Good morning, and welcome to the Henkel Conference Call. With us today are Hans Van Bylen, CEO Karsten Knobel, CFO and the Investor Relations team. For the duration of the call, you will be Please note that there will be live webcast of today's conference call including the Q And A session. In addition, a replay of the conference call and the Q and A session will be available on our website www.hankle.com/ir for a certain period of time. You.
Published on our website. Here we will briefly mention your name and the company you're representing. At this time, I'd like to turn the call over to Mr. Van Bylen. Please go ahead, sir.
The investors and analysts Good morning from Dusseldorf and welcome to our earnings call for the second quarter of 2018. I would 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 the disclaimer, we will not read the disclaimer, but propose we take it as read into the records for the purpose of this conference call.
Today, I'm going to lead you firstly through the key developments of the second quarter in 2018. Then Karsten will comment the detailed financial after that, I will close my presentation with the guidance for fiscal year 2018, our focus areas for the remainder of the year and the key takeaways. And finally, cash and I, of course, will take your questions. Let me start with an overview on key macroeconomic developments impacting our businesses. Henkel overall operates in a continuously heterogeneous environment.
The overall economy is characterized by a moderate global GDP growth and the continued strong momentum of the industrial production. Against the background of increasing geopolitical and economical risk, we are facing an environment of high uncertainty and volatility. However, so far with limited implications on the economic developments and outlook. An ongoing price and promotion pressure, especially in key mature markets. Looking at FX, we continue to see weakness of major currencies.
Besides the U. S. Dollar, we see intensified headwinds from key emerging market currencies, such as the Turkish lira or the Russian ruble, which devaluated significantly compared to the prior year quarter. At the same time, we faced an increased direct material price pressure including market shortages and FOX reserves. In this environment, Henkel achieved a strong growth in the second quarter of 2018, further increasing sales, adjusted EBIT and adjusted earnings per preferred share.
The strong organic sales growth at 3.5 percent in the 2nd quarter was driven by the very strong performance of Adhesive Technologies, Butte Care And Laundry Home Care came back to growth as the North American consumer goods businesses returned to normal service levels in the course of the quarter. Group sales were also supported by a double digit increase in digital sales with a particularly strong performance in our consumer businesses. Sales reached a new record level of 1,000,000,000, nominally 0.19 percent above the prior year. Also in the second quarter, Evix headwinds had a very strong impact on the quarter with minus 6.1%. Also adjusted EBIT came in at a new high of 1,000,000 and we continue on our profitable growth path, increasing the adjusted EBIT margin to 18.0 percent, up 20 basis points supported by our strong cost management focus.
Despite significant negative FX headwinds of minus 5.8 percent as well as increasing raw material headwinds on the bottom line, we continue to deliver a strong operating performance and grew the adjusted earnings per preferred share by 1.9% to Castle will talk about the ongoing Evic headwinds and direct material price pressure on our P and L later on. I will now go through our business units starting with Adhesive Technologies. The business unit continued its profitable growth path and delivered again a strong performance. With very strong organic sales growth 5.2 percent Adhesive Technologies continue to outperform its markets and relevant pairs driven by innovative high impact solutions for its global customer base. All business areas contributed raw material headwinds, the business unit accelerated implementation of further pricing measures.
Together with the execution of our fund growth initiatives, this resulted in a continuously high adjusted EBIT margin level of 19%. Let me highlight some examples among the initiatives that contributed to the strong performance of Athesives Technologies. In the aerospace business, we achieved double digit growth, driven by high performance solutions for aircraft, which enabled the increased use of lightweight constructions and help to improve safety. In the metal packaging business, we achieved significant growth driven by our high impact solutions for beverage, food and aerosol cans. Our unique portfolio enables our customers to enhance sustainability increase line speed and reduce costs.
In the automotive electronics business, we achieved significant growth driven by our innovative solutions, for example, in the thermal heat management. Our advanced materials enable our customers to further innovate in the areas of connectivity, e mobility and autonomous driving. Summing up, At Egypt Technologies has shown another excellent quarter, mapping the headwinds from raw materials and FX while continuously outperforming competition. Beauty Care returns year. The quarter with strong organic sales growth.
In a continued weak global mass beauty market, the retail business was organically slightly below prior year. North America returned to growth and was back to normal service levels in the course of the second quarter. At the same time, we delivered profitable growth and increased the adjusted EBIT margin to 18.1%. Also here, our Fund Growth initiatives had a positive impact Let me highlight some categories and businesses in Beauty Care that showed a compelling performance. The Hair Professional business continued its strong growth momentum, further enhancing its market position in both mature and emerging markets.
Growth was especially driven by our Swatko professional brands such as Agora as well as by our acquired brand, Kenra. Also our retail hair coloration business continued its very strong growth momentum and further expanded market shifts across regions. Existing and new brands such as Pallet natural and easy and got to be color contributed to this result. In North America Retail, we were back to normalized service levels and positive organic sales growth in the second quarter. This was supported by the successful expansion of hair category, in particular, the successful rollout of our Gartoubi brand.
