into that in greater detail in a couple of seconds.
Growth at Derma was again above 20%, thereby confirming the strong performance from the first half of the year, driven by high demand in the Americas, including our key markets U.S. ongoing success of Thiamidol and strong white spot penetration, we were able to once again outpace the competition and gain significant market share. The continued growth of our plaster brands was again driven by last year’s relaunch, which help us to outgrow the market. And as we already anticipated in our last call, La Prairie is now back to double-digit growth with an increase of plus 14% despite lockdowns around Henan. This clearly demonstrates that our intensified focus on strengthening the online business is having a positive impact.
In addition, Tesa expanded its growth to an extremely impressive 14.3% in the third quarter. The main drivers here were the electronics business as well as a significant recovery in the automotive business. Taken together, all of these results in a remarkable plus 12.3% growth for the group in Q3 despite increasingly challenging market conditions.
Let us now take a closer look at some of those notable performances in Q3. As I just mentioned, NIVEA outcomes out of the third quarter with sales growth of plus 9.9%. Worth mentioning in this regard is also the fact that it was the first time that NIVEA managed to expand its market share in all regions and in all categories. And this wide-ranging expansion is not just limited to market share. Indeed, we are seeing growth throughout the entire portfolio.
The Skin Care portfolio even managed to outperform the Personal Care portfolio. The same season completed with strong growth in the third quarter, and there was positive growth in all Skin Care subcategories in Q3, so demonstrating the strength of the NIVEA portfolio. The Personal Care growth was driven by a strategic deliverance category.
We are also pleased to see that our pricing actions have been well received. Due to our successful pricing initiatives in the first half of the year, the growth in Q3 was mainly driven by pricing, while volume was still positive. A quick glance at the competition show that we are in line with the market when it comes to pricing but our volume performance remains better than most of our competitors. This is a clear indication that we are finding the right balance between pricing and volume growth and that our brands are highly resilient in terms of price sensitivity.
Let us turn now to our performance in China. There, we have grown by an outstanding plus 24% with NIVEA in Q3. We’re also pressing ahead with our premiumization strategy in China. That means that we have optimized our portfolio. We are concentrating resources on driving premium development and high-margin products. Additionally, we have a clear focus on e-commerce activities. We are relying on online first product launches. Our online share of business increased significantly from 46% in 2019 to around 60% expected for the full year 2022.
At the same time, we are upgrading our lower price categories. Our focus is on premiumization drivers in our current categories, men, face cleansing and body and especially in the strong growing online business. Since the start of our valorization process in 2020, we have increased the average selling price in our online business by more than 32% for our portfolio. On top of that, our successful Luminous 630 launch a cross-border e-commerce has been delivering some impressive results. The market share of NIVEA Face Care increased significantly in 2022. Luminous 630 is currently ranked #2 in cross-border e-commerce Anti-Spot with a market share of 4.3%. And just a quick reminder here. This is all coming only from cross-border e-commerce business. The formal approval to set in domestic China, which we are working on will be a huge milestone.
This brings us to our selective cosmetics business, La Prairie in China. Following a difficult second quarter that was marked by ongoing lockdowns, we saw a strong recovery in China in the third quarter with a growth of plus 41%. With the goal of achieving a greater degree of the diversification, and to be able to react to short-term disruptions going forward, we decided to further expand our distribution.
On top of a strong brick-and-mortar business and impressive growth in the travel retail business over the course of the past year, we also strengthened our online business in the third quarter. We took the lessons learned from our successful online launch on Tmall and applied them to the latest launch of La Prairie on JD.com. Initial results have been extremely promising and have exceeded our expectations.
These results are including 140,000 unique visitors in the first 4 weeks since launching, strong conversion rates, and what is even more important, we are reaching a more diverse consumer base. We are missing more clients from Tier 3 cities than at our other online platforms. We will work to continue strengthening our presence on JD.com and are confident that it will be a strong partner in addition to our Tmall presence, thus providing us with a much greater degree of flexibility going forward.
