Beiersdorf AG (OTCPK:BDRFF) Q4 2013 Earnings Conference Call March 4, 2014 8:00 AM ET
Stefan Heidenreich – CEO
Ulrich Schmidt – CFO
Eva Quiroga – UBS Limited
Harold Thompson – Deutsche Bank
Gael Colcombet – MainFirst
Celine Pannuti – JPMorgan
Andreas Riemann – Commerzbank
Iain Simpson – Barclays
Harold Thompson – Deutsche Bank
Good afternoon and welcome to Beiersdorf’s Analyst Meeting. It’s our pleasure to have you all here in our headquarters in Hamburg today. As you know, we had already published our preliminary results on January 16. What we have here for you today is then the full set of data and lots of interesting details about the 2013.
We will start our meeting today with a message from our CEO Stefan Heidenreich, and I am happy that he is here today because he had to undergo complex knee surgery not too long ago, still is not mobile and will need some more time for recovery. So I am really glad you are here. And you are going to talk about the progress Beiersdorf has made in the year 2013, based on the blue agenda, we come to that in a second.
Our CFO Ulrich Schmidt is going to talk about the financial details of the year 2013, and then at the end of the meeting as always we are going to have question and answer here with you.
So I suggest we start now and hand over to Stefan Heidenreich.
Good morning, ladies and gentlemen, and welcome to Beiersdorf’s full year financial analyst meeting. Thank you for your interest in our company's performance in financial year 2013. Together with my colleague Ulrich Schmidt, I will now give you an update on the group’s financial performance in 2013 as well as an overview on the operation and strategic development of Beiersdorf.
Ladies and gentlemen, 2013 was an important and successful year for Beiersdorf. The Group made gains in market share, increased sales and improved its earnings. Beiersdorf is back on a sustainable growth track.
In 2012, we developed and started with our Blue Agenda. In 2013 we further deeply implemented the Blue Agenda within the organization. The result so far, our brands are back. We are gaining market share in our core categories. We are significantly expanding our presence in the emerging markets and we are strengthening our position in Europe. In short, we are pleased with the 2013 results. We are seeing a continuous sustainable upward trend for Beiersdorf.
Turning to the financials. We increased organic group sales by 7.2%. In nominal terms, growth rate was at a level of 1.7% as a result primarily of the strong euro. Net sales for the year were €6.141 billion. EBIT, excluding special factors, improved by 10.7% from €735 million to €814 million, representing an EBIT margin, excluding special factors of 13.2% compared to last year’s 12.2%.
Profit after tax, excluding special factors, rose from €480 million to €537 million. The executive and supervisory boards will propose to the shareholders’ meeting a dividend of €0.70 per share.
To the consumer segment. In 2013, the consumer business segment recorded organic sales growth of 7.0%. In nominal terms, sales rose by 1.1% from €5.048 billion to €5.103 billion. Each of the group’s core brands contributed to this positive development with NIVEA delivering 7.5% growth, Eucerin 11.5%, and La Prairie 7.5%.
EBIT, excluding special factors, saw an increase of 5.2% to €638 million, representing an improvement in the EBIT margin again excluding special factors from 12.0% to 12.5%.
Turning now to the regions. In Europe, the business recorded an organic sales growth of 0.9%. In Western Europe, for the first time since 2008 we were able to deliver sales growth. In our home country of Germany, we saw a very pleasing performance. We also saw significant sales in the United Kingdom and Spain. And in Southern Europe, there were initial signs of recovery. In Eastern Europe, sales remained more or less at last year’s level with a slight decline of minus 0.4%.
The Americas region was able to deliver strong organic sales growth of 9.0%. North America saw a growth of 4.6% and Latin America 11.4% with especially strong growth in Brazil. Most of the other Latin American markets also delivered good rates.
We also recorded strong sales growth in Africa, Asia, Australia region. Organic sales increased by 19%. All of the markets in the region achieved significant growth uplift in particular China, India and Japan.
To tesa. For the reporting period, the tesa business segment increased organic sales by 8.5%. Nominal sales rose by 4.7% from €992 million in the previous year to €1.038 billion. EBIT, excluding special factors, moved up from €129 million to €176 million, an increase of 36.3%, representing an improved EBIT margin of 16.9% compared to last year’s 13.0%.
All regions were successful with especially strong growth rates in the U.S. and Asia. Key growth areas were the electronics and automotive industries. This strong performance once again demonstrates the sustainability and strength of tesa’s innovation prowess.
