P&L Check Beiersdorf's Lone Blemish

The maker of Nivea cream has had another strong year with big profits, growing margins and a stable dividend. But it still has some work to do in its adhesive tape business.
Quelle: dpa
Nivea creams make big bucks for Beiersdorf.
(Source: dpa)

When it comes to annual results, Germany’s blue-chip companies are not averse to dolling up their more weakly performing segments. For example, companies are wont to explain significant chunks of their overall costs as “restructuring outlays.” With these costs subtracted, the tidied up operating costs look significantly better.

Beiersdorf, maker of Nivea cream and Elastoplast plasters, has again forgone the cosmetic approach. Like last year, the skincare company’s pre-interest and pre-tax figures (EBIT) are all natural. In fact, the firm has very little to conceal: its margin has increased by 0.6 percentage points to 15 percent and only narrowly trails Henkel, its giant German competitor. And its non-operating assets register at €3.2 billion ($3.4 billion) after deducting its non-operating liabilities.

Even ignoring these numbers, Beiersdorf is proving astoundingly stable. The company owns 9.99 percent of its own shares, making it well equipped to deal with a takeover bid. The Herz family, the company’s controlling shareholder, has kept dividend payments at a low level in spite of rising profits. The equity-to-assets ratio has risen by one point to 62 percent.

But at the shareholders’ meeting on April 20, small shareholders are likely to express their concerns. They think that Beiersdorf should increase its dividends, which are currently pegged at 70 cents per share. Given the highly stable positions of the majority of major shareholders, this plea is bound to fall on deaf ears.

The company is in an enviable position. It is profitable, highly stable and has room to grow.

Beiersdorf’s earnings come from two strictly separate – and separated – entities. On the one side is the Hamburg-based consumer business with skincare products such as Nivea, Eucerin and 8x4. This entity drives much of the business.

On the other is the independently organized Tesa SE, with its new headquarters near Hamburg airport. Tesa produces adhesive tape for consumers and industry, with the industrial branch geared mainly toward the automotive, electronic, pharmaceutical and printing sectors. Tesa film is used in Apple’s iPads and Samsung’s smartphones.

Beiersdorf’s annual report shows that both entities function according to different logic. Tesa, for example, swallows up a disproportionate amount of the company’s research and development costs and investments. This, of course, is a cost of doing business in industry: Tesa develops technologies for highly specialized industrial applications. In the electronics business, the company needs to bid for every new cellphone model – and that necessarily entails high research costs.

With cosmetics, the pressure to innovate is much less pronounced. Beiersdorf, however, is introducing innovations in this field, too, for example, a clear sunscreen that doesn’t leave any streaks.

Through its focus on technology, Tesa has a higher operating margin than its cosmetic sibling – 16.2 percent versus 14.8 percent. But the rate of returns relative to net assets – 30.3 percent for Tesa, 96 percent for cosmetics – paints a very different picture. The reason: laboratories and production facilities for adhesive tapes are much more capital intensive than they are for cosmetics, where much of the products’ value is added through marketing.

Throughout the company, nearly 36 percent of business volume is directed toward sales and marketing. At Tesa, this figure stands at 20.8 percent. In the end, selling to industrial clients is cheaper.

But sales were more challenging for Tesa in 2016, at least in comparison to the more stable cosmetics business. In Tesa’s electronics sector, which supplies Apple and Samsung, annual sales decreased by 18.2 percent.

Tablets, which require a lot of adhesive tape, represent a shrinking market segment. And Samsung’s problems with its Note 7 model, namely its capacity to explode, put a damper on business, as well. Tesa reacted to this and began courting Chinese manufacturers like Huawei and Oppo, the world’s third and fourth largest smartphone producers, respectively. Additionally, Tesa is beginning to shift its focus in the electronics segment to smart watches.

At the same time, Tesa has been able to expand its business in the automotive industry. This highlights an important regional divide: in Asia, where electronics are taped and glued together, turnover is contracting; but it’s increasing in those places where cars are manufactured, such as Europe and the United States.

In the end, Tesa grew by only 0.5 percent in 2016 – less than in the previous year. The company, with a 2016 margin of 16.2 percent, fell short of its record margin of 17 percent from 2014. This stems from the fact that the high costs of its new headquarters came into play last year. Tesa constructed the building, complete with specialized laboratories, for itself, resulting in significant expenditures.

The move was reflected in the company’s investments: in 2015, they were as high as €111 million but dropped to €49 million for 2016. The €62 million difference encapsulated the cost of the building. Bigger building costs could be in the pipeline: Beiersdorf is planning a makeover of its Hamburg headquarters, with more than 70,000 square meters of space planned for completion by 2022.

Tesa’s focus on the consumer and industrial sectors appears to be paying off. While the industrial business was long dominant, the consumer branch is now responsible for half of Tesa’s sales.

Changes at Tesa, however, are not the main drivers behind the company’s performance. Overall margins are increasing due to internal improvements. Beiersdorf head Stefan Heidenreich is seeking to secure additional improvements through a more optimized mix of products.

Despite efforts to expand globally, Beiersdorf has retained its strong emphasis on Europe, where it enjoys a 17.5 percent margin. In Asia, in spite of years-long investments in the Chinese market, margins are 13.8 percent. In the United States, this figure rests at 10.2 percent.

Overall, the company is in an enviable position. It is profitable, highly stable and has room to grow.


Christoph Kapalschinski covers consumer goods, textiles and food for Handelsblatt. To contact the author: [email protected]