Henkel's (HENKY) CEO Kasper Rorsted on Q1 2014 Results - Earnings Call Transcript

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Henkel Ag and Co. Kg (OTCPK:HENKY) Q1 2014 Earnings Conference Call May 7, 2014 3:00 AM ET


Kasper Rorsted – CEO

Carsten Knobel – Executive Vice President–Finance (NASDAQ:CFO), Purchasing & Integrated Business Solutions


Christian Faitz – Macquarie

Hermine de Bentzmann – Raymond James

Gael Colcombet – MainFirst Bank

Warren Ackerman - Societe Generale

Markus Mayer - Kepler Cheuvreux

Rosie Edwards – Goldman Sachs

Pinar Ergun – Bank of America Merrill Lynch


Good morning and welcome to the Henkel Conference Call. With us today are Kasper Rorsted CEO; Carsten Knobel, CFO and the investor relations team. For the duration of the call, you will be on listen-only. (Operator Instructions) Today’s conference call is being recorded and the webcast is available at www.henkel.com/ir. At this time, I’d like to turn the call over to Mr. Kasper Rorsted. Please go ahead sir.

Kasper Rorsted

Good morning ladies and gentlemen and welcome to our conference call. First, I’d like to focus on the key developments of the first quarter 2014, then Carsten will provide you with the first quarter financials in greater detail and after that, I will close my presentation with a summary for first quarter and the outlook for 2014 and finally, we’ll take your questions.

I’d like to begin by reminding everyone that the presentation, which contains the usual formal disclaimer to forward-looking statements within the meaning of relevant U.S. legislation, can be accessed via our website at henkel.com/ir. The presentation and discussion are conducted subject to the disclaimer. We will not read the disclaimer but propose we take it as read into the records for the purpose of this call.

Now, let’s get started. We had a good start into the year with an organic sales growth of 4.3%, an adjusted EBIT margin of 15.8% and an adjusted EPS growth of 8.3%, very much in the line of our current guidance. We saw organic sales growth in the emerging markets of 9.2%, net working capital of 4.8%, and our net financial position of €923 million.

The emerging markets share was 42% which was currency-related currency quarter-on-quarter adjusted which we normally don’t do and we don’t as 45%. But overall, we saw a very strong growth; it was the strongest growth in the emerging markets in 2011 and the strongest growth in mature markets since 2012 driven by an exceptionally strong China.

So, on the top side, solid organic growth driven by all businesses the emerging market was very strong, organic sales growth as I said the highest growth since the third quarter of 2011 and for the mature markets it was the highest growth since the fourth quarter of 2012.

We saw our hair salon business and our electronic adhesive business coming back to positive, I’m showing you can remember it’s been on the right side of our chart. So, it was very good to see it was coming back to positive.

We saw a very strong improvement in our adjusted EBIT margin supported by all businesses and I said on the introductory side, high single-digit EPS growth very much in line with our guidance of high single-digit EPS growth.

Some of the challenges we saw throughout the first quarter, we saw an exceptionally high pressure from the FX which you can see in the translation of our organic reported in constant will go into the details of this. We saw a continued geopolitical and social unrest in some countries and of course the high uncertainty in developments in Russia and Ukraine.

Russia is today our fourth largest market and Ukraine is one of the top 10 of our emerging markets. But despite that we saw strong organic sales growth in Russia, but the bigger challenge in Russia was more than 20% devaluation of the Ruble in the first quarter.

Regards to North America, we came out with negative organic sales growth that was partially due to weather and partially due to less flawless execution. So it was a mix of the two, a very slow start given the weather but also less flawless execution and we see a continued high intensity in the HPC environment.

Now let me move to the business groups. Laundry and home care had a strong organic sales growth and excellent margin improvement in the first quarter of 2014. I am showing a moment back that we had an exceptionally strong first quarter last year.

Again, this year with strong organic sales growth, both in laundry and home care, it was strong, the emerging markets the organic sales growth was double-digit and in the mature markets sales growth was positive.

We also saw the adjusted EBIT margin showing excellent increases, and ROCE further increased. Just to set the reminder on sales expectation very similar to last year, we do not expect that the first quarter growth rate is the run rate for the year that is very similar to last year; part of it is due to very strong introductions of new innovations but, a good quarter for laundry and home care business.