Ladies and gentlemen, this positive development results from the strategic decisions made in 2012 laid down in our Blue Agenda and systematically implemented in 2013. Of the business activities, priorities focused on strengthening our brands, first and foremost NIVEA; second, increasing our innovation power, and third, systematically extending our presence in the emerging markets while strengthening our position in Europe.
To brands. Beiersdorf has a portfolio of outstanding and globally successful brands. Above all, we are re-charging the iconic NIVEA brand. Our discipline and focused brand strategy has enabled us to sharpen the brand profile and thereby win market shares.
Our new brand logo and new packaging designs for NIVEA significantly increased brand recognition among NIVEA consumers. This has been demonstrated by several representative consumer panels [ph]. Recently and importantly, NIVEA was again voted the most popular brand among Germans.
Innovation. The new products we have launched on the market are resonating well with our consumers. New products such as body in shower, face cellular anti-age and deo stress protect generated significant market momentum in 2013. In all launched markets, for example, NIVEA in shower was one of the best sellers in the body category already in the first year. We also saw growth in the face category mainly driven by the launch of NIVEA cellular anti-age.
To markets. As part of the company strategic development we have sharpened our focus on the emerging markets without losing sight of our traditional markets. In 2013, we successfully expanded our position in the emerging markets and improved our structures. These regions now account for more and this for the first time then 50% of the consumer business segment total sales, to be precise 52%.
The construction of new factories and regional development, that’s in China, Mexico and India and it’s actually [ph] for towards better identifying the specific regional consumer needs and integrating these into our expanding product portfolio.
To be a little bit even more concrete, our new development center in the Chinese city of Wuhan is already operational. Our Mexican plant – a big plant and regional lab will be completed in summer 2014. And in India, we are planning a new production facility with more than 300 employees, that is expected to be completed by 2015.
To the outlook. Ladies and gentlemen, let me close my presentation by giving some guidance on 2014. In 2014, we will systematically continue our profitable growth path on the basis of our Blue Agenda. We will also benefit from a slight recovery in the global economy which we are expecting in the industrialized nations. By contrast, we expect the developing and emerging countries to see weaker performance than in the previous years.
For 2014, we forecast for the consumer business segment sales growth in the excess of 4% to 6%. The operating EBIT margin should be slightly above this year’s level. As regards tesa, we expect sales to slightly out-perform the market which is forecasted to grow by 2% to 3%.
Tesa’s EBIT margin from operations is expected to be slightly below the prior year’s level. Based on the forecast for the two business segments, we expect the group sales grow by 4% to 6%. The consolidated EBIT margin from operations should slightly exceed the prior year figure.
Ladies and gentlemen, thank you for your attention.
Yes, good afternoon ladies and gentlemen. I am happy to present some more financials, first this quote, give us a lot of credit. So let’s have a look to the facts and figures.
Here we see the development of the group. If you have looked to the like for like sales of 7.2%, you will see that we have a devaluation effect of 5.5%, it’s coming out of 3 factors. First of all, you will be aware that we had a strong euro, so that’s [indiscernible] translate into this euro, that’s the first effect.
Secondly, we have strong devaluation of a number of emerging market currencies, especially we’ve seen that in rupee, South African rand, we have seen it also in Brazilian real. And thirdly, we had substantial effect from Venezuela because we were applying actual exchange rates last year. That’s a very conservative approach, that took some sales in nominal terms.
If you look to the EBIT and profit after tax, we have difference between reported and those excluded special factors. What have been the special factors, first of all, last year we had €37 million coming from restructuring of China and coming also out of impairment calculation in Turkey. We have increased our share to 100%. This year we had a rather normal – this year 2013 we had a rather normal year without lot of extraordinary factors so that we have 43 million better result in extraordinary.
If we look to the different regions, you have seen part of that slides already, so we had rebound situation in Europe, growing our market share slightly. We had a mixed situation in Americas. First of all, the single digit growth in North America, robust market and a strong robust market in Latin America. Now we have been affected by the devaluations of the currencies in Latin America. Like I was mentioning, if we would have excluded Venezuela, we would have seen more than 15% of growth in Latin America.
We have very strong growth in Africa, Middle East, Asia, the countries have been extremely well in terms of growth has been in India, Middle East and South Africa, we have done growth, good growth in Japan and in China.
We are especially satisfied seeing that the gross margins are stable. First of all, we need to make you aware that we still depend on our production network in Europe which means that we invoice in euro to part of the regions. That compensated that. Secondly, it’s also compensating the very strong growth of emerging markets that normally have lower gross margins in Europe and certainly we have also had an effect from the reporting where we had reported high gross margins in the past, using official exchange rate and now have applied to marketplace.