In summary, the slight organic growth at consistently high margin levels is encouraging. The team is working hard to accelerate the performance further going forward. Laudian Home Care delivered good organic sales growth of 2.9% in Q2. Both mature and emerging markets drove this development. In the Laundry Care business, organic sales growth was very strong.
In Home Care, sales decreased organically year over year. Also for Laundry And Home Care, we returned to normal service levels in North America. With a strong increase of 40 basis points, the adjusted EBIT margin reached 7 18.9%. In a highly competitive environment, this performance reflects the very good progress in the sun integration as well as the implementation of our Fund Growth initiatives. Let me come to the highlights of our Laundry And Hope Care Business Unit.
Our personal brand delivered double digit growth. This was driven by a successful base business as well as innovations such as percival relaunch in Europe offering higher concentrated formulas, while at the same time offering even better performance. Middle East Africa continued to deliver very strong growth in the second quarter of 2018, thanks to our dishwashing and premium detergent brands like Prydle and Persil throughout the region. In North America, the top line recovery was supported by the return to normal service levels as well as the successful launch of innovation such as Perksy ProCleanorder Fighter or the All Oxy Clean. In summary, a very sound performance of lounge and home care in the second quarter And with this, I now hand over to Karsten.
Thank you very much Hans, and good morning to everyone. Let us now have a look at the financials of the second quarter of 2018 in more detail. In the second quarter of 2018, Hankook showed a strong growth. Overall, we generated record net sales of 1000000000. This is 0.9 percent up on the previous year level.
Significantly impacted by FX. We delivered a strong organic net sales growth of 3.5%. The adjusted gross margin came in at 47.0 percent compared to the 47.6 percent in the prior year quarter. We continued to increase the adjusted EBIT margin now to a level of 18.0 percent this is up 20 basis points compared to the prior year level. And this is thanks to the execution of our fund growth initiatives as well as the integration of our acquisitions which I will allude to later during the presentation.
We achieved as already heard a new quarterly high for our adjusted earnings per share of which represents an increase of 1.9% despite significant FX and direct material headwinds. Adjusted for currency effects, we showed a continuously strong operational EPS performance of 7.7 of net working capital to sales increased to 6.3%. This is 100 and basis points up versus the prior year quarter. The free cash flow very positively was strong at 1000000, mainly driven by an improved operating cash flow. Lastly, our net financial position remained robust at -1000000000below the year end following the pay out of our dividends.
Coming back to the group performance in terms of top line for the let's have a look at a closer look at our sales bridge. Organically, we delivered a strong growth of 3.5% as already indicated with a good balance between volume growth 180 basis points and pricing of 170 basis points. Important to remark that all three business units contributed to the pickup in pricing. The net effect of our acquisitions and divestments had a positive impact of sales of 3.5%. So adding the organic plus the inorganic growth this amount to 7.0 percent, a very strong increase.
This was almost entirely offset by significant currency headwinds, as you can see on the chart of minus 6.1%. As a result, sales increased normally by 0.9 percent in the second quarter to a level of 1,000,001,431,000,000. Also Q2 was heavily impacted by FX, as already said, by minus 6.1% only slightly lower compared to the first We have listed here quarter of 2018, some even with double digit development. The biggest headwinds in absolute terms came in from the U. S.
Dollar, the Russian ruble and the Turkish lira. In the second quarter, emerging market currency already accounted for all 2 thirds of the absolute headwind we faced. While FX effects overall were lower quarter on quarter, especially key emerging market currency had an increasingly negative effect on our revised in Q2. And based on the recent developments, the FX market, we expect them also to remain very volatile also looking ahead. With that, let me now come to the organic sales performance of our regions.
With a strong organic growth driven by the emerging market with a very strong growth of 5.4%. Sales amounted to 1,000,000,000 overall, representing now 40% of the Henkel Group sales, slightly below the level of the prior year. Reason for that as already indicated, the significant increase of the currency effects in the emerging markets. Sales in the mature markets came in at the level of 1,000,000,000. Organically, this is a 2.2% increase above the prior year.
And this was driven by a very strong growth in North America where we returned to a normal service level in our consumer goods businesses. And thanks to our countermeasures, we were able to partly catch up on the Q1 losses. Nevertheless, year to date, we are still at minus 0.9 percent organic growth. Sales in Western Europe organically were stable at 0.1% as a result of ongoing price and promotional pressure in the consumer goods businesses. Eastern Europe recorded a significant organic net sales growth of 8.2% driven by a double digit development in Turkey.
Latin America recorded very strong growth with a level of 6.3%. Africa, Middle East achieved a very strong organic sales growth of 4.7% despite the continued political and social unrest in some of these countries. And lastly, Asia Pacific showed a good organic sales growth of 1.9%. Here we seen in India and in China, strong growth developments. With that, let me now move to the performance of our business units and starting with Adhesive Technologies.
