Earnings Call: Q4 2017

Feb 22, 2018

Good morning, and welcome to the Henkel conference call. With us today are Hans Van Bylen, CEO, Carsten Knobel, CFO, and the investor relations team. For the duration of the call, you will be on listen only. If at any time you need assistance, please press star zero on your telephone keypad and you will be connected to an operator. 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. Van Bylen. Please go ahead, sir. Dear investors and analysts, good morning from Dusseldorf, and very much welcome to our full year 2017 earnings call. 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 to 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 our achievements in 2017 and highlight the key developments. Afterwards, I will report on the progress with the implementation of our strategic priorities. Carsten will then comment on detailed financials for the year. After that, I will close my presentation with a brief summary and the guidance for fiscal 2018. Finally, Carsten and I will take your questions. 2017 was a very good year for Henkel, with strong profitable growth. For the first time, we exceeded annual sales of more than EUR 20 billion. We grew sales nominally by 7% compared to the prior year. Organically, Henkel delivered a strong sales growth of 3.1%. This was supported by a continued strong organic performance of 3.2% in the fourth quarter. Adjusted operating profit grew significantly by 9.1% to EUR 3.5 billion. The adjusted EBIT margin increased by 40 basis points to 17.3%. Also here, the positive development continued in the fourth quarter with an increase of the adjusted EBIT margin by 60 basis points to 16.4%. Adjusted earnings per preferred share grew by 9.1% for the year from EUR 5.36 to EUR 5.85. At our annual general meeting on April 9, we will propose to our shareholders a dividend increase of 10.5% to EUR 1.79 per preferred share. With these results, we delivered on our ambitions and reached new record levels in sales, profitability, and earnings. All three business units contributed to the strong performance. The emerging markets continued to achieve a very strong organic sales growth of 5.3%. Mature markets showed a positive organic growth of 1.5%. We continue to improve profitability and earnings driven by our intensified cost management focus. Adjusted EBIT, adjusted EBIT margin, and adjusted EPS all reached new record levels. We successfully strengthened our portfolio with compelling acquisitions and are progressing well with the integration. In our first year of the strategic cycle, we are very satisfied with the progress we made in the implementation of our strategic initiatives. We achieved this performance thanks to the huge commitment and passion of our strong global team. We delivered this strong set of results in a continued challenging environment, characterized by persisting geopolitical tensions and political and macroeconomic uncertainties. The business environment in the consumer goods markets remained difficult throughout the year. On the positive side, the industrial production showed a good growth momentum. We faced FX headwinds from key currencies, especially in the second half. Increasing raw material prices adversely impacted our gross margin. Looking at our business development, organic growth in the Beauty Care retail business remained below our expectations. After a period of flat nominal sales development, we have been able in the past couple of years to make a substantial step change exceeding sales of EUR 20 billion. Our portfolio represents a very robust and balanced setup, and our highly attractive businesses units offer attractive growth opportunities. Laundry & Home Care represents 33% of our business and Beauty Care 19%. At close to 50%, Adhesive Technologies contributes by far the largest share to Henkel's group sales and even over proportional to earnings. This unit posted EUR 9.4 billion in sales, a nominal increase of 4.8%, and a very strong organic sales growth of 5.0%, with all businesses contributing. General industry and electronics posted significant and even double-digit growth respectively. The adjusted EBIT showed a very strong growth of 6.4% to EUR 1.7 billion and the adjusted EBIT margin reached a new all-time high of 18.5%. This excellent performance was driven by high impact solutions. For example, in the consumer electronics business, we achieved double-digit growth thanks to innovative solutions under our mega brand, TECHNOMELT and Loctite. These enable our customers to develop new functionalities and designs for mobile devices. In general industry, our high performance Loctite products drove significant growth and market share gains in the manufacturing and assembly segment. In the automotive and industry business, we achieved very strong growth driven by our comprehensive portfolio of meanwhile more than 300 high impact solutions. Those enable manufacturers and suppliers, for example, to further progress on the way to e-mobility and autonomous driving. To sum it up, Adhesive Technologies showed an excellent operating performance, outperforming competition, and is well positioned to continue its profitable growth trend. With sales of EUR 9.4 billion, we further strengthened our unrivaled position. With our continued margin expansion, we have set a benchmark in the industry. In a challenging environment, Beauty Care delivered EUR 3.9 billion in sales, nominally 0.8% above the prior year. Organically, sales came in at +0.5%. In a continued weak global mass beauty market, organic growth in the retail business was stable. The hair professional business continued its successful development and delivered good organic sales growth, further strengthening its global number three position. At the same time, profitability increased thanks to our intensified cost management focus. The adjusted EBIT grew by 2.7% to EUR 665 million and resulted in a new high for the adjusted EBIT margin of 17.2%. The overall top line growth in Beauty Care was below expectations, with a mixed development across categories and businesses. The hair professional business continued its organic growth momentum, further enhancing its market position. Growth was especially driven by our Schwarzkopf innovations and our acquired brands, Kenra and SexyHair. In retail, our more volume-oriented haircare business was below last year, while our hair coloration and styling businesses achieved strong sales growth and market share gains under the göt2b, Natural & Easy, and Life brands. On a regional level, we achieved strong growth in the U.S., driven by both body and hair care. We further expanded our mega brand, Schwarzkopf, through successful innovations such as Gliss Kur. In China, on the other hand, although sell-out was very good, we faced de-stocking in the