We come through the care of sales and EBIT, emerging markets now as you see is contributing 31% of the EBIT and has a steady development. Together with our strong growth we're gaining more number one and number two positions. We are also increasing our market share and therefore we're generating natural profitability in those markets. That’s a trend that we are seeing also for the next years.
In tesa, we have had number of special applications for quality projects and also our calls that we’ve had over the – here, that's an example, we can see in electronics, we had a number of applications in tesa that was in the smartphones, tablets, MP3 players or PDA and number of the applications in these machineries. If you’re interested in that, I've taken the photo that will show you that in like that, you have up to 12 applications for tesa and that’s substantial. Business now is difficult to forecast what business will be over this year or next year because normally lifespan of tools like that is rather 6 months, 12 months. So it depends on the tenders that are going to which extent you can qualify for a tender.
What we have seen is increase in our investment. The biggest project we are having is in Mexico plant. We’ll have production in that plant in first quarter, start of this year. We’ll also bring over more and more production volumes from North America to that plant. We closed down the old plant in Mexico City in the first half of next year. Secondly, we have new headquarter for tesa that will open in 2015 as also having placed for maybe 1000 tesa people who used to be in that area of the town.
So guys you have seen already mentioning this, I like to make you aware that, again like we have in Venezuela, we’ll do a very conservative approach this year for Argentina and we’ll apply actual exchange rates for Argentina when calculating like-for-like and that will of course have an effect like we have had an effect applying those rates already in 2013, now we’ll have that effect for 2014 as well. That’s the end of my presentation.
Okay. So these were the strategy update and the review of our full year numbers. So please go ahead if you have any questions. Yeah Eva?
Eva Quiroga – UBS Limited
Thank you. A couple of questions please. First of all, we have seen the margin development in consumer. Can you talk a little bit as well about the trend in Western Europe and North America? Now on the subject of North America, you have said in the past that analyzed that you wanted to fix the other problems first and think about North America. Have you started thinking about North America yet? And can you maybe remind us how big Venezuela and Argentina are of your Latin American sales? Thanks.
Let’s start with Western Europe. I mean I think we are very, very pleased in Western Europe. It was next to the West to the emerging market where we saw growth early on. Western Europe is now quite nicely growing. I mean you’re all, I guess, getting these numbers from quarter 4 and these numbers in January, and if I recall from the numbers, there is no one growing except one company which is Beiersdorf and we are not growing 1% or 2%, we are growing close to 10%. So we are very pleased in Europe since our turning around there and margin-wise it’s always the same. Once you grow in this business, you’ll also make nice margin. So the margin development in Europe is still strong despite all the factors of pricing of trade of what can you count on but it’s overall in a very good development. We always had margin but we have gone back to growth.
I think North America is a similar one. It is such that we are finding our way better to growth. Again, I will -- because I’m not talking normally for numbers, when you look at these numbers which came out for North America, I mean our competition is always heavily decreasing, and the only one growing big time is Beiersdorf. Have we found the way in North America? No. Not a big way. But we have found a very nice way. I think that we can grow in the singles and we also for the first time are making nice margins. We already made nice margins in 2013 and that trend will continue. So it’s not the big solution, but I think we changed the strategy dramatically, we are not [ph] more but it’s a different strategy than a year before and then that seems to work so far. We also changed management and all the rest of it, but North America, I think, is at least in its size of what it is on a good trend.
Regarding Latin America, we have a very unstable situation in Venezuela at the moment and also now the government will decide how to handle foreign exchange and imports. So it’s rather vague to give a forecast there. Argentina, we have just seen a 20% devaluation. We will see some further devaluation over the year. Still we think this one is a healthy one because Argentina has been over-devaluated in the past and made imports very expensive for the economy. So we think this one is a good one. In total, two countries are standing for about 15% of our sales for Latin America.
So you could ask arguably why we did this? I think again we are very conservative when it comes to our approach with the business and I think also there our company is well ahead of other companies. We took everything ahead of Venezuela which as you know was quite substantial in our books but that’s gone and now we also take ahead of the crowd of the Argentina a bit if it doesn’t come even better, if it comes we are prepared, but we are very clear with these growth rates. We also have the luxury to take certain things now.
Okay. So we jump to Harold, please.