And as I said, it was due to very strong innovations across the board. And let me just highlight one Pril du viel which is the first time that we are taking enzyme technology to hand dish washing, which is substantially increasing the performance of our products.

So over the last set of years we have seen a substantial increased pipeline of innovation and you can see that now here also on the Pril on the hand dish washing this new technology bring much better performance to this market segment and of course it’s accretive when it comes to gross profit margin which is part of our strategy.

Moving on to our beauty care business where we saw solid organic sales growth and very strong margin improvements in the first quarter of 2014. Retail was solid. Hair salon was positive which means that we are seeing a slight turnaround in Japan and Southern Europe, too early to say if it’s – but slight positive. The emerging market OSG was strong and mature markets organic sales growth was positive.

The adjusted EBIT margin is showing very strong increase. The decrease in ROCE is purely related to an acceleration of restructuring to ensure that we adjust our market structures to the changes we continue to see and some of the changes we already spoke to you about last year which are particularly related to Southern Europe but also to Asia.

Again here we have a very strong innovation pipeline going from skin to hair, so to speak and one of the most exciting innovations that we brought into the marketplace has been the announcement of our new hairline essential serum which is a high-end hairline that we have now introduced in more than 25 countries.

It is not comparable to – is more in the volume space. This is more moving up in the higher end space and so first time the so-called super model has co-branded with us and we are very excited about selling this product. This is a purely retail product that we have launched.

Moving on to adhesive technologies. We saw solid organic sales growth and strong market improvement in the first quarter of 2014. Emerging markets OSG was very strong and the mature markets OSG was positive. We saw a strong increase in the EBIT margin and ROCE also further increased. So overall a good performance also from adhesive technologies business in the first quarter.

Again, we have also here a strong innovation pipeline across the board whether it’s from consumer side or electronic side or in automotive side, we’ll continue to do – bring new products in that makes that our margin accretive and you’ve been able to see that over the last set of years where we had seen a consistent strong increase in our margin due to a higher technology component on one side. But also the brand consolidation that we’ve undertaken over the last couple years has helped tremendously.

One example here is the bundle process which is a game changer in the automotive industry introducing lighter materials for the automotive industry that is significantly helping driving the weight down and thereby gas consumption down.

It has already been implemented at Audi, Chrysler and at Ford and it’s an integral part of the F150 truck which is the most successful truck I think ever introduced into the marketplace approximately 18 months ago by Ford in North America.

With this, I’d like to stop my part and I’ll then hand over to Carsten for giving you the details on the first quarter. Carsten, please?

Carsten Knobel

Thank you very much, Kasper. Good morning everyone. After having had a look on the overall picture, let me now guide you through the financial details. Let me start giving you an overview on our key financials. We started the year with a solid top-line growth of plus 4.3% organically.

In nominal terms, we reached a level of €3,929 million which is as you can see from the chart below the previous year being precise, minus 2.6% in nominal terms and this is due to a negative – a significant negative FX effect amounting to 6.8% in total.

Our adjusted gross margin, came in with 48.9% and by that being up 30 basis points compared to the Q1 of last year. Let me allude to that a moment, already the 48.6% of last year had been an all-time high for the Q1 and for the company and so it’s the 48.9% in quarter one of 2014.

On the back of that, our adjusted EBIT margin came in with 15.8% being up 90 basis points compared to the year before supported by all our three businesses and finally, adjusted EPS earnings per share, came in with €1.04 and by that being up 8.3% despite the negative FX effect I already have alluded to.

Let me now move and look on our cash side starting with net working capital. Our net working capital ratio for Q1 2014 could be improved again and this was supported by all our three business divisions. We reduced the net working capital to sales ratio to a level now of 4.8% being an improvement of 100 basis points compared to the Q1 2013.

Our free cash flow came in with €63 million being down compared to the Q1 2013 and this was due to a lower operating cash flow mainly caused by two factors. Firstly, and we have already mentioned that, in our full year release call at the end of February that we are approaching a net working capital ratio that we deem appropriate.

The improvement the 100 basis points I alluded to is lower than the 170 basis points improvement over Q1 2013 versus Q1 2012 and from a cash flow perspective you can imagine then this leads to a lower inflow.

Secondly, we have received extraordinary tax incomes or refunds in Q1 2013 and that caused lower outflow for taxes paid in that quarter of 2013 now in the quarter one of 2014 we are seeing normal cash outflow from income taxes paid.