offline channels. In summary, performance of Beauty Care was characterized by top-line challenges in retail and a good performance in hair professional. Under new leadership, we will focus on strengthening our global and local brands, launching exciting innovations, and driving sales across all channels. Let me finalize the business unit overview with Laundry & Home Care. The business unit achieved EUR 6.7 billion in sales, growing nominally by 14.8%. Organic sales growth reached 2.0%, driven by positive growth in laundry care and strong growth in home care. Growth was impacted by market deceleration of our important Middle East Africa region. The adjusted EBIT grew by 17.0% to close to EUR 1.2 billion. The adjusted EBIT margin came in at 17.6%, a new all-time high. This performance also reflects the very good progress we made with the integration of our acquired Sun business. Let me come to the highlights in our Laundry & Home Care business unit. Our performance was, amongst others, driven by the ongoing growth momentum of our specialty detergent segment. Perwoll increased double-digit growth through the successful expansion of our portfolio with international innovations. In toilet care, we delivered significant growth. The success of Power Aktiv, the global number one toilet rim block, is driven by the launch of new variants in more than 60 countries worldwide. In Eastern Europe, our very strong growth was driven by our laundry care business, successful innovation across categories. For example, the new Persil 360° drove this development. Overall, despite challenges in some markets, Laundry & Home Care continued to deliver profitable growth through our existing business and acquisitions. Thanks to our strong market positions and the ongoing implementation of our strategic priorities, we feel well positioned to continue on our growth path going forward. Summarizing the year, we achieved a strong set of results delivering on our guidance. Both organic sales growth of 3.1% and the adjusted EBIT margin of 17.3% were perfectly in line with our outlook. With an increase of 9.1%, adjusted earnings per preferred share were in line with our upgraded guidance of around 9%. Let me now talk about the progress we made in implementing our strategic initiatives and achieving our financial ambition. For each of the four strategic priorities, drive growth, accelerate digitalization, increase agility, and fund growth, we are implementing strong initiatives with high dynamics and huge commitment. Let's start with drive growth. Firstly, we want to drive growth through superior customer and consumer engagement. In our industrial business, we are implementing ambitious roadmaps for our top 100 industrial customers to accelerate growth with tailor-made solutions. In our consumer businesses, we expanded our digital Connect to Consumer program to create insight-driven innovations and services. This ties in with strengthening our leading brands and technologies. We increased sales of our top three brands to more than EUR 6.4 billion. Worth mentioning is that Henkel now has a EUR 3 billion brand named Loctite. At the same time, we further focused on our local brands that showed a successful development based on their strong positioning in their respective markets. We are launching exciting innovations and services as illustrated in the different highlights of the business units. Another example is the launch of our first influencer brand, #mydentity, in the hair professional business. In addition to acquisitions of around EUR 2 billion in 2017, Henkel has captured new sources of growth through investments and cooperation in digital services and technologies. For example, in the area of 3D printing and innovative consumer business models. Moving on to our second priority, accelerate digitalization. In 2017, we have further expanded our digital business and achieved double-digit growth across all business units. In our industrial business, we launched a new state-of-the-art e-commerce platform and achieved already around EUR 1.5 billion in digital sales. In our consumer businesses, we drove digital sales by stepping up engagement with pure online as well as brick-and-click retailers. We leverage Industry 4.0 by implementing smart factory concepts in our industrial and consumer operations and further digitalization of our integrated global supply chain. For example, real-time production analytics based on half a billion data points per day enable us to reduce downtime, eliminate waste, and increase output. Last but not least, we are progressing with the e-transformation of our organization. The newly appointed Chief Digital Officer established a dedicated organization, driving the digital transformation across all units. Henkel X will be the new platform to bring together internal and external networks and collaboration events, digital engagement formats, as well as new ways of working. Increasing agility is another key priority for us. Energized and empowered teams are crucial for our success. We have established Henkel 2020+ Talks, providing a platform for powerful dialogues between leaders and employees. To create a more agile organization, Henkel has fostered the entrepreneurial spirit of its employees. In Adhesive Technologies, 28 customer-facing steering units enable closer customer collaboration. As part of the fastest time-to-market initiative, innovation lead times have been reduced, and entries into new markets have been accelerated. In the era of smart simplicity, we are implementing flexible business models capable of adapting to fast-changing markets. Our fourth strategic priority is fund growth that on top of our continuing rigorous cost management includes four initiatives. ONE! ViEW drives higher efficiency through optimized cost management and increased transparency on a global scale. ONE! GSC integrates Henkel's global supply organization across all business units. Henkel also rolled out Net Revenue Management across all business units and further increased efficiency in its structures. As those four initiatives are instrumental to deliver on our financial ambition, Carsten will provide more visibility on their potential. Ladies and gentlemen, looking at the strong results in 2017, we had a good start into our strategic cycle and made substantial progress in the implementation of our strategic priorities. With this, let me hand over to Carsten. Thank you very much, Hans. Also from my side, good morning to everyone. Let us now have a look at the financials of the full year 2017 in more detail. Let's start, as always, with our key KPIs. In 2017, our sales exceeded EUR 20 billion for the first time and reached EUR 20 billion and EUR 29 million. In nominal terms, this represents an increase of 7.0%. Organically, as already indicated, we