Harold Thompson – Deutsche Bank
Yes. 3 questions please. First of all on supply chain and R&D, you said you got big plant opening in the summer in Mexico, you have expanded your R&D in China and $30 million in India is quite a substantial number. How crucial to you just gross margin developments are all these investments going forward, is it kind of catch up to what it should have been or is it kind of forward thinking? Second question is on tesa, I don’t know what was used to describe its performance, excellent, good, brilliant whatever, but if the tesa team came to you Stefan said right, actually would you like to spend €0.5 billion buying another business because we are quite good at managing these, what would your response be given you have wider group longer term ambitions? And the third and the final point is – products are the lifeblood of the business. We saw some interesting launches in 2013. You keep telling us 2015 is the better year, so it does nothing happen in 2014? The only reason I say that is because there are no slides or names of new products or initiative for us to see. Thank you.
I’ll let Ulrich do with the second and let’s start with the easier one. I’m not showing you anything and I will not talk about it even to the moment it is on the market. We have… I think when you look at our categories, the six key categories, I think we have shown market shares proved our innovation had really hit the market big time. And there’s so much leeway still in the innovation that we have… in the first half year we have some innovations, but I would call them in the first half year very important innovation in key fields of my categories, where I said we need to get a little better. For example, we launched two important lines with already -- but we launched two important lines, one on sensitive skin for face and one on sensitive skin for men and both of them are very important lines with [indiscernible] concept, why is it so important because for NIVEA, that’s a cost of business, sensitive skin.
We deliberately put in some categories the big hits into the second half, why because we simply have so much growths and leeway on the innovations from 2013 that we still have to focus on bringing in cellular home and stress protect to the full extent. So other than that, you will not hear from me, but I have more luxury problems and I have problems of rich innovations I see for this update, so the pipeline is still good. No I’ll let you first to continue and then I answer Harold’s first question because that was an interesting question.
And so I’ll give you an answer to the $500 million. So it’s a good question, but it’s not easy to answer. First of all, we think to that on a very solid way in the last 20 years after doing heavy restructuring in the 90s, solidly building one step up to the other and had another number of pruning in the commodity business, upgrading and upgrading. So, in principle, I would agree that in the moment it could not be a bad time to commit an investment like that, so in principle yes. How do I see it as a management? As a management it’s very cautious, so when they see $500 million compared to the $1 billion, so it’s very sizable, so they might hesitate. But I was saying if they came then they would have thought a lot about it and they would think they can do it and then I would also think they can do it.
To the first question, why did I say a little bit of ironic? This is such an important question. I think that is another cornerstone of our Blue agenda and it’s much further than a couple of plants and developments. I completely believe that we should go more regional and even more decentralization. My competitive friends are all claiming centralization on the corporate and I think that’s good, we go the other way around. Why? Because there is no such thing than one’s skin care, just doesn’t exist. If I want to successfully conquer India, I have to have a plant, I have to have an R&D there, I need to have my marketing, I need to have my sales, I need the 49 yards to compete for it. I cannot do that with a plant in Hamburg, I cannot do that with an R&D there from Hamburg. It sounds relatively simple yet we were for years and years in a very centralized mode, I go the other way around.
The second part of your question is a question which I will answer like that – if you just take a plant and let – and all the rest of it do it and compare that cost-wise to the product sourcing out of a European center even if you take the goodies of taxes or localize in it, you would not make a huge margin gain, you would not. Some markets are different, India for example, but in general probably not. But I’m not building these plants for products which I have in Europe. I’m building these plants, for example, like in India we are coming with fully new assortments which we’ve never done before, assortments which really not talking to the A class of consumers, which talking to B and C class. You have to see that mostly what you see in the financial analyst conferences… you see the… what you see on the -- products for the A class. We are not talking to the B class and we are not talking to the C class. If we go to Brazil, we go China or India, products for $0.10, products for $0.05, products for $0.04 or $0.06 or $0.075 needs different skill set and need different in size and that’s what we are after.
Now that’s a long quest of course, but that’s the only way to win in these markets. I think that if NIVEA stays where it is, it will become a super-premium brand in a lot of markets. So we have to go down like in Europe. We are not considered premium wherein most of the emerging markets are lot, we will considered super premium, super expensive. So that’s the way we’re going. So I would drive that company much more regional, much more decentralized and yes that’s very different to my friends, but that is where we see a chance and where we also see the chances in winning with consumers. So it’s a very important question, yeah.
And we will move over.
Gael Colcombet – MainFirst
Thank you very much. Gael from MainFirst. Two questions from my side. The first one, when you talked about decentralizing the super chain, the whole organization and understanding that from historical background you export a lot out of Western Europe to these countries. Can you give us an idea in terms, for instance, of your volume or your revenues? How much of that is actually sourced from Western Europe into the emerging markets? My second question will be on tesa, is there any reason why there they seem to be a bit cautious on the guidance on EBIT margin and slightly below what’s they achieved for 2013? And my last question which is also related to the decentralization of the organization. There was a significant spike in terms of the CapEx in ‘13. What is your expectation for ‘14? Thank you.