And finally, our net financial position, as already mentioned by Kasper came in with €923 million and in that respect being an improvement of €809 million compared to the Q1 2013.

With that, I would like to take a closer look on our sales development. As pointed out before, our organic net sales growth came in with plus 4.3% and this was driven by a component of price of 70 basis points and volume driven by 360 basis points.

As already mentioned by Kasper and also by myself all of that was significantly influenced by an FX and FX headwind of 6.8% and this headwind was caused by depreciation of several emerging market currencies but also of the U.S. dollar. The M&A effect was minus 0.1% was quite low in that respect bringing up to a nominal sales for Q1 2014 of €3,929 million.

Now looking and coming to our regional performance. First on the emerging markets, in absolute terms, we reached a level of €1,669 million and as you can see, this is slightly below the previous year. In organic terms, we reached with 9.2%, the highest growth in the emerging markets since Q3 2011.

And this represents an emerging market share of 42%. This is slightly below the Q1 2013, but taking into account the FX adjustments which Kasper also said before, we would have increased the level, FX-adjusted to 45%.

The mature markets reached a level of €2,226 million, showed a positive organic net sales growth of 80 basis points.

With that, I would like to go a little bit more in detail in the regional performance and give you an overview of the individual regions. First of all, we saw a broad based growth across all regions. In that respect, the BRIC countries, Brazil, Russia, India and China showed a very strong organic net sales growth close to double-digit, in particular driven by our Chinese business with clearly double-digit development.

Western Europe experienced a 2.4% organic net sales growth, also here the highest growth since Q3 2011, we could over compensate the development in Southern Europe,

Southern Europe only showed a slightly negative development in the Q1 and as I said, overcompensated by the rest of the countries in Western Europe.

Eastern Europe came in with an organic net sales growth of plus 5.4%, mainly driven by a strong development in Russia and from Turkey, Africa, Middle East, a strong double-digit growth of plus 17.9% despite the geopolitical and social unrest we face in that region.

Coming now to North America and you have heard it already before that’s a region with minus 3.1% where we are not satisfied with that different reasons for that development. First of all, all our three divisions showed negative organic net sales growth in that quarter one.

And the three reasons behind are, one is obvious that’s the cold winter, the second one is a very intense competition within the HPC sector combined with mostly negative markets and thirdly, there are also internal reasons in the fact that we also faced supply chain issues in bringing new lines into production.

Latin America with a very strong growth of plus 8.4%, especially driven by our performance in Brazil and in Mexico and finally Asia Pacific also here very strong growth plus 9.3%.

Here please take into account that’s the combination of Asia mature and Asia emerging, especially, Asia emerging and I have already alluded to that, China with a very strong double-digit growth in that respect supporting our development and we also had a positive growth in Japan and we see that as a first sign of recovery in that respect also supported in the region of Indonesia in terms of growth.

With that, I would like to move to our three divisions and give you here some more details starting with our laundry and home care business. A very good performance in quarter one 2014 continued very good performance in overall strong organic net sales growth with plus 6%. This 6% growth was driven purely by volume and both businesses laundry and home care showed a strong performance or strong organic development.

Again, the emerging markets in laundry and home care showed double-digit development supported or contributed by Africa, Middle East, Eastern Europe and Latin America the most. Despite negative development in North America and in Southern Europe, the mature markets were managed to show a positive organic net sales growth especially thanks to Western Europe.

With that, you also see an adjusted EBIT margin growth and impressive margin growth of 160 basis points, now to a level of 16.6% in relation to sales and also when we have a look on our net working develop in laundry and home care with minus 6.1% or an improvement of 230 basis points.

We see a very positive development regarding our profit. This was especially driven by excellent improvements in terms of efficiency gains in cost measures but also improvements in production and supply chain.

With that, having looked on our beauty care business, the beauty care business showed another quarter of profitable growth, the 33rd quarter in a consecutive row. Organic net sales came in with plus 3.0% showing a solid development with pricing contributing 170 basis points and volume on a level of 130 basis points in that respect.

Looking on to the businesses, retail and professional, the salon business supported that development while retail achieved a solid organic sales development our hair salon business managed to be back to a positive growth in that respect.

Also here looking at emerging markets and mature markets, the emerging markets showed a strong development with double-digit contribution from emerging market of Asia and a strong growth in Middle East Africa.