delivered a strong sales growth of 3.1%. The adjusted gross margin reached 47.1% compared to the 48.4% in the prior year. Excluding the impact of acquisitions of around 90 basis points, our gross margin amounted to 48.0, and that is 40 basis points below the prior year. Increasing direct materials impacted negatively the gross margin in 2017. Despite this, our adjusted EBIT margin came in at a record new high of 17.3%, up 40 basis points compared to the prior year level. Also here, excluding the effect and the impact of acquisitions of 30 basis points, profitability would have increased to 17.6%. Our adjusted earnings per preferred share increased by 9.1% to EUR 5.85, the highest adjusted EPS we ever had in a year. With this set of results, we delivered on our commitment to sustainable, profitable growth. Before moving now to more details on the full-year figures, let me shed some light on the Q4 financials. Our sales in quarter four amounted to EUR 4 billion 886 million. In nominal terms, this is an increase of 0.6%. At -4.7%, FX effects were a significant headwind in the quarter, while acquisitions contributed with 2.1% to this growth. Thanks to our diversified and robust businesses mix, we delivered a strong organic top-line growth of 3.2%. In Q4, Adhesive Technologies showed an outstanding momentum with organic growth of 6.4%, even accelerating compared to the already very strong increase in the first three quarters of 2017. Laundry & Home Care delivered a softer quarter of 1.2, mainly due to a weaker development in Middle East, Africa. Beauty Care was negative at -1, mainly due to the ongoing destockings in the Chinese market. Our adjusted gross margin came in at 45.9%, 90 basis points below the prior year quarter. Also here, excluding the impact of acquisitions of roughly 30 basis points, our gross margin amounted to 46.2, and that is 60 basis points below the prior year, a slight subsequent improvement compared to Q3. With a 60 basis points improvement in the adjusted EBIT margin to 16.4, we delivered a strong increase in profitability. Lastly, our adjusted earnings per preferred share increased by 6.3% to EUR 1.35. Let me highlight the increasing impact of FX on our adjusted EPS growth. For the full year 2017, FX negatively impacted adjusted EPS by EUR 0.05 or one percentage point. At constant currencies, we would have delivered an adjusted EPS growth of 10.1% over prior year, which you can see on the left side of the chart. FX turned into a headwind throughout the second half, and especially in the fourth quarter alone, FX negatively impacted adjusted EPS by EUR 0.05 or 3.9 percentage points. Looking at our operating performance at constant currencies, we continued to deliver an adjusted EPS growth of double digits, 10.2% to be precise, also in the fourth quarter. Looking ahead, we expect the strong volatility in the currency markets also to continue in 2018. With that, let me come back to full year 2017 results and now focusing on our cash management. The ratio of net working capital to sales increased to 4.8%, 130 basis points up versus the prior year. Almost half of this increase is related to acquisitions and one-time effects. The remaining increase is attributable to higher net working capital in our consumer goods businesses. We are not satisfied with this development, and we will put high emphasis on that getting back to a lower level as you have been used by us in the prior years. The free cash flow remained strong at EUR 1.7 billion, decreased compared to the prior year, mainly to a higher CapEx and higher net working capital, but is in line with the average over the last four years, where we recorded roughly also 1.7 if you take the period from 2013 to 2016. Finally, our net financial position was lower at minus EUR 3.2 billion, primarily due to payments for acquisitions. I will also provide you some more details on that later on. Taking now a closer look on our sales bridge at the group level, our organic plus inorganic growth amounted to 9.0, a significant increase in the year 2017. Organically, as indicated, 3.1%, mainly volume driven, while prices increased by 20 basis points. The net effect of our acquisitions and divestments had a positive impact on sales of 5.9 in absolute terms, more than EUR 1.1 billion, with Sun being the main component representing 4.6 percentage points out of that 5.9 I mentioned. In 2017, currencies turned into a headwind in the second half, resulting in a negative full year impact on sales of 2.0%. The development was driven by FX headwinds in emerging market currencies. Not surprisingly, the same we reported also in the quarters before, which means the Egyptian pound, the Turkish lira, the Chinese yuan, but also the weakening U.S. dollar. The strong organic growth was broadly supported by all regions. Growth continued to be driven by the emerging markets with a very strong organic sales growth of 5.3. In absolute terms, EUR 8.1 billion, representing about 40% of our Henkel Group sales. The sales share is below the prior year due to the impact of FX, but also the focus of acquisitions in the mature markets. On sales development in the mature markets, here we also have seen a positive organic growth of 1.5% to an absolute level of EUR 11.8 billion. Looking at the individual regions, North America delivered a strong organic growth with 3% driven by our consumer businesses. Western Europe grew organically 0.5. Germany showed a good growth and compensated for the decline in France. Eastern Europe recorded a very strong growth of 6.0, especially with a double-digit development or supported by a double-digit growth in Turkey. Latin America recorded a very strong growth of 4.4. Africa, Middle East, an organic sales growth of 1.7% despite the continuing political unrest in some countries. In Asia Pacific, we showed a very strong increase with organic sales of 5.9 here. China and South Korea contributed with a significant growth. With this, let me move on to our business units, starting with our Adhesive Technologies business. The business unit posted a very strong organic sales growth of 5.0, mainly driven by volume of 4.6 and the price component of 0.4. Let me here highlight also the pricing implementation we have pointed out to you during the year. in Q1, we had a slight negative pricing effect of -0.3. In Q2, it was flat. In Q3, we saw a positive price effect of 50 basis points, and now in Q4, we have seen 100 basis points of price effect by that partially offsetting raw material increases. All business areas contributed to the very strong organic sales growth. The performance was driven by a double-digit increase of electronics, a significant growth in general industry. Transport and metal delivered a very strong growth, packaging adhesives with a good growth, and the consumer