The business unit, once again, and this is a very positive and good development post the very strong organic net sales growth of 5.2 percent driven by a very balanced combination of volume growth of 2.7% and price growth of 2.5%. And especially, let me also highlight the development regarding price. As you know, we are talking quarter on that, and there are a lot of questions on that. But as indicated in Q3 of last year in 2017, We had the price impact of 50 basis points in Q4 of last year of 100 basis points. We started the year 2018 in Q1.
With an increase of 110 basis points. And as I alluded before, 250 basis points, price increase is a clear point that we're accelerating the implementation of price increases in order to offset the ongoing pressure, which comes from significant raw material headwinds. Acquisitions in that context contributed 3.3% and Adhesive Technologies were impacted IB adverse currency effects on a level of minus 5.9 percent. And that resulted in nominal sales increase of 2.6% now to a level of 1,000,000,000. Also good to state that all business areas contributed to this very strong organic sales growth.
The performance was driven by a significant increase of our general industry business, electronics, transport and metal and consumer and craft men, each delivered a very strong growth, packaging adhesives contributed with a strong growth. Looking at the regional perspective, Adhesives Technology recorded a strong sales growth, organic sales growth in the mature market, very strong development in North America and a good organic growth in Western Europe. Looking at the emerging markets, Again, also here a significant organic net sales growth development and this was driven by a development of double digit from Eastern Europe and a significant growth in Latin America. Looking at Asia, excluding Japan, we should have seen and contributed here with a very strong growth. And finally, moving on to the profit of Adhesives Technology, We have seen now or we recorded a margin of 19.0 percent.
That's an absolute fantastic and high number and the adjusted EBIT margin was slightly below the prior year level. Excluding the impact from acquisitions, you know, that we made some in last year, which impacted also hear the business, it would have been stable. Thanks to the accelerated implementation of the price increases, as I indicated before, as well as our strong cost management focus, we therefore able to offset the significant headwinds from the higher raw material price. Looking now on our beauty care business. The beauty care business returned to growth.
Organic sales was positive at 0.4 percent, also here, driven by a good price component of 100 basis points, while the volume was negative with minus 60 points. The currency effects on the division were as on adhesives with minus 5.9% thanks to the professional acquisitions in Hair, which contributed 9.3% to the growth, we achieved record sales of more than 1,000,000,000 in the quarter 2, in nominal terms, we were up 3.8% compared to the prior year. In persistently, very difficult market conditions, the organic sales growth was still slightly negative in retail. However, we see first signs of an improvement and our innovation pipeline makes us confident to further improve going forward. The Hair Professional business as you have seen for a lot of quarters, more than 10 quarters in a row now show a strong organic sales growth also in quarter 2.
Of this year. Looking at the regions, the mature markets displayed a stable development, thanks to North America, which returned to growth. Back by the normalization of our service levels. The performance in Western Europe was mixed with an ongoing high competitive pressures in the key markets. The emerging markets posted a positive growth, mainly driven by Middle East Africa.
Despite these challenges, Beauty Care maintained it's consistently high profitability level, slightly increased the adjusted EBIT margin now to a level of 18 0.1%. This is an increase of 10 basis points. And this is also thanks to the continued execution of our fund growth initiatives. With that, let me move finally to our Laundry And Home Care business. The business unit showed a good growth momentum, as you have already heard, with organic sales of 2.9 percent up in the quarter, driven by an increased volume of 1.8% and also here prices are up by 110 basis points.
Acquisitions had a small impact of 0.4%, negative currency effects for the division amounted to minus 6.7 percent, the highest impact related to the 3 divisions. So that in total, nominal sales were down by minus 3.4%. Looking at the 2 business units, laundry care delivered a very strong organic sales growth. The home care business was below the level of the prior year for the quarter. But we have a stable development for the first half year for the 1st 6 months.
In the mature markets, we achieved the good organic sales growth, This was driven also here by a good development in North America, where also like in Beauty Care, we returned to normal service levels as well as the mature markets of Asia Pacific showed a good development. In Western Europe, we showed a good development in Germany and in front. Looking at the emerging markets, here we have seen a very strong organic sales development This was driven particularly by a very strong growth in Africa, Middle East and in Eastern Europe. Laundry And Home Care has a track record of profitable growth and delivered in the quarter 2, a strong increase in the adjusted EBIT margin now to a level of 17.9%. This is an increase of 40 basis points.
And also here, this reflects on the one side the strict cost management focus we are having and on the other side, the very good progress with the integration of our Sun acquisition. With that, let me now move back And I will give you some more details of the development of the different lines. Our adjusted gross margin was 47.0% compared to the 47.6% in the prior year. The development was driven by a continued headwind from higher direct material prices and also transactional FX headwinds. These could not be fully offset by our continued savings from cost reduction measures and the efficiency improvements and the price increases.
As I said, We accelerated the implementation of our price increases, especially in Adhesives Technologies, thus limiting the negative impact on our gross margins. Also in our consumer goods businesses, we are facing headwinds from raw materials, particularly offset by also the positive price if I alluded before. Moving now to our part of sales, marketing, selling and distribution expenses. They were in percent 110 basis points lower, now at the level of 22.5%. This was mainly driven by the continued realization of the efficiency gains the higher share of our Adhesives Technology businesses, our acquisitions and the FX effects contribute to the positive development.