Mature markets I pointed it out North America was also in beauty care, slightly negative, but this was compensated, or overcompensated by a very good development in Western Europe, and also in the mature markets of Asia.

The adjusted EBIT margin, an improvement of 80 basis points driven also here by efficiency gains in production and supply chain as well as cost reduction measures bring us to a level of 15.7% and also from a cash perspective, net working capital improved by 100 basis also here to a very good level of 2.4% related to sales.

Coming now to our adhesives technology performance, the performance of the division showed an organic net sales growth with plus 4.1% prices contributing by 80 basis points while the volume was up 330 basis points.

All our business sectors were contributing to that performance, in that respect also electronics reporting a positive organic development with a start into the year, a very strong development in our general industry sector and all other business sectors remaining on the solid development when it comes to our organic net sales growth.

Regional speaking, the emerging markets with a strong or very strong development particularly supported by Eastern Europe, Latin America and the emerging part of Asia, also the mature markets showed a positive organic net sales growth.

North America negative, but compensated, overcompensated by Western Europe and by the mature part of Asia in that respect particularly Japan, but we said it before we see here first signs of recovery but we would also like to see the development of the next quarters in order to see a general change.

Coming then to the adjusted EBIT margin, also here a strong – a positive development of 40 basis points to a level of 16.9% and this was specially contributed an ongoing – our ongoing portfolio optimization and also efficiency gains especially in the area of supply and production.

Also, like the other two divisions’ net working capital shows very good development, 90 basis points improvement now to a level of 12.7%.

With that, I would like to come to our income statement adjustment and I would start with the development from sales to gross margin. I said it before, our gross margin further improved on a record level. We experienced sales of €3,929 million on a nominal basis being down 2.6%.

Cost of goods on an absolute level came in with a level of €2.7 million which related then to a gross profit in absolute terms of €1,922 million being reduced compared to the previous year quarter of minus 2% and that led already to the point what I said before to an improvement of our gross margin level by 30 basis points to a level of 48.9.

Let me allude a little bit to that, the negative impact of higher promotions, I think which we clearly have said that this is a tendency in the HPC sector driving promotions on a significant level now.

The impact of the higher promotions and transactional FX effects could be overcompensated by savings in the area of cost reduction measures, supply chain, but also portfolio optimization in that respect and partly also selective price measures and price increases.

Moving on and now coming to the income statement from gross profit to EBIT starting with our marketing selling and distribution expenses. They have been decreased compared to the previous year quarter mainly due to the significant FX impacts we already alluded to.

Additionally, we also see a rebalancing of our marketing mix in that respect that it results into a shift from marketing investments into the area of promotional activities.

R&D expenses came in at the level of last year with minus 2.6%. Our admin expenses was 4.5%, it could be reduced by 30 basis points and the balance of our other operating income – other operating expense stayed or remained on a very, very low level.

With that, we reached an adjusted EBIT in absolute terms of €619 million which translates into an adjusted EBIT margin of 15.8% or effectively being up 90 basis points compared to the Q1 of 2013.

Now focusing or having a look on our bridge from reported to adjusted EBIT the reported EBIT came in with €608 million. We face one-time gains with an amount of €25 million. This amount reflects completely our decision to no longer pursue the selling of our Iranian business following the positive signs respective in the geopolitical environment.

Therefore, we have reclassified the assets and liabilities from assets and liabilities held for sale into the respective balance sheet positioning. Following that, we have incurred a write-up of €25 million. This represents a reversal of the €35 million impairment loss we booked in Q2 2013 upon classification into assets held for sale.

The difference between the €25 million and the €35 million, the €10 million is related to the impact of the further devaluated Iranian currency on the existing foreign current liabilities in our Iranian entities.

One-time charges of €8 million relate to the extraordinary investments we are doing for setting up our scalable platform – scalable business platforms we are operating over the next years and finally, we continue to adapt our structures to the market and this is reflected with €28 million restructuring charges bringing us to an adjusted EBIT level of €619 million for the Q1.

I would like to close the financial overview and the details by having a look on our net financial position. You have already heard that we experienced a strong net financial position with €923 million. This is an improvement of €809 million compared to Q1 2013 and more or less on the level of Q4 2013 at the end of the year of last year.

With that, I am at the end of the details and would like to hand back to Kasper. Thank you very much.