and craftsman business with a positive development. From a regional perspective, adhesives recorded a significant growth in the emerging markets, with more or less all regions contributing. In the mature markets, the organic sales growth was good. Moving on to profit, the adjusted EBIT margin progressed once again to an all-time high for a year with 18.5% of net sales, a good improvement of 30 basis points over the prior year. Taking out the acquisition effect, it would have even increased by 50 basis points. The net working capital ratio on sales also improved by 30 basis points to 10.7. Also here with acquisitions, taking out, it would have been even slightly better. Let's now move to Beauty Care. Overall, in difficult market conditions, the Beauty Care business was able to continue on its path of profitable growth. However, retail being a tension point, as already indicated and pointed out by Hans Van Bylen. Organic sales growth was positive at 0.5, driven by 0.4 in volume and 0.1 in price. The organic sales growth was flat in the retail business. The hair professional business showed a good organic sales growth, outperforming the market. Emerging markets posted a positive growth with significant positive developments in Middle East Africa. In China, we continued to be negatively impacted by the channel shift from brick and mortar to the online business. In the mature markets, we were impacted by intense competition and price pressure. In total, slightly below the previous year. By contrast, here in North America, we saw a very strong development. Profitability-wise, Beauty Care posted a good increase in adjusted EBIT margin with an improvement of 30 basis points, also here to a new high of 17.2. Net working capital came in at the level of 3.9 of sales compared to 0.6 in the prior year. Here, the acquisitions of Nattura and Zotos, especially related to the second half or end of the year, impacted net working capital roughly with 200 basis points. Finally, now let me move to our financials in our Laundry & Home Care division. The business unit delivered a good organic net sales growth of 2.0, largely driven by volume. The laundry care part contributed with a positive organic increase. Home care delivered a strong growth. Emerging markets showed a good organic sales development, also here with support from all regions. In the mature market, we had also a positive organic net sales growth by strong growth in North America. Laundry & Home Care reported an adjusted EBIT margin of 17.6%, also here a new high, 30 basis points above prior year. Important to remark, the realization of Sun synergies is contributing exactly according to our business plan, and we are on track to achieve our synergy target by the end of Q3 this year, as we have indicated that we need two years or 24 months to get the full impact of synergies into our P&L. The net working capital ratio was again at a very low level of -2.4% of sales. The increase compared to prior year is also here attributable to acquisitions, but also a higher operating net working capital level. Let me now move back to our Henkel Group and in particular to our adjusted income statement. Our adjusted gross margin was at 47.1% compared to the 48.4% in the prior year. Excluding acquisitions, the adjusted gross margin, as already indicated, would have been at 48.0%, 40 basis points below the prior year. This development was driven by a continued headwind from higher direct material prices and also that impacted, in particular, our Adhesive Technologies business and our Laundry & Home Care business. In contrast, the adjusted gross margin of Beauty Care slightly increased, underlining the good earnings quality of this business unit. Despite these headwinds, we were able to further increase our adjusted EBIT margin. In percent of sales, marketing, selling, and distribution, these improved by 110 basis points to 23.3%. This is amongst others attributable to the lower sales share related to the Sun Products acquisition. Moreover, we realized efficiency gains throughout our Project ONE! ViEW in marketing, selling, and distribution. I also highlighted that during our Q3 call, and I will give you also more quantified information on the overall efficiency later on. Lastly, we also adapted our marketing spend to the current business environment while we continued to adequately invest in our brands. R&D expenses increased year on year to EUR 469 million. In percent of sales, this ratio is slightly below the prior year. We were again able to reduce the admin expenses in percent of sales to 4.3%, an improvement of 30 basis points. At EUR 34 million, the balance of other operating income and expenses remained at a low level and was slightly above prior year due to numerous individual transactions relating to our operations. Overall, our adjusted EBIT came in at EUR 3,461,000,000 and the adjusted EBIT margin continued to increase to an all-time high to 17.3%. Let me also now take the occasion to comment on the exceptional impact from the U.S. tax reform. Our reported tax rate was down significantly to 15.4% compared to 23.7% in 2016. This is due to a positive one-time effect impact of EUR 270 million, mainly from the revaluation of our deferred tax liabilities. Excluding this one-time effect, the reported tax rate would have been at 24.4%. The adjusted tax rate in 2017 was at 25.0%, slightly above the prior year level. On a recurring basis from 2018 onwards, we expect the U.S. tax reform to have a neutral to slightly positive effect. Positive effects from the reduction of the federal income tax rate and the tax exemption of certain dividends are estimated to be compensated by other effects, for example, a limited or eliminated deductibility of some interest payments. Let's now take a look at the development of our net financial position. Our net financial position in 2017 came in at minus EUR 3.2 billion. This is EUR 0.9 billion below the prior year of minus EUR 2.3 billion. Looking at the components, we continued our strong free cash flow generation with a free cash flow of EUR 1.7 billion. This enabled us not only to increase our dividends, but also to invest in our businesses. Firstly, we paid dividends of EUR 736 million for 2016 and 2017, and that is EUR 70 million more than 2016. Secondly, we paid around EUR 2 billion in terms of acquisitions. As usual for a full year, I will conclude my presentation with the usage of cash. You are familiar with the three pillars of how we achieve excellence in value creation. It is investing in organic growth with CapEx, investing in acquisitions, and thirdly, distributing dividends. Let me start with CapEx. In 2017, our capital expenditures amounted to EUR 663 million and were therefore in line with our guidance. We spend around two-thirds on capacity