Lastly, as also indicated in the quarters before, we adapted also our marketing spend to the we invest in our brands. R and D and administrative expenses remained largely stable in Q2 twenty eighteen And with 1,000,000, the balance of operating income and expenses remained at a low level. Coming back again to our margin and looking overall at the situation, the adjusted EBIT increased by 1.8% now to a level of 1,000,000. And by that, the adjusted EBIT margin continued to increase by 20 basis points now to a level of 18.0 percent. This is in particular driven by our progress in the implementation of our 4 fund growth initiatives, which we will further advance also going forward.
And let me give you some more highlights on that. With one view, we have reached a new level of transparency and are consequently optimizing our non personnel costs. Secondly, with our most efficient structures, we are increasing the efficiency gains with meanwhile more than 130 robotic solutions and automated processes in our shared service landscape, and we are continuing to adapt our production and admin structure. Thirdly, we are further rolling out our 1 global supply chain initiatives, we are seeing an increasing contribution, and that's the false initiative from our net revenue management, which we are currently rolling out on a global level. We are well on track to achieve more than 1,000,000 as already indicated, during our full year presentation at the beginning of the year.
And after more than EUR 100,000,000 in 2017, we are confident to make a further significant step towards our ambition also in this year, thanks to the progress I mentioned before. In the light of the intensified headwinds we are facing, we will for sure bring a higher share of the efficiency gains let me now share the detailed bridge from our reported to the adjusted EBIT. The reported EBIT came in at 1000000 We had no one time gains during this quarter too. We incurred 1,000,000 to 1,000,000 as one time charges, which relates to two topics on one side to our acquisitions and the secondly to the optimization of our IT infrastructure. Restructuring charges increased to 1,000,000 in the second quarter.
The focus here was on the adaptation of our sales and distribution structures in key emerging markets to the market environment as well as further optimization of our structures in R&D, admin and operation. For example, by reducing expenses of 1000000 to 1000000 in 2018. And as we spent a relative high number of 1000000 in the first half, we will end the year most likely more at the higher end of this range. Earlier on, I already highlighted the continuously significant impact on of FX on our sales growth. This is of course also impacting our adjusted EPS growth with a very strong FX headwind of minus 5.8%.
Only slightly below the Q1 impact in 2018, which was at the level of minus 6.4%. If we would exclude the FX, we continue to deliver a strong operational EPS performance as highlighted at the beginning of the presentation with a level of 7.7%. Only to remind you, the same number in Q1 2018 was at the level of 7 point 8%. So overall, the adjusted EPS came in 1.9% higher at the new quarterly high of Let's move to some more details on our cash KPIs and here, starting with networking capital. Net working capital of Adhesives came in at 11.9%.
This is an increase in quarter 2 of 80 basis points, of which 20 basis points account for the acquisition effects I also mentioned before and the remaining increase is mainly related to temporary operational topics such as the production scale up or shifts. In Beauty Care, net working capital increased by 160 basis points to a level of 6.1 percent. The increase is mostly driven by acquisitions, which account for 140 basis points of that 160 basis points. And in Laundry And Home Care, we recorded an increase of 80 basis points now to a level of minus 1.4%. While our consumer goods businesses, as reported, were tracked to a we're back to a normal service level in North America, we will take some more time to also reduce our networking capital level.
However, we already covered almost half of the negative effects in the second quarter and would have shown an operational improvement year on year in both business units if we would adjust for these one time effects. As a result, the group recorded now a net working capital level asset with an increase of 110 basis points to 6.3% in Q2. If we exclude the effect of acquisitions and the effect in North America, we would have shown a performance on a prior year level. But to be sure and be very clear, we are putting high emphasis on getting back to a lower level and we'll continue to report on this progress we are making quarter by quarter going forward. With that now, let me move to our free cash flow, and I already talked about it that we were very satisfied with the development in Q2.
We increased the number by 1,000,000 in quarter to million. The free cash flow with that in the 1st 6 months now is 1,000,000 and also up by that year on year. And this increase would have been even stronger. If we would adjust for the special million, I reported during Q1, the technology investment we did in one of our divisions. The strong free cash flow in the quarter was mainly driven by an increase in the operating cash flow, which was up 1,000,000 compared to year on year, and we continue to invest in our businesses and spend roughly 1,000,000 on capital expenditures.
The figure is below Q2 last year mainly due to a different phasing of our investment. Thanks to our strong free cash flow, net financial position decreased by only 1,000,000,000 now to a level of minus 1,000,000,000 driven by the dividend payout, which we recorded in April. Summing up, we continue to have a very strong balance sheet and with that, Good moment to give back to Hans.
Thank you very much, Carsten. Let me now conclude with our guidance for 2018, our priority for the remainder of the year and the key takeaways before we move on to the Q And A. But let me first briefly summarize our performance in the 1st 6 months. The first half of twenty eighteen Henkel generated sales of 1,000,000,000. Organic sales growth was at 2.3%.