So starting with the export volume from Western Europe through emerging markets, so out of emerging markets cost would perhaps have 20% to 30% coming from Western Europe. That’s based on our actual assortment especially coming from special products, face care products. We used to have plants in Latin America, in Mexico, Brazil and Chile for the deodorant product, personal care products and basic skin care products. We would have today already plants in China, in Thailand for local products, but as was mentioned already the formulas are very similar to what we have in Western Europe.
Regarding tesa, we have had specially fixed in tesa. In the year 2012, we had the closedown of one company that used to produce labels that was low margin business in Switzerland. We closed it down, we had an extraordinary loss of €12 million. Last year, we had closed down a plant in Singapore also PVC low margin business but because of valuable land, so we had an extraordinary profit of €18 million. So if you look to the profit of tesa, there is a swing of €30 million to compare 2012 to 2013. Now when we normalize the tesa profitability, the profitability is rather 16% to that we have had last year operationally and that we expect it also this year.
For the last question, if the decentralization gains traction and we are playing with a lot of formats to make that successful because there is not one format. Mexico is a huge plant, a monster, which will not only serve Latin America, it will also serve North America. That’s a big one, probably one of the biggest we have ever built outside. Definitely the biggest we have ever built outside Europe. India, as I said, is a very different plant. It’s basically there for really making the $0.05 or $0.10 of products and has a huge expenditures base if it is successful. It’s a very different technology I’m looking for.
And in China we are also building. Now, if this more improved depending on what the market needs and I have a lot of ideas where I need people or I need teams and we will further roll out which are inevitable that means more CapEx, more spendings and probably more important, investments and they are always – it becomes as a question of growth and margin but maybe I choose that in front of everyone, I go on growth. Our number one currency is market shares. As long as we gain market shares as we do today, we will further put that off. Margins will come. You see the margins, margin 1, it’s the 63% margin, don’t worry. But as long as I see that innovations to hit home, as long as I see markets which I can’t hit home and don’t forget any emerging markets, we are still relatively small in some markets, we will invest. If the team proves them and is successfully we will do that. And that will stay on for years. So it’s not like that it will change next year or so on. That we’re very clear understanding of where we want to go and we see still a lot of potential on NIVEA, Eucerin and also La Prairie to be very --
So we go to Celine please.
Celine Pannuti – JPMorgan
Yes. Three questions. The first one is on Zone AAA [ph]. Can we have… maybe go a bit deeper in terms of the performance on Japan, China and Thailand and I understand Japan has been very strong? If you can mention what’s the actual -- how you see that continuing? Equally for China there seemed to have been a step up in performance for few years in an environment that where we see lower growth in the tier 1, tier 2 cities, how should we look at China? And I ask for China because I think you have quite sizeable business there given what’s happening in that market. My second question is just to remind you. At some point you mentioned that you see opportunity for margin in Western Europe, but there is some pressure from the retail and as well price pressure, if you can elaborate a bit more on that.
And then lastly to some of the questions some of which you have already did just now, but would it be fair balancing margin and implying to that we see the margin potential still coming from Western Europe, but probably if I look at Zone AAA [ph] where you still should see margin benefit from China becoming a breakeven this year, beyond that your focus will be probably reinvestment and therefore should we see Europe, North America as the margin driver and maybe emerging market being flat margin, if that make sense? Thank you.
So let’s thought with Japan we have had very successful launches and friend support. However, the last year we have strong gain in market share in Japan, comes together with the development of the markets. You know that the government had been very pushy and had very inflationary supply of money so that it was helping the market in Japan. Finally, we launched the shower products in Japan, all which affect us together, generated clearly double-digit growth in Japan, same was true for China, that we had double-digit growth in NIVEA business as well as hair care business. Now we have reported already about launches of last year while we have been successful and was meeting our expectation. Thailand was also doing good, double-digit growth. So overall Asia is in good shape.
We had, regarding the price situation in Europe, regarded that as a concentration of trade. On the other hand, that’s not a recent development that used to be the cases last 10-20 years. There is no trade company that’s dominating or is very strongly growing. You have normally local heroes that dominate the local market and they try to play power games, we use that. On the other hand, we have a very strong market, market share and very strong brand and I think that’s a precondition for resisting. So we have had not big changes last year compared to what we had. What was helping was innovation. If you have good innovation, normally you don’t have too much fight with the trade.