expansion, innovations, and streamlining measures. In Adhesives, we focused on consolidating our production site, expanding our footprint in emerging markets. An example of this is India. In Beauty Care and Laundry & Home Care, the focus was on capacity expansions. In Beauty Care, for example, in a plant in Russia and in Laundry & Home Care, we introduced a new plant in Egypt. Looking ahead, we will continue to invest in our businesses in 2018. For the full year, we expect to spend around EUR 750 to EUR 850 million. On to acquisitions, and also here, including venture capital investments, both being an integral part of our strategy. We spent EUR 2 billion in 2017 on acquisitions, adding more than EUR 600 million in annual sales in a full swing. In our industrial business, as you know, the acquisitions were focused on Darex and Sonderhoff, expanding our portfolio. In Hair Professional, we did acquisitions with Zotos International and Nattura Laboratorios. In addition, we explore new business opportunities and strengthen our know-how in relevant areas throughout the EUR 150 million venture capital program. In 2017, we have invested in a leading on-demand laundry and dry cleaning service, Zipjet. In the field of printed electronics, we acquired a participation in the start of Copprint. Going forward, we have a strong balance sheet allowing us to do M&A in case attractive targets match our criteria, and at the same time, we remain committed to our A rating. Closing the third pillar with dividends. Over the past years, we have continuously increased our dividend payout. In 2017, we distributed EUR 736 million in dividends. At the AGM in April, we will propose a dividend of €1.79 for the preferred shares, which is an increase of 10.5% compared to the prior year. The proposal translates into a payout ratio of 30.7%, being in line with our target range between 25% and 35%. Compared to 2012 level, we will thus have almost doubled the payout per share from €0.95 per preferred share within only five years. Let me conclude my presentation with an update on our strategic priority fund growth. The implementation started with full speed, and we are fully on track with the realization. I indicated that already during Q3, and we have achieved already in 2017 more than EUR 100 million of benefits. Our initiatives, most efficient structures and ONE! Global Supply, which we already launched prior to 2017, continued to drive sustainable efficiency gains in 2017. Let me give you some examples on that. With our most efficient structures, and here relating to shared services, we increased efficiency through the implementation of more than 100 robotic solutions and automation software applications already in 2017. In ONE! Global Supply, we will further try to get the value chain improvements, capturing cross-business synergies. We have successfully implemented the concept completely in Europe and have prepared in 2017 the rollout to North America. Project ONE! ViEW, the Henkel approach of zero-based budgeting, started in 2017 and already delivered a significant contribution in efficiency. I highlighted that especially in regard to our marketing, selling, and distribution expenses. It is related in approach to non-personal costs. We have more than 120 initiatives underway to increase our efficiency with a new cost structure. Our fourth initiative, Net Revenue Management. We will see here first efficiencies coming in as of 2018. Here we are increasing the efficiency of our trade spend and leverage our price and promotion effectiveness. We have pilot projects in North America in 2017, and we are rolling the concept and the project out to Europe and North America while we are speaking. Summing up, we are well on track and in full swing, and we expect to deliver more than EUR 500 million of annual efficiency gains by 2020. These support further investments in our growth, while at the same time, we will bring a fair share each year also to the bottom line. With this, I thank you for your attention, and hand over back to Hans. Thank you very much, Carsten. Let me now summarize before we look at our guidance for the full year and then move on to the Q&A. The strong performance in 2017 was driven by our strong and passionate global team. Our people are key in delivering on our ambitions. For the first time, we achieved sales above EUR 20 billion. Driven by our significant organic and inorganic growth, we reached record levels in profitability and earnings. All three business units contributed to this performance. A major driver of this improvement was our intensified cost management focus. We are fully committed to continue our successful development in the future. We want to generate sustainable, profitable growth to 2020 and beyond. To achieve this, we are becoming more customer-focused, more innovative, more agile, and fully digitized in our internal processes and our customer-facing activities. In addition, we are aiming to promote sustainability in all our business activities, reinforcing our leading positions in the future. We continue to advance our portfolio with value-adding acquisitions. In summary, we have a very clear and exciting growth strategy going forward. Let me now conclude with our outlook for the current fiscal year 2018. We expect the high volatility and uncertainty of the business environment to persist. In addition, geopolitical tensions, political and macroeconomic uncertainties remain. The GDP forecasts indicate a moderate growth with the positive momentum of industrial production expected to continue. However, we anticipate challenges in the consumer goods markets to prevail. FX continues to show an unfavorable development, especially the U.S. dollar. We expect a moderate increase in raw material prices throughout 2018. In this environment, based on the strong performance in 2017 and substantial progress made in the implementation of the strategic priorities, we reconfirm our financial ambition for 2020. Organic sales growth of 2%-4%, continued increase in adjusted EBIT margin, adjusted EPS growth of 7%-9%. For 2018, Henkel expects to generate organic sales growth of 2%-4%, with each business unit in this range. For adjusted return on sales, Henkel anticipates an increase versus the prior year to more than 17.5%, with all three business units contributing. Reflecting the uncertainties in the currency market, especially the U.S. dollar trend, Henkel expects an increase in adjusted earnings per preferred share in EUR of between 5% and 8%. Going forward, we will focus on the implementation of our four strategic priorities to deliver sustainable profitable growth with attractive returns. With this, I would like to come to the close and move on to the Q&A. Thank you, Mr. Van Bylen. Ladies and gentlemen, the question and answer session will