Kasper Rorsted

Thank you, Carsten. Overall, it was a good start into the year and we continued our profitable growth pace and let me just stop here for a second and say the following: over the last many years, we have consistently been able to gain market share while at the same time expand our market position or margin position and that is our strategy.

So when we look upon our investment profile how we invest into the market. What we are aiming to do is, grow the market share while at the same time also expanding our margins.

I think you can see particularly also in the first quarter with 4.3% organic growth. We’ve found a very good balance between strong top-line growth and at the same time strong expansion of our margin. We saw a solid organic sales growth driven by all businesses across the board.

The emerging markets were very strong, up at 9.2%. So the highest in three years, China, as Carsten said on a couple of occasions, double-digits. So, no slowdown in the emerging markets. And we saw the mature markets being positive albeit a negative North America which we also discussed.

So very strong adjusted EBIT margin improvement and high single-digit adjusted EPS growth which is of the 2010 the primary KPI like the 14% was in the range between 2008 and 2012. At the same time, we are doing what we can to counteract the headwinds with operational excellence.

We expect that the headwinds coming from FX will continue to impact us particularly in the first nine months of the calendar year of 2014. We also believe we have a strong innovation pipeline in which I gave you an insight to right here that will help drive the growth and also margin expansion in the business groups.

We have a very focused and balanced investment and growth initiatives to ensure that we grow the top-line also in areas where we have volatile currencies but with the overall aim of growing market share, at the same time, as growing our margins. And we continue to have a strong focus on cost optimization.

This is one element where we believe we have never done and we can always find areas here that are a very important path for us that cost will never lose our eyesight and as you can see also part of the market expansion over the last many years has been to cost optimization.

We will continue to do so in the future we believe cost is always an item that you need to get down. So how do we guide for the year unchanged meaning 3% to 5% top-line emerging markets sales here slightly increase, adjusted EPS – EBIT margin of 15.5% and our adjusted EPS growth at high single-digits. And as I said earlier on the call 8.3% in the first quarter.

At the same time, we are very much aware of the changes we are seeing in the marketplace it will continue to adept our structures to the market at the same rate as we did last year which Carsten at the end of last spoke about. So, we are now in at the end of - we have to change our structure.

So with this, I would like to come to a close. Thank you for dialing in. We look forward to your questions. And just remind you that on June 4 we have the Investor and Analyst Beauty Day up – Beauty Day Meeting here in Düsseldorf, August 12 second quarter numbers and November 11, the year is pretty much over third quarter numbers. That’s the roadmap and now Carsten and I look forward to take your questions. Let’s get started please and thank you for dialing in.

Question-and-Answer Session


Thank you, Mr. Rorsted (Operator Instructions) The first question comes from the line of Christian Faitz from Macquarie. Please go ahead.

Christian Faitz – Macquarie

Yes, thank you. Chris Faitz from Macquarie. Two questions please. First of all, can you please comment on the weather impact for adhesives in the U.S. with some specific numbers and then, second your underlying growth in Eastern Europe during Q1 was quite solid on FX-adjusted basis or the political economic crisis there? Thank you.

Carsten Knobel

Hi, Chris, I am certainly aware we cannot share with you any numbers on how the second quarter has started but what you did see in the first quarter and I think that is the positive underlying growth is still solid. As I said, Russia continued to be very strong in the first quarter. Negative was Ukraine, so it’s very much up to which extent will the sanctions having a continued impact on the overall economy in Eastern Europe.

But our expectation is and you can see in the numbers a slower growth rate in 2014 and 2013, but overall, strong growth in the first quarter. I think is a question mark that nobody can really quantify at this stage is, to which extent will the Russia and Ukraine crisis impact the remaining economies and that’s where your assessment is as good as mine and I’ll give you all the details on the Eastern European growth in August.

Kasper Rorsted

Regarding your third question, regarding the weather situation, let me start in a different way. I think we wanted to make sure that we have different effects while our North American performance was not in line with our expectations. And a part of that is internal and we will fix that as we have done that also with other countries or regions.

And secondly for sure, we also have been impacted on the weather. In that respect, we cannot quantify that in terms of what kind of impact that has on sales. The only thing what I can tell you, but as I said again, we don’t want to over push that topic is we had around production closures.

Especially, in our industrial sector of around 20 days in the first quarter. So, for sure, it’s that significant but nevertheless I think we are here to make business independent about weather conditions or whatever it is and I think we were clear on that we overall have been not satisfied with the development in North America.