The momentum in our Derma business has continued and is still growing at very high rates. Our so-called white spots, either countries, categories and businesses with high potential, where again, strong growth drivers. All of these investments in developing the white spots are fueled by strong profitability increases in our Legacy Business. Long-standing businesses in Europe, Asia or the U.S. have managed to significantly increase their profitability over the course of the past few years, while still delivering strong top line growth.
The EBIT margin of our Legacy Business has increased by 380 basis points since 2020. We have been using this profitability increase to help us invest in the following White Spots. In Brazil, we have been working to expand distribution and to maintain a digital focus. We launched Eucerin in Rio and Sao Paulo for years ago. And from there, we expanded the brand nationally with a strong digital focus. The strategy is clearly paying off. With Eucerin, we have achieved the #1 position for the anti-pigment category, and we are now growing 3x faster than the market.
In China, we are on track in terms of our expectations and have been recording strong growth, thanks to our online-only strategy that started with Tmall. We are also seeing strong sales years from our Thiamidol products via cross-border e-commerce. After 2 years, we are now one of the fastest-growing international Derma brands in China.
In the U.S. market this year, we leverage our existing know-how and added local expertise from the Coppertone R&D team to launch Eucerin Sun thereby transforming our already very successful body brand into a full Derma cosmetic brand. The first summer season was very successful, and we have already established our position as an important competitor in the U.S. dermacosmetics market.
In Poland, we took our lessons learned from the most recent successful White Spot penetrations and decided to reenter the Polish market in the third quarter. This reentry has been shaped by focused distribution in major cities, medical detailing and a strong focus on e-commerce. Taking these steps means that we are entering the largest dermocosmetic market in Eastern Europe. I’m very happy with the overall performance of Beiersdorf and our teams around the world in these volatile times.
Now I will hand over to Astrid, who will take you through our financials in greater detail.
Astrid Hermann
Thank you, Vincent, and good morning also from my side. It will be my pleasure to guide you through our nine-month 2022 results. Let us start with a view on the group and our sales results per segment.
In the first nine months, the consumer business grew by 11.7% like-for-like. On a nominal basis, favorable foreign exchange effects and the additional sales from our most recent acquisition Chantecaille led to growth of 18.1%. Our Tesa business accelerated its top line growth significantly in the quarter, bringing like-for-like growth of the first 3 quarters to 8.3%. In nominal terms, the sales growth was 11.8%. All in all, the group grew double digits at 11.1% from January to September and by 16.9% in nominal terms.
The Consumer segment showed a very stable performance on a high level throughout the year. After strong growth in the year 2021, we have managed to grow double digit every quarter this year. This is a remarkable performance, especially given the volatility and changing market situation throughout the year.
Turning to our performance by brand in the Consumer division. The broad-based growth I mentioned is also visible when looking at the nine-month performance of NIVEA. Personal Care and Skin Care are growing at similar rates. In addition, all of our major subcategories are growing year-to-date. Next to outperforming businesses like sun, lip or deo, we are very happy with the performance of our focused categories, body and face care, which both show strong growth rates in the first nine months.
Our Derma business continues to outperform, both in terms of net sales and market share. Year-to-date, almost all countries are growing double digits. This is true for our biggest markets like U.S., Germany and Thailand but also for smaller markets, which are picking up significantly with Gate of China or countries in Latin America.
Let us now look at the Healthcare business, which continuously gained market share in every month of 2022, which is proof of our leading market position. In the first nine months, all our main countries recorded positive growth rate and the development of our businesses in markets like India and Mexico is impressive.
In the Luxury segment, La Prairie looks back at a very volatile performance in the course of this year. This was primarily caused by external disruptions like the lockdown in China. As we mentioned earlier, we just expanded our Chinese online business and made it more diversified. We have seen a strong recovery in Shanghai in Q3 after the lockdowns were lifted. At the same time, our global travel retail returned to very good growth rates in Q3.