Foreign exchange effects reduced sales by minus 7.4%. Adjusted operating profit rose by point 3 percent to 1,000,000,000 and we increased the adjusted EBIT margin by 30 basis points to 17.7 percent Looking at the business units in the first half of twenty eighteen, Adhesive Technologies generated very strong organic sales growth of 5.0 percent, and the continuously high adjusted EBIT margin of 18.5 percent. Thanks to the accelerated implementation of price increases and our fund growth initiatives, we were able to offset the significant direct material headwinds. Sales in our consumer goods business were adversely affected by delivery difficulties in North America. The Beauty Care Business Unit showed a negative organic sales developed of 2.0% with 17.4% adjusted return on sales was at the level of the prior year.
The Laundry And Home Care Business Unit generated organic sales growth of 1.1% adjusted return on sales showed a very strong increase from 70.4% to 18.2%. Summing up, despite severe FX and direct material headwinds on top and bottom line, we delivered an adjusted EPS growth of 1.7% to in the first half of twenty eighteen. Excluding Ebix, we grew our adjusted EPS by 7.8%. As you can see utility and uncertainty. While GDP forecast indicate a moderate growth with the positive momentum of industrial production expected to continue, we anticipate challenges in the consumer goods markets to prevail.
In particular, key emerging market currencies, showed an unfavorable development in Q2 and remained very volatile, which is underlined by the current turbulences on currency markets. Also for material prices, the pressure further increased and is expected to remain high throughout 2018. In total, currencies and material prices have been developing more negative than expected. In this environment, we have updated our guidance for fiscal 20 18. We confirmed our expectation for organic sales growth of 2% to 4% for the Henkel Group.
We now organic sales growth in the Adhesive Technologies business unit of 4% to 5%. We confirm our expectation of positive organic sales growth of 0 2% in the Beauty Care Business Unit and in the range of 2% to 4% in the Laundry And Home Care Business Unit. For the adjusted EBIT margin, we now anticipate an increase year on year to around 18%. This upgrade in particular reflects progress we make in the implementation of price increases, our fund growth initiatives and the integration of acquisitions. All three business units are expected to contribute to this positive performance.
Reflecting the development of currencies and material prices, we now expect an increase of between 3% 6% in adjusted earnings per preferred share. This outlook underlines our continued focus on sustainable profitable growth and we are committed to further driving the implementation of our strategic priorities. For the remainder of this year, we have set clear focus areas. In Adhesive Technologies, we are working hard to maintain our strong growth momentum implementing further price measures in order to strengthen our profitable growth path. We are driving growth in both Beauty Care And Laundry And Home Care are compelling innovations and superior execution.
We are leveraging the full synergy potential from our acquisitions. We are advancing with the implementation of our fund growth and restructuring initiatives to support investments and our bottom line. And we are intensifying our efforts to reduce networking capital quarter by quarter. With this, we are committed to driving profitable growth Let me summarize the key takeaways we want to convey to you today. In the second quarter, Henkel reached record levels in sales, adjusted EBIT and adjusted earnings per preferred share despite significant FX headwinds.
We delivered strong organic sales growth driven by a very strong performance of Athesives Technologies. Our consumer good businesses are back to growth also backed by the return to EBIT margin. Looking ahead, we raised our adjusted EBIT margin outlook while we update the adjusted EPS growth to reflect the development of currencies and material prices. We are well underway in the execution of HANCO 2020 plus and our 4 strategic priorities drive growth accelerated utilization, increased agility and fund growth, and we are confident to deliver on our financial ambition. With this, Let's move on now
you. We will take questions in order received and will take as many as time permits. The first question comes from the line of Alain Oberhuber from MainFirst. Please go ahead.
MainFirst. I have two questions. The first question is regarding the Landry And Home business. Obviously, you we saw a margin improvement of 40 basis points, but I see that contains us expected 120 basis points. Could you elaborate a little bit on that?
I guess there were some shifting about the synergies, which we are expecting? Give us a little more outlook for H2. The second question is regarding currencies. Given this high volatility today at constant currencies, what do you expect the full year impact will be on sales and on EPS?
Thank you, Alain, for both questions. Carsten?
Yes. Alone. So regarding the Laundry And Home Care Margin. First of all, we are continuing to doing well on the progress. And I have mentioned that, on the execution of the integration of SUN and by that also, the realization of our synergies.
Regarding the points, the increase of 40 points, while maybe you expect that more there are 3 major impacts, which should be taken into account. The first one is that there's a quite significant high FX transactional impact, especially driven by Middle East countries, Secondly, the logistic costs, especially market driven, especially in the U. S. And in North America, impacting the situation. And thirdly, I think that's also something which you can see from others.
There's a quite high competitive pressure which is currently existing. That was the first point. And the second question was related to FX. But you know, as I understand, you're asking what we expect going forward. We are not guiding, on FX, as you know, and therefore I can only report what we can see currently.