Christian Faitz – Macquarie

Okay, very helpful thank you


The next question comes from the line of Hermine de Bentzmann from Raymond James. Please go ahead.

Hermine de Bentzmann – Raymond James

Hi, good morning. The first question will be on laundry and home care and you had a very strong growth in Q1 and you expect the growth to be between 3 and 5 in full year. Why do you expect such a slowdown through the rest of the year?

And second question on marketing and distribution and selling expenses. You had a strong decrease in Q1 and you expand the reason behind that, but what can we expect for the rest of the year for those expenses? Thank you.

Kasper Rorsted

So, as you can see, we are guiding between 3 and 5 for the company, but also for each of the business groups. And our strategy for our laundry and home care business is to drive a lot of innovations into the market in the first quarter. You saw that also, last year that you saw an exceptionally strong first quarter. And that's what you are also seeing here.

So, right now, we still believe that a range of 3 to 5 is the appropriate guidance for our laundry and home care business. As I said, we do believe that the first quarter will continue to be abnormally strong very similar to last year. So I don’t think there is a strong decline.

We are right now reporting 6, we are guiding between 3 and 5 and depending on where you end in the range, I don’t think is that far away. The reason why I said you shouldn’t expect that is, I see how we plan it very similar to last year. So, we are quite happy with the start of the year, but that is also how we plan our innovation pipeline.

So, the sales expectation will be the range but we don’t expect we would like to, but we don’t expect to be at the first quarter run rate throughout the year. Carsten, the second question.

Carsten Knobel

Regarding your question on marketing expenses, first of all, we do not guide on marketing expenses. Nevertheless, I think, I hope I was clear in the comments the reduction in the first quarter was significantly impacted by the FX.

But I also clearly said that there is definitely a change in the marketing mix that is on the one side related to a further driving into the area of promotions and that has a shift in the P&L from marketing line to between gross and net sales, that’s the first thing.

Second thing we are also getting more efficient. I think you clearly have noticed over the last years that we have significantly brought down the number of brands from more than 1000 to now a level of around 300 and as a consequence that’s clear.

If you have less brands you can put the same amount on the lower number of brands, but that you get more efficient and on top there is a third part which is also clear, digital comes more into this set up and all of that we have increased our market shares in that respect over in Q1 and looking into the rest of the year we will continue supporting our brands in a very efficient way and that’s what I can say to that topic.

Hermine de Bentzmann – Raymond James

Thank you.


The next question comes from the line of Gael Colcombet from MainFirst. Please go ahead.

Gael Colcombet – MainFirst Bank

Yes, good morning gentlemen. My first question is on Russia. It seems you continue to have a pretty strong growth rate in Q1. What trend could you see across the quarter or do you see any change in trends towards March or April when the crisis broke out?

Secondly, is there any change to your tax guidance for the full year? And lastly, if I may, an additional one on Japan it seems that your beauty business performs reasonably well there. Was there any impact from the VAT increase in April 1? Thank you.

Carsten Knobel

Thanks, on Russia, as I said in the previous, we don’t guide separately. And it’s too early to say what will happen in there and that’s where depending on what the sanctions will be, that will drive that. So we guide separately.

Kasper Rorsted

We continue to be long-term policy on Russia but short-term happens, politically we can’t comment on. On the Japanese side, as you said we are trying to see an improvement in Japan. It’s too early days.

There is no doubt that there is an overall positive development in the first quarter for most companies on the change on the VAT side. We expect a better performance in Japan in 2014 and 2013 but with one quarter in the deck it’s too early to (Inaudible)

Carsten Knobel

Yes, regarding tax guidance, we don’t guide on tax. Can somebody put your cell phone mute? Thank you. Regarding the tax guidance, we don’t guide for tax in the year, but I think you can recall our strategy meeting in November.

What we were saying that we are calculating with around 25% tax over the period from 2013 and 2016 and we said around and we have experienced now an effective tax rate in quarter one of 24% and now believe I think that’s around 25%. So that’s the area where we also striving over the next quarters and years. Thank you.

Gael Colcombet – MainFirst Bank

Thank you.


The next question comes from the line of Warren Ackerman from Societe Generale. Please go ahead.

Warren Ackerman - Societe Generale

Good morning Kasper, good morning Carsten. It’s Warren Ackerman here at So Gen. Three questions, the first one is just, talking about your financial position, you have now almost €1 billion in net cash. Could you just discuss Kasper the M&A landscape improved terms as you see it and I could not able to find suitable M&A.