The question regarding the margin development in Asia, Africa and China overall and in total, you have seen that we have double-digit ratios. Meanwhile, in all of that areas China still has a negative result. This year 2014 we have forecasted to be breakeven. We would then develop over the next years together with the market also in China. We think that especially in those markets where we have a very healthy share, we also have a fair chance to grow profitability closer to Europe while we want to keep our profitability that we have in Europe actually.
We have a nice slide there. I think it’s page 18 where you can see that we are growing EBIT disproportionately in the emerging markets that actually illustrates the progress we are making right now.
So another question from Pena [ph].
Thank you. This is Pena [ph] from Mary Lynch [ph]. So my first question is your top three brands NIVEA, Eucerin and La Prairie, they are all growing organically about 7.5% which means some of your other brands are dragging the overall growth down. So do you think these other brands can catch up with the rest of the group or if they don’t, would you consider divesting them? And now my second question is regarding your cash policy. So on one hand I see is conservative cash policy didn’t raise your dividends. On the other hand, your working capital levels have deteriorated as the percentage of sales. So I guess the question is two-fold. Why didn’t your dividends grow when your earnings were growing and you had a good cash balance and now what’s your focus on… whether you have a strong focus on improving working capital levels or would it come later? Thanks.
Again, we are growing sequentially, I mean I probably should answer we are not selling anything, not in my rate. There is nothing to say. We are here to develop business and I think when you look at NIVEA we have 7.5% and you particularly don’t look at the 7.5%, look at the last quarters where we see, I think, very very nice development. Eucerin is double digit again. Also not an easy market… the promising market is for a lot of reasons also not an easy market today. And even La Prairie when you saw the latest from the lower [ph] and the rest of the word, even the selective market is now coming down and we are still growing above the crowd. These three brands are pretty good in shape. La Prairie and Eucerin also at the moment coming with, I think, big innovations both of them.
La Prairie has shown it already nicely and affordable and I think it’s big where we bring in La Prairie and let’s see how the market reacts about it. What do we do with the rest of the brands? We work on them. So we’re not going to let them die. Probably, we cannot survive everyone. I mean one of our brands which we… when you go back to the presentation you for the first time see a new brand on their which we never saw before, it’s our plaster business, which we also now put focus again. It’s a wonderful business, actually our heritage. If you look at 130 years ago, plaster was the call for business and we have funded [indiscernible] and a less surplus. We have a lot of nice business and they are very, very sizeable business, close to $300 million, that’s it and high margins, so we are starting to work on that and we have a couple of other brands which we now have put special teams on it, our new -- and I hope that some of them start showing traction over the years to come.
In terms of the cash and the dividend, I’m always asked why is that so and so? I can only tell you I love it. It stays in the company. I think that is the biggest trust we have from our majority shareholder is that he believes in the business and the things we do. Eventually, it is clear that we have to use it and that’s clear, but for the time being we follow our past and I always said we are not ruling out M&A but other than other companies, I mean we are not putting it on the big wall. I mean it comes at a certain point. When the time is ready, then we probably also do something but not now. We still have to focus and have to gain so much on organic and have to grow on so much potentials of the things. So we follow that route diligently. And as Ulrich said, I mean it could in areas like tesa, could be areas like clustered, can be anything. The good news is we have so much cash available and we love it, it’s better than that. And that will continue and we are not going to be forced to put money outside the company, we are keeping it in the company for the right time.
Regarding the working capital, we had put a target in 2005 saying we think 12% of sales is a reasonable KPI for working capital. In this year we are expanding the business to emerging markets. It means that we are building plants over there but still long way to go. The supply markets, so we have a structural disadvantage, together with the plants we will see better ratios over the next year, but it’s not a target that’s high on our agenda. Cash at the moment is not very expensive, so we are not taking too much for good on that, rather satisfied with 12%.
So we go to Andreas, Commerzbank please.
Andreas Riemann – Commerzbank
Two questions from my side. I understand that at present growth is top priority, top line growth. You say you want to decentralize the business, you want to reach certain market positions or size, so my question would be, what is the pre-requisite that – you may say and now we are focused more on margins again, what’s the pre-requisite for that, number one? And question number two, an easy one, Q4 growth investment in euro was pretty strong. Maybe can you shed some light on it, was it market share gains, I think so, was it also a better market, maybe you can speak about the market environment, investment in Europe in the first quarter?