And this is reflected, you know, that in Q1, we had the minus 8.6% impact and we had minus 6.1% in Q2. You may remember that we said in Q1, and we have also shown a graph on that, that the impact of U. S, will go down a little bit during the year because of the comparables, the lower comparables we face in the second order, but important is what I mentioned during my presentation is the significant negative acceleration of the emerging market currency, which we have seen in Q which we have seen in Q2 and which we also indicate or see that this will also remain going forward. And as you know, Hans, when Hans was talking about the EPS situation from 5 to 8 to 3 to 6, the significant one of the significant impact of that is the situation of FX. And I hope with that, I could clarify the two points.
Thank you, Carlos. Just Regardless, if we look at the currencies today, what could be then the impact for the full year at this year's current at today's currency
would be mid single digit on the sales for the full year.
The next question comes from the line of Kristin Faitz from Kepler Cheuvreux. Please go ahead.
Yes, good morning, gents, very good morning from my side. 3 questions, if I may. First of all, could you please explain your exposure to Turkey side, obviously, from the FX situation and which, other countries, you have significant production and sales hops are currently experiencing Turkey like problems in your experience or any of you. Second I'm glad to see that your logistical challenges in the U. S.
Seem to be solved. Can you please explain to us how much of an impact used who still saw in terms of timing, how many weeks? And then 3rd, looking at the current demand situation in the TSYS, what kind of trends you see from automotive and from construction in Q3, mainly with a few into September?
Thank you, Christian, for your, Christian, for your 3 questions. Turkey, perhaps in the framework, perhaps this is an important country. Country, which is in our top 10, with 3 business units all being very successful. So for us, a key country. Concerning U.
S, the as you say, I mean, and also as we have been reporting now, we that during the quarter, I mean, we have been coming back to normal service level and really meaning, I mean, we have been, of course, as you can imagine, being extremely focused on that. And our service levels now, both the beauty and lounge in home care are, since mid of the quarter, towards the end of the quarter, back on the high levels we had before. So on that, I mean, as we said, we're back to normal in our service. And the other question was indeed on the on the Adhesive Technologies. I mean, we did see also in Q2.
I mean, you saw growth and we have been reporting that all businesses have been contributing, also our AT, our transportation business has been very strong in the quarter. And this has also is also consequence of all the applications we apply in this industry, As you know, we do not want to talk on weight anymore. In the past, we were saying that we had 6 kilogram of our products in the car. Now we talk about potentially more than 3 year applications. And those applications, which we deliver, are very much focused on electronics, on the weight reduction and also on autonomous driving, which means our growth fields within transportation.
And that's also why we feel confident that strategically, we are very well positioned in this business. Okay. Any additional information, Carlos?
Yes, maybe, Christian, to your question of the U. S. Where you were talking about the transportation topic that you had asked for, what is the effect? I think it's very difficult to separate effects of what we may be, what is base business and what we may be recovered from that. That's very difficult.
I would say it's not possible to separate. Important is, and that is, I think, the message was made and if you can see also figures, if you looked at North America, especially in both consumer businesses, we are back to a good growth is that we are back to normal service levels and that's an important factor. And as you know, as all indicated, the question of Allah when it was regarding voluntary and home care margin where I do general, for sure, logistic costs worldwide, but with a very focus in North America, you know, that is what Henkel faced, but what the market cases is a significant increase in North America when it comes to the situation, especially and the tariffs with that. But as I said before and as Hans said, we are back to normal service levels and that's exactly what we indicated during our last calls that we want to achieve that and we achieved that.
So on that, it is safe to assume that basically during half of the quarter, you saw our normal service levels again in the U. S.
Say it again?
It is pretty safe to assume that during half of the quarter, you saw normal stable, you saw, the consumer business with respect to normal service
As we said, we took immediate actions to solve the issues and And during Q2, we have been very close and that was for sure, a step by step improving and for sure now at the end, we're already there where we wanted to be. And on and also on average, the quarter 2 shows exactly what we wanted to achieve.
Okay. And then sorry to up on that, but I asked for the current automotive demand in your end and construction demand, I. E, what you currently see in your order books, is that at the moment at a pretty much normal level in adhesives. I recognize that you were strong. Exactly.
Yes. Okay. Thank you.
Christian, on top, raising the guidance from 2 to 4 to 4 to 5, I think is a clear indication of that.
Okay, great. Thank you very much. Thanks Hans and Karsten.
Pleasure.
The next question comes from the line of James Targett from Berenberg. Please go ahead. Hi,
good morning everyone. A couple of questions from me. Firstly, just coming back on, on laundry margins, I'm afraid. I mean, do correct me if I'm wrong, but I suppose ex the sun synergies margins were probably down in Q2 in Laundry. And I just as the sun synergies fade from Q3, how confident are you in being able to return the division back to the of margin development?
And secondly, just in North America, obviously a very strong organic growth figure, which which is great. I just wondered if you could say if there's a big difference in that figure between adhesives and the consumer business. And then finally, just coming back to Turkey, I think you flagged double digit growth in Q2. Was there any change during the quarter? And how I imagine none of that's pricing.