Could you outline your priorities for uses of cash? And would you consider a buyback or increasing your dividend payout ratio? And that’s the first one. And then secondly, just on China, you gave us a little bit of color in terms of strong double-digit growth.

I was just wondering whether you could tell us exactly what the organic growth in China was in the first quarter. And maybe discuss which divisions are particularly driving that improvement? Is it macro in China that’s improving or is it market share? Thank you.

Kasper Rorsted

Thanks, Warren. On the M&A side, as you know, we are patient company, so that we have a strong balance sheet it does lead us to short-term changes and we increased the dividend from 25% to 30% payout this year, so, we are paying more out. If you look upon the current multiples that are paid they are very, very high. The availability of assets is still scarce.

So what we do, do is that, we do spend a lot of time and energy but you got to put some – you got to cross the finish lines before you say you won anything. So we don’t see a big change in the availability. We see very high multiples. However we are not discouraged, we are very certain that we can put our balance sheet to use.

So that’s the first one. Carsten did in the announcement of our strategy in 2012 also say that of course over time, we look upon three areas, one is investing heavily in the business taking our capital up to €500 million plus, second is, using it for M&A.

And thirdly is, other ways of returning money to shareholders, one is increasing dividend and eventually also share buyback, but I think we have said consistently that share buyback is not part of our strategy at this stage and will not be until 2015, 2016 if we have a very different balance sheet.

On the dividend payout, as you know, we paid 30% now the new policy actually says between 25% and 35%. So, we would like to invest, but I think as all shareholders, we don’t want to sell investments because if we buy just for the sake of buying, you’ll be chasing us during the next call and say we paid too much.

On the China side, let me just, first start at the macro. We have been consistently bullish on China for a very, very long time and have been less, I would say Weatherly in our view on China.

And that 7.4% or 7.5% GDP growth continues to be a very strong GDP growth. That is our consistent position has been for a long period of time. What we do see is, we see our two businesses with very active in are adhesives and of course beauty care business having very strong positions when it comes to coverage, when it comes to coverage when it comes to competence.

But also investing into the market whether it’s being the largest plain in the world for adhesives, our biggest display center for flat screen technologies. So we believe that we are gaining market share through a very strong coverage and as I said, we’ve been consistently bullish and we think that China will continue to develop strong growth for us whether running at a 7.4% GDP or 7.8% or 7.2%.

Just going back to the investment into the market. We said €500 million per year actually the right way of saying it is, we said that we would invest €2 billion in the range between 2013 and 2016.

Warren Ackerman - Societe Generale

Okay and Carsten, just to clarify, are you able to actually tell us what the organic growth number specifically was in the quarter for China please?

Kasper Rorsted

No, we don’t disclose that, but at Carsten said, they were strong double-digits. So, it was a very strong performance in the first quarter in 2014 and that was like-for-like.

Warren Ackerman - Societe Generale

Okay, okay, thank you very much.


The next question comes from the line of Markus Mayer from Kepler Cheuvreux. Please go ahead.

Markus Mayer - Kepler Cheuvreux

Yes, good morning gentlemen. Three questions as well. First of all you mentioned first signs of recovery maybe you can shed some more light on that where they are coming from? From what kind of division then maybe also in adhesives, system, electronic recovery or from the construction, steel or whatever? Then – and also…

Kasper Rorsted

Excuse me, just go back and start with the first question, you said recovery where, Japan?

Markus Mayer - Kepler Cheuvreux

Yes, you mentioned some signs of recovery in Japan, but also for the adhesives business. But that would be my first question. And also if you then expect certain leverage impacts due to recovery and then secondly, if you can update on the start-up phase of the second plant in China and then the last question, is promotional pressure in particular India has intensified or is it just the ongoing level you mentioned earlier with the Q4 numbers and before?

Kasper Rorsted

I will do one and two, Carsten will do three. On Japan, we are seeing a recovery for our business. We had a not satisfying year. We are also seeing a Japanese economy that’s overall stable and we think that will hopefully continue throughout the year, it’s not going to be a great growth recovery, but we don’t specify it by segments.

What has come back a bit this year and you can see that is the electronics business and the electronics business is predominantly U.S. Asia and Japan being one of them. So that's the level of insight I can give you. So that Japan will be never a high growth economy but it is consistent.