be conducted electronically. If you would like to ask a question, please press star one on your telephone keypad. If you change your mind about asking a question, please press star two on your touchtone keypad. We will take questions in the order received and will take as many as time permits. Please limit your questions to a maximum of two questions at a time. Again, please press star one to ask a question. The first question comes from the line of Alain Oberhuber from MainFirst. Please go ahead. Good morning, Hans. Good morning, Carsten. Alain Oberhuber, MainFirst. I have two questions. Could you give us a little bit more insight regarding the Adhesive cycle, where we currently stand? Congratulations for the very good performance, but maybe to get a little bit of flavor, if we are topish or if there is more to come. The second question is regarding FX. Obviously, significant impact. If the currencies stay where they currently are, what could be the negative impact this year on sales and on margins? Thank you, Alain, for both questions. I suggest I comment on your question on Adhesive Technologies, and Carsten will comment on your FX question. As indicated, Adhesive Technologies had, with 5% organic growth, a fantastic momentum with all the five business units contributing. On top also, we have seen that the margin structure has developed quite healthy, 30 basis points, as Carsten indicated. Even excluding acquisitions, it would have been stronger. I also refer in the outlook to the IPEX Production Index, where we do see that 2017 had some good development. Forecasts indicate that also in 2018, this will continue. Even more important is that we also have been strengthening our both innovation leadership and also our customer proximity. As indicated, we have 28 units within Adhesive Technologies which are working extremely close to customers. We have more than 6,500 people with our customers who develop superior solutions. Also we do see that in this business, we have been strengthening our share. We also have technology investments focusing on future developments. If you take, for example, the example of automobile, there we focus on weight reduction, we focus on e-mobility, we focus on electronics in cars. That's why we feel well-positioned that our Adhesive Technologies business will further continue this profitable growth path. On currencies, Carsten, can you give some more insight there? Hello. Thanks for the question. If you have seen, we have indicated the FX impact in 2017, while in the relation to EPS, when we were focusing on the full year and on the Q4, you have seen that in Q4, the impact of currencies has been roughly 400 basis points negatively. This is then also related to what you have heard for our guidance 2018, that we see a weakening trend of the U.S. dollar and also emerging market currencies could further weaken. Also important to mention is that we have confirmed our midterm guidance of 7%-9% in EPS. As you know that on a midterm period or a long-term period, we always see that currencies are leveling out. As an international company, we are faced with these kind of developments and therefore, we see that we will have an impact of FX in 2018, especially when the currencies continue. This is then also reflected in the guidance, what you have heard, with 2%-4% in OSG, with an increase of our margin higher than 17.5%, and with an EPS growth of 5%-8%. Hope that helps. Just a follow-up, Carsten. Thank you very much. If the currencies stay where they are today, could you give an indication of what could be the sales impact then? Yeah. The point is, if everything would as it is be, then we would not manage our company because everything is changing every day. You see, and especially the volatility of the currencies, nobody would have expected having a dollar at this point being in the 120s at the end of last year when we were setting up our plan. I think it's very difficult to predict the things and therefore, what we set with our guidance is very clear, that we stick to the 2%-4% and the 5%-8% in EPS. For sure, being at this point, most probably, higher impacted by currencies than in 2017. Thank you very much. You're welcome. The next question comes from the line of Christian Faitz from Kepler Cheuvreux. Please go ahead. Yes. Good morning, gentlemen. Two questions, if I may. First of all, can you talk a bit about Q4 trends, particularly on the Laundry & Home Care side, where you saw a nice EBIT improvement? Then, second of all, how do you currently see, in 2018, the competitive environment in Beauty Care? Is Europe and North America still very price competitive as we speak? Thank you very much. Thank you, Christian, for both questions. Concerning competitive environment, I think all of us see that this environment, we expect not to change fundamentally. I think you also see that especially in Western Europe, price pressure remains. There are also examples out of, not in our categories, but it is an industry topic that you do see that the tensions, retailers and suppliers, let us say, that these are very concentrated on negotiation and pricing, and we expect this environment to remain, and we also are prepared to successfully develop our business within this environment. On the question of Q4, Carsten. Yes. Christian, very happy to talk about the Laundry & Home Care question in terms of why the adjusted EBIT margin improved or significantly increased in quarter 4. Different reasons. One is a little bit more technical in terms of the increase was mainly also driven by an increase in the gross margin as the Sun acquisition now annualizes, and direct material prices could be compensated by savings. Secondly, as I mentioned it, overall, we have the fund growth initiatives, and here our ONE! ViEW project, which is paying off in terms of marketing, selling, and distribution expenses, where we realized gains and in the admin cost area. And thirdly, this is also for sure a significant impact, therefore we are very proud to see this development, the synergies of Sun, which we expect, as I mentioned, to have a full swing in quarter three of this year, are really improving as indicated and as planned step by step. You know that I have already indicated step by step the improvement quarter by quarter of the margin, and this is also to be seen in quarter four. This basket of actions, measures have improved the margin of our Laundry & Home Care business, especially here in Q4. Okay, great. Thanks very much, Hans and Carsten. The next question comes from the line of James Taggart from Berenberg. Please go ahead. Good morning, everyone. A couple questions from me. Firstly, just on the outlook, the guidance for the consumer businesses, so Beauty Care and Laundry & Home Care. Could you give some color as to what gives you