Let’s now take a more detailed look at our regional performance. All three regions: Europe, Americas and Africa, Asia, Australia were growing again in Q3 and have further solidified our strong nine-month results. Europe is growing organically by 6.4%, while Western Europe grew slightly faster than Eastern Europe, which is negatively impacted by the war in Ukraine. In Western Europe, we are keeping up good top line growth with the exception of a few markets in which ongoing difficult price depreciations are impacting our performance.
Americas continues to be our strongest growth region in Q3, but also for the nine months was 24.5% organic growth. Latin America’s performance is driven by growth in Eucerin as well as NIVEA. Countries like Brazil, Mexico or Chile are leading the development in the region. In terms of categories, deo, sun, and face care are outperforming the market. North America’s performance is clearly led by the convincing performance of Derma, but also our businesses around NIVEA and Coppertone are growing double digits here. After weaker start to the quarter for La Prairie in North America, the trend turned around, and we recorded good growth in the month of September.
The region with the fastest acceleration quarter-on-quarter was Africa, Asia, Australia. We already mentioned the strong development of our portfolio in China after the easing of lockdown. Additionally, countries like Thailand, India or South Africa performed particularly well in the third quarter, bringing the nine-month performance of this region to double-digit growth of 11.2%.
Moving to the Tesa business. There is broad-based growth in Tesa as well, next to Tesa’s growing consumer business, we see two divisions outperforming in Q3, leading to an acceleration of growth in Q3 at 14.3% organic sales growth. One area is the electronics business. Throughout the year, electronics has been the main driver of Tesa’s performance. This continued in Q3, and we saw an encouraging favorable trend towards the end of the quarter where we achieved high growth in the Asian region.
Our market outperformance is driven by top-notch technology like structural bonding solutions, which gives us a competitive advantage when it comes to winning new contracts. One of these leading solutions is the patented bond and detached approach, which so far has been applied more than 2 billion times for batteries and smartphones. Combining our expertise in electronics with our long-term experience in automotive, we are using this approach now in the construction of electrical vehicles also. Europe is gaining speed in this area, and we have a close cooperation with key manufacturer. Automotive was a growth driver in the third quarter and will be even more important in the mid and long term.
Before I finish my part of the presentation, let’s have a look at our updated guidance for the full year of 2022. We are pleased to again have achieved an outstanding performance year-to-date and are therefore raising our guidance for the year. Given the macroeconomic and geopolitical challenges as well as ongoing price negotiations with retailers in Europe, we are considering a factor of uncertainty in our below update. Assuming continued strong market, we would expect performance at the higher end of the range.
For Consumer, we are now expecting organic sales growth of 9% to 10% for the full year, indicating a more normalized level of growth in the fourth quarter. We confirmed the consumer EBIT margin to be slightly above previous year’s level. At Tesa, we raised our organic sales growth to 7% to 9%. The increase in sales driven by the direct industry segment also enables us to increase our guidance for profitability. The EBIT margin will now be only slightly below previous year’s level despite the higher levels of input cost inflation. For the group with me, we expect organic sales growth of 9% to 10% and the EBIT margin will be at previous year’s level.
To sum up, despite a more cautious view on the fourth quarter, we see governments reacting to the high inflation number, limiting the financial impact on consumers. With our portfolio, we have mastered recessions previously, and are now preparing for the next potential downturn. We are pushing our Skin Care categories, we’re seeing our businesses become more profitable, and we are winning in former white spots. These developments make us confidence going into the next year.
Thank you for your attention. Back to Jens, who will start our Q&A session for today.
Question-and-Answer Session
Q – Jens Geissler
[Operator Instructions] The first question comes from Guillaume Delmas UBS.