I just wonder what how you think we should think about the Turkey growth development going forward? Thanks.
Thank you, James, for your three questions. Perhaps starting on Turkey, because of course, it can be sure that we also have a clear focus on that and check that very short term. Today, we do not see any change in business dynamics organically today. Of course, I mean, we see a huge topic But checking on all our businesses, and you can be sure we do that now permanently. We do not see a change in the local dynamics neither in our industrial business as neither in consumer business?
Topic and your question of some integration or not. I think it's very difficult also here now, Arthur, almost roughly 2 years of being integrating the business to differentiate. Nevertheless, I think we are getting as we that. And as I have alluded during the last couple of quarters, good integration synergies out of the sun business. And by that, especially also related to the point of competitive pressure, which I mentioned at the beginning when Alain had his question, this is also a reason.
I think you can say that also without the sun, the market is a little bit
Hi. Sorry, you cut out then at the end.
Say it again.
Sorry, you cut out there. You said without some
It was a technical problem.
Without some, I said the base business, if you would go for cost, I think, would be a little bit below the market. But as I said, we are not differentiating anymore. Sun is a part of that. And now for almost 2 years, next quarter, it will be 2 years in our your last question was related to North America in terms of if there is a difference between the division, we have seen good organic growth in the TKI a very strong growth in Laundry And Home Care and also a very strong growth in its So I could have made it also short. There is not a big difference between the development series.
And yes, that's it. I hope that clarifies.
Yes, thanks very much.
The next question comes from the line of James Advadis Jones from RBC. Please go ahead.
Yes, good morning. Two questions again, please. On marketing, Could you give us a bit more granularity on the decline in marketing sales and distribution expenditure? How much that was down strength of the adhesives business or put it another way, can you give us any idea of the evolution in marketing of each of the 3 business units and how that's looks likely to progress through the remainder of 2018. And secondly, a lot of consumer companies have been struggling to get price increase is over the first half.
You don't seem to have been having that problem. Have you found the pricing environment more challenging than usual?
Let me thank you, James. Let me start with the second question. I mean, indeed you see in our reporting, that we on the 3 businesses, I mean, we do focus on trying to get price increases implemented. And especially in consumers, I mean, comparing also what I mean, you have now also having, I mean, you have one of the last two report we do some extra effort here, but not easy. I mean, the market environment within consumers at the moment to implement size increases is extremely challenging.
On the other hand, I mean, we do see that it was in packs, also transportation costs are putting quite severe headwinds against us. So we see this as a clear way forward in order to secure our gross margins also see that in our gross margin development, being behind 1st last year, but comparing also that to what others have been reporting mean, we do try to close that gap as much as possible. But this being said, I mean, it is extremely challenging and if also look in certain businesses, how we see margins of competition development. I mean, it is a point of attention on which we really do our utmost to balance out the headwinds we have on the components as we have been mentioning them. Carsten, you go into more detail in March day.
For sure, I'm more than happy to give you some more highlight on that marketing selling and distribution expenses. I tried already during my presentation.
So you're coming through very faintly. Is it possible to speak nearer the microphone?
I can't speak nearer to the mic. You know, the mic is with me.
I'll give you mine. I think we have a technical problem. I'll give you mine. So then we switch mic.
Okay. Wait a second. Better now?
Yes. Much better.
So technical topics So marketing, selling, distribution expenses. I was already alluding to that during my presentation. As I said, you know, we have improved marketing selling by 110 basis points to the level of 22.5 percent. And really the main driver and that's really something, which I was alluding during the last quarters is definitely the 1 view initiative where we are definitely changing the way of handling costs and realizing costs with a new approach, which is a kind of 0 based budgeting where we see continued realization efficiency, efficiency against, which are impacting the marketing part, the selling and the distribution part. And there but there are also some technical topics related to that.
One is that our adhesives technology business gets a higher share. And by that, having lower selling and marketing selling and distribution expenses, especially marketing expenses that have an impact on the mix. And also the FX effects contribute to that positive development. And the last factor is based on the whole topic of ecommerce, the whole topic of digitalization and also the discussion of improving the efficiency to our marketing spend. We adapt that continuously to the market environment.
And by that, having an impact also on our brand investments. Nevertheless, we adequately invest behind our brands. I hope that gives some more brands.
The next question comes from the line of Martin Debo from Jefferies. Please go ahead.
Good morning, everybody. It's Martin Debo from Jefferies. It's two questions about the guidance, please. The first is really just one about how you're giving the guidance. I mean, the financial the shares are down 4% in the early open.
The Financial Times headline says, gluemaker Henkel lowers full year earnings after sticky Q2. When we all know that, you've actually slightly increased underlying guidance this morning and you had very solid 8% earnings growth in the first half. So the inevitable ask is why do you stick to the idea of giving EPS guidance at actual currencies given that currency isn't under your control or just value your rationale and comment on that. The second question is why you're lifting margin guidance? The margin guidance would imply that you're going to get a 70 basis point improvement in the full year 20 basis points in H1 or Q2.
