P&L Check Henkel's Fly in the Ointment

The consumer products giant is often viewed by investors as the Old Faithful of Germany's big companies. Latest results show last year was no exception, yet a failure to meet its targets suggest growth may be slowing.
Quelle: Bloomberg
Persil is among Henkel's best-known brands.

From Persil laundry detergent to Pritt Stick glue and Schwarzkopf shampoos, products sold by German chemicals giant Henkel are instantly recognizable around the world.

Less well known, however, is its value to investors. The firm has gained great respect among shareholders for its immunity to economic cycles and global reach, not to mention its billions of euros profit. So investors will understandably be expecting more good news at the firm’s annual shareholder meeting on Thursday. They’ll get it, but it may come with a sting in the tail.

Henkel, based in Düsseldorf, sees itself as a mixed conglomerate based on chemicals. It has two segments that focus on retail customers: detergents and cosmetics under the Schwarzkopf brand. Just more than half of revenue is generated by its adhesives division, the global market leader.

The company is a consistent performer. Only nine of the 30 firms listed in the German DAX share index, the country’s leading index, have managed to increase their dividend continuously over the past eight years, and Henkel is one of them.

Investor trust in the firm’s decisions remains high, and is reflected in the share price.

It’s also one of only four DAX firms that have increased operating profit without major setbacks. The others are BMW, medical group Fresenius and media company ProSiebenSat.1.

Last year was another good year on paper. Revenue rose 3.5 percent to €18.7 billion ($19.9 billion) and operating profit increased by 4.9 percent to €2.8 billion. At the meeting on Thursday, shareholders will vote on a 10.2 percent rise in the dividend on preferred shares to €16.62. There’s little doubt that investors will approve the move, not least because the Henkel family owns a majority of the voting shares.

The return on sales reached a record of 14.8 percent as the management lived up to its promise to keep a lid on costs, or cut them, in all relevant business segments.

But it’s not all good news. The company failed to meet the goals of its four-year plan that ended in 2016. Former chief executive Kasper Rorsted, a Dane who left last year to run sports goods giant Adidas, wanted to reach €20 billion in revenue by the end of last year, of which €10 billion was to come from growth markets. He also targeted 10 percent average adjusted growth in earnings per share.

Henkel didn’t meet either goal, and Mr. Rorsted’s Belgian successor, Hans Van Bylen, has come up with less ambitious goals for 2020. He plans growth of 2 to 4 percent per year for revenue and 7 to 9 percent for adjusted earnings per share. Evidently, he’s confident that Henkel has ample scope to boost its efficiency even with slow organic revenue growth.

According to Handelsblatt calculations, the new targets mean Henkel would reach revenue of between €20.2 and €21.9 billion in 2020, and adjusted operating profit of between €4.2 and €4.5 billion. That amounts to an adjusted operating margin of between 19.3 and 22.4 percent.

Mr. Van Bylen will likely benefit in the coming years from appreciating currencies in emerging markets. Henkel’s failure to meet its last four-year targets was partly due to weak exchange rates in those markets, which hampered its sales there.

Henkel is also managing to tighten up on costs. Marketing and distribution outlays, the biggest portion of costs after manufacturing, inched up just 0.6 percent to €4.63 billion in 2016 as the firm merged many brands, thereby reducing advertising expenditure.

Research and development costs fell 3.1 percent to €463 million, and the company has saved administrative costs by relocating some functions to Bratislava and Manila. The company also benefited from slight declines in raw materials costs.

On the downside, its potential for sales growth remains curtailed by fierce price competition in Germany. The group’s 2.9 percent sales growth in 2016 stemmed mainly from acquisitions which included the €3.2 billion purchase of The Sun Company, a U.S. detergents maker.

The group’s unadjusted operating margin was 14.8 percent in 2016, below the level achieved by U.S. rivals 3M, P&G and Reckitt Benckiser, and European competitors Beiersdorf, L’Oréal and Unilever.

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Last year also included a shopping spree, mainly targeting emerging markets. Detergent firms in Nigeria and Iran, as well as shampoo brands in Eastern Europe, Saudi Arabia and Turkey, and two Colombian tile adhesives brands were all acquired.

The total cost was around €500 million and with consumer goods regarded as highly valued in 2016, the acquisitions were likely to have been on the pricey side. They also increase the risk of write downs.

At present, Henkel is focusing its investment on adhesives where its main clients are the automakers and cellphone manufacturers. Henkel is also expanding its biggest adhesives factory, the Dragon Plant near Shanghai.

Investor trust in the firm’s decisions remains high, and is reflected in the share price. It has been rising continuously for years as Henkel turned out reliable annual performances. In addition, profits and dividends keep on rising.

Another positive factor is the Henkel family, which controls around 59 percent of ordinary shares and consists of more than 120 heirs of founder Fritz Henkel. The family has guaranteed it will remain faithful to the company until the end of 2033 at least. That stable shareholder base means Henkel is free from takeover speculation.

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