Guillaume Delmas
Two questions, if I may, please. The first one is on Western Europe, where it seems your organic sales growth for consumer has slowed in the quarter from around 8%. I think it was in the first half to, I get to around 3.5% in the third quarter. So wondering what you’re seeing in Western Europe? Is there some down trading happening in maybe some product categories? Or can you talk maybe a bit about the price negotiations you’re currently having with retailers and to what extent you’ve been facing more delisting than usual? And more importantly, how do you see this situation evolving over the coming weeks and months?
And then my second question is on your margin outlook because despite raising quite significantly your organic sales growth guidance for consumer, you have left the division’s margin outlook unchanged. So I guess I’m curious to hear why this is the case? And I would imagine you are getting more operational benefit from this stronger than initially anticipated organic sales growth. So are you reinvesting more behind your brands? Or is it a cost environment that is getting more and more challenging?
Vincent Warnery
Thank you, Guillaume. I will take the first question and Astrid will answer the second one. In Western Europe, you’re absolutely right. What is happening in the third quarter is that we are engaged in some discussions about crisis. We’ve been obliged like all our competitors to do price increases. We even did two price increases in Europe, and we are now entering into the second — the execution of the second price increase which is pretty high. So we have some tension, some irritation in some countries. But overall, the acceptance of our price increase is pretty good.
What you mentioned also is something we were afraid of, but we can testify that it is not happening. This is what you call the down trading. We have been able also to evidence and especially in the last weeks or last month, looking at the sellout data of, for example, Europe — France and Germany, that the price increase that is now really affecting our price in the market did not reduce the growth in volumes. So we are gaining market share in the last week of September in August like before, both in volume and in market share.
The truth also is, and this is one of the assets of NIVEA, we have a pretty large range of prices. If you look at the more strategic category, which is face care, yes, indeed, we have Luminous, which is the best-ever success of NIVEA at [EUR 19], but you can find also Q10 at EUR 9, and you will find the essential NIVEA at EUR 4. So we have a pretty large range of prices, which means that if people are willing to down trade, they can do that within NIVEA. And again, we didn’t see it so far. So we are optimistic for the fourth quarter, and we will pursue our price increases as planned. On the second question, Astrid.
Astrid Hermann
Sure. So in terms of margin and leaving that unchanged. We are continuing to invest heavily in kind of our business in terms of ASP and continue once you do that in Q4, obviously, some big spend to go to really support all the activities Double 11 and so on in the business. So we very much want to come out of this year very strong and we’re supporting the business significantly. We’re also not seeing a decline, unfortunately, in terms of cost pressure. That continues to be very high, a bit of a different mixture, energy-related increases and so on, but certainly continued strong pressure from a cost perspective.
Jens Geissler
Next in line is Fulvio Cazzol at Berenberg.
Fulvio Cazzol
Two questions. I guess I realize it’s too early to really talk about 2023, but I was just wondering how we should think about the tough comparables that you’ll be facing next year. I guess I’m asking, how is your innovation pipeline looking currently compared to say, this time last year? And then my second question is, again, sort of a little bit more forward-looking. I mean, as we are likely to head into a recession next year, can you highlight for us which areas or categories that the company is exposed to that you think could be the most vulnerable in a consumer downturn? And what actions are you taking now to ensure that the business competes effectively?
Vincent Warnery
Thank you, Fulvio. I will take the first question, and Astrid will take the second one. When we look at ’23, we are not yet able to give a guidance. What I can tell you that it will be the first year where we are doing fewer, better, bigger launches. We have decided to globalize NIVEA and to come with big initiatives that are spread across the world. And this is a change in the way we were managing the brand over the last year. So we are coming with big initiatives, particularly associated to the Luminous work and also in the case of Eucerin to the [indiscernible] world.