Let’s start with the easier question, the second one. I mean you can all read the numbers, Western Europe, market is more or less flat in our categories. That’s more easy to report. And there is a slight improvement this year, slight. Again I mean for me the most important is are we gaining market shares? I think nearly everywhere in Europe we have gained tremendously market shares. Driven by innovations, driven by better executions, driven by a lot of things. So I think we are doing good, but there is still a lot to make better that we are not 100% there, but we are getting better and better. I think it’s also good to see is that market by market if you look at it into the European shares, you can really see the track, we took for certain market, then we took the next market, we took the next market, we took the next market, and it’s very interesting to see – we call it, regional markets to regional markets, we have five, six regions in Europe, step by step everyone gets more or less better and better.
To the first question, I could be ironic on that question, maybe never answer, maybe I just go on. Why, because I cannot answer one important question and the question is you tell me the potential of my current franchise, is it 6 billion, is it 7 billion, is it 8 billion, is it 9 billion, is it 10 billion? I believe it’s closer to 10 than it is just 5. If that is the case, and the best investment for any entrepreneur or owner is to invest behind its own business, because this is what we know. This is what we can do. And I think we have tracks in the recent history that we started to do – or to be someone we are not to be. As my motto always causes M&A – it’s easy to say M&A but you pay for M&A big price. And also, I don’t want to sound lecturing here is if you run teams, say football team, it’s hardly a team can play offence and can play defense. And Ulrich was really right when he said, if you want my guys to focus on working capital, they focus on working capital. If you want them to focus on efficiency, they focus on efficiency. You pay for everything you do, you pay price. Margin improvement is the easiest bit on my business. Easiest bit. We have 63% margin – if I need to improve by 1% or 2% in a year, I can do it. Big deal. The point is more what is right for the business and I think that as long as we go forward, we go for growth with a slight improvement step by step in the margin, that’s how we see things. That’s the strategy, and – but you cannot have it all, you cannot on the one hand to say, I want growth, and I want margin, hardly when you also follow, it’s really very difficult to play the teams on both. The more we get together the more over time I think – at the time at the moment it’s growth, growth, growth. And my guys see I win it. A wonderful people. They are winning in the market, they are the motivation, unbelievable. That’s what I need at the moment, in tough markets like Europe or tough markets in emerging markets. Whether they make a percent more on cost or not, it’s not a big deal at the moment, it’s growth. And it always comes back from the potential. That’s how we see – that’s the call. Now you can disagree or not agree to the call, but that’s the call we are going forward. And I said the things [ph] in EMEA, and also together with my team, we and my team, and also with the majority shareholder, we are going to the potential of the company, loud and clear. And that’s not going to change as long as we have the potential. But it’s a call, it’s a choice.
Okay, I think Iain also had a question.
Iain Simpson – Barclays
Thanks very much. It’s Iain Simpson, Barclays. Firstly sort of general question I guess which is we’ve clearly seen a massive setup in execution, and sort of fairly profound cultural change over the last few years. How far along the journey of sort of changing personnel and getting people, sort of forming at the top of the game, do you feel based off – I mean how much is left in the turnkeys [ph] at the management in the Americas were recently changed, are there any sort of particular problem areas you would like to see improved over the coming quarters or you feel that it’s now the right people and it’s all about the execution? And then just secondly, looking at your guidance, clearly macro visibility at the moment is a little bit uncertain, it’s not particularly clear what’s happening in some of the emerging markets, so do you feel with these sort of builds, since – I mean you could perhaps do a little bit better than that, if things calm down, and then just lastly looking FX, you are talking about how you’re sort of changing or how you deal with that in Argentina and Venezuela, are you able to give us any sort of impact of current rates, what sort of impact we should expect in 2014?
Yeah, perhaps giving some comments regarding this year, you are right saying there is uncertainty in, not only Ukraine, also Latin America, we discussed Argentina, Venezuela. Already we are also coping with the devaluation in a number of countries, second half of last year was already the case, so we were able to retain our situation on the other hand, there are number of challenges. So then you can see Stefan’s – functioning, so it’s limited what we can do in management with traveling and making personal as the countries and things like that. No kidding too much about it. I think there is uncertainty, we used to be conservative with our outlook. I have said that like for like calculation is slightly different this year but might affect 0.5, 0.1% of growth for Latin America in the overall effect and we will give you new guidance over the year.
What we think is that cosmetic market like for like might well grow this year as we present, now if we end up with 5, too bad, of course our ambition is higher.