On dragon, we opened that plant in December – September last year, it’s according to plan. We are in the process of building the second phase. That should be done by the end of the year early next year. So, dragon is fully in plan fully in scope fully in budget.

Carsten Knobel

Regarding your question of promotional pressure, I think, from a worldwide perspective, I think we are on a similar high level, as in the year before. But going more into the specifics.

And I think I mentioned that when I was commenting on North America, we see here an extraordinary high pressure when it comes to promotional activities for North America and selective countries in Western and Eastern Europe.

So not overall in these regions, but in selective countries we face an extraordinary or a higher level of promotions, but in general overall, I think it’s on the same level on a very high level as in the years before.

Markus Mayer - Kepler Cheuvreux

Okay, perfect. Thanks.


The next question comes from the line of Rosie Edwards from Goldman Sachs. Please go ahead.

Rosie Edwards – Goldman Sachs

Good morning. Two questions, firstly, slightly struggling to reconcile the very strong improvement in margins that you saw in Q1 versus the full year guidance. I was wondering if you can kind of give any color or any comments on what will change over the subsequent quarters to slow that improvement down.

And secondly on interest, we saw a significant drop year-on-year. Are there any exceptional impacts within this? Or should we reflect this annual change in full year numbers?

Kasper Rorsted

Rosie, I have to do the first one. We guide on annual basis and of course it would be misleading to change guidance on a quarterly basis because that way when things go up we change up, when things go down they go down.

We believe that the overall guidance of a high single-digit EPS improvement and 3% to 5% organic sales growth is the right one. On the margin also the 15.5% potentially was an upside but we don’t change at this stage.

If we believe it’s appropriate we change, typically following either the second or the third quarter along the first quarter frankly makes no sense for us to change and the primary guidance is still around the 20, 10, 10 delivering very attractive EPS growth.

Carsten Knobel

I think your question regarding interest, yes, we are seeing a very positive development in the quarter one for minus €30 million to minus €15 million and I would say there are two effects in.

There is one effect in which we’ll continue because we have repaid or paid back two mature bonds, one in mid of last year and one in the first quarter of 2014. So the first senior bond will have an impact on quarter one and quarter two.

The second senior bond we paid back has an impact in the full year, coming in that respect, but Q1 was also impacted by one extraordinary item which is related to one of our divestment gains we had in our financial results. So, yes, we expect an improvement over the year, but not at the same level, because of an extraordinary income in Q1.

Rosie Edwards – Goldman Sachs

Thank you very much.


The next question comes from the line of Pinar Ergun from Bank of America Merrill Lynch. Please go ahead.

Pinar Ergun – Bank of America Merrill Lynch

Thank you very much. Could you please give us a quick update on your portfolio please? Are you done or is there more to come? And I guess, a follow-up question on your full year guidance.

Do you have any expectations for your significant improvement in below the line items, because we are struggling to reconcile the high single-digit EPS growth with 3% to 5% organic growth and margins of 15.5%, so, just wondering if we are missing anything here. Thank you very much.

Carsten Knobel

On the portfolio, we are getting closer to the end of the portfolio. We are still having some work to do on the brand side. And as I said, we guided in 2012 that we would divest approximately €500 million over the four year period. We work through that. So I would expect minor in the future. But there is still something to come, but we don’t guide specifically on this.

On the guidance, I think, as we said, what we said, we guide for full year and that is still the guidance that we have. So you are not missing anything that the guidance is the way the guidance is and we are guiding high single-digit 3% to 5% and then 15.5%.

That is the way we are looking upon this year when we believe it’s appropriate we will change the guidance, but we don’t change guidance on a quarterly basis unless something disruptive happen in the marketplace positive or negative.

Pinar Ergun – Bank of America Merrill Lynch

Thank you very much.


(Operator Instructions) Thank you ladies and gentlemen. I will now hand over to Mr. Rorsted for closing remarks.

Kasper Rorsted

One second. So, thank you for participating in today’s conference call. We believe within a challenging and difficult market environment, particularly characterized by strong FX and higher competitive intensity, we did deliver a good start into the year of 2014. I wish you all the best and look forward to meeting you at our Investor Conference and Analyst Day for our beauty care business on June 4, 2014 here in Düsseldorf and our second quarter result is scheduled for August 12. Thank you very much for dialing in.

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