The second element, which is making us more optimistic than pessimistic is the development of our premium skin care businesses and the fact that now we are in a very positive — profitable situation with Derma and of course, with La Prairie plus the opening of whitespaces. Whitespaces in the U.S., for example, for Derma, whitespaces e-commerce, for example, for La Prairie is also positive. And also the fact that in emerging markets, we have some big launches in some key countries, like, for example, India.
So all of that is making us more positive than optimistic. We still have to go through price increase, obviously, not at the same level as what we have done in 2022. So there will be still some discussions, some irritations, but I would say the tougher part of the job, again, if the material price increase is not worsening has been done in 2022. Astrid?
Astrid Hermann
Your second question. So we actually looked back at previous recessions, obviously, to really understand what’s happening. And what we saw there is that while the business flows, we didn’t actually see a decline overall in each of our brands, even within NIVEA for example, our mass market business, we saw a continued growth. What we did see is that certain parts of the world, this decline, for example, Western Europe, particularly but other parts of the world continue to grow. And as I said, we continue to see positive overall sales performance at a much, much lower level.
We think, again, that we have a diversified portfolio that can really help us to deal with a recession, hopefully, better than some of the competition given our brands as well as our categories. And most recent reminder also when we saw COVID impact, we saw very strong business in face and body, which is really our core business, and we want to continue to grow that. And we would hope that during a recession, our consumers again continue to really look after themselves in that way, even if maybe more discretionary categories might be impacted in the short term.
What we also saw is a very quick recovery of the business. So after recession, we saw quite quickly consumers coming back into all categories and even the most recent Corona crisis shows that as well.
Jens Geissler
Next on line, we have Iain Simpson of Barclays.
Iain Simpson
A couple of questions from me, please. I just wondered if you could provide any commentary on sort of future pricing or at least the input cost picture. So you’ve got through the bulk of your pricing now. Is that pretty much it? If input costs don’t do anything weird over the next sort of 6, 12 months, do you feel happy that you’re in a good place? Or will you need to push for more down the road if things says they will — and so as they are other? And then just thinking about next year, I mean, you sound pretty confident, you’ve clearly got tough comps, but flagging the launch pipeline and that sort of stuff. So would it be reasonable to assume sort of mid-single-digit growth next year based on what we currently know? I appreciate there’s an element of macro volatility in there.
Vincent Warnery
Astrid will take your first question, Iain, and I will take the second one.
Astrid Hermann
So in terms of cost, Iain, unfortunately, what I just mentioned is that we are seeing a bit of a mixed picture with some materials really helping, but other things still continue to hurt also driven by supply constraints. We continue to see bottleneck event of our time and that being in and also in our cost. And as you might remember, we said all along that this year, we’ll not be able to cover 100% of the cost. We always had a target to cover about 80%, and we’re well on our way with that. So that’s positive, but we’re not at 100%. So we are looking to still take pricing early next year.
Vincent Warnery
On your second question, Iain, obviously, the objective and the plan is to overperform the market. So the level of growth you are indicating, which is mid-single digit. This seems indeed reasonable. But still, we have to see the way the market is evolving. All the new price increases are hitting the market. There is a fear of recession. Still, we don’t see the way China will be open or not open. But this is a scenario in which we are working, yes.
Jens Geissler
We move on to Ulrika [indiscernible] of Dow Jones.
Unidentified Analyst
Yes, there were some — maybe that was already mentioned in your presentation, I had to log in late bit, on your price policy, which you mentioned several times, how are the negotiations with retail going along? Are there signs of store delisting because of the price demand?
Vincent Warnery
Ulrika, I will answer very precisely. We are all facing the same issue, retailers. We have private labels. They know the price — the increase of material price. But clearly, we are doing, especially in Europe, we are transferring 50% of the material price increase to retailer to consumers, which is already — we’re sharing the pain. So we have been able to have pretty good conversations in most of the country with most of the retailers, knowing that it’s the first time we are really increasing prices, so far so good. A few issues, a few short-term delisting, but nothing really dramatic, and we will not change our strategy. We will go with price increases the way we have decided to do.