I think in terms of people, I think the general statement is I am over the last 2 years amazed what our people are able to do. I am very proud with the team. We have made a lot of changes, but predominantly internal change. So we have given great certain chances to move up the ladder and that has proven as you see from the realized astonishingly well. That we are already the fastest growing company in our fields, is a tribute to – contribute to the teams. Bias of as a whole is that any company, again it’s a choice, we are very strong in some functions, and we are building these, I think we are pretty good in marketing nowadays, still can grow here and there. We are becoming better and better in R&D which is very important. And then there are definitely some functions where we can do better. So there’s still room for more excellence which probably over the years was not trained that way and here and there we are putting more forces and also new forces to the ground to be better there. So there is still a lot of potential to get better, if you look at by Munich [ph] 4, 5 years we dominate Europe, so it’s in the second year.
I mean German born – my friend, where we see – I hope nobody from Spain here, some of them are Spain here, no? So I think that they dominate at the moment and that’s what we want to do and grow also that, we are known for bringing the innovation to the market, keeping our brands and here and there like in every football team you have to make year over year but there is more slight change, and that’s been to really put some positions put in place but overall I am very happy with the people and overall I think we have some great talent and people here, which has to be further grown. My biggest headache is more to your question on the resource question per se. See if when I built India or we built Mexico, or we built China, my problem is more that I have too little resources, too few resources to fill my growth ambitions. So there we have to work on, that’s why we also have, as you know new HR chief, some months, I think a great addition to the team. But we need more talents to fuel the growth. That’s clear.
Okay. No more questions. Then I would say – I have a final one – final from Harold.
Harold Thompson – Deutsche Bank
My knee-jerk reaction on people, but are you basically suggesting that you need more people from the outside and inside, to deliver the growth ambitions which you have, is that what you basically say?
Predominantly it only can happen from the inside because this is also I think the bench, we probably – if you look at that as probably – there is a funny thing that probably some inside – we are strong first bench now, the next bench hardly exists, and then below that we have great talents again. So we miss one, if you want – just one generation, and that layer we have to fill, we are taking a lot of strings out. The question is – when you look at Southeast Asia, I mean we are growing significantly in Vietnam, that demands full team which we built, but that means that resources we have to put. We are by far the market leader in Myanmar. Yet I have no people there. Still it’s a market, -- 50, 60 million which is now waking up. And so and so and so – and all people need to be trained in our culture, which is the branding culture, which is the marketing culture, which is a commercial, but also the financial discipline culture and that takes time. So that we have to work on.
But I am confident, I mean we are now obviously this company – success, nice thing with the success, the more successful you are, the more you attract great talent. I think we are on the road – our younger ranks look pretty healthy and pretty good for what is coming up and here and there we also have to take people from outside to fill the big gaps we have. So it’s a mixture of everything at the moment, but that will be one of the most important questions getting the deeper question, so over the years to come, what growth we expect.
Harold Thompson – Deutsche Bank
And then very small one, on tesa, Ulrich, you said your discussion about the life cycle of products is hard to guide, what you are trying to say is the – what tesa supplies, quite short life cycles, so that’s why it’s hard to predict in the near term, is that what you were trying to say?
Yes, okay. In electronics.
Harold Thompson – Deutsche Bank
Just in electronics.
Yes, not in general.
Harold Thompson – Deutsche Bank
And how much is electronics again of tesa?
Might be the 20%.
Harold Thompson – Deutsche Bank
Okay, and finally on Western Europe, you said your panels in December and of course, do they still look healthy, and I think you mentioned the word, 10%, should one interpret that you will start the year as healthy?
Like you always ask, much better than my knee. But you see me smiling. I am very happy. And especially happy because Jan, Feb, last year we were also running again quite some big comps, so you could argue, why they keeping the growth rate, but from the numbers and I am not telling you anything, from the numbers you have seen so far they look pretty good. So there is a lot of work ahead of us, and we also have to see what eventually our friends from competition are going to do. So it’s a year where also to your question, the year is a very interesting and hard to predict here. If I look just as that, I think we have a great year. If you have listened to other parties, etc., there are some grey clouds on the horizon. What it really affects us in this or that way, hardly predict, I have never run through this with these friends [ph]. I would argue so that our portfolio is pretty robust against this downturn, why because would someone really still buy NIVEA, don’t think so. Eucerin, which is more – if you are a loyal user, hardly say. And what we see with La Prairie, you don’t bring any La Prairie user changing and whether it’s €50 more or €50 less I don’t think that makes a huge difference. So I see our portfolio and also the quest for good cosmetics for healthy skin for something, I think they are really some of the best industry I have ever worked in, I am pretty robust for things to come, whether that holds major storms, probably not but it is one of the – if you ask me, one of the best industry and markets to be in at that time. Really it is.
Okay. Nice final question. And I think that now this concludes our Q&A session. Thank you very much.
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