the confidence in getting from where you were in Q4 back to the 2%-4% range? Just thinking about whether you're expecting an acceleration of market growth, it sounded not based on the previous question, or innovation, or if it's particular turnaround from the China destocking situation or in Middle East and Africa, in laundry. Really getting an idea of what gets back to that 2%-4% range, and whether you expect that delivery to be back half weighted in 2018. Secondly, just on gross margins, the outlook. Obviously, lower M&A impact, more moderate input costs, supply chain savings, et cetera, pricing coming through. Would you hope to be ending the year with the gross margins up? Thanks. Thank you, James. Let me elaborate on the outlook of Laundry & Home Care and in Beauty Care. We do see, and where also, if you take the Laundry & Home Care business, as indicated, where we did not see the growth happening last year in 2017 was in, take a region like Middle East, Africa. The question before, I answered more on what is happening Western Europe. What we do expect is that market situation and you also see it is also partly linked to oil price and so on to Middle East, Africa, that markets will turn back there. In 2017, if you see for both businesses, by the way, the growth momentum, in fact, slowed down overproportion in emerging markets. We did have competitive growth in our mature markets, although there we had severe market challenges. Going forward, we think that our emerging markets performance on growth can accelerate during 2018. Of course, on top, if we are in a challenging environment like the mature markets, we also try to get better every day in innovation power. We are convinced that our innovation pipeline going forward is very competitive, very strong, and this innovation power also will enable us competitive growth. On top, in Beauty Care, we have new leadership. Also there, on top of further innovation initiatives, also market execution will be a strong focus point. James, good morning. To your question of gross margins, for the full year 2018. First of all, I have to disappoint you a little bit. I will not guide on that. I hope you understand. On the other side, for sure, I will give you some more insight in that. I think you have seen during the course of 2017 that the peak of being impacted by raw materials and by gross margin was Q2, Q3, and especially what I have shown you with the development in Adhesive Technologies in terms of our pricing effect, and now with the pricing effect of 100 basis points pricing in Q4, it shows exactly what we are trying to do, is to take raw material impact and bring it also to the market. And this we, better to say, Jan Dirk Ahlers and his team are executing that very good and very stringently. This will also continue going forward. Nevertheless, we also have the point that going forward, we expect a lower impact, a lower negative impact from the acquisitions. At the same time, we continue to expect a moderate increase in direct material prices. But we aim to counter these effects by continuous implementation of price increases, as I indicated with Adhesive Technologies, as well also our strict margin focus. I hope you have also heard during the presentation that especially also in Beauty Care, the gross margin was not impacted in 2017, and by that we are confident that we will also have a good development of our gross margins going into 2018. Okay, thanks. Very helpful. The next question come from the line of Martin Deboo from Jefferies. Please go ahead. Yes, morning, everybody. Morning, Hans. Morning, Carsten. Just two quick questions. You're just guiding some moderate commodity inflation for the business as a whole in 2018. I just wonder if you could give some color in what you expect to happen to commodity inflation in the consumer business versus the Adhesive Technologies business. That's the first question. Secondly, I just value some color on how you're feeling about the U.S. laundry market and how Sun Products is performing. You called out strong growth in North America. I'm curious as to whether that's an organic sales comment or whether that just reflects the addition of the sales of Sun Products. That's the second question. Thank you. Let me comment on U.S. laundry market. Indeed, as we indicated in 2017, and that was valid both for Laundry but also Beauty, we had a strong organic. Because of course, nominally, it was very strong with the addition of Sun, but also organic development. And we expect market situation not to change substantially. We are further working on strengthening portfolio with premium brand Persil. Persil has a good momentum, and now that we can develop our innovation on all price tiers, we will continue to do so. On that, we do not expect a substantial change. Martin, to your question of the moderate increase of raw materials. Overall, we see that, and that is, I would say not different to 2017, that Laundry will be more impacted than Beauty and Adhesives on a similar level than Laundry. On the other side, why have we said moderate increase? You know that crude oil prices have been increasing over the last couple of quarters. One third of our raw materials and packaging spent is directly connected to the crude oil and crude oil base for feedstocks. For sure we have numerous initiatives to compensate these effects, and for sure an intensified cost management focus. And as I indicated for Adhesives, we will continuously try and impact the positive pricing to the market. And I think 2017 is a very good proof point that what we say and what we promise, we deliver in terms of continuously bringing that. We have a time lag, we already indicated that, of roughly three to six months depending on category, depending on customers, but we are exactly working on that. Okay. Thank you for that. Thank you. The next question comes from the line of Guillaume Delmas from Bank of America. Please go ahead. Good morning, gentlemen. Firstly, a housekeeping question on the savings initiative that you have quantified at more than half a billion euros. Just to be clear, does this include the EUR 150 million from the Sun synergies or it is separate? Secondly, could you give us a rough idea of how much of the EUR 500 million you plan to reinvest and how much will flow through to the EBIT line? Guillaume, that is a very good question. Both are very good questions. For the first one, to be very clear and thanks for clarification, the EUR 500 million plus we have mentioned for fund growth has nothing to do with the synergies of Sun or the acquisition. So that is on top or separate, however you want to phrase it. The point of what we are doing with these efficiency gains, that is exactly what we want to decide year by year depending on the situation, how business and economy is