Unidentified Analyst
Can we expect NIVEA to be delisted in some retail chains? Or are you confident it will be there anywhere?
Vincent Warnery
NIVEA as a brand will not be delisted per se, but there might be some SKUs, which are delisted. There might be some categories that could be a bit areas of irritation. But what I can tell you so far, we’ve been presenting the second price increase already 4 months ago, everything is doing pretty okay.
Jens Geissler
And we move on. Now in line, we have Olivier Nicolai.
Olivier Nicolai
Just got two questions, please. Just considering the move in commodities, are you still confident to confirm at this stage your midterm guidance on margins of at least 50 bps per year? That’s the first question. Just a very quick follow-up on La Prairie. We’ve seen some lockdown in Henan, I think it was in August. Is that 41% growth in China, is it sell in? Is it sell out? And did you see any real impact from that lockdowns in Henan affecting your performance this quarter?
Vincent Warnery
Astrid will take the first question. I will take the second one.
Astrid Hermann
So Olivier, in terms of midterm guidance, yes, absolutely, we’re continuing to confirm that. It does assume that there is market growth obviously happening next year as [indiscernible] path. If there is a very deep and broad-based market decline, we would need to do a detailed adjustments on what our performance would be, but we’re very, very committed to the profitable growth story that we’ve laid out at the 50 basis points.
Vincent Warnery
On your second question, Olivier, in fact, the sell-in and sell-out figures of — are pretty consistent. The chance we had in a sense is that we have been able to extend or to develop our ecosystem in China. We used to be very dependent on brick-and-mortar. So we are doing high single-digit growth because, in fact, we are not it in Beijing and Shanghai, which are our biggest area. What is bringing the additional growth and which is leading to the 41% you see is the fact that we are able to develop our online business. We grew with Tmall, 20%, we’re able to launch JD.com. So a big impact of online business, and we were also able to develop to open new stores in Henan. Henan was pretty good also in the third quarter. So we grew 50% in Henan. So all of that together, making the plus 40%. I think what is important for us is not to be less dependent on Beijing, Shanghai, brick-and-mortar, which was a little bit issue we had at the time of the Q2.
Jens Geissler
Next on our line here, we have Chris Pitcher of Redburn.
Chris Pitcher
Could I ask a little bit about the management team and sort of fixed costs? There’s been some high-profile recent hires from outside of the company into some pretty important positions. Are you now largely done with filling the new management team? And then secondly, headcount has been pretty much flat for the last couple of years, particularly in marketing and sales. Should we expect headcount to start to increase? Or can you generate the sales growth on a flat headcount? And what sort of level of wage inflation are you expecting to see?
Vincent Warnery
Thanks for your question, Chris. I think we have a very strong management team, and this management team is very stable and very performing. And I can tell you that the return on investment of the — all the last recruit is pretty high. So very happy with the team and no new changes to expect. Be aware of the fact it’s also something we’re very proud of that we have 42% of the Board, which is a female. When I joined the company in 2017, it was zero. So it’s also satisfaction pride for the company. So a good return on investment. On the question of headcount, Astrid will answer.
Astrid Hermann
So what we’ve done, actually, we’ve invested in headcount in the key initiatives that we’re driving in terms of e-commerce, having the right capabilities there in terms of physician marketing, having the right capabilities there, innovation and so on. But we’re obviously also looking for efficiencies and are going to continue to do so, but we absolutely are committed to ensuring that we have the right people, resources, investors behind our key initiatives. In terms of inflation or wage inflation, it really depends on the region. We obviously want to make sure that we’re competitive in markets and can hold our employees, and it really is aligned with what the market situations are in the various countries.
Jens Geissler
I don’t see any new callers here and new questions. So I think we can actually conclude the call. So thank you very much for having joined our conference call. We appreciate your interest in Beiersdorf. Thank you, and goodbye for today.
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