So it implies a very strong H2 the margin line. I understand that U. S. Problems weighed on the margins in Q1, but I also, to James' point, understand that the sun synergies run out in H2. So just what's the rationale for the uplifted margin guidance in terms of what's different in H2?
That's the second question. So thank you for those.
Thank you, Martin, for both questions. I mean, concerning guidance, I mean, it's clear, I mean, as we also have been showing, I mean, you have been showing a year guidance, which has 3 different components. And during the year, course, we update on the different components. And one of the components, I mean, the growth we discussed where we confirm with an increase of adhesives on margin and custom, we alluded that. That's your second question.
If you're confident that with all the measures we take, we strengthen further margins, I mean, which, as you indicate yourself, is telling a lot about the value we create with our company. And the third is, I mean, we're a year over year company. I mean, is that indeed we report and also we deliver EPS in euro currency. And also there, I mean, we now made some correction because we have some inflows of currency as we have been describing But that is the way we guided it and we have to be consistent with that.
Of margin guidance. And I tried already a couple of quarters to highlight some topic, which from my point of view is a very clear strength of Henkel going over the last couple of years. We're always trying to be ahead of the curve when it comes to efficiency improvements and with that certain programs or activities initiatives, we have been setting up over the last couple of years. When we started, the cycle to 2020 plus, we told you that we have 4 topics in on focus too, which are progressing based on the things which we initiated even before. That is the topic of most efficient structures which is related to shared service level automation and optimization and now more the level of not adding people but adding automation robotics and I alluded to that.
And the second thing was the rollout of our 1 global supply chain initiatives. Where we're also getting significant positive impacts in these days. And we added 2 new initiatives. This is the one view, which I just submitted go alluded to and the net revenue management initiative, which will also have a positive impact on gross profit, like the 1 GSE. And with these initiatives, which we are progressing very well, we are on the one side able to partly, as I said, counter attack the things which are negative.
That means the material costs and the Avics. And secondly, we are getting this efficiencies into our company on a sustainable basis and that's the consequence that from 17.5 or more than 17.5, which we guided originally, we are very confident and that's the reason why we are updating the guidance as you are also asking to now a level of around 18% because we see the gains and contribution coming into a P and L partly partly bringing that and the last part besides this initiative is for sure also the acquisition synergies. You know, we are not doing acquisitions for the sake of acquisitions. We have clear business plans behind and also here the majority of our acquisitions progressing well in terms of getting the synergies into our P and L as indicated. And that makes us confident and that's the reason why we changed the margin guidance.
We will now take our last question from Pinah Urgin from UBS. Please go ahead.
Good morning. Thank you for taking my question. It's a quick one on working capital and free cash flow I believe consensus currently forecast above 1,000,000,000 of free cash flow for 2018. And given the 1,000,000 in one? Do you feel comfortable with what the market's expecting for the full year?
And I guess more generally, what are your expectations for both working capital and cash flow growth in the longer term? Thank you.
Thank you for both points. It's Gus. And I think a question which you already have been commenting?
Yes, Pinah, good morning. So first of all, to the first part, I think what I can tell you is, you know that we are not guiding on free cash flow for the year, but having EUR 639,000,000 the first half year. And as I said to you that this is something which is slightly above the prior year despite effect that we had a quite high one time effect in terms of the investment behind our technologies one of our technologies in the first quarter. We are confident to improve our free cash flow in this respect. Your second question was more related to the point of how we see free cash flow on the midterm situation.
And here, I think it's very clear what we have alluded to ambition when it comes to 2020 plus here we want to improve the free cash flow on a continuous basis and we are not giving, and there are no needs and necessity and, signs that we should give up on that. For super one important factor to free cash flow is our net working capital. And that's the second part of your question. Here I clearly alluded during this quarter, that for sure we are not satisfied with 110 basis points increase to a level of 6.3 compared to the prior year situation, but I think I was very clear that this has 2 effects which from my point of view, from our point of view, affects which are which we will which will go away. The one part is acquisitions, you know, it takes some time to bring the acquisitions, which are not on the good level of net working capital Henkel are used to in the 3 divisions to in the future, and that has an impact of roughly 50 basis points and the 60 basis points are related to the North American logistic topic the kind of spillover effect, which we still see in Q2.
Doesn't mean that being on prior year level is something where we are satisfied with We have clear action plans for all three divisions to improve net working capital quarter over quarter because that is also a clear indication to help us to improve the situation on our free cash flow. Very clear action plans and, very clear development what we see. You're welcome, Pinah.
Sure. Thanks, Kaps. And the investors, the analysts, again, thank you very much for your interesting questions. I would like to remind you of our upcoming events, our next event, Casa and myself will be very pleased welcome you for an investor and analyst meeting in London, and this will take place on September 4. And please contact Investor Relations in case you did not registered yet.
Many thanks again for calling in for listening and wish you a nice day. Goodbye.
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