developing. You can assume that the fair share of that, for example, you know, I mentioned the EUR 100 million plus for 2017 went to the P&L especially also due the impacts we have been coming from the external environment, especially from currency side. Going forward, the full swing, which we indicated with the EUR 500 in 2020. Also here you have to assume that we will decide year by year what portion of that goes to the P&L and what of that will be reinvested in our businesses. Okay. Very helpful. My two real questions. The first one is on Adhesive Technologies for consumer craftsmen in building. It seems margins declined by around 140 basis points in the second half of 2017. Out of the last four years, we have seen three years of margin contraction in this division. Wondering what the issue is with this division. Is it structural, a lack of pricing power and anything you might have been putting in place in order to get the margins expanding again? Second question is on Laundry & Home Care. You have been singling out Africa, Middle East as a key reason for the subdued growth of the division. If I look at Beauty Care, there was significant growth in that region. So why Laundry & Home Care seems to be disproportionately affected by the tough macro environment there? Also Latin America. Second quarter, you are mentioning strong deflationary pressures there. What is driving this and what would be the outlook for 2018? Thank you. Let me start with your question on the emerging markets for the consumer goods. The difference between Laundry & Home Care is the quite significant different country mix. In Laundry & Home Care it is a region in which in a lot of key countries we are a market leader. There are some big countries. If you purely see Egypt on itself, for example, you see it also in the currency developments. There you see the size of Egypt for our company. It is one of the currencies which has been hitting us most, but also the whole economy has been affected by that. I would say, if you then see our Beauty Care business, we are by far more in a challenger position, and we have a quite substantial different country mix. That is the fundamental difference in the setup of both. Latin America, also there it is a different setup. If you see our Laundry & Home Care business is in fact mainly a Mexico business, whereas our Beauty Care business has a very strong position both in Colombia and is building up in Mexico. With the professional business, we have a full presence in Latin America. That is on the fundamental difference between both. Part of your question was also Latin America, the development itself, and there indeed, we have seen that second half of last year also markets have been quite under pressure. Going forward, we also expect here, like in all setup, that we see some indications that emerging markets are starting to recover there. Guillaume, on your question to Adhesive Technologies or to be precise on the consumer business, I would give you an answer in two steps. The first was, is related to 2017. Here, our Adhesive Technologies consumer business faced a higher negative impact from direct material prices. Here, especially driven by higher exposure to Eastern Europe and the Middle East region. At the same time, I think something is clear also related to, in general, to industry and consumer. It is the pricing topic and consumer business in Adhesive Technologies was lower as the markets are more competitive. Therefore, pricing in combination with our saving initiatives could not compensate the material price increase. You also mentioned now for two, three years, take into account, if you go back two, three years, that we had here a significant FX topic with the Russian ruble. As I pointed out, the consumer business is very strong in Russia or in Eastern Europe. So that had the impact two years before. The impact in this year is related to what I mentioned before, material prices and the problem of not having the same power to bring the prices to the market as in the rest of the industrial business. Thank you very much. We will now take our last question from the line of Philipp Frey from Warburg Research. Please go ahead. Hello, gentlemen. Another question on pricing. Actually, if we look at Beauty Care pricing, you had a significant decline in the fourth quarter. Could you please give us a bit of flavor if this is mainly the impact of tough competition in mature markets or what's behind that in general. Then would it be fair to say that if you look at the raw material price development over the last couple of quarters, did you still have a lot of pent-up potential for price increases and that we shouldn't see, obviously, the negative margin impact in Q4 as something permanent? What do you mean with negative? Philipp, what do you mean with negative? Well, you had a slight adjusted EBIT margin decline in Adhesives in Q4. I assume pricing is also a major factor for you for Adhesive margins to again improve in 2018, or wouldn't that be true? Yeah. I think the point is very not technical, but is related to M&A, so M&A, better to say. The impact, what you see in Adhesives in the fourth quarter is only related to the consolidation of M&A in terms of like for like. If I would exclude that, we would be even slightly increasing also in Adhesives. That has nothing to do with prices or the opposite. As I said, Q4, the pricing power was the strongest in 2017 with +100 basis points. Your second question, or better to say your first question, was related to Beauty Care pricing. Price effects vary from quarter to quarter, and the full-year price impact was slightly positive. The markets are generally characterized by an intense price and promotion competition, what you pointed out, especially for sure in the mature markets, and we expect an intense price and promotion pressure also to continue going forward. Okay. Thank you. You are welcome, Philipp Frey. Thank you, ladies and gentlemen. I will now hand over to Mr. Van Bylen for his closing remarks. Please go ahead. Thank you very much. Dear investors and analysts, thank you again for your questions, and let me summarize the key takeaways we wanted to convey to you today. Henkel had a record year 2017 with new highs for sales, profitability, and earnings. We made substantial progress in implementation of our strategic priorities. We have an ambitious guidance for fiscal 2018, and we are fully on track and committed to deliver on our financial ambitions 2020. Last but not least, let me remind you of our upcoming events. Let me highlight that we will hold our Investor and Analyst Day for Laundry and Home Care on May 29 at our headquarters in Dusseldorf. Thanks again for listening in and goodbye. Thank you for joining today's conference